2024 Supervisors Symposium

Supervisors Symposium

December 11 -12 , 202 4 Scottsdale, AZ

@ www.csbs.org ♦ @csbsnews

CONFERENCE OF STATE BANK SUPERVISORS 1300 I Street NW / Suite 700 / Washington, DC 20005 / (202) 296-2840

CSBS Board Meetings & Supervisors Symposium December 9-12, 2024 | All Times Mountain Time | Scottsdale, AZ

Monday, December 9 8:00 AM

Registration | Heritage Foyer 8:00 AM-5:00 PM

8:30 AM

Breakfast | Laguna Lawn/Heritage Patio 8:30 AM-9:30 AM

10:00 AM

CSBS Bankers Advisory Board Meeting | Heritage 2 10:00 AM-4:00 PM

12:00 PM

Lunch | Laguna Lawn/Heritage Patio 12:00 PM-1:00 PM

2:00 PM

SRR Board of Managers Meeting | Heritage 1 2:00 PM-4:00 PM Small Group Dinners (Invitation-Only) Meet in lobby at 5:30; Dinners 6:00 PM-8:00 PM

5:30 PM

Tuesday, December 10 8:00 AM

Breakfast | Laguna Lawn/Heritage Patio 8:00 AM-9:00 AM

9:00 AM

CSBS Board of Directors Meeting | Heritage Ballroom 1/2 9:00 AM-5:00 PM MMC Annual Meeting (Invitation-Only) | Orangedale A 9:00 AM-5:00 PM

9:00 AM

12:00 PM

Lunch | Laguna Lawn/Heritage Patio 12:00 PM-1:30 PM Welcome Reception | La Boca Pool 5:30 PM-7:30 PM

5:30 PM

Wednesday, December 11 8:00 AM

Breakfast | Laguna Lawn/Heritage Patio 8:00 AM-9:00 AM

9:00 AM

Supervisors Symposium | Heritage Ballroom 1/2 9:00 AM-5:00 PM

9:00 AM

Opening Remarks & Welcome to Arizona 9:00 AM-9:15 AM Barbara Richardson Director, Arizona Department of Insurance & Financial Institutions

Sebastien Monnet Senior Vice President & Deputy Chief Learning Officer, Conference of State Bank Supervisors

9:15 AM

An Insider's Guide to the New Reality in DC 9:15 AM-10:15 AM David Wasserman Senior Editor & Elections Analyst, The Cook Political Report

10:15 AM

Break 10:15 AM-10:30 AM

10:30 AM

U.S. Economic Outlook 10:30 AM-11:15 AM Jill Cetina Executive Professor and Associate Director of Commercial Banking Program, Texas A&M University Tom Siems Chief Economist, Conference of State Bank Supervisors

11:15 AM

Break 11:15 AM-11:30 AM

11:30 AM

Dialogue with the FDIC 11:30 AM-12:30 PM Doreen Eberley Director, Division of Risk Management Supervision, Federal Deposit Insurance Corporation

12:30 PM

Committee and Working Group Lunches 12:30 PM-1:45 PM CSBS Legislative Committee Lunch | Heritage 3 CSBS Non-Depository Supervisory Committee Lunch | Heritage 5 CSBS Regulatory Committee Lunch | Heritage 4 CSBS State Supervisory Processes Committee Lunch | Founders Room Supervisors Symposium Lunch | Laguna Lawn/Heritage Patio

1:45 PM

Dialogue with the Federal Reserve 1:45 PM-2:45 PM Jennifer Burns Deputy Director, Division of Supervision and Regulation, Federal Reserve Board of Governors

2:45 PM

Networking Break 2:45 PM-3:15 PM

3:15 PM

De Novo / M&A Activities & the Future of Community Banking 3:15 PM-4:15 PM Roberta Hollinshead Director of Banks, Washington Department of Financial Institutions Michael Sprouse Deputy Commissioner, Depository Supervision, Maryland Office of Financial Regulation Jared Whitson Director of Bank and Trust Supervision, Texas Department of Banking Sabrina Bergen Chief of Staff, Policy & Supervision, Conference of State Bank Supervisors

5:30 PM

Networking Reception | Laguna Lawn/Heritage Patio 5:30 PM-7:30 PM

Thursday, December 12 8:00 AM

Breakfast | Laguna Lawn/Heritage Patio 8:00 AM-9:00 AM Demystifying A.I. in Financial Services 9:00 AM-10:00 AM Jack Vonder Heide President, Technology Briefing Centers, Inc.

9:00 AM

10:00 AM

Break 10:00 AM-10:15 AM

10:15 AM

Perspectives and Recent Developments in the Mortgage Industry 10:15 AM-11:00 AM Jason Cave Principal, Piedmont Risk Advisors, LLC

11:00 AM

Break 11:00 AM-11:15 AM

11:15 AM

Fireside Chat on the Intersection of Payments and State/Federal Regulatory Frameworks 11:15 AM-12:00 PM Adam Shapiro Partner & Co-Founder, Klaros Advisors, LLC Matt Lambert Deputy General Counsel – Policy, Conference of State Bank Supervisors

12:00 PM

Innovative State Charters: Q&A 12:00 PM-12:45 PM Bo Fears Senior Deputy Commissioner, Georgia Department of Banking and Finance Joe Chambers General Counsel & Chief of Staff, Connecticut Department of Banking Joey Samowitz Director, Policy Development, Conference of State Bank Supervisors District Luncheons 12:45 PM-2:00 PM – See signs onsite for lunch locations. District I Lunch (Attendees from ME, NH, VT, MA, RI, CT, NY, NJ, PA, DE, MD, DC, PR) District II Lunch (Attendees from MN, WI, IA, MI, IL, IN, MO, OH, KY) District III Lunch (Attendees from WV, VA, NC, TN, SC, GA, AL, AR, LA, MS, FL, VI) District IV Lunch (Attendees from ND, SD, WY, NE, CO, KS, OK, NM, TX) District V Lunch (Attendees from WA, OR, ID, MT, CA, NV, UT, AZ, AK, HI, GU) Cyber Threats and Examination Modernization Efforts 2:00 PM-3:00 PM Holly Chase Director of Cybersecurity/IT/Fintech, Massachusetts Division of Banks Phillip Hinkle Director of Cybersecurity and Technology Strategy, Texas Department of Banking Brad Robinson Senior Director, Cybersecurity Policy and Supervision, Conference of State Bank Supervisors Mary Beth Quist Senior Vice President, Bank Supervision, Conference of State Bank Supervisors

12:45 PM

2:00 PM

3:00 PM

Year in Review & Closing Remarks 3:00 PM-3:15 PM Brandon Milhorn President & CEO, Conference of State Bank Supervisors

Internal Use Only #

December 11-12, 2024 | Scottsdale, Ariz. Supervisors Symposium

ATTENDEES Alabama State Banking Department Caver, Jay

jay.caver@banking.alabama.gov mike.hill@banking.alabama.gov

Hill, Mike

Alaska Division of Banking & Securities Schmidt, Rob Arkansas Securities Department Tierney, Karyn Arkansas State Bank Department Marshall, Susannah

rob.schmidt@alaska.gov

karyn.tierney@arkansas.gov

smarshall@banking.state.ar.us dpatel@banking.state.ar.us rpendergist@banking.state.ar.us

Patel, Dharmin

Pendergist, Raychel

California Department of Financial Protection & Innovation Hewlett, Cloey

cloey.hewlett@dfpi.ca.gov Avy.Mallik@dfpi.ca.gov KC.Mohseni@dfpi.ca.gov

Mallik, Avy

Mohseni, Khalil (KC)

Colorado Department of Regulatory Agencies - Division of Banking Hunter, Kara

kara.hunter@state.co.us

Connecticut Department of Banking Chambers, Joe

joseph.chambers@ct.gov

Perez, Jorge

jorge.perez@ct.gov

Delaware Office of the State Bank Commissioner Collison, Lisa

Lisa.Collison@delaware.gov christopherL.Hall@delaware.gov

Hall, Chris

Florida Office of Financial Regulation Brinkley, Ben

Ben.Brinkley@flofr.gov Jeremy.Glover@flofr.gov

Glover, Jeremy

Georgia Department of Banking & Finance Fears, Bo

bfears@dbf.state.ga.us khagler@dbf.state.ga.us msneed@dbf.state.ga.us

Hagler, Kevin Sneed, Melissa

Idaho Department of Finance Perkins, Patti

Patricia.Perkins@finance.idaho.gov gabriel.quintero@finance.idaho.gov

Quintero, Gabo

Illinois Department of Financial & Professional Regulation Soriano, Susana

Susana.Soriano@Illinois.gov

Internal Use Only #

Iowa Division of Banking Johnson, James

james.johnson@idob.state.ia.us

Kansas Office of the State Bank Commissioner Herndon, David

david.herndon@osbckansas.org Ryan.Seitz@osbckansas.org

Seitz, Ryan

Louisiana Office of Financial Institutions Finley, Jonathan

jfinley@ofi.la.gov

Jeansonne, Michelle

Mjeansonne@ofi.la.gov

Jolly, Scott

pjolly@ofi.la.gov

Maine Bureau of Financial Institutions LaFountain, LLoyd Maryland Office of Financial Regulation Hyland, Kat

lloyd.p.lafountain.iii@maine.gov

kat.hyland@maryland.gov tony.salazar@maryland.gov michael.sprouse@maryland.gov

Salazar, Tony

Sprouse, Michael

Massachusetts Division of Banks Gallagher, Mary

mary.l.gallagher@mass.gov

Michigan Department of Insurance & Financial Services Luetzow, Aaron

LuetzowA@michigan.gov WestrinJ1@michigan.gov

Westrin, Jim

Minnesota Department of Commerce Barness, Kasie

kasie.barness@state.mn.us michael.crow@state.mn.us mark.hastie@state.mn.us jacqueline.olson@state.mn.us

Crow, Mike Hastie, Mark

Olson, Jacqueline

Mississippi Department of Banking & Consumer Finance Hubbard, Sam

sam.hubbard@dbcf.ms.gov rhoshunda.kelly@dbcf.ms.gov

Kelly, Rhoshunda

Montana Department of Administration - Division of Banking & Financial Institutions Hall, Melanie mghall@mt.gov

Nebraska Department of Banking & Finance Bailar, Darcy

darcy.bailar@nebraska.gov kelly.lammers@nebraska.gov

Lammers, Kelly

Nevada Department of Business & Industry - Division of Mortgage Lending Sheehy, Cathy

csheehy@mld.nv.gov

New Mexico Regulation & Licensing Department - Financial Institutions Division

Moore, Becca

rebecca.moore@state.nm.us

Internal Use Only #

North Carolina Office of the Commissioner of Banks Bosken, Katherine

kbosken@nccob.gov krice@nccob.gov estandrews@nccob.gov

Rice, Kristin

St.Andrews, Gene White, Stephanie

sryals@nccob.gov

North Dakota Department of Financial Institutions Kruse, Lise

lkruse@nd.gov

Ohio Division of Financial Institutions Allard, Kevin

kevin.allard@com.ohio.gov

Prude-Smithers, Pam

pamela.prude-smithers@com.ohio.gov

White, Ingrid

Ingrid.white@com.ohio.gov

Oregon Division of Financial Regulation Anderson, Kirsten

kirsten.l.anderson@dcbs.oregon.gov Stephen.Gordon@dcbs.Oregon.gov jason.a.horton@dcbs.oregon.gov

Gordon, Stephen Horton, Jason

Keen, TK

tk.keen@dcbs.oregon.gov

South Dakota Division of Banking Afdahl, Bret Texas Department of Banking Abbassi, Lilly

Bret.Afdahl@state.sd.us

lilliana.abbassi@dob.texas.gov charles.cooper@dob.texas.gov kenneth.kuntschik@dob.texas.gov robert.nichols@dob.texas.gov thomas.susany@dob.texas.gov jared.whitson@dob.texas.gov

Cooper, Charles Kuntschik, Kenneth

Nichols, Robert Susany, Tom Whitson, Jared

Texas Department of Savings & Mortgage Lending Retta, Hector

hretta@sml.texas.gov

Utah Department of Financial Institutions Berrett, Shaun

shaunberrett@utah.gov

Rude, Darryle

drude@utah.gov

Vermont Department of Financial Regulation Ferenc, Aaron

aaron.ferenc@vermont.gov luke.jandreau@vermont.gov

Jandreau, Luke

Washington Department of Financial Institutions Clark, Charlie

charles.clark@dfi.wa.gov

Hollinshead, Roberta

roberta.hollinshead@dfi.wa.gov

Tabb, Anya

anya.tabb@dfi.wa.gov

West Virginia Division of Financial Institutions Holstein, Dawn

dholstein@wvdob.org

Internal Use Only #

Wisconsin Department of Financial Institutions Olson Collins, Cheryll

Cheryll.OlsonCollins@dfi.wisconsin.gov

Wyoming Division of Banking Bishop, Jeremiah

jeremiah.bishop@wyo.gov justin.chavez@wyo.gov

Chavez, Justin

EXTERNAL SPEAKERS Arizona Department of Insurance & Financial Institutions Richardson, Barbara

barbara.richardson@difi.az.gov

Federal Deposit Insurance Corporation Eberley, Doreen Federal Reserve Board of Governors Burns, Jennifer

deberley@fdic.gov

jennifer.j.burns@frb.gov

Klaros Advisors, LLC Shapiro, Adam

adam@klarosgroup.com

Massachusetts Division of Banks Chase, Holly

holly.chase@mass.gov

Piedmont Risk Advisors, LLC Cave, Jason

jasoncave71@gmail.com

Technology Briefing Centers, Inc. Vonder Heide, Jack

jv@tbchq.com

Texas A&M University Cetina, Jill

jcetina@mays.tamu.edu

Texas Department of Banking Hinkle, Phillip The Cook Political Report Wasserman, David CSBS STAFF Office of the President Milhorn, Brandon

phillip.hinkle@dob.texas.gov

bmilhorn@csbs.org lchanin@csbs.org ldove@csbs.org

Chanin, Leonard Dove, Le'Shea

Office of the General Counsel Lambert, Matt

mlambert@csbs.org

Liu, Margaret

mliu@csbs.org

People Operations Haire, Kelly

khaire@csbs.org tszucs@csbs.org

Szucs, Terrie

Internal Use Only #

Policy & Supervision Alcala, Alejandro

aalcala@csbs.org dbarbieri@csbs.org sbergen@csbs.org klawson@csbs.org mbquist@csbs.org BRobinson@csbs.org jsamowitz@csbs.org tvasile@csbs.org nross@csbs.org

Barbieri, Dana Bergen, Sabrina Lawson, Karen Quist, Mary Beth Robinson, Brad

Ross, Nathan

Samowitz, Joseph

Vasile, Tony

Communications & Brand Strategy Fisher, Laura

lfisher@csbs.org slucernoni@csbs.org

Lucernoni, Shannon

Products & Solutions Boyce, Sean

sboyce@csbs.org ddwyer@csbs.org Vpeck@csbs.org ephillips@csbs.org tsiems@csbs.org jjarmin@csbs.org kland@csbs.org mmartin@csbs.org smonnet@csbs.org

Dwyer, David Peck, Vickie Phillips, Emil Siems, Thomas

Accreditation & Workforce Development Jarmin, Jennifer

Land, Kelly Martin, Max

Monnet, Sebastien

Internal Use Only

Where do we go from here? Jill Cetina, CFA Executive Professor and Associate Director of Commerical Banking Program

WHERE BUSINESS MEETS LEADERSHIP

Internal Use Only

A bit about me • Treasury debt management financial economist • OCC financial economist • Dallas Fed vice president of supervision • Associate managing director for US banks at Moody’s

• Now professor of finance, associate director of Texas A&M banking program, and North America chapter director for Bank Treasury Risk Management (BTRM) certification

Commercial Banking Program (CBP) Adam C. Sinn ‘00 Department of Finance

2

Main messages

Internal Use Only

• The US economy is strong.

• But monetary and fiscal policy errors have been and remain significant. These errors kicked off a banking crisis in 2023 and will continue to affect banks through higher interest rates and liquidity.

• Core messages

• 2023 we were in the acute phase of a US banking crisis; we remain in a banking crisis but are now in a chronic phase with parts of the industry trying to earn its way out of rate losses.

• Loss of confidence in capital is foundational to every banking crisis. Capital remains weak at some firms.

• CRE problems are growing.

• Limit interest rate sensitivity and keep ample liquidity; expect interest rate and economic volatility.

Commercial Banking Program (CBP) Adam C. Sinn ‘00 Department of Finance

3

Internal Use Only

The US economy is strong and actually stronger than earlier this year Q4 2019 Q3 2023 Q4 2023 Q1 2024 Q2 2024 Q3 2024 US GDP (Q/Q, SAAR) 2.8% 4.4% 3.4% 1.6% 3.0% 2.8% Personal 1.76% 1.72% 2.33% 1.30% 1.90% 2.46% CBO ESTIMATES OF US OUTPUT GAP RELATIVE TO GDP WIDER March 2024 June 2024 0.8% 0.9% consumption expenditure

Net exports

1.40% -0.10

0.09% -0.61% -0.90% -0.56%

Change in inventories Fixed investment

-0.78% 1.34% -0.47% -0.49% 1.05% -0.17%

-0.19% 0.45% 0.62% 1.14% 0.42% 0.24%

Govt spending 0.57% 0.94% 0.61% 0.30% 0.52% 0.85%

Source: BEA, Bloomberg

Commercial Banking Program (CBP) Adam C. Sinn ‘00 Department of Finance

4

Internal Use Only We are having both monetary and fiscal policy challenges. • Fed has made a policy error by announcing a start to a rate cut cycle in August at Jackson Hole and starting into a rate cut cycle given the following: • the US economy is strong • fiscal policy is loosening and may ease further • inflation had not yet returned to target • In Sept Chair Powell emphasized that inflation is “much closer” to target and the labor market is “less tight.” He also emphasized r* -- • what is r* -- it is the assumed long run neutral real interest rate for the economy… • But given the level of the government budget deficit we probably were at neutral prior to Sept FOMC… • We are closer to the end of the Fed rate cut cycle than the market seems to realize. Risk-assets may be vulnerable if Fed stops rate cut cycle; lower asset values would reduce wealth effect and spending; US economy could decelerate. • 5 Commercial Banking Program (CBP) Adam C. Sinn ‘00 Department of Finance

Internal Use Only

In Q3 & Q4 US monetary and fiscal policy eased simultaneously

Commercial Banking Program (CBP) Adam C. Sinn ‘00 Department of Finance

6

Internal Use Only

US public debt stock allowed to grow too large

Treasury auctions having more difficulty.

Insufficient real money buyers with balance sheet. Treasury market is overwhelmed with supply. Concerns also about economic policy credibility.

Commercial Banking Program (CBP) Adam C. Sinn ‘00 Department of Finance

7

Internal Use Only Expect Game of Thrones on new Administration’s economic policy in year 1 • Treasury Sec nominee Bessent has strong background and recognizes the urgency of some fiscal tightening to allow the Fed to cut interest rates. • However, multiple voices in the incoming Administration on economic policy with disparate ideas. Some other advisors may need to make mistakes for his voice to gain more sway – so expect some policy mistakes next year.

• On fiscal, extension of 2017 tax cuts likely to get funded with China tariffs. May also see the executive branch impound spending.

• My impression – economic team more of financial markets than financial institutions focused. Risk of merely acceding to large bank lobby.

Commercial Banking Program (CBP) Adam C. Sinn ‘00 Department of Finance

8

Internal Use Only

On economic policy – four key changes in 2025 … sequencing matters; inflation risk elevated • Deregulation • Growth positive

• Growth positive; expect will be used to fund extension of 2017 tax cuts so not likely going away

• Tariffs

• Extension of 2017 tax cuts and maybe further tax cuts

• Fiscal policy to remain expansive

• Immigration/deportation

• Not in direct control of economic team; very important and wildcard

Commercial Banking Program (CBP) Adam C. Sinn ‘00 Department of Finance

9

Internal Use Only

What should bank supervisors focus on? • In this environment, financial institutions need to maintain strong liquidity and limit market risk/sensitivity. • Banks shouldn’t go much beyond a duration of 2-3 in bond holdings

• Avoid agency MBS (as agency MBS are basically short interest rate vol unless funded with term borrowings at positive spread). • Some banks sold businesses generating fee income in 2023-2024 to cover losses related to interest rates – but did the team learn how to better manage ALM? Generally, no. • Management and board qualifications on ALM now matter. They didn’t when rates were near zero.

• Superior bank capital is also helpful in this environment. Areas of capital erosion include

• Unrealized losses • Double leverage at the hold co • Credit risk transfer transactions

• CRE risks are mounting with H4L interest rates.

Commercial Banking Program (CBP) Adam C. Sinn ‘00 Department of Finance

10

Internal Use Only Banks should lend and grow the US economy; not become a parking lot for an oversupply of US Treasuries • Financial repression is when governments implement policies to channel to

themselves funds that in a deregulated market environment would go elsewhere – generally as a form of debt reduction. • Financial regulation has history of financial repression – forcing banks to fund the government; could it happen again? • History of fights in the US about the leverage ratio related to treatment of Treasuries.

Commercial Banking Program (CBP) Adam C. Sinn ‘00 Department of Finance

11

Internal Use Only

Questions/discussion

Commercial Banking Program (CBP) Adam C. Sinn ‘00 Department of Finance

12

Internal Use Only

The Trump 2.0 Economy: What Does the Future Hold? Thomas F. Siems, PhD, CSBS Chief Economist

CSBS Supervisors Symposium Scottsdale, AZ December 11, 2024

1

Internal Use Only

Current Economic Conditions…

2

Internal Use Only

Real GDP Annualized Growth

10 20 30 40 50 60 70 80 90

GDP Growth Is Solid

2.8

3.0

3.2 1.6

4.4

2.5

2.8

3.4

2.7

7.4

0.3

-1.0

3.5

6.4

5.6

4.4

35.2

2.8

4.8

3.4

-5.5

2.5

2.5 0.6

3.3 2.1

Change in Real GDP, Annualized Growth -20 -10 0

-28.1

2018

2019

2020

2021

2022

2023

2024

3

Internal Use Only

Inflation Rates Are Down from Lofty Levels...But Remain Above Target

12

Food Inflation

10

8

CPI less food & energy

6

Core Inflation has Improved

4

CPI All Items

Inflation Rate (%)

2

Fed Tightening Begins

0

-2

Jan-16

Jan-17

Jan-18

Jan-19

Jan-20

Jan-21

Jan-22

Jan-23

Jan-24

Sep-16

Sep-17

Sep-18

Sep-19

Sep-20

Sep-21

Sep-22

Sep-23

Sep-24

May-16

May-17

May-18

May-19

May-20

May-21

May-22

May-23

May-24

4

Internal Use Only

Inflation Expectations > Price Stability Target

7

6

5

4

3

Inflation Expectations Are Too High

Target = 2%

2

1

0

-1

Jul-83

Jul-86

Jul-89

Jul-92

Jul-95

Jul-98

Jul-01

Jul-04

Jul-07

Jul-10

Jul-13

Jul-16

Jul-19

Jul-22

Jan-82

Jan-85

Jan-88

Jan-91

Jan-94

Jan-97

Jan-00

Jan-03

Jan-06

Jan-09

Jan-12

Jan-15

Jan-18

Jan-21

Jan-24

5

Internal Use Only

Monthly Job Growth Has Slowed

900

800

700

600

500

3-month moving average

400

300

Job Growth Enough to

(Thousands of Workers, SA)

200

Maintain ~4.2% Unemployment Rate

100

Net Monthly Payroll Employment Growth, Total Nonfarm

0

6

Internal Use Only

The Fed Starts Easing Policy in Late 2024…

7

Internal Use Only

The End of the Fed's Recent Aggressive Tightening (Pace & Length of Fed Tightening Cycles since 1994)

6

3/22-9/24

5

6/04-9/07

4

3/94-7/95

3

12/15-7/19

2

6/99-1/01

1

Tightening Cycle (Percentage Points)

0

0

34 Increase in the Fed Funds Target Rate from Start of Fed 68

102

136

170

204

238

272

306

340

374

408

442

476

510

544

578

612

646

680

714

748

782

816

850

884

918

952

986

1020

1054

1088

1122

1156

1190

1224

1258

1292

Number of Days Following Start of Fed Tightening Cycle

8

Internal Use Only

Fed Cuts 25bps (Nov ‘24) What Happened at the Other End of the Yield Curve When the Fed Cut Rates in Late 2024?

Fed Cuts 50bps (Sep ‘24)

9

Internal Use Only

Recessions Often Follow Fed Rate Cuts

10 12 14 16 18 20

0 2 4 6 8

Fed Funds Rate (%)

Jul-64

Jul-73

Jul-82

Jul-91

Jul-00

Jul-09

Jul-18

Jan-60

Jan-69

Jan-78

Jan-87

Jan-96

Jan-05

Jan-14

Jan-23

Oct-66

Oct-75

Oct-84

Oct-93

Oct-02

Oct-11

Oct-20

Apr-62

Apr-71

Apr-80

Apr-89

Apr-98

Apr-07

Apr-16

10

Internal Use Only

Recessions Often Follow Fed Rate Cuts

10 12 14 16 18 20

…But Not Always!

0 2 4 6 8

Fed Funds Rate (%)

Jul-18

Jul-09

Jul-00

Jul-91

Jul-82

Jul-73

Jul-64

Jan-23

Jan-14

Jan-05

Jan-96

Jan-87

Jan-78

Jan-69

Jan-60

Oct-20

Oct-11

Oct-02

Oct-93

Oct-84

Oct-75

Oct-66

Apr-16

Apr-07

Apr-98

Apr-89

Apr-80

Apr-71

Apr-62

11

Internal Use Only

What Are the Downside Economic Risks?

12

Internal Use Only

Leading Economic Index

120

100

80

60

40

Leading Economic Index (2016 = 100)

20

Source: The ConferenceBoard

Note: Gray bars delineate economic recessions

0

Jan-59

Jan-61

Jan-63

Jan-65

Jan-67

Jan-69

Jan-71

Jan-73

Jan-75

Jan-77

Jan-79

Jan-81

Jan-83

Jan-85

Jan-87

Jan-89

Jan-91

Jan-93

Jan-95

Jan-97

Jan-99

Jan-01

Jan-03

Jan-05

Jan-07

Jan-09

Jan-11

Jan-13

Jan-15

Jan-17

Jan-19

Jan-21

Jan-23

13

Internal Use Only

Leading Economic Index

120

100

The LEI is Down 31 Consecutive Months

80

60

40

Leading Economic Index (2016 = 100)

20

Source: The ConferenceBoard

Note: Gray bars delineate economic recessions

0

Jan-59

Jan-61

Jan-63

Jan-65

Jan-67

Jan-69

Jan-71

Jan-73

Jan-75

Jan-77

Jan-79

Jan-81

Jan-83

Jan-85

Jan-87

Jan-89

Jan-91

Jan-93

Jan-95

Jan-97

Jan-99

Jan-01

Jan-03

Jan-05

Jan-07

Jan-09

Jan-11

Jan-13

Jan-15

Jan-17

Jan-19

Jan-21

Jan-23

14

Internal Use Only

15

Internal Use Only

ISM New Orders Index Contracted 26 of the Last 29 Months

80

70

60

50

40

Diffusion Index (SA)

30

20

Jan-59

Jan-61

Jan-63

Jan-65

Jan-67

Jan-69

Jan-71

Jan-73

Jan-75

Jan-77

Jan-79

Jan-81

Jan-83

Jan-85

Jan-87

Jan-89

Jan-91

Jan-93

Jan-95

Jan-97

Jan-99

Jan-01

Jan-03

Jan-05

Jan-07

Jan-09

Jan-11

Jan-13

Jan-15

Jan-17

Jan-19

Jan-21

Jan-23

16

Internal Use Only

Moody's Analytics' Recession Probability Indicator Based on Economic Data

0 10 20 30 40 50 60 70 80 90 100

Oct 2024 11.8%

Probability of a Recession in the Next 12 Months (%)

Jul-05

Jul-16

Jan-00

Jan-11

Jan-22

Jun-06

Jun-17

Oct-02

Oct-13

Oct-24

Apr-08

Feb-10

Apr-19

Feb-21

Sep-03

Sep-14

Dec-00

Dec-11

Dec-22

Aug-04

Aug-15

Nov-01

Nov-12

Nov-23

Mar-09

Mar-20

May-07

May-18

17

Internal Use Only

Yield Curve Signals Economic Recession

4

2

0

Yield Curve Inverted for 23 Consecutive Months

-2

-4

-6

Interst rate spread, 10-year Tbond minus Fed Funds

-8

Jan-59

Jan-61

Jan-63

Jan-65

Jan-67

Jan-69

Jan-71

Jan-73

Jan-75

Jan-77

Jan-79

Jan-81

Jan-83

Jan-85

Jan-87

Jan-89

Jan-91

Jan-93

Jan-95

Jan-97

Jan-99

Jan-01

Jan-03

Jan-05

Jan-07

Jan-09

Jan-11

Jan-13

Jan-15

Jan-17

Jan-19

Jan-21

Jan-23

18

Internal Use Only

Nov 2024 32.9%

19

Internal Use Only

CMBS Delinquency Rates by Major Property Type

0 1 2 3 4 5 6 7 8 9 10

Office

Retail

Overall

Lodging

Multifamily

Delinquency Rate (%)

Industrial

Source: Trepp

Jul-24

Jul-23

Jan-24

Jan-23

Jun-24

Jun-23

Oct-24

Oct-23

Oct-22

Feb-24

Apr-24

Feb-23

Apr-23

Sep-24

Sep-23

Dec-23

Dec-22

Aug-24

Aug-23

Nov-23

Nov-22

Mar-24

Mar-23

May-24

May-23

20

Internal Use Only

So, Where Is Economic Growth Coming From?

21

Internal Use Only

Massive Post-Pandemic Federal Reserve Stimulus…Now Running off the Balance Sheet

22

Internal Use Only

Post-Pandemic Government Spending Far Above Trend

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000

Pre-Pandemic Spending Trend Line (Exponential)

Federal Government Expenditures

(Billions of Dollars, Seasonally Adjusted Annual Rate)

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

23

Internal Use Only

24

Internal Use Only

Federal Debt Held by the Public to GDP

100

80

Debt ↑ 5x GDP ↑ 2x

60

40

Debt ↑ 19x GDP ↑ 14x

20

0

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

25

Internal Use Only

26

Internal Use Only

Where Might Policy Go From Here?

27

Internal Use Only

28

Internal Use Only

29

Internal Use Only

Possible Trump 2.0 Economic Policies • Higher Tariffs • Restrictive Immigration • Fiscal Policy Austerity? • Less Federal Government Spending • Extension of the 2017 Tax Cuts and Jobs Act

• Lower Regulatory Burden • Increase Energy Production

30

Internal Use Only

Moody’s Analytics U.S. Risk Matrix Suggests Greater Economic Risks

31

Internal Use Only

Community Banker Sentiment Likely to Improve Dramatically…

32

Internal Use Only

33

Internal Use Only

CBSI Component Trends

180

153

160

133 132 129

140

125

120

110

100

80

80

60

>100=Positve Sentiment)

40

20

20

CBSI (100=Neutral; <100=Negative Sentiment;

0

CBSI

Business Conditions

Monetary Policy

Regulatory Burden

Operations Expansion

Capital Spending

Profitability Franchise Value

34

Internal Use Only

35

Internal Use Only

Banking Industry Consolidation: Projection of State Banks by Asset Size • Rapid decline in smallest banks • Growth in larger community and midsize banks • By 2029, state banks with >$10B could increase by 50%.

1

Internal Use Only

Merger Activity Decreases, Processing Time Increases

2

Internal Use Only

De Novo Bank Replenishment Rate Remains Low

• Pre-financial crisis bank replenishment rate* was 32% • Post-crisis average has been consistently much lower at 3.4%

*Replenishment rate is the number of De Novo banks opened divided by the number of banks merged, liquidated or failed

3

Internal Use Only

De Novo Chartering by State • De novo chartering is strongest in states with growing populations, strong local economies and history of bank merger and acquisition activity, according to BankingStrategist. • Average capitalization of De Novo banks doubled post-crisis.

4

:ĂĐŬ sŽŶĚĞƌ ,ĞŝĚĞ ũǀΛƚďĐŚƋ͘ ĐŽŵ ϲϯϬͲϳϴϵͲϴϮϮϮ

ĞŵLJƐƚŝĨLJŝŶŐ / ŝŶ &ŝŶĂŶĐŝĂů ^ĞƌǀŝĐĞƐ

^ ^ ^ƵƉĞƌǀŝƐŽƌƐ ^LJŵƉŽƐŝƵŵ

:ĂĐŬ sŽŶĚĞƌ ,ĞŝĚĞ

ĞĐĞŵďĞƌ ϭϮ͕ ϮϬϮϰ

dŚĞ ^ĞŐǁĂLJ͞

ĂƐ ƐŝŐŶŝĨŝĐĂŶƚ ĂƐ ƚŚĞ ƉĞƌƐŽŶĂů ĐŽŵƉƵƚĞƌ͘͟ ^ƚĞǀĞ:ŽďƐ

:ĂŵŝĞ ŝŵŽŶ ŽŶ ƌƚŝĨŝĐŝĂů /ŶƚĞůůŝŐĞŶĐĞ

•͞ tĞ ĂƌĞ ĐŽŵƉůĞƚĞůLJ ĐŽŶǀŝŶĐĞĚ ƚŚĞ ĐŽŶƐĞƋƵĞŶĐĞƐ ǁŝůů ďĞ ĞdžƚƌĂŽƌĚŝŶĂƌLJ ĂŶĚ ƉŽƐƐŝďůLJ ĂƐ ƚƌĂŶƐĨŽƌŵĂƚŝŽŶĂů ĂƐ ƐŽŵĞ ŽĨ ƚŚĞ ŵĂũŽƌ ƚĞĐŚŶŽůŽŐŝĐĂů ŝŶǀĞŶƚŝŽŶƐ ŽĨ ƚŚĞ ƉĂƐƚ ƐĞǀĞƌĂů ŚƵŶĚƌĞĚ LJĞĂƌƐ͗ dŚŝŶŬ ƚŚĞ ƉƌŝŶƚŝŶŐ ƉƌĞƐƐ͕ ƚŚĞ ƐƚĞĂŵ ĞŶŐŝŶĞ͕ ĞůĞĐƚƌŝĐŝƚLJ͕ ĐŽŵƉƵƚŝŶŐ ĂŶĚ ƚŚĞ /ŶƚĞƌŶĞƚ͕ ĂŵŽŶŐ ŽƚŚĞƌƐ͘͟

ŐĞŶĚĂ • / KǀĞƌǀŝĞǁ • ŝƐĐŽǀĞƌŝŶŐ ƚŚĞ ĞŶĞĨŝƚƐ ŽĨ / /Ŷ &ŝŶĂŶĐŝĂů ^ĞƌǀŝĐĞƐ • ϭϭ <ĞLJ ŽŶƐŝĚĞƌĂƚŝŽŶƐ • &ŝŶĂů WŽŝŶƚƐ

/ KǀĞƌǀŝĞǁ

^ŽŵĞ / ŽŵƉŽŶĞŶƚƐ • EĂƚƵƌĂů >ĂŶŐƵĂŐĞ WƌŽĐĞƐƐŝŶŐ • ZŽďŽƚŝĐƐ • DĂĐŚŝŶĞ >ĞĂƌŶŝŶŐ

EĂƚƵƌĂů >ĂŶŐƵĂŐĞ WƌŽĐĞƐƐŝŶŐ

WŽƉƵůĂƌ dŽŽůƐ • ŚĂƚ'Wd ;KƉĞŶ /Ϳ • ŽƉŝůŽƚ ;DŝĐƌŽƐŽĨƚͿ • ůĂƵĚĞ ; ŶƚŚƌŽƉŝĐͿ • 'ĞŵŝŶŝ ;'ŽŽŐůĞͿ • DĞƚĂ / ;DĞƚĂͿ

ŚĂƚ

ŚĂƚ ;KdžĨŽƌĚ ŝĐƚŝŽŶĂƌLJͿ •͞ ƚĂůŬ ŝŶ Ă ĨƌŝĞŶĚůLJ ĂŶĚ ŝŶĨŽƌŵĂů ǁĂLJ͟

'ĞŶĞƌĂƚŝǀĞ WƌĞͲƚƌĂŝŶĞĚ dƌĂŶƐĨŽƌŵĞƌ

'ĞŶĞƌĂƚŝǀĞ WƌĞͲƚƌĂŝŶĞĚ dƌĂŶƐĨŽƌŵĞƌ

ŚĂƚ'Wd 'ĞŶĞƌĂƚĞƐ͗ • dĞdžƚ • ŽŵƉƵƚĞƌ ĐŽĚĞ

• sŝĚĞŽƐ • /ŵĂŐĞƐ

'ĞŶĞƌĂƚŝǀĞ WƌĞͲƚƌĂŝŶĞĚ dƌĂŶƐĨŽƌŵĞƌ

'ĞŶĞƌĂƚŝǀĞ WƌĞͲƚƌĂŝŶĞĚ dƌĂŶƐĨŽƌŵĞƌ

,Žǁ ĚŽ / ƵƐĞ ŚĂƚ'Wd͍

WƌŽŵƉƚ

tŚĂƚ ĞůƐĞ ĐĂŶ ŚĂƚ'Wd ĚŽ͍ • tƌŝƚĞ ĞŵĂŝůƐ • ZĞĂĚ ĂŶĚ ƐƵŵŵĂƌŝnjĞ ĚŽĐƵŵĞŶƚƐ • DĞĂů ŝĚĞĂƐ • ^ĂůĞƐ ĐĂůů ƉƌĞƉ • dƌĂŶƐůĂƚŝŽŶ • DĂŶLJ͕ ŵĂŶLJ ŽƚŚĞƌ ƚŚŝŶŐƐ

ZŽďŽƚŝĐƐ

ŽƐƚŽŶ LJŶĂŵŝĐƐ ^ƉŽƚ

ŽƐƚŽŶ LJŶĂŵŝĐƐ ^ƚƌĞƚĐŚ

ŽƐƚŽŶ LJŶĂŵŝĐƐ ůĞĐƚƌŝĐ ƚůĂƐ

ƌĞĂŬĨĂƐƚ ŝŶ DŝƐƐŽƵƌŝ

DĂĐŚŝŶĞ >ĞĂƌŶŝŶŐ

^ĞůĨͲ ƌŝǀŝŶŐ ĂƌƐ

^ĞůĨͲ ƌŝǀŝŶŐ dĂdžŝƐ • ƌƵŝƐĞ ;'ĞŶĞƌĂů DŽƚŽƌƐͿ • tĂLJŵŽ ; ůƉŚĂďĞƚͿ

^ĞůĨͲ ƌŝǀŝŶŐ dĂdžŝ sŝĚĞŽ • ŚƚƚƉƐ͗ͬͬ ǁǁǁ͘ LJŽƵƚƵďĞ͘ ĐŽŵͬ ǁĂƚĐŚ͍ ǀсsĨ &:dY,Ϭs/

ŽŵŝŶŐ ^ŽŽŶ

ĂĚŝůůĂĐ sdK> ;sĞƌƚŝĐĂů dĂŬĞ KĨĨ ĂŶĚ >ĂŶĚŝŶŐ ĚƌŽŶĞͿ

ĂĚŝůůĂĐ sdK> sŝĚĞŽ

ĂĚŝůůĂĐ sdK> sŝĚĞŽ • ŚƚƚƉƐ͗ͬͬ ǁǁǁ͘ LJŽƵƚƵďĞ͘ ĐŽŵͬ ǁĂƚĐŚ͍ ǀсϱϮƌhƉY ĞĞsϬ

dŚĞ EĞǁ ŽŽŵ

WƌŽũĞĐƚ ^ƚĂƌůŝŶĞ sŝĚĞŽ

WƌŽũĞĐƚ ^ƚĂƌůŝŶĞ sŝĚĞŽ • ŚƚƚƉƐ͗ͬͬ ǁǁǁ͘ LJŽƵƚƵďĞ͘ ĐŽŵͬ ǁĂƚĐŚ͍ ǀсYϭϯ ŝƐŚ

ĞŶĞĨŝƚƐ ŽĨ / /Ŷ &ŝŶĂŶĐŝĂů ^ĞƌǀŝĐĞƐ

ĞŶĞĨŝƚƐ ŽĨ / /Ŷ &ŝŶĂŶĐŝĂů ^ĞƌǀŝĐĞƐ • WŽůŝĐŝĞƐ ĂŶĚ WƌŽĐĞĚƵƌĞƐ DĂŶƵĂů

• ϯ ƌĚ WĂƌƚLJ ŝůŝŐĞŶĐĞ • /ŶǀĞƐƚŵĞŶƚ ŶĂůLJƐŝƐ • WĞƌƐŽŶĂůŝnjĂƚŝŽŶ • ^D >ŽĂŶ KƌŝŐŝŶĂƚŝŽŶ

WŽůŝĐŝĞƐ ĂŶĚ WƌŽĐĞĚƵƌĞƐ DĂŶƵĂů

WŽůŝĐŝĞƐ ĂŶĚ WƌŽĐĞĚƵƌĞƐ DĂŶƵĂů • dŝŵĞ ĐŽŶƐƵŵŝŶŐ ƐĞĂƌĐŚĞƐ • ŝĨĨŝĐƵůƚ ĨŽƌ ŶĞǁ ĞŵƉůŽLJĞĞƐ

WŽƐŚ

ϯƌĚ WĂƌƚLJ ŝůŝŐĞŶĐĞ

ϯƌĚ WĂƌƚLJ ŝůŝŐĞŶĐĞ • EĞǁ ǀĞŶĚŽƌƐ • EĞǁ &ŝŶƚĞĐŚ ƉĂƌƚŶĞƌƐ • >ĂĐŬ ŽĨ ƌĞŐƵůĂƚŽƌLJ ĞdžƉĞƌƚŝƐĞ

<ŽďĂůƚ >ĂďƐ

<ŽďĂůƚ >ĂďƐ sŝĚĞŽ • ŚƚƚƉƐ͗ͬͬ ǁǁǁ͘ LJŽƵƚƵďĞ͘ ĐŽŵͬ ǁĂƚĐŚ͍ ǀс^yďytLJ Zz

/ŶǀĞƐƚŵĞŶƚ ŶĂůLJƐŝƐ

/ŶǀĞƐƚŵĞŶƚ ŶĂůLJƐŝƐ • sŽůƵŵŝŶŽƵƐ ƌĞŐƵůĂƚŽƌLJ ĨŝůŝŶŐƐ • KƉƉŽƌƚƵŶŝƚŝĞƐ • ,ŝĚĚĞŶ ƌŝƐŬƐ • /ĚĞŶƚŝĨLJŝŶŐ

ĚĞĞƉ<Ɖŝ ďLJ ZĞǀĞůĂƚĂ

ZĞǀĞůĂƚĂ sŝĚĞŽ • ŚƚƚƉƐ͗ͬͬ ǁǁǁ͘ LJŽƵƚƵďĞ͘ ĐŽŵͬ ǁĂƚĐŚ͍ ǀсϬ^/:ŵƵŐũĂ'h

WĞƌƐŽŶĂůŝnjĂƚŝŽŶ

WĞƌƐŽŶĂůŝnjĂƚŝŽŶ • ZĞĂůͲƚŝŵĞ ĐƵƐƚŽŵŝnjĂƚŝŽŶ ŽĨ ĐŽŶƚĞŶƚ ǁŚĞŶ ƵƐŝŶŐ ƚŚĞ ďĂŶŬ͛ Ɛ ǁĞďƐŝƚĞ͘ • ĞĞƉĞƌ ĞŶŐĂŐĞŵĞŶƚ • dƌĂŶƐĂĐƚŝŽŶĂů ĂŶĚ ďĞŚĂǀŝŽƌĂů ĚĂƚĂ

&ŝŶĂůLJƚŝĐƐ͘ Ăŝ

&ŝŶĂůLJƚŝĐƐ͘ Ăŝ

^D >ŽĂŶ KƌŝŐŝŶĂƚŝŽŶ

^D >ŽĂŶ KƌŝŐŝŶĂƚŝŽŶ • >ŝŵŝƚĞĚ ůŽĂŶ ŽĨĨŝĐĞƌ ƚŝŵĞ •͞ ŚƵƌŶ͟ ŝŶ ƐĞůĨͲƐĞƌǀĞ ƐLJƐƚĞŵƐ • KŶůŝŶĞ ƉƌĞĚĂƚŽƌLJ ůĞŶĚĞƌƐ • DŝƐƐĞƐ Z ŽƉƉŽƌƚƵŶŝƚŝĞƐ

ĞŶƚĂů WƌĂĐƚŝĐĞ džĂŵƉůĞ

ĂƐĐĂ ;^ĂƌĂŚͿ

ĂƐĐĂ sŝĚĞŽ • ŚƚƚƉƐ͗ͬͬ ǁǁǁ͘ LJŽƵƚƵďĞ͘ ĐŽŵͬ ǁĂƚĐŚ͍ ǀсͺZtsǁͲEĐŶK

ϭϭ <ĞLJ ŽŶƐŝĚĞƌĂƚŝŽŶƐ

ϭ͘ ZĞŐƵůĂƚŽƌLJ ŽŵƉůŝĂŶĐĞ

• ĂƚĂ WƌŝǀĂĐLJ͗ ŶƐƵƌĞ ĐŽŵƉůŝĂŶĐĞ ǁŝƚŚ ĚĂƚĂ ƉƌŝǀĂĐLJ ůĂǁƐ͘ • ŶƚŝͲDŽŶĞLJ >ĂƵŶĚĞƌŝŶŐ ; D>Ϳ͗ / ŵƵƐƚ ĂĚŚĞƌĞ ƚŽ D> ƌĞŐƵůĂƚŝŽŶƐ͘ • &Ăŝƌ >ĞŶĚŝŶŐ WƌĂĐƚŝĐĞƐ͗ ǀŽŝĚ ďŝĂƐĞƐ ŝŶ / ƚŚĂƚ ĐŽƵůĚ ůĞĂĚ ƚŽ ĚŝƐĐƌŝŵŝŶĂƚŽƌLJ ůĞŶĚŝŶŐ ƉƌĂĐƚŝĐĞƐ͘

• It is becoming increasingly clear that interdicting AI is not a viable option — the technology is too pervasive and promising to block or drive underground.

• Banks have employed AI in a responsible manner for decades and are leveraging that mature risk management framework as they begin implementing GAI.

• First, we urge that any new horizontal federal law pertaining to AI preempt state requirements and clearly exclude banks from any duplicative obligations.

• Because variations in definitions across agencies can cause confusion within individual banks and in the ecosystem at large, we suggest the National Institute of Standards and Technology (NIST) work with banking regulators to craft a workable interagency definition that can be leveraged to guide specific policies, particularly in the realm of supervisory activity.

Ϯ͘ ĂƚĂ DĂŶĂŐĞŵĞŶƚ • ĂƚĂ YƵĂůŝƚLJ͗ / ƐLJƐƚĞŵƐ ƌĞƋƵŝƌĞ ŚŝŐŚͲƋƵĂůŝƚLJ͕ ĂĐĐƵƌĂƚĞ ĚĂƚĂ͘ • ĂƚĂ ^ĞĐƵƌŝƚLJ͗ /ŵƉůĞŵĞŶƚ ƐƚƌŽŶŐ ƐĞĐƵƌŝƚLJ ŵĞĂƐƵƌĞƐ ƚŽ ƉƌŽƚĞĐƚ ƐĞŶƐŝƚŝǀĞ ĐƵƐƚŽŵĞƌ ĚĂƚĂ͘ • ĂƚĂ /ŶƚĞŐƌĂƚŝŽŶ͗ ŶƐƵƌĞ / ƐLJƐƚĞŵƐ ĐĂŶ ŝŶƚĞŐƌĂƚĞ ƐĞĂŵůĞƐƐůLJ ǁŝƚŚ ĞdžŝƐƚŝŶŐ ĚĂƚĂ ƐŽƵƌĐĞƐ͘

ϯ͘ ZŝƐŬ DĂŶĂŐĞŵĞŶƚ

• KƉĞƌĂƚŝŽŶĂů ZŝƐŬƐ͗ ǀĂůƵĂƚĞ ĂŶĚ ŵŝƚŝŐĂƚĞ ƌŝƐŬƐ ĂƐƐŽĐŝĂƚĞĚ ǁŝƚŚ / ĚĞƉůŽLJŵĞŶƚ͘ • LJďĞƌƐĞĐƵƌŝƚLJ͗ WƌŽƚĞĐƚ / ƐLJƐƚĞŵƐ ĨƌŽŵ ĐLJďĞƌ ƚŚƌĞĂƚƐ͘ • ƚŚŝĐĂů ZŝƐŬƐ͗ ŽŶƐŝĚĞƌ ƚŚĞ ĞƚŚŝĐĂů ŝŵƉůŝĐĂƚŝŽŶƐ ŽĨ / ĚĞĐŝƐŝŽŶƐ ĂŶĚ ĞŶƐƵƌĞ ƚƌĂŶƐƉĂƌĞŶĐLJ͘

ϰ͘ ƵƐƚŽŵĞƌ /ŵƉĂĐƚ

• ƵƐƚŽŵĞƌ ^ĞƌǀŝĐĞ͗ hƐĞ / ƚŽ ĞŶŚĂŶĐĞ͕ ŶŽƚ ƌĞƉůĂĐĞ͕ ŚƵŵĂŶ ĐƵƐƚŽŵĞƌ ƐĞƌǀŝĐĞ͘ • ƵƐƚŽŵĞƌ dƌƵƐƚ͗ DĂŝŶƚĂŝŶ ƚƌĂŶƐƉĂƌĞŶĐLJ ǁŝƚŚ ĐƵƐƚŽŵĞƌƐ ĂďŽƵƚ ŚŽǁ / ŝƐ ƵƐĞĚ͘ • ƵƐƚŽŵĞƌ džƉĞƌŝĞŶĐĞ͗ ŶƐƵƌĞ / ĞŶŚĂŶĐĞƐ ƚŚĞ ŽǀĞƌĂůů ĐƵƐƚŽŵĞƌ ĞdžƉĞƌŝĞŶĐĞ͘

ϱ͘ KƉĞƌĂƚŝŽŶĂů ĨĨŝĐŝĞŶĐLJ

• ƵƚŽŵĂƚŝŽŶ͗ >ĞǀĞƌĂŐĞ / ƚŽ ĂƵƚŽŵĂƚĞ ƌŽƵƚŝŶĞ ƚĂƐŬƐ͕ ƌĞĚƵĐŝŶŐ ŽƉĞƌĂƚŝŽŶĂů ĐŽƐƚƐ͘ • ĞĐŝƐŝŽŶͲDĂŬŝŶŐ͗ hƐĞ / ƚŽ ĞŶŚĂŶĐĞ ĚĂƚĂͲĚƌŝǀĞŶ ĚĞĐŝƐŝŽŶͲŵĂŬŝŶŐ ƉƌŽĐĞƐƐĞƐ͘ • ^ĐĂůĂďŝůŝƚLJ͗ ŶƐƵƌĞ / ƐŽůƵƚŝŽŶƐ ĂƌĞ ƐĐĂůĂďůĞ ĂƐ ƚŚĞ ďĂŶŬ ŐƌŽǁƐ͘

ϲ͘ ^ƚĂĨĨ dƌĂŝŶŝŶŐ ĂŶĚ ĞǀĞůŽƉŵĞŶƚ

• ^Ŭŝůů ĞǀĞůŽƉŵĞŶƚ͗ /ŶǀĞƐƚ ŝŶ ƚƌĂŝŶŝŶŐ ƐƚĂĨĨ ƚŽ ǁŽƌŬ ĂůŽŶŐƐŝĚĞ / ƐLJƐƚĞŵƐ͘ • ŚĂŶŐĞ DĂŶĂŐĞŵĞŶƚ͗ WƌĞƉĂƌĞ ƐƚĂĨĨ ĨŽƌ ĐŚĂŶŐĞƐ ŝŶ ǁŽƌŬĨůŽǁ ĚƵĞ ƚŽ / ŝŵƉůĞŵĞŶƚĂƚŝŽŶ

ϳ͘ sĞŶĚŽƌ ^ĞůĞĐƚŝŽŶ

• ZĞƉƵƚĂƚŝŽŶ ĂŶĚ ZĞůŝĂďŝůŝƚLJ͗ ŚŽŽƐĞ ǀĞŶĚŽƌƐ ǁŝƚŚ Ă ƉƌŽǀĞŶ ƚƌĂĐŬ ƌĞĐŽƌĚ ŝŶ / ƐŽůƵƚŝŽŶƐ ĨŽƌ ďĂŶŬŝŶŐ͘ • ƵƐƚŽŵŝnjĂƚŝŽŶ͗ ŶƐƵƌĞ ƚŚĞ / ƐŽůƵƚŝŽŶ ĐĂŶ ďĞ ƚĂŝůŽƌĞĚ ƚŽ ŵĞĞƚ ƐƉĞĐŝĨŝĐ ŶĞĞĚƐ ŽĨ ƚŚĞ ďĂŶŬ͘ • ^ƵƉƉŽƌƚ ĂŶĚ DĂŝŶƚĞŶĂŶĐĞ͗ ŽŶƐŝĚĞƌ ƚŚĞ ůĞǀĞů ŽĨ ƐƵƉƉŽƌƚ ĂŶĚ ŽŶŐŽŝŶŐ ŵĂŝŶƚĞŶĂŶĐĞ ƉƌŽǀŝĚĞĚ ďLJ ƚŚĞ ǀĞŶĚŽƌ͘

ϴ͘ ŽƐƚͲ ĞŶĞĨŝƚ ŶĂůLJƐŝƐ • /ŶŝƚŝĂů /ŶǀĞƐƚŵĞŶƚ͗ ƐƐĞƐƐ ƚŚĞ ŝŶŝƚŝĂů ĐŽƐƚƐ ŽĨ ŝŵƉůĞŵĞŶƚŝŶŐ /͘ • ZĞƚƵƌŶ ŽŶ /ŶǀĞƐƚŵĞŶƚ ;ZK/Ϳ͗ ǀĂůƵĂƚĞ ƚŚĞ ƉŽƚĞŶƚŝĂů ZK/ ĨƌŽŵ / ĚĞƉůŽLJŵĞŶƚ͘ • >ŽŶŐͲdĞƌŵ ^ĂǀŝŶŐƐ͗ ŽŶƐŝĚĞƌ ůŽŶŐͲƚĞƌŵ ĐŽƐƚ ƐĂǀŝŶŐƐ ĂŶĚ ĞĨĨŝĐŝĞŶĐLJ ŐĂŝŶƐ͘

ϵ͘ ƚŚŝĐĂů ĂŶĚ ^ŽĐŝĂů ZĞƐƉŽŶƐŝďŝůŝƚLJ • dƌĂŶƐƉĂƌĞŶĐLJ͗ ŶƐƵƌĞ / ĚĞĐŝƐŝŽŶƐ ĂƌĞ ĞdžƉůĂŝŶĂďůĞ ĂŶĚ ƚƌĂŶƐƉĂƌĞŶƚ͘ • ŽŵŵƵŶŝƚLJ /ŵƉĂĐƚ͗ ŽŶƐŝĚĞƌ ƚŚĞ ďƌŽĂĚĞƌ ŝŵƉĂĐƚ ŽĨ / ŽŶ ƚŚĞ ĐŽŵŵƵŶŝƚLJ ƐĞƌǀĞĚ ďLJ ƚŚĞ ďĂŶŬ͘

ϭϬ͘ ^ƚƌĂƚĞŐŝĐ ůŝŐŶŵĞŶƚ

• ƵƐŝŶĞƐƐ 'ŽĂůƐ͗ ůŝŐŶ / ŝŶŝƚŝĂƚŝǀĞƐ ǁŝƚŚ ƚŚĞ ďĂŶŬ͛ Ɛ ŽǀĞƌĂůů ďƵƐŝŶĞƐƐ ƐƚƌĂƚĞŐLJ͘ • ŽŵƉĞƚŝƚŝǀĞ ĚǀĂŶƚĂŐĞ͗ >ĞǀĞƌĂŐĞ / ƚŽ ŐĂŝŶ Ă ĐŽŵƉĞƚŝƚŝǀĞ ĞĚŐĞ ŝŶ ƚŚĞ ŵĂƌŬĞƚ͘ • /ŶŶŽǀĂƚŝŽŶ ƵůƚƵƌĞ͗ &ŽƐƚĞƌ Ă ĐƵůƚƵƌĞ ŽĨ ŝŶŶŽǀĂƚŝŽŶ ƚŽ ƐƵƉƉŽƌƚ / ŝŶƚĞŐƌĂƚŝŽŶ͘

ϭϭ͘ DŽŶŝƚŽƌŝŶŐ ĂŶĚ ǀĂůƵĂƚŝŽŶ

• WĞƌĨŽƌŵĂŶĐĞ DĞƚƌŝĐƐ͗ ĞĨŝŶĞ ĂŶĚ ƚƌĂĐŬ ŬĞLJ ƉĞƌĨŽƌŵĂŶĐĞ ŝŶĚŝĐĂƚŽƌƐ ;ŽŽƉƐ͗ ƐƚĂďůŝƐŚ ĨĞĞĚďĂĐŬ ŵĞĐŚĂŶŝƐŵƐ ƚŽ ĐŽŶƚŝŶƵŽƵƐůLJ ŝŵƉƌŽǀĞ / ƐLJƐƚĞŵƐ ďĂƐĞĚ ŽŶ ƵƐĞƌ ĂŶĚ ĐƵƐƚŽŵĞƌ ĨĞĞĚďĂĐŬ͘

&ŝŶĂů WŽŝŶƚƐ • /ĚĞŶƚŝĨLJ ŽƉƉŽƌƚƵŶŝƚŝĞƐ ƚŚĂƚ ĨƌĞĞ ĞŵƉůŽLJĞĞƐ ĨƌŽŵ ůŽǁͲǀĂůƵĞ͕ ƌĞƉĞƚŝƚŝǀĞ ƚĂƐŬƐ͘ • ŶƐƵƌĞ ƚŚĂƚ LJŽƵƌ ĚĂƚĂ ŝŶĨƌĂƐƚƌƵĐƚƵƌĞ ŝƐ ƌĞĂĚLJ ĨŽƌ / ŽƉƉŽƌƚƵŶŝƚŝĞƐ͘ • hŶĚĞƌƐƚĂŶĚ ƚŚĂƚ ĞdžƚĞƌŶĂů ƚĞĐŚŶŝĐĂů ƚĂůĞŶƚ ǁŝůů ďĞ ŝŶ ƐŚŽƌƚ ƐƵƉƉůLJ ŝŶ ƚŚĞ ŶĞĂƌ ƚĞƌŵ͘ • dŚĞ ƌĞŐƵůĂƚŽƌLJ ĞŶǀŝƌŽŶŵĞŶƚ ŝƐ ĞǀŽůǀŝŶŐ͘

• / ŝƐ ŶŽƚ ƐĞƚ ŝƚ ĂŶĚ ĨŽƌŐĞƚ ŝƚ͘ • ǀŽŝĚ ƉĂƌĂůLJƐŝƐ ďLJ ĂŶĂůLJƐŝƐ͘

dŚĂŶŬ zŽƵ͊

:ĂĐŬ sŽŶĚĞƌ ,ĞŝĚĞ ũǀΛƚďĐŚƋ͘ ĐŽŵ ϲϯϬͲϳϴϵͲϴϮϮϮ

Mortgage Markets and Regulation Jason Cave Principal, Piedmont Risk Advisors, LLC

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Elections Have Consequences…

• And they are particularly acute in the mortgage finance space • FHFA is now a political agency for all intensive purposes • Expect turnover in key CAREER STAFF positions in addition to Director • FHFA as Conservator DIRECTS (not supervises) virtually actions of the GSEs from approving Executives and Board to business operations such as setting loan pricing, product returns, and credit risk standards • Pendulum swing from Calabria (GSE exit 24/7) to Thompson (equitable housing) was significant, and will likely swing back. • And we are talking about $9 trillion in MBS guarantees. Big Book.

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Republican Led FHFA Priorities • FHLB Banks breath a sign of relief…no longer the center of attention • Expect FHFA to Use the Infrastructure Calabria built to pursue exit • Capital rules completed; GSEs have built $150 billion in net worth • Focus on “plumbing”—common securitization, rules with Fed/banking agencies for bank investments in GSEs, SEC… • Work with Treasury and investment bankers on pricing, ROE, and capital stack restructuring (Treasury and preferred investors) • Structuring the MBS Guaranty WILL BE EXTREMELY IMPORTANT!!! • FHFA needs Treasury on Board with all parts of the Exit Plan..Bessent’s appetite to take on the ”mortgage ecosystem” will be the most important factor in whether GSEs exit. • For a good explanation of GSE Exit challenges—Chris Whalen on HousingWire

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FSOC Report on Mortgage Servicers • Yellen-led FSOC placed servicers under the designation microscope • Nonbank mortgage servicers are 7 of the 10 largest servicers for Fannie Mae, Freddie Mac, and Ginnie Mae • Identifies vulnerabilities that can impair servicers’ ability to carry out critical functions • Failure could amplify shocks to the mortgage market and pose risks to financial stability • Large servicing portfolios cannot be transferred quickly because the transfer process is inherently resource-intensive and complicated. • Combination of various state requirements and limited federal authorities to impose additional requirements do not adequately and holistically address the risks described in the Council’s report.

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FSOC Recommendations • Encourages state regulators, as the primary prudential regulators of nonbank mortgage servicers, to enhance prudential requirements require recovery and resolution planning. • Encourages Congress to consider providing FHFA and Ginnie Mae with additional authority to directly examine nonbank mortgage servicer counterparties. • Encourages Congress to consider establishing a fund financed by the nonbank mortgage servicing sector to provide liquidity to nonbank mortgage servicers that are in bankruptcy or have reached the point of failure. • 2024 Annual Report: “ Stress in the nonbank mortgage sector could lead to disorderly servicing transfers; a stressed nonbank mortgage servicer may fail to apply collections properly, make required advances, mitigate losses, or perform other servicing activities”

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CSBS Response to FSOC: Current Regulatory System Adequate • As the primary regulator of nonbanks, states have broad licensing, examination, investigation, and enforcement authorities. Prudential standards, including financial capacity (i.e., net worth/capital and liquidity), governance, and risk management requirements, are also a matter of state law enforced by state regulators. • Under existing authorities, federal agencies have significant options to mitigate risk at nonbank mortgage companies and throughout the mortgage market. • These federal agencies examine and stress test nonbank mortgage companies, and effectively determine if a nonbank can participate in the respective agency mortgage market. • The tangible shareholders’ equity of the top 50 nonbank servicers has increased 155% since 2019 and 6.4% in the past year. 4 Nonbank mortgage companies have remained resilient and weathered interest rate increases and challenging operating conditions over the last two years. • The unrestricted cash of the top 50 nonbank forward mortgage servicers has increased 221% since 2019 and 11% in the past year. 5 • Targeted improvements to federal programs, particularly Ginnie Mae-focused reforms, can enhance the resilience of the nonbank mortgage sector and consumer protections

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FSOC Under Trump • Bessent-led FSOC likely to de-emphasize firm designations • Congressional fixes unlikely—forget FDIC fund for servicers. • Servicer access to FHLB advances?? • Will the new team use the Servicer report as a roadmap for activities designations? • Will they be more comfortable with state-based regulation of servicers? • Connections between GSE exit plans/nonbank risks/Basel end game will be important—do banks want to reclaim the business??

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Resolution and Recovery Planning Expectations-FSOC Report • Considerable focus on RRP for large nonbank servicers • “Large servicing portfolios cannot be transferred quickly because the transfer process is inherently lengthy and complicated” • “any large nonbank mortgage servicer that failed might need to remain operational while in bankruptcy for some time to maintain critical mortgage servicing functions” • “absent sufficient liquidity just before bankruptcy, the NMC would likely only be able to sustain operations for a limited period of time” • “federal banking agencies have resolution tools to enable core operations, such as mortgage servicing by a bank, to continue in the event of a bank failure” • no servicing transfers have ever occurred at the scale of the largest current NMC portfolios; the largest ever -- ResCap BK 375B would be 9 th on the today’s list.

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Developing RRP Framework

• Clear statutory/legal/regulatory framework for “who” does “what” to “who”, and “when” they do it. • FDIC and FHFA benefit from established special resolution authorities • FDIC and Fed can force banks to become makes resolvable under BK • OCC established recovery guidelines under statutory S&S (FDICIA) • What authorities do the States/CSBS have to compel NMC to make themselves resolvable under BK? • What authorities do the States/CSBS to resolve NMC in an orderly manner in event BK not feasible? • What authorities do the States/CSBS to require early remediation/receovery actions to reduce the probability of failure?

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Authorities Matter

• FDIC had no authorities whatsoever to get involved in bankruptcy processes before DFA. • Without special resolution authority over banks (since 1930s) and BHC (Title 2), FDIC would have no authority to conduct orderly resolutions. Just another insurer. • FHFA has similar powers over GSEs and FHLBs banks. • General safety and soundness/recovery planning authorities work….as long as some other authorities has resolution powers. • Understanding your authorities….and their limitations…is essential.

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Coordination among States is Critical to Success • Clarity on role and responsibilities before gameday—just like with a large state bank operating in multiple jurisdictions • GSEs—very clear its FHFA—stated in the HERA statute along with all of the powers and authorities the FHFA has to resolve the GSEs and FHLB Banks. • Large Bank BHCs—the 3 keys. FDIC resolves the SIFI IF a Majority of FDIC Board/Fed Board/Treasury Secretary determine BK not feasible/would have serious effects on financial stability. Otherwise, its BK Court w FDIC for IDIs. • Benefit from the insurance regulator’s success • Consider who your ”3 keys” are in the event of a large NMC failure • Who makes the decisions to place a NMC into bankruptcy/special resolution—is their a lead state regulator? If not, then who? Do you just leave it to the company (not advisable…)…who makes the call and under what basis. Just like when you close a bank…

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Prioritize • Focus on the big ticket items. What resolution powers do you have? • Is it just Bankruptcy? Do states have additional laws or regulations that allow for special resolution tools--like over QFCs, similarly situated claims, liquidity. • Ensure the NMC has a credible plan for accessing DIP in various adverse scenarios. • Have the NMC servicer articulate a scenario where DIP would not be forthcoming and develop a plan to mitigate that event • Don’t get caught up in the “weeds” of whether every service contract is bankruptcy remote. Start at the top. Ability to facilitate a large scale transfer of serviced customers—fsoc mentioned this 20x. • Look to large servicer failures—New Century and ResCap to see what the big issues were and make sure you have them covered.

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