Large Bank Supervision Forum eBook

Internal Use Only

Large Bank Supervision Forum

March 4-6, 2024 Baltimore, MD

@ www.csbs.org ♦ @csbsnews

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

Large Bank Supervision Forum March 4 - 6, 2024 | All Times Eastern Time Baltimore, Maryland

Location: Hyatt Regency Baltimore Meeting Room: Constellation EF

Monday, March 4 12:00 PM – 1:00 PM

Registration I Outside Constellation EF

Welcome & Opening Remarks Amy Richardson Senior Director, Workforce Development Conference of State Bank Supervisors Welcome to Maryland Antonio Salazar Commissioner Maryland Office of Financial Regulation Keynote Mo Romani Deputy CRO & Chief Credit Officer Truist Bank

1:00 PM – 1:15 PM

1:15 PM – 1:30 PM

1:30 PM – 2:15 PM

Break

2:15 PM – 2:30 PM

A Tale of Economic Metrics: Understanding Current and Potential Future Economic Conditions Tom Siems Chief Economist Conference of State Bank Supervisors

2:30 PM – 3:30 PM

Break

3:30 PM – 3:45 PM

A Dialogue with CSBS Leadership Lise Kruse Commissioner North Dakota Department of Financial Institutions

3:45 PM – 4:30 PM

Brandon Milhorn President & CEO Conference of State Bank Supervisors

Networking Reception I Columbia/Frederick

5:30 PM – 7:30 PM Tuesday, March 5 7:30 AM – 8:30 AM

Breakfast I Columbia/Frederick

Beyond (Lagging) Financial Metrics A CAMELS examination approach that starts with Corporate Governance Scott Polakoff Director Royal Business Bank

8:30 AM – 10:00 AM

Break

10:00 AM – 10:15 AM

Enterprise Risk Management (ERM) Discussion Jacob Gardner Senior Examination Specialist, Large Financial Institutions Federal Deposit Insurance Corporation (FDIC)

10:15 AM – 11:30 AM

Lorenzo Garza Vice President, Banking Supervision Federal Reserve Bank of Dallas John Hays Senior Director, Supervisory Process Conference of State Bank Supervisors Data Analytics Carlos Cordova Data Scientist Conference of State Bank Supervisors Brennan Zubrick Vice President, Research & Analytics Conference of State Bank Supervisors Lunch on Own

11:30 AM – 1:00 PM

1:00 PM – 2:00 PM

Break

2:00 PM – 2:15 PM

Navigating the Current Landscape of CMBS Markets: Trends & Risks Stephen Buschbom Research Director Trepp

2:15 PM – 3:15 PM

Break

3:15 PM – 3:30 PM

Financial Crimes & Cyber Threats Keith Custer Supervisory Special Agent Federal Bureau of Investigation (FBI) Steve Spillman Special Agent Federal Bureau of Investigation (FBI)

3:30 PM – 4:30 PM

Wednesday, March 6 7:30 AM – 8:30 AM

Breakfast I Columbia/Frederick

Federal Agency Panel Chris Rivera

8:30 AM – 10:00 AM

Section Chief, Risk Management Supervision Federal Deposit Insurance Corporation (FDIC)

Jason Schemmel Assistant Vice President, Supervision, Regulation & Credit Federal Reserve Bank of Richmond

Mary Beth Quist Senior Vice President, Bank Supervision Conference of State Bank Supervisors

Break

10:00 AM – 10:15 AM

Fireside Chat: Recap of SVB Failure Aaron Prosperi Deputy Commissioner of Banking California Department of Financial Protection & Innovation

10:15 AM – 11:30 AM

Mary Beth Quist Senior Vice President, Bank Supervision Conference of State Bank Supervisors

Lunch on Own

11:00 AM – 1:30 PM

Lessons Learned from March 2023 Varanessa Marshall Assistant Director, Monitoring & Risk Analysis Federal Deposit Insurance Corporation (FDIC)

1:00 PM – 2:00 PM

Large Bank Supervision: State of the State and Best Practices Mary Beth Quist

2:00 PM – 2:45 PM

Senior Vice President, Bank Supervision Conference of State Bank Supervisors

Break

2:45 PM – 3:00 PM

What’s Happening in DC Will Dargusch Senior Director, Legislative Policy Conference of State Bank Supervisors

3:00 PM – 3:30 PM

CSBS Accreditation, Certification & Training Updates Melissa Sneed Deputy Commissioner for Supervision Georgia Department of Banking & Finance Sebastien Monnet Acting Senior Vice President, Workforce Development Conference of State Bank Supervisors

3:30 PM – 4:15 PM

Closing Remarks Amy Richardson

4:15 PM – 4:30 PM

Senior Director, Workforce Development Conference of State Bank Supervisors

Adjourn

4:30 PM

CSBS Large Bank Supervision Forum Baltimore, Maryland March 4 ‐ 6, 2024

ATTENDEES Alabama State Banking Department Bonds, Alison

alison.bonds@banking.alabama.gov jonathan.face@banking.alabama.gov curtis.larsen@banking.alabama.gov john.russell@banking.alabama.gov

Face, Jonathan Larsen, Curtis Russell, John

Arkansas State Bank Department Bush, Gary

gbush@banking.state.ar.us chamilton@banking.state.ar.us jhouseholder@banking.state.ar.us bmoseley@banking.state.ar.us

Hamilton, Caleb Householder, John Moseley, Baker

California Department of Financial Protection and Innovation Levernier, Timothy

timothy.levernier@dfpi.ca.gov mohammad.noor@dfpi.ca.gov

Noor, Mohammad

Florida Office of Financial Regulation Hicks, Susan

susan.hicks@flofr.gov terry.hughes@flofr.gov

Hughes, Terry

Georgia Department of Banking and Finance Bridges, Laura

lbridges@dbf.state.ga.us jmendoza@dbf.state.ga.us msneed@dbf.state.ga.us

Mendoza, Jennifer Sneed, Melissa

Illinois Division of Banking Andreatos, Andreas

andreas.andreatos@illinois.gov oscar.gonzalez@illinois.gov samuel.hendrickson@illinois.gov russell.holman@illinois.gov katherine.reddick@illinois.gov wayne.r.shoemaker@Illinois.gov thomas.stuart@illinois.gov

Gonzalez, Oscar

Hendrickson, Samuel Holman, Russell Reddick, Katherine Shoemaker, Wayne

Stuart, Thomas

Kansas Office of the State Bank Commissioner Baugh, Michael

michael.baugh@osbckansas.org marcella.haskell@osbckansas.org

Haskell, Marcella

Louisiana Office of Financial Institutions Bruce, Jesse

jbruce@ofi.la.gov cfloyd@ofi.la.gov

Floyd, Chris

Maine Bureau of Financial Institutions McLaughlin, Andrea

andrea.mcLaughlin@maine.gov

Massachusetts Division of Banks Beighley, Denise

denise.beighley@Mass.gov martin.jewett@mass.gov

Jewett, Martin

Mississippi Department of Banking & Consumer Finance Burton, Bryan

bryan.burton@dbcf.ms.gov

Cox, Jeff

jeff.cox@dbcf.ms.gov

Hudson, Mark Jones, Reed

mark.hudson@dbcf.ms.gov reed.jones@dbcf.ms.gov cody.king@dbcf.ms.gov paul.lion@dbcf.ms.gov nicky.shelton@dbcf.ms.gov erik.smith@dbcf.ms.gov hannah.thames@dbcf.ms.gov perryanne.thimmes@dbcf.ms.gov

King, Cody Lion, Paul

Shelton, Nicky

Smith, Erik

Thames, Hannah

Thimmes, Perry Anne

Williams, Don

don.williams@dbcf.ms.gov

Nebraska Department of Banking and Finance Focken, Brody

brody.focken@nebraska.gov benjamin.kiolbasa@nebraska.gov

Kiolbasa, Benjamin

New York State Department of Financial Services Alvarez, Nerissa

nerissa.alvarez@dfs.ny.gov marian.chen@dfs.ny.gov reena.mathew@dfs.ny.gov nia.mcleod@dfs.ny.gov matthew.meyer@dfs.ny.gov stuart.taub@dfs.ny.gov

Chen, Marian Mathew, Reena

McLeod, Nia

Meyer, Matthew

Taub, Stuart

North Carolina Office of Commissioner of Banks Dalpiaz, Jay

jdalpiaz@nccob.gov tgatlin@nccob.gov rstewart@nccob.gov

Gatlin, Thomas Stewart, Richard

North Dakota Department of Financial Institutions Kruse, Lise

lkruse@nd.gov amills@nd.gov

Mills Fischer, Angie

Ohio Division of Financial Institutions Morgan, Brian Oregon Division of Financial Regulation Anderson, Kirsten

brian.morgan@com.ohio.gov

kirsten.l.anderson@dcbs.oregon.gov stephen.gordon@dcbs.oregon.gov

Gordon, Stephen

Pennsylvania Department of Banking and Securities Cestello, Alison

acestello@pa.gov rolopez@pa.gov memiddleto@pa.gov

Lopez, Robert

Middleton, Meghan

South Carolina Division of Banking Fleming, Aaron

aaron.fleming@banking.sc.gov

Tennessee Department of Financial Institutions Casselberry, Grant

grant.casselberry@tn.gov alisse.fowler@tn.gov michael.glaser@tn.gov

Fowler, Alisse Glaser, Michael

Ragan, Holly

holly.ragan@tn.gov

Utah Department of Financial Institutions Farnsworth, Bryan

bfarnsworth@utah.gov tremington@utah.gov aschilhabel@utah.gov

Remington, Teri Schilhabel, Angela

Washington Department of Financial Institutions Harvey, Matthew

matthew.harvey@dfi.wa.gov

SPEAKERS California Department of Financial Protection & Innovation Prosperi, Aaron

aaron.prosperi@dfpi.ca.gov

Federal Bureau of Investigation Custer, Keith

kacuster@fbi.gov sspillman@fbi.gov

Spillman, Steve

Federal Deposit Insurance Corporation Gardner, Jacob

jagardner@fdic.gov vamarshall@fdic.gov chrivera@fdic.gov

Marshall, Varanessa

Rivera, Chris

Federal Reserve Bank of Dallas Garza, Lorenza

lorenzo.garza@dal.frb.org

Federal Reserve Bank of Richmond Schemmel, Jason

jason.schemmel@rich.frb.org

Georgia Department of Banking and Finance Sneed, Melissa

msneed@dbf.state.ga.us

Maryland Office of the Commissioner Salazar, Antonio

tony.salazar@maryland.gov

North Dakota Department of Financial Institutions Kruse, Lise

lkruse@nd.gov

Royal Business Bank Polakoff, Scott Trepp Buschbom, Stephen

smpolakoff@icloud.com

stephen_buschbom@trepp.com

Truist Bank Ramani, Mo

mo.ramani@truist.com

CSBS STAFF Barnett, Susanna Cordova, Carlos Dargusch, William

sbarnett@csbs.org ccordova@csbs.org wdargusch@csbs.org jhays@csbs.org khoyle@csbs.org jjarmin@csbs.org bmilhorn@csbs.org smonnet@csbs.org mbquist@csbs.org arichardson@csbs.org tsiems@csbs.org bzubrick@csbs.org

Hays, John Hoyle, Katie

Jarmin, Jennifer Milhorn, Brandon Monnet, Sebastien Quist, May Beth Richardson, Amy Siems, Ph.D., Thomas

Zubrick, Brennan

In Our Risk Era (Mo’s Version) Mo Ramani March 2024

© 2024 Truist Financial Corporation. TRUIST, the Truist logo and Truist Purple are service marks of Truist Financial Corporation. All rights reserved.

ƒ The views and opinions expressed in this presentation do not necessarily state or reflect those of Truist Financial (Truist) and its subsidiaries. Disclaimer

2

IN OUR RISK ERA Table of Contents

2024 Risk Outlook

Credit Risks Overview

CRE Considerations

Generative AI/ML

Emerging Cyber Risks

Regulatory Relations

Other Risk Topics

Q & A

3

EYES OPEN 2024 Risk Outlook

4

2024 Risk Outlook

5

Source: Shifting Priorities, Enduring Risks: The 2024 RMA and Oliver Wyman CRO Outlook Survey

Staffing / Budget Trends

Risk headcount YoY changes

Risk budget YoY changes

6

Source: Shifting Priorities, Enduring Risks: The 2024 RMA and Oliver Wyman CRO Outlook Survey

...READY FOR IT? Credit Risks Overview

7

Emerging Credit Risks

ƒ Consumer FOMO continues to fuel confidence with financial leverage ƒ Geopolitical instability ƒ Fed easing / Soft landing? ƒ Contagion risk / Counterparty risk ƒ Strong housing market / Lack of supply ƒ Corporate layoffs continue ƒ Continued growth in non-bank competition Macro Trends

Areas of Concern

ƒ Elevated rates and impact on DTI / Debt Service Coverage ƒ Student loan repayments ƒ Record credit card debt ƒ Falling auto prices ƒ CRE Office / Multifamily / Senior Housing ƒ Leveraged finance market ƒ Non-reported debt (BNPL, etc.)

8

Consumer Credit Card Balances

9

Source: New York Fed Consumer Credit Panel/ Equifax

Consumer Health

10

Source: Goldman Sachs Economics Research

Post Pandemic Credit Scores

11

Source: Federal Reserve, Intex, Goldman Sachs Global Investment Research

Banks Tightening Lending Standards

12

Source: Oxford Economics/Haver Analytics

BLANK SPACE CRE Considerations

13

CRE – Industry Reserve Ratios

14

Source: Shifting Priorities, Enduring Risks: The 2024 RMA and Oliver Wyman CRO Outlook Survey

In-person Activities vs RTO

15

Source: Morgan Stanley: Why The Commercial Real Estate Crisis Will Be With Us For A Long Time

MASTERMIND Generative AI/ ML

16

Generative AI Considerations

Aiding in software development

Enhancing marketing efforts where AI can generate content, optimize ads, and customize sales

Improving data insights and reporting

Assisting in customer support and advice

Strengthen existing fraud models with insights from unstructured data

Value Factors Driving Adoption

Big Tech offering secure, ethical Generative AI tools

Growing public adoption of Generative AI

Generative AI policies and procedures being developed

Evolving client expectations

17

Source: Truist Foundry

Generative AI Challenges and Risks

Reliance on AI

Data sharing and ownership

Risk of not adopting Generative AI

Explainability

Hallucinations, bias and adversarial robustness Reproducibility

Security implications

Unpredictable cost of ownership

Developing regulation and policy

Model accuracy

Deep fakes and phishing

Training and usage data exfiltration

18

Source: Truist Foundry

I KNEW YOU WERE TROUBLE Emerging Cyber Risks

19

Cyber-related Impacts on Financial Services Industry

Number of cases of data violation due to cyber attacks in financial services industry in the United States from 2019 to 2023

Share of attacks by industry 2019-2023

Number of Incidents

20

Sources: IBM; Statista

Key Cyber Considerations for Financial Services

Secure-by design software/ banking products

Phishing prevention

Supply chain security

Open banking

API security

Ransomware security

21

SAFE AND SOUND Regulatory Relations

22

2024 KPMG Regulatory Themes

‘Threat Actors’

Regulatory Intensity

6 7 8 9

1

Fairness

Risk Standards

2 3

Responsible Systems

Risk Sustainability

Security & Privacy

Growth & Resiliency

4

Data

Capital & Valuation

10

5

23

Source: KPMG Regulatory Insights

Ensuring Trust and Transparency with Supervisors

Demonstrating risk ownership across all lines of defense

Building and maintaining trust

Understanding regulatory priorities

Continuous improvement mindset

Reduced regulatory observations

Safety and soundness

24

Regulatory Relations

Regulatory Relations

Regulatory Supervisors

Truist

What does Truist Reg Relations Do?

Provides oversight/monitoring of Supervisory Matters

Leads end to end process for prudential regulators examinations

Handles ad hoc requests for regulators

Oversight of non prudential regulator examinations

Manages Continuous Monitoring meetings

25

Value of Routine Continuous Meetings

Additional Value in Face-to Face Meetings

Initial Benefits

Increased engagement and participation

Organic Collaboration

Limit technology issues

Enhanced communication

Proactive problem solving

Clarity and perspective

Clearer communication and goals

Mitigate distraction

Relationship building

26

CHANGE Other Risk Topics

27

Emerging Risk Programs

Climate

Automation oversight

Strategic workforce planning

Data risk

Resilience

28

…QUESTION? Q & A

29

Internal Use Only

2024 Economic Turbulence: Fed’s Soft Landing, CRE Air Pockets, and National Debt Altitude Increases Thomas F. Siems, CSBS Chief Economist

2024 CSBS Large Bank Supervisory Forum Baltimore, MD March 4, 2024

Internal Use Only

2024 Economic Turbulence Are We in a Recession Yet?

The Fed’s Pursuit of a Soft Landing

CRE Air Pockets

The Federal Debt Increases Altitude

Internal Use Only

2024 Economic Turbulence Are We in a Recession Yet?

The Fed’s Pursuit of a Soft Landing

CRE Air Pockets

The Federal Debt Increases Altitude

Internal Use Only

Internal Use Only

Coincident Economic Indicators

Personal Income

650

550

Manufacturing and Trade Sales

450

Coincident Economic Index

350

Industrial Production

250

Payroll Employment

150

Economic Indicators, Indexed (January 1959 = 100)

Sources: The Conference Board; Bureau of Economic Analysis

50

Jul-70

Jul-93

Jul-16

Jan-59

Jan-82

Jan-05

Jun-72

Jun-95

Jun-18

Oct-64

Oct-87

Oct-10

Apr-76

Feb-80

Apr-99

Feb-03

Apr-22

Sep-66

Sep-89

Sep-12

Dec-60

Dec-83

Dec-06

Aug-68

Aug-91

Aug-14

Nov-62

Nov-85

Nov-08

Mar-78

Mar-01

May-74

May-97

May-20

Internal Use Only

Internal Use Only

Internal Use Only

Total U.S. Nonfarm Payroll Employment Surpasses Former Peak by 5.4 Million

160,000

155,000

150,000

145,000

140,000

135,000 Thousands of Persons

130,000

Source: U.S. Bureau of Labor Statistics

125,000

Internal Use Only

Help Wanted! Still 9 Million Open Jobs Available in the U.S.

14000

12000

10000

8000

6000

4000

Job Openings (in Thousands)

2000

0

Jun-02

Jun-05

Jun-08

Jun-11

Jun-14

Jun-17

Jun-20

Jun-23

Sep-01

Sep-04

Sep-07

Sep-10

Sep-13

Sep-16

Sep-19

Sep-22

Dec-00

Dec-03

Dec-06

Dec-09

Dec-12

Dec-15

Dec-18

Dec-21

Mar-03

Mar-06

Mar-09

Mar-12

Mar-15

Mar-18

Mar-21

Internal Use Only

Internal Use Only

Leading Economic Index

120

100

80

60

40

20 Leading Economic Index (2016 = 100)

Source: The Conference Board

Note: Gray bars delineate economic recessions

0

Jul-70

Jul-93

Jul-16

Jan-59

Jan-82

Jan-05

Jun-72

Jun-95

Jun-18

Oct-64

Oct-87

Oct-10

Apr-76

Feb-80

Apr-99

Feb-03

Apr-22

Sep-66

Sep-89

Sep-12

Dec-60

Dec-83

Dec-06

Aug-68

Aug-91

Aug-14

Nov-62

Nov-85

Nov-08

Mar-78

Mar-01

May-74

May-97

May-20

Internal Use Only

Leading Economic Index

120

100

80

60

40

20 Leading Economic Index (2016 = 100)

Source: The Conference Board

Note: Gray bars delineate economic recessions

0

Jul-70

Jul-93

Jul-16

Jan-59

Jan-82

Jan-05

Jun-72

Jun-95

Jun-18

Oct-64

Oct-87

Oct-10

Apr-76

Feb-80

Apr-99

Feb-03

Apr-22

Sep-66

Sep-89

Sep-12

Dec-60

Dec-83

Dec-06

Aug-68

Aug-91

Aug-14

Nov-62

Nov-85

Nov-08

Mar-78

Mar-01

May-74

May-97

May-20

Internal Use Only

Internal Use Only

Leading Economic Index Signaling Recession

Internal Use Only

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

0 10 20 30 40 50 60 70 80 90 100

Jan 2024 25.9%

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

Internal Use Only

Implied Recession Probability Based on the Yield Curve (10 yr minus 2 yr)

0 10 20 30 40 50 60 70 80 90 100

Feb. 28, 2024 51.4%

Implied Probability Based on Interest Rate Spread (%)

3-Jan-00

3-Jan-01

3-Jan-02

3-Jan-03

3-Jan-04

3-Jan-05

3-Jan-06

3-Jan-07

3-Jan-08

3-Jan-09

3-Jan-10

3-Jan-11

3-Jan-12

3-Jan-13

3-Jan-14

3-Jan-15

3-Jan-16

3-Jan-17

3-Jan-18

3-Jan-19

3-Jan-20

3-Jan-21

3-Jan-22

3-Jan-23

3-Jan-24

Internal Use Only

Fed Tightening Begins

Internal Use Only

CBSI Component Trends

180

160

131

140

119 118

120

91.9

96

100

81

73

80

60

40

>100=Positve Sentiment)

25

20

0

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

CBSI

Business Conditions

Monetary Policy

Regulatory Burden

Operations Expansion

Capital Spending

Profitability Franchise Value

Q2 2019 Q1 2021 Q4 2022

Q3 2019 Q2 2021 Q1 2023

Q4 2019 Q3 2021 Q2 2023

Q1 2020 Q4 2021 Q3 2023

Q2 2020 Q1 2022 Q4 2023

Q3 2020 Q2 2022

Q4 2020 Q3 2022

Internal Use Only

Internal Use Only

81% of Community Bankers Indicate U.S. Economy starting, or in, a Recession

Internal Use Only

2024 Economic Turbulence Are We in a Recession Yet?

The Fed’s Pursuit of a Soft Landing

CRE Air Pockets

The Federal Debt Increases Altitude

Internal Use Only

The Fed and an Economic Soft Landing

Internal Use Only

Aggressive Monetary Tightening (Pace & Length of Recent Fed Tightening Cycles)

6

3/22-2/24+

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

68

102 Increase in the Fed Funds Target Rate from Start of Fed 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 Number of Days Following Start of Fed Tightening Cycle 1020 1054 1088 1122 1156 1190 1224 1258 1292

Internal Use Only

Higher Inflation Rates Prompted the Fed to Begin to Tighten Monetary Policy...

12

Food Inflation

10

8

6

4

CPI less food and energy

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

May-16

May-17

May-18

May-19

May-20

May-21

May-22

May-23

Internal Use Only

...Resulting in Higher Interest Rates

9

Prime Rate

8

7

30-year Mortgage Rate

6

5

4

3

Interest Rate (%)

Fed Funds Rate

2

1

0

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

May-16

May-17

May-18

May-19

May-20

May-21

May-22

May-23

Internal Use Only

U.S. Applications for Home Purchase, Index

370

320

270

220

170

Fed Tightening Begins

120

4-Jan-19

4-Jan-20

4-Jan-21

4-Jan-22

4-Jan-23

4-Jan-24

Internal Use Only

Consumer Loan Delinqueny Rates

12

Real Estate

10

8

6

Total Loans

4

Credit Card

Delinquency Rate (%)

2

Personal

0

1991Q1

1992Q1

1993Q1

1994Q1

1995Q1

1996Q1

1997Q1

1998Q1

1999Q1

2000Q1

2001Q1

2002Q1

2003Q1

2004Q1

2005Q1

2006Q1

2007Q1

2008Q1

2009Q1

2010Q1

2011Q1

2012Q1

2013Q1

2014Q1

2015Q1

2016Q1

2017Q1

2018Q1

2019Q1

2020Q1

2021Q1

2022Q1

2023Q1

Internal Use Only

Current Fed Tightening and the Most Severe Tightening in the Late 1970s 8/77-5/80

16

14

12

10

8

6

3/22-1/24+

4

2

Tightening Cycle (Percentage Points)

0

0

34

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

Increase in the Fed Funds Target Rate from Start of Fed

1020

1054

1088

1122

1156

1190

1224

1258

1292

Number of Days Following Start of Fed Tightening Cycle

Internal Use Only

U.S. Unemployment Rate

16

14

12

10

8

6

Unemployment Rate (%)

4

2

Source: U.S. Bureau of Labor Statistics

0

Internal Use Only

Monthly Job Growth: Slowing?

900

Fed Tightening Begins

800

700

600

3-month moving average

500

400

300

(Thousands of Workers, SA)

200

100

Net Monthly Payroll Employment Growth, Total Nonfarm

0

Internal Use Only

2024 Economic Turbulence Are We in a Recession Yet?

The Fed’s Pursuit of a Soft Landing

CRE Air Pockets

The Federal Debt Increases Altitude

Internal Use Only

Vacancy Rate Percent

Too Many Office Buildings?

Forecast

16

12

8

Office Industrial Multifamily Retail

4

0

4Q06 4Q08 4Q10 4Q12 4Q14 4Q16 4Q18 4Q20 4Q22 4Q24

Source: CoStar. Actual data are through fourth quarter 2023.

Internal Use Only

Falling Demand for Office Space

Actual Forecast

0.6

18

0.4

15

0.2

12

0.0

9

-0.2

6

Absorption/Stock (Percent, Left Scale) Completions/Stock (Percent, Left Scale) Vacancy Rate (Percent, Right Scale)

-0.4

3

-0.6

0

4Q07 4Q09 4Q11 4Q13 4Q15 4Q17 4Q19 4Q21 4Q23

Source: CoStar. Note: Actual data are as of fourth quarter 2023.

Internal Use Only

Most Employees in Big Cities Still Work from Home

60 Austin Houston Dallas Chicago New York Los Angeles Washington D.C. San Jose San Francisco Philadelphia Office Attendance - Percent of Pre-COVID 80 100

40

20

0

Source: Kastle Systems. Note: Office attendance is card swipes of Kastle access controls, averaged weekly through February 14, 2024.

Internal Use Only

CMBS Delinquency Rates by Major Property Type

8

7

Office

Retail

6

Lodging Overall

5

4

3

Multifamily

Delinquency Rate (%)

2

1

Industrial Source: Trepp

0

Internal Use Only

CMBS Delinquency Rates by Major Property Type

8

7

Office

6

5

Overall

4

3

Delinquency Rate (%)

2

1

Source: Trepp

0

Internal Use Only

Internal Use Only

Highest criticized office share of the 10 largest metros = 64.1% CRE Office Delinquency Rate:

Q4 2021 = 0.0% Q2 2023 = 25.2% Some Explanations: * Remote work

* Corporate downsizings * Rising crime * Decreasing business vitality

Internal Use Only

Largest percentage increase in criticized office share of the 10 largest metros = 32.3% (from 0.4% in Q4 2021) CRE Office Delinquency Rate:

Q4 2021 = 0.0% Q2 2023 = 5.5% Some Explanations: * Remote work

* Corporate downsizings * Leases not being renewed * Zombie office buildings (22%) 53 buildings empty 126 buildings >50% empty

Internal Use Only

Internal Use Only

2024 Economic Turbulence Are We in a Recession Yet?

The Fed’s Pursuit of a Soft Landing

CRE Air Pockets

The Federal Debt Increases Altitude

Internal Use Only

The Federal Debt Debacle

• Federal Debt is Growing Rapidly • Interest Payments Are Rising with Higher Rates • Publicly-Held Debt-to-GDP Near Historical Highs

Internal Use Only

Internal Use Only

Perspective: Convert Dollars to Time • 1 million seconds from today: March 15, 2024

Internal Use Only

Perspective: Convert Dollars to Time • 1 million seconds from today: March 15, 2024 • 1 billion seconds from today: November 12, 2055

Internal Use Only

Perspective: Convert Dollars to Time • 1 million seconds from today: March 15, 2024 • 1 billion seconds from today: November 12, 2055 • 1 trillion seconds from today: December 18, 33732

Internal Use Only

Perspective: Convert Dollars to Time • 1 million seconds from today: March 15, 2024 • 1 billion seconds from today: November 12, 2055 • 1 trillion seconds from today: December 18, 33732 • YES! That’s 31,709+ years from now!

Internal Use Only

27,168,056,539,211 HELD BY THE PUBLIC

$80,829 …….

Internal Use Only

Peak = 106%

98%

Internal Use Only

181%

Internal Use Only

Does the U.S. Have a Spending Problem or a Revenue Problem?

Internal Use Only

Internal Use Only

Internal Use Only

Average Interest Rate Paid on U.S. Treasury Debt

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5

Average Interest Rate (%)

Source: U.S. Department of Treasury

Jul-05

Jul-07

Jul-09

Jul-11

Jul-13

Jul-15

Jul-17

Jul-19

Jul-21

Jul-23

Nov-04

Nov-06

Nov-08

Nov-10

Nov-12

Nov-14

Nov-16

Nov-18

Nov-20

Nov-22

Mar-06

Mar-08

Mar-10

Mar-12

Mar-14

Mar-16

Mar-18

Mar-20

Mar-22

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Interest Expense @ Avg. Rate: 2014 = $428B 2023 = $962B

Internal Use Only

Interest Expense @ Avg. Rate: 2014 = $428B 2023 = $962B

If at 4.7% (2005 fiscal year rate): Projected Interest Cost = $1.5T

Internal Use Only

Most Economists Warn Against High Debt/GDP But Not All…

Internal Use Only

Some Implications of Higher Debt/GDP: • Reduced Public Investment (from Higher Interest Payments) • Higher Cost of Capital (Crowds Out Private Investment) • Fewer Economic Opportunities for Americans • Greater Risk of Fiscal Crises • Challenges to National Security (with a Smaller Budget) • Jeopardizes the Federal Safety Net (Social Security, Medicare, etc.)

Internal Use Only

Internal Use Only

Are There Critical Debt/GDP Thresholds? • Academic Research Generally Agrees that After 60%... Debt/GDP Economic Growth

Internal Use Only

Are There Critical Debt/GDP Thresholds? • Academic Research Generally Agrees that After 60%... Debt/GDP Economic Growth • As this ratio increases… • GDP Growth Slows Even More • Interest Rates Rise Higher • Rating Agencies Downgrade Debt

Internal Use Only

Federal Debt Held by the Public to GDP

120

100

80

60

40

20

Federal Debt Held by the Public to GDP (%)

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

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Federal Debt Held by the Public to GDP

120

> 80%

100

< 80%

80

60

< 50%

< 40%

40

20

Federal Debt Held by the Public to GDP (%)

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

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Annual Real GDP Growth Slows with Higher Debt/GDP

4.0

3.6

Median Average

3.5

3.2

3.0

3.0

2.7

2.5

2.2

2.2

2.0

2.0

1.8

1.5

1.0

Annual Real GDP Growth (%)

0.5

0.0

Under 40% (1970-1989) Under 50% (1990-2009) Under 80% (2010-2019) Over 80% (2020-2023)

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How to Reduce Debt/GDP: • Fiscal Austerity Measures • Cut Government Spending • Increase Tax Revenues • Faster Economic Growth (faster than debt growth) • Negative Real Return on Bonds (interest rates < inflation rates)

Internal Use Only

How to Reduce Debt/GDP: • Fiscal Austerity Measures • Cut Government Spending • Increase Tax Revenues • Faster Economic Growth (faster than debt growth) • Negative Real Return on Bonds (interest rates < inflation rates) 1945 - 1975

Internal Use Only

How to Reduce Debt/GDP: • Fiscal Austerity Measures • Cut Government Spending • Increase Tax Revenues • Faster Economic Growth (faster than debt growth) • Negative Real Return on Bonds (interest rates < inflation rates) ~40% ~40% ~20%

1945 - 1975

Internal Use Only

The Federal Debt Debacle

• Federal Debt is Growing Rapidly • Interest Payments Are Rising with Higher Rates • Publicly-Held Debt-to-GDP Near Historical Highs • Conclusion: The U.S. Federal Debt Path is Unsustainable

Internal Use Only

The Danger of Lagging Indicators CSBS Examiner Conference

46 East Main Street • Suite 303 • Somerville, NJ 08876 • P: (908) 234-9398 • finpro@finpro.us • www.finpro.us

© 2023 – FinPro, Inc.

Internal Use Only

Top 20 Risks . . .

1. Liquidity / Risk Profile (numerator and denominator) 2. Search for Core Deposits (Stable/Volatile/Immed Volatile) 3. Corporate Governance 4. Talent Management 5. Asset Quality / Credit Risk / Competition for good lns 6. Commercial Real Estate (Office Bldg) / Pipeline − Breakout C&I loans backed by real estate 7. Cost of Interest Bearing Deposits 8. Risk Management

17. Stress Testing

− Capital: baseline/severely adverse (also dividend impact) − AQ: shock to cash flow and collateral value − Mgmt: succession planning − Earnings: based on AQ, Liq, and Sensitivity shocks − Liquidity: baseline/uninsured − Sensitivity: +/- 400 (Beta/Decay/Prepay assumptions) 18. Appraisal discrimination − Appraisal Subcommittee − Jan 23 / May 23 / Nov 23 / Feb 24 − Feb 12, 2024 FFIEC Statement of Examination Principles 19. Section 1071 20. QUARTERLY – communicate with your regulator before your Call Report is uploaded

9. Transparency with the regulators 10. Cyber security – tabletop exercise 11. Third party risk management / fintechs 12. Concentration Risk 13. Succession Planning 14. Credible Challenge – document! 15. Board training 16. BSA / New Beneficial Ownership

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Internal Use Only

2023 CSBS Annual Survey: External Risks . . .

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Internal Use Only

2023 CSBS Annual Survey: Internal Risks . . .

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© 2023 – FinPro, Inc.

Internal Use Only The Community Bank Sentiment Index is an index derived from quarterly polling of community bankers across the nation.

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© 2023 – FinPro, Inc.

Internal Use Only

Wow, let’s talk about the Regulatory Burden . . .

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© 2023 – FinPro, Inc.

LIQUIDITY RISK

Home

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© 2023 – FinPro, Inc.

Internal Use Only Traditionally, Liquidity was analyzed using the following key metrics, which made sense in a cash centric society . . .

Liquidity Ratios - Current Quarter Liquidity Ratios - Current Quarter

Liquidity Type, Priority and Targets 1. Cash Liquidity – 2% to 5% 2. On Balance Sheet Liquidity >= 10% 3. On Balance + Borrowings Capacity >= 20% 4. Total Available Liquidity >= 25%

10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%

45 .73%

25 .67%

10 .80%

0.0% 5.0%

The issue is that on-balance sheet cash liquidity is not available until day 2 or 3, by then the game is over!

1.26%

On Balance Sheet On Balance Sheet Liquidity Liquidity + Borrowing Capacity

Example Bank

Cash Liquidity

Total Available Liquidity

Total Cash and Cash Equivalents Available Current Unpledged Investment Capacity

6,888

6,888

6,888

6,888

52,139 59,027

52,139 59,027 81,349 140,377 140,377 518,747 28,000 546,747 25.67% 20.00%

52,139 59,027 81,349 140,377 109,663 250,040 518,747 28,000 546,747 45.73% 30.00% 15.73%

Total Cash + On Balance Sheet

6,888

Current Remaining Borrowing Capacity

Total Cash + On Balance sheet + Borrowing Capacity

6,888

59,027

Current Remaining Wholesale Capacity

Total Available Liquidity

6,888

59,027 518,747 28,000 546,747 10.80% 10.00%

Total Deposits

518,747 28,000 546,747

Short-Term Borrowings (< 12Months) Total Deposits + Short-Term Borrowings

Liquidity Ratio Threshold Level

1.26% 2.00%

Excess / (Deficit) of Threshold

(0.74%)

0.80%

5.67%

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© 2023 – FinPro, Inc.

Internal Use Only The 2023 Banking Crisis proved that the antiquated liquidity risk framework was lacking several key elements . . .

The failures in March of 2023 introduced a digital run at record speed demonstrating that the industry could not count on antiquated liquidity analytics and should take the following steps to modernize their liquidity risk framework.  Track time sequenced liquidity metrics  Shift from cash to fed master account availability  Shift borrowing capacity in front of on-balance sheet liquidity  Brokered and listing are acceptable funding sources for IRR and Liquidity  Large deposits ($250k and up, large deposits, uninsured deposits) must be analyzed and uninsured deposits must be tracked  Banks must rethink and redo their contingency funding plans

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© 2023 – FinPro, Inc.

Internal Use Only

Identify stable vs. volatile funding . . .

Stability Metrics for non maturity deposits: 1. Relationship with Director or shareholder 2. Within market area 3. Additional non-deposit services 4. Electronic banking services 5. Active demand deposit account 6. At market interest rate 7. Tenure of bank relationship

Short term volatile

Long term volatile

Stable Funding

Insured Deposits (i.e. < $250k) High Cost Deposit calc is critical Internet Deposit assessment is critical Uninsured Deposits Valid “high cost” deposits Valid “internet” deposits Municipal Deposits Large Depositors Listing Service

$$$

$$$

$$$

Core Funding Non-Core Funding Wholesale Funding Non Maturity Non Maturity Non Maturity Maturity Maturity Maturity

$$$

$$$

$$$

Brokered Deposits FHLB Borrowings Other Borrowings

$$$

$$$

$$$

core deposits: the sum of demand deposits, all NOW and ATS accounts, MMDAs, other savings deposits and time deposits under $250,000, minus all brokered deposits under $250,000

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© 2023 – FinPro, Inc.

Internal Use Only

The FinPro Liquidity Solution - A solution to modernize liquidity risk management . . .

1. Add Time Sequence Liquidity Analytics 2. FDIC needs to insure all deposits 3. Include pledged but unencumbered securities as a source of on balance sheet liquidity 4. Add term structured solutions at the Discount Window 5. Make contractual term deposits available, like brokered deposits 6. Enhance and standardize liquidity ratios by measuring liquidity against non-contractual maturity deposits 7. Implement new stress tests and assign appropriate waterfalls

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© 2023 – FinPro, Inc.

Internal Use Only Time series liquidity methodology is a necessary step for liquidity analytics . . .

Liquidity Ratios - Policy and Collateral Liquidity Ratios - Time Series

10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%

45 .73%

25 .67%

16 .14%

0.0% 5.0%

1 .26%

Example Bank

Minute 1

Day 1

Week 1

Month 1

6,888

Total Cash and Cash Equivalents Available Current Remaining Borrowing Capacity Current Unpledged Investment Capacity Current Remaining Wholesale Capacity

81,349

52,139

109,663 250,040 518,747 28,000

6,888

88,237 518,747 28,000

140,377 518,747 28,000

Total Available Liquidity

518,747 28,000

Total Deposits

Short-Term Borrowings (< 12Months)

1.26%

16.14%

25.67%

45.73%

Liquidity Ratio

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© 2023 – FinPro, Inc.

Internal Use Only

Rather than continue to focus solely on these historical categories, we must add time sequencing to our liquidity analytics to reflect the new digital reality . . .

 Minute 1  Day 1

 Week 1  Month 1  Forward Cash Flow

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© 2023 – FinPro, Inc.

Internal Use Only

Let’s talk about a bank’s Liquidity Risk Profile

What are the key risk components? − Uninsured − Stable vs Volatile − Loan Funding

 What is the timing element of these risk components (e.g., predictable cash flow)?  How should a bank “stress test” the key risk components?  How should a bank “stress test” the timing element?  What about concentration risk − Individual − Industry (NAICS) − # accounts that control % deposits

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© 2023 – FinPro, Inc.

Internal Use Only

As part of this liquidity analysis process, banks should also. . .

 Review all uninsured deposit levels and track balances (even if less than $1 billion in assets)  Assign NAICS codes to each uninsured depositor to determine concentrations  Contact the depositors to ensure relationship and stability  Compare its uninsured deposit levels to Day 1 liquidity levels

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© 2023 – FinPro, Inc.

Internal Use Only

Let’s talk about Insured Deposit Risk versus Liquidity Risk . . .

Subsidiary ledger versus control − CDARS − ICS

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© 2023 – FinPro, Inc.

Internal Use Only

 Over half of the banking industry is part of the IntraFi network that allows customer deposits to be fully insured.  CDARS: − Certificates of Deposit − For new deposits, every Wednesday will be settled throughout the IntraFi network  ICS: − Non maturity deposits (either non-interest bearing or money market) − For new deposits: − Manual Processing: every Day will be settled starting at 2:30 pm and ending at 4:00 pm throughout the IntraFi network − Integrated processing: next Day − It should be noted that even if a Bank is doing the processing on an integrated basis, the Bank can choose to run it manually to ensure same day settlement  The cost is 12-15 bps to your bank − For a bank with 30% uninsured deposits, it would cost ~ 3-5 bps of ROAA to insure all of these deposits − The cost can be shared by lowering the rate on these deposits compared to your deposits rates If necessary, address uninsured deposit levels through CDARS and ICS . . .

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Source: https://www.intrafinetworkdeposits.com/

© 2023 – FinPro, Inc.

Internal Use Only

Move from hard currency to funds available at the Fed master account . . .

Minute 1 Liquidity = Cash Equivalents with a target of ≥ 5.00%

 A lesson learned is that the deposit run from Silicon Valley happened virtually and extremely quickly  As such, one big change is that the driver has shifted from vault cash to funding available in the fed master account.  Real time cash movements (ala FedNow) will only put more pressure on this reality.

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© 2023 – FinPro, Inc.

Internal Use Only

Move from on balance sheet liquidity to borrowing capacity . . .

Day 1 Liquidity = Minute 1 Liquidity + Borrowing Capacity (e.g. pledged but unencumbered assets) with a target of >= 20%  Traditional liquidity would first focus on on-balance sheet capacity, but the speed at which banks can convert on balance sheet liquidity into cash takes time (too much time or in some cases too much loss). Banks need to understand the speed at which on balance sheet liquidity is truly available:  Treasury bills, bonds, and notes: T + 1  Agency bonds: T + 2

 Corporate bonds: T + 2  Municipal bonds: T + 2  Mortgage-Backed securities: T + 2

 The establishment of the Bank Term Funding Program by the Federal Reserve could be viewed as an acknowledgment that immediate borrowing capacity is more critical than some traditional on-balance sheet liquid assets.

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© 2023 – FinPro, Inc.

Internal Use Only

Borrowing capacity typically has the following same day availability timeframe . . .

FHLB: − Overnight funding is credited to a bank’s account quickly with the cut off at 5:00 pm. − Term funding must be secured before noon for same day settlement. Otherwise ,it will be the following day. If secured before noon, a bank’s account is typically credited quickly. FRB − Can secure funding up until 7:00 pm (like any other discount window program). FRB prefers that banks do not secure funding this late. − A bank’s account will be typically credited within 15 to 30 minutes.

Unsecured Borrowings and other lines − Cannot count on these sources for capacity in a crisis as they typically dry-up when needed − Good for diversity Bank Term Funding Program

− Great program. Do not use as a leverage funding strategy. − Be aware, the BTFP has a sunset date of March 11, 2024.

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© 2023 – FinPro, Inc.

Internal Use Only

Should the FDIC insure all deposits . . .

 Insuring all deposits will reduce the runoff risk experienced during the March 2023 banking crisis by increasing consumer confidence and reducing the contagion associated with reputational risk.  This can be achieved in two ways – 1. The FDIC enhances insurance limits to insure all deposits. − Deposits over $250 thousand will receive a higher insurance premium than traditional insured deposits to price in the risk. This should be equivalent to the cost of Intrafi or 12 to 15 basis points. 2. The industry makes a concerted effort to move all uninsured deposits into private insurance solutions − Intrafi provides a low-cost insurance solution for uninsured deposits

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© 2023 – FinPro, Inc.

Internal Use Only

Include pledged but unencumbered securities as a source of on balance sheet liquidity . . .

 Bank Investment Policies often center on holding investments as a secondary source of liquidity.  With the unrealized loss position in investment portfolios, reputation risk associated with a loss trade, and the proliferation of the Bank Term Funding Program, selling securities for liquidity purposes has moved down the liquidity waterfall.  The most logical liquidity strategy with the investment portfolio is to maximize borrowing capacity by pledging eligible unencumbered securities to the Bank Term Funding Program, and if ineligible the Discount Window or FHLB, to increase secured contingent liquidity capacity.  The second step in this process is to continually monitor and report on pledged but unencumbered securities as a source of on balance sheet liquidity.  This strategy maximizes investment portfolio liquidity by increasing secured borrowing capacity while also maintaining adequate on balance sheet liquidity by holding unencumbered securities during normal operating periods.  Depending on a Bank’s Contingency Funding Plan, it could either borrow against the securities (encumber them) or sell them to stave off a liquidity stress.

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© 2023 – FinPro, Inc.

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