Zions Bancorporation, National Association (ZION) Earnings Call Transcript & Summary

Good afternoon, everyone. This is Terry McEvoy from Stephens. I'm happy to have with us today Zions Bank here in Nashville at our investor conference. With me today is Paul Burdiss, the CFO, to my right; and to his right is James Abbott, Senior Vice President and Director of Investor Relations. Before we kick off, James has a couple of opening comments.

Thanks, Terry. We would direct you to our slides, which are on our website at zionsbancorporation.com. It's right there in the front and center on the landing page for presentation slides. In those slides, Slide #2 is a forward-looking statement slide, which refers to any statements that we may make during this presentation may be forward-looking in nature and are protected under the safe harbor statement. They're on Slide 2. And there's also a GAAP, non-GAAP reconciliation table there. And so with that, back to you, Terry.

Thanks. Paul, if you would like to kick it off with some opening comments, and then we'll move forward with the Q&A?

Sure. Yes. Thank you, and thanks for having us, Terry. We -- I think we've got a pretty wide sort of diverse audience, more than just bank investors. So I'm going to start generally go through a few introductory comments and then open it up for Q&A, if that's okay. So Zions Bancorporation is based in Salt Lake City. We're based in the -- our footprint is in the Western U.S., if you draw a line from kind of Texas up through Washington and Oregon, through Colorado and all the states to the west, that's where you'll find us. And as James said, we've got some slides on the website that visually articulate these things. We have a full spectrum of clients from retail to corporate. But I would say our bread-and-butter client is micro business, small business to the smaller end of middle market. And a function of our model is that we operate in distinct names in each of our geographies in each of our markets. So for example, in Colorado, we're known as Vectra Bank; in Arizona, we're the National Bank of Arizona; in Nevada, we're Nevada State Bank; and so on, Zions Bank in Utah. An artifact of the sort of clients we have, and our sort of locally oriented model is that we have an extremely valuable and granular deposit portfolio. We'll talk a little bit more about that. But I would characterize it as an industry-leading portfolio with respect to granularity, with respect to deposit mix, about half of our deposits are noninterest-bearing demand deposits and with respect to our overall cost of funds. We are industry leaders in all these things. And it's driven by our customers, and it's driven by the operating nature of our deposits and the stickiness of those deposits, which allows us to have effectively a much lower cost of funds than the average bank. This is particularly valuable as rates start to rise. When rates are low and flat, I think it's kind of hard to see a differentiation among banks in the value of deposit franchises and the value of deposits. But as interest rates begin to increase, and as we've seen them increase, I think this is where you'll really start to see differentiation among banks in those deposit portfolios. We are an asset-sensitive bank with half of our deposits approximately in noninterest-bearing demand deposits essentially fixed to 0. Our loans were priced faster than our deposits as interest rates go up. That means that we create more revenue off of the balance sheet as our assets reprice faster than our liabilities. In our disclosures, starting in the second quarter, we began to disclose -- breakdown the components of our asset sensitivity, and we broke that down into 2 main themes, which are latent sensitivity and emergent sensitivity. The latent sensitivity is an expectation, all of the things equal, an expectation of the change in net interest income a year from now versus the current quarter. In the third quarter, again, based on the rate movements that had already occurred and before incorporating loan growth or other things like that, we would expect based on solely this interest sensitivity measure, latent sensitivity, that our net interest income would be 10% higher in the third quarter of '23 when compared to the third quarter of '22. We add to that, emergent asset sensitivity. And what emergent tries to capture is the increase in net interest income associated with the forward curve at the time. So in -- at the end of the third quarter, you may recall, the interest rates were expected to continue to increase. And so that expectation of increases is what leads to the emergent sensitivity measure, which is an additional 4% growth in net interest income. And so you would add those together when you're looking year-over-year, based on latent sensitivity and emergence sensitivity, we would expect our net interest income to be approximately 14% higher in the third quarter of '23 when compared to the third quarter of '22. Now part of the reason that the interest rates are higher is because of inflation. The positive effect, if you could, although it might be a secondary effect of inflation is the value -- is the change in interest rates and sort of the outcome that creates on net interest income that is higher rates equals better net interest income for Zions Bancorporation. The other side of that coin is expenses. And what you've seen is that our noninterest expenses have been up. Some of that's inflationary pressures, some of that wage pressures, 2/3 of our expenses. Generally speaking, our compensation. And so as inflation has worked its way through wages, we've absolutely seen some pressure on that. But we think the increase in revenue has also provided some opportunity to invest for the future and invest in business. And so for example, where we might find individuals or small groups of people who can be additive to the business, we will bring them on and hire them on. And another example is our Capital Markets business for a commercially oriented bank. Historically, we have had a fairly unsophisticated Capital Markets product offering. We've been actively building that out over the last couple of years. This past year and the next year, we'll continue to do that. And we're doing it the right way, starting with operational resiliency, followed by revenue growth. It's a little more expensive to do it that way, but we think it's the right way to do it to make sure that we are appropriately managing all the risks attached to those businesses. So those inflationary pressures, as I said, they do create increases in rates. And when 80% of our revenues are associated with net interest income and increase in interest rates creates an opportunity for more net interest income and it's 80% of the value of our revenue stream, it creates, I think, a very good mix for our investors. And the example of that or the outcome of that would be our pre-provision net revenue year-over-year. If I exclude PPP-related loans, pre-provision net revenue, or PPNR, is up about 50%, 5-0, 50% year-over-year, which I think is pretty extraordinary performance over the course of last year. And then finally, it wouldn't be a bank conversation without talking about credit. I've saved credit for last because I think credit has been performing very, very well. We had several quarters of near 0 net charge-offs. We had a small uptick in the third quarter. It was -- I would characterize that as a sort of episodic and not indicative of another underlying trend. Our loan portfolio is heavily secured. If you were to compare our loss rates to peers, I think you would find that once a loan goes to nonaccrual, our loss rates actually screen very, very well relative to peers because of the heavily secured nature -- heavily secured nature of our loan portfolio. And so we have a really great, I think, revenue sort of performance over the last year and revenue outlook. And you combine that with a so far, a pretty benign credit environment, and I think Zions Bancorporation is in line to perform very well for the foreseeable future, next several quarters at least.

Thanks to that, Paul. Maybe let's start with deposit mix and what's the best way to think about the noninterest-bearing deposits, which were kind of 41% pre-COVID to over 50% today. Or maybe said another way, you kind of talked about these lowest churn deposits, which are 37% versus the low 30s, where do you think those go going forward? And how quickly do they get there?

So as I -- we have a history of, on a relative basis, having more noninterest-bearing demand deposits than our peers. And again, that's an artifact of the customers that we have. Within that, there are a lot of what we call operating accounts. And the operating accounts are sort of the checking accounts for our customers, be it sort of retail customers or micro businesses or small businesses. Because of the nature of those accounts, the fact that they're operating accounts, it makes them a little bit stickier. And while 50% -- to your point, Terry, 50% historically has a pretty high proportion of deposits. We would expect that to sort of come back down over time. I said on the third quarter call that if we were to get to our -- if our most rate-sensitive deposits were to return to where they were proportionally to the rest of the deposits in 2019 -- returned to where they were in 2019, that would be approximately $5 billion of deposit runoff. I'm not necessarily predicting that. It's -- deposit behavior is a little hard to predict, particularly when interest rates are moving as quickly as they are. But I would argue that with a loan-to-deposit ratio currently at 71%, we have a lot of room to actively manage rate and actively manage rate for the sake of volume to continue to support loan growth.

And then maybe a theoretical question on the net interest margin. You did a great job positioning the bank [ when rates were ] 0 to benefit from higher rates, which you talked about earlier. What level of Fed Funds need to be before you kind of advocate being liability sensitive or more rate neutral?

Well, I would love to say that we were geniuses in positioning the balance sheet very well. There's -- but there's 2 artifacts there that I think it's important to discuss. One is that being a commercially oriented bank with a lot of noninterest-bearing demand deposits, we are naturally asset sensitive. And so we need to actively hedge the balance sheet to hedge away that asset sensitivity. When interest rates are very low and the yield curve is very flat, the 10-year, at one point, I think, as low as like 60 basis points, right? When rates are effectively 0 all across the curve, and we believe that it was highly unlikely for interest rates to go below 0, that is negative rates. There was really nothing to hedge against as we got to those very low level of rates. And so we let that asset sensitivity run a little bit because we didn't think we were being paid to add duration to the asset side of the balance sheet to offset the duration on the liability side, the deposit-driven duration on the liability side. As the interest rates have risen, you have seen us more actively add duration to our assets to create more balance in that interest sensitivity to the point now where -- and it's heavily dependent on the behavior of deposits. But now we are approaching neutrality. I think we're sort of low single digits, mid- to low single digits with respect to asset sensitivity. I think my expectation is it's going to be a committee decision from our Asset Liability Management Committee. But my inclination is that we would -- we are sort of in the zone of where we need to be, and that might be a little liability sensitive, it might be a little asset-sensitive. But the point is we're trying to remove that risk as much as we can from the balance sheet. Our goal is to create consistency of earnings over time and not necessarily try to predict where rates are going and position the bank as sort of a trade on rates, right? We're trying to be relatively balanced and remove as much of that interest sensitivity out of the balance sheet to create a consistent earnings stream. And I'd say we've been working on that, and I think we're getting close to that balanced view.

And one of the concerns out there among investors is peak net interest margins. Looking at Slide 36 of your investor deck, it shows the repricing of earning assets. What are your thoughts on not only the net interest margin over the near term, but how do you see some of the repricing dynamics come into play over the next kind of 4 quarters?

Well, the key repricing dynamic for us are going to be deposits. And the reason is that the loans -- the loan portfolio is contractual, right? And so we know how that's going to reprice. What it's a little harder to predict are the behavior of nonspecific maturity deposits because the rate and the volume -- the rate is sort of subject to market pressures as is the volume in addition to customer preferences. And so as we think about that net interest margin, which is your question, I would like to take us a little bit away from the net interest margin discussion because net interest margin ultimately is just an artifact of your net interest income. And I would rather really focus on the revenue piece of it. And the reason is there's so many things that go into that net interest margin, the ratio -- the problem with the ratio is there's 2 numbers, and you have to be accurate on both of them. So just focusing on net interest income, I would take us back to the -- my comment at the very beginning of the conversation, which is we continue to be positioned well for rising rates, partly because we're asset sensitive, but mostly because when you've got 50% of your deposits are noninterest-bearing demand, those deposits are worth a lot more in a higher rate environment. And so that creates opportunity for more revenue, all of things equal, if rates are just higher, right? And so again, looking ahead, not necessarily focusing on the margin but focusing on net interest income, we expect all of the things equal, and net interest income to be about 14% higher in the third quarter of '23 when compared to the third quarter of '22.

And kind of moving on, in October, you transferred $9 billion of available for sale securities into the held-to-maturity category. That $1.8 billion difference when I look at the $9 billion versus the $7.2 billion was a pretty good component of your AOCI. Maybe just talk about the decision behind that move and that kind of layers into the tangible common equity ratio, which dipped below 4% last quarter. How important is that ratio internally, externally and thoughts on those 2 topics.

So the movement of bonds from available for sale to held to maturity. That's just -- I think everyone understands but it's worth repeating. This is an accounting classification. Available for sale means that we can sell them at any time without any sort of accounting penalty, held to maturity means that we will hold them to maturity, and we cannot sell them. And if we do sell them, then it creates some accounting difficulties for us. Therefore, flexibility is maximized when bonds are held in available for sale. However, looking at where interest rates have gone and looking at the pricing of some of these bonds, we decided that it was extremely unlikely that we were going to be selling these bonds and, in fact, decided to commit to not selling these bonds because sort of the price differential has become pretty large. And so we're not going to sell those at a loss because we can extract liquidity out of them in either held to maturity or available for sale, either designation. And what I mean by that is that the investment portfolio exists as a source of liquidity for the balance sheet. That's the sort of the first and the primary purpose for the investment portfolio. We can extract liquidity out of the portfolio regardless of what the accounting classification is. In other words, we don't need to sell securities to extract liquidity value. These are very high-quality agency securities. We can repo [indiscernible] repo these out on a regular basis. We can pull a lot of liquidity out of them that way or we can place them, for example, to the Federal Home Loan Bank and get a lot of liquidity out of them that way. So if the portfolio exists for liquidity purposes and the liquidity is consistent between the accounting designations available for sale or held to maturity, we become -- from a liquidity management perspective, we become indifferent to where they're held. And given the change of intent associated with those securities, i.e., we know we're not going to sell them, we decided to move those over to held to maturity. Incidentally, just a point of fact, the about -- approximately, you referenced approximately $1.8 billion of AOCI loss attached to those. That will -- that has now been sort of fixed. That is to say it doesn't move around now as interest rates move. And as those bonds mature and repay, that will be sort of accreted back into GAAP equity at a rate of about 18% a year.

And the tangible common equity ratio...

Oh, yes, sorry. Yes, tangible common equity. So tangible common equity is an artifact of GAAP accounting. Approximately, if I look at the sum total of our assets and liabilities, approximately 15%, 1-5, 15% of our balance sheet is marked to market, which means that there's an awful lot of our balance sheet that's not being mark-to-market. For all the reasons that I've articulated, our deposits are worth a lot more today than they were a year ago. And while it's true that the value of our investment portfolio has fallen in our modeling, our models would indicate the value of our deposits has actually increased more than the value of our investment portfolio has fallen. And looking at this from another perspective, when we consider that our pre-provision net revenue is up about 50% year-over-year, it's, in my mind, at least, hard to imagine that our common equity is actually worth less than it was a year ago, which is what this asymmetrical accounting associated with the mark on the investment portfolio would indicate. So tangible common equity, we do not have any internal limits around it. There is not a regulatory ratio around it. We manage to our regulatory capital ratios and largely to common equity Tier 1 capital. That's our -- that's where we're focused. And so the tangible common equity ratio is sort of an artifact of this asymmetrical GAAP accounting but it's not -- we do not manage that ratio internally or externally.

Okay. Any questions at all? Yes, [indiscernible]?

Paul, just to back up a little bit. Loan-to-deposit ratio, 70-ish percent in the slide deck. Years back, looks like it was around mid-80s. Does it sound like there's any expectations of getting back to those levels anytime soon? I just want to make sure I understand your expectation.

Well, I'll put it this way. So the question was loan-to-deposit ratio is about 70% today. Historically, it's been kind of in the 80% -- above 80%. Is there an expectation that we'll get there again? And I'll be honest with you, it wouldn't bothered me if we did. I think 70% is pretty low. Previously, we're in the 60s. Now we're at 70%. It wouldn't bother me from a balance sheet management perspective to move back that way. But the answer is, though, is that we have a lot of flexibility, right? We have flexibility to support a lot of loan growth because of the strength of our deposit portfolio. And we have the flexibility to really actively manage our deposit pricing. We can be more aggressive or less aggressive because we can accept and we're starting from a much stronger place as it relates to that loan-to-deposit ratio. So we're not feeling funding pressure. And as a result, I think we can maximize the value that exists between deposit volume and deposit pricing. Hopefully, that answers your question.

[indiscernible] one more topic on before. I'm not asking [indiscernible] you mentioned different brand names in different markets. I think I saw this years ago with banks with different charter, different brand names, just kind of curious kind of why the bank has maintained different brand names and does it give you any kind of advantage there?

So the question, I hope you don't mind if I repeat them, just so everyone can hear it is, as we think about the different markets we're in and different brand names, why maintain that where maybe others in the past have kind of gone away from that. So we did have separate charters up until if I remember correctly, 2016, so there was separately chartered in each state. We've consolidated the charters. As a reminder, we do not have a bank holding company. We are a national bank regulated by the OCC, but we are one bank. And we are doing business as all these banks in these different markets. And so in Texas, for example, we're Amegy Bank; California Bank & Trust in California; Zions Bank in Utah. So the -- we believe that the -- our customer that is sort of the -- the majority of our customers, these micro businesses, small businesses, small in the middle market with some retail and some corporate, we believe that the nexus of our customers appreciate local management teams, local branding, a lot of community involvement from the local bank. And by maintaining separate identities and separate names in each of our states, we are able to maintain that localness, if you will, and if I could coin the term. We believe that, that creates loyalty and a better customer relationship and customer experience. And so for us, we think it's a very important part of -- when we think about the value of the organization and a lot of the value organization being centered on deposits, banking, in my opinion, is all about trust, and it's really important that you trust your counterparty and having a local counterparty is very important to our bread-and-butter customers.

Maybe let's move on to expenses. They were up 3% quarter-over-quarter in the presentation, continuing hiring of new employees. Maybe -- the question is, can you talk about the level of unopened position. And just overall, this war on talent and how you think that will impact expenses going forward?

Yes. There has been a war on talent. I guess that's the term of art there. And we see it in compensation. Our expenses in 2022 noninterest expense -- first of all, 2/3 of our expenses are people related, compensation related. And expenses were higher this year than expected. It's easy to say due to inflation. But if you peel that back, it's really compensation. And it feels like while we haven't disclosed the number of open positions that we have, it feels like that's kind of stabilized. And it feels like, again, this is anecdotal, but it feels like that things are abating a little bit as it relates to that sort of war on talent. But it's still really early innings. It's hard to tell if that's going to -- it's hard to tell if that's going to continue, but that's how it feels. The other artifact of expenses this year, though, are -- we're continuing to invest heavily in the business. We're investing in technology. We've got a core deposit transformation that is almost complete, [ we've been working ] on it for years. It's very expensive. And we expect that to be implemented next year. And so there's a lot of technology investments that are occurring. And then there's a lot of talent investments that are occurring as I think I noted earlier, where we can pick up groups or individuals, we do that. And then we're investing, as I noted on the product side, we're investing heavily in Capital Markets, which again, has been a contributor, maybe a small one, but a contributor to expenses in 2022 when compared to '21.

That leads right into my next question, Capital Markets. Where are you in that investment? What inning are you in? And you noted earlier, higher dependence on net interest income, just maybe the opportunity to build fees going forward.

Right. So as we think about a key opportunity for us, is improving noninterest income and the proportion of noninterest income to total revenue. As I said, we're at about -- net interest income right now is about 80% of our revenue. Therefore, noninterest income is about 20%. I don't think that's high enough. It needs to be higher. So we're trying to invest in key businesses that will allow us to grow that. Capital Markets is one of those businesses. In terms of what inning, maybe sort of halfway through the game, if we could put it that way. We consolidated our Capital Markets' activities a couple of years ago. We put a leader in charge. He's built out his management team, has added talent where he's needed to add talent, and we've added products where we needed to add products. So for example, 3 years ago, we did not have the ability internally to participate in bond underwriting, which is an important revenue source for a commercial bank, we can do that now. So we're building out our products, and that's not an enormous driver, but it's just an example -- just an example of some of the things that we're building out, we've got a sophisticated interest rate swaps product capability. We have significantly grown our syndications and added to that commercial real estate syndications, which historically we haven't done. So we're building out sort of adding to and building out the product suite as we move forward. Looking ahead into 2022, we're building out, I would say, a pretty sophisticated real estate capital markets strategy. It is not only a fee income strategy, but it's also importantly, we have been constrained in our commercial real estate growth because of our internal capital limits, we could grow commercial real estate loans far faster than we do. By building out our commercial real estate capital markets division that should enable us to create more velocity around our commercial real estate assets and actually get our commercial real estate lenders to be even more active than they have been while effectively controlling risk.

Transitioning, you built up the loan loss reserve last quarter. Maybe talk about the decision to build the reserves, others kind of held at constant, maybe in some cases, allow it to run lower. What were your changes in economic assumptions? And if you look at specific portfolios, where were the reserves increased?

Well, we haven't really spoken to specific portfolios, but I will say our allowance for credit loss process is heavily dependent on the macroeconomic forecast that we use. And as has been disclosed previously, we use the Moody's economic forecast and economic outlook as the basis for our allowance for credit loss calculation. And then there are, of course, qualitative adjustments sort of all made within the context of the accounting rules related to that. So there wasn't a big change in the macroeconomic forecast. There was some change in some offsetting things. The key driver, when you [ boil it all ] through the key driver of the increase in the allowance, particularly if you look year-over-year, was the increase in the size of the portfolio. We've not seen adverse credit migration, for example. And so there's been a few changes here and there, smaller exchanges within the portfolio. But the key driver year-over-year has been growth in the portfolio. Looking ahead, the key driver will be a combination of portfolio growth, any credit migration that happens beneath the surface. But most importantly, and I would say the senior partner in all of that are the macroeconomic forecasts we receive and how those are weighted and therefore, the sort of model losses that those create and therefore, the allowance for credit loss, that is the outcome. And then of course, the provision for credit losses is -- ends up being the difference between the change in the allowance and charge-offs.

And maybe a question for James. As you sit down on meetings internally, are there any reoccurring themes on the credit quality side that have surfaced. I know we're just at the early innings potentially. But what are you hearing and seeing?

I mean a very small number of the questions these days are about credit quality, frankly. I would say it's usually 1 or 2. One thing that we've stressed over and over again is the collateralized nature of our portfolio. We have a couple of slides in the slide deck on that, particularly Slide 16, which shows the charge-off rate relative to the problem loan rate. And we consistently screen no matter what time period you use, we consistently screen at the best part of that chart. So I think no matter investors are definitely looking for early signs of weakness. We're definitely starting -- I'm hearing questions that are slicing very, very thinly, like looking at super subprime and the difference between whether a customer is paying down their balance as fast as they had been before, those kinds of little nuances, I suppose are the types of things that we hear about a little bit or questions that we get. But we're really not seeing anything within our portfolio. We're closer to the super prime part of the spectrum. And so that's not something that we'll see until it's -- until you're seeing it in several other banks or credit card companies.

Maybe just on that same theme, Slide 38 in the back there, I think it's really telling where it looks at the 10-year loss rate versus the industry and peers. What's the key takeaway from there in your perspective?

Yes, we -- it's a good question. Slide 38, and it's -- what we try to do is we've been able to demonstrate that we've had a very low best performance charge-off rate overall. And one of the questions that I wanted to explore is, is there any portfolio within our portfolio that is problematic where we've had -- where we've not been superior -- had superior performance. And so this looks at the commercial and industrial portfolio, the owner-occupied portfolio. Term commercial real estate, it looks at multifamily, it looks at 1- to 4-family, et cetera. It breaks each portfolio down and says, over the last decade, have we underperformed or outperformed in any of these different categories? And the answer is, in all cases, we've been better with 2 exceptions, and that is those -- in those cases, we were in line with the peer median. But in all cases, we were better than the peer median in terms of loss content on those portfolios. So we -- we manage our underwriting very carefully, very tightly, a lot of collateral there and it ultimately results in a lot lower loss content for us over a long, long period of time over multiple portfolios.

And the outlook for loan growth 4 quarters out versus this quarter is moderately increasing. When you think about the drivers of that growth and the little bubbles of growth that you show in your presentation, what do you think will be the key areas of growth?

Well, maybe I can start and then Paul can round it out as one of the areas of strength has been in municipal lending, which is an extremely to kind of segue from credit quality into what's growing. Municipal lending for us has been exceptionally clean credit quality. The probability of default is something on the order of 10 basis points. It's extremely, extremely clean. And that's been an area of growth. We've hired a lot of people over the past several years to help us build that out. The median loan size, the average loan size here is -- sorry, $3 million. And one of our executives would say here that these are not the kind of credits that the guys from New York City with their [indiscernible] pockets will go around looking for. These are very small credits, typical, maybe 10,000, 20,000 person population municipalities. And a lot of it is secured through hard collateral, such as real estate or hard assets like fire trucks and whatnot. -- other -- the rest of it is secured through the taxation of the -- taxation general obligation bond type situation. So that's an area where I can think of that will continue to grow, we expect over the course of the next several quarters.

We're also very focused on C&I. One of the key products for us in C&I is owner-occupied loans. So for example, so there are a couple of other areas like that, that I expect will be key to growth drivers.

And just small business lending, you've got outsized exposure there. You saw that with your success with the PPP program. What are your thoughts on small businesses across your footprint and other weathering, inflation, higher interest rates and whether you think that can be a portfolio that can grow from here?

Yes, it absolutely is a portfolio that can grow from here. I think PPP helped small businesses quite a bit. As it turns out, I think one of the key leading credit indicators for us was watching very closely the deposit accounts of those small business customers. At the beginning of the pandemic, they were burning cash. But everyone acts in their own self-interest at some level, right? And some of these small businesses found a way to balance their cash flows. And in fact, what we saw was the sort of the burn rate decline stopped and then deposits starting to grow. And we still -- we pay a lot of attention to sort of PPP versus non-PPP borrowers and sort of where deposits are growing and where they're shrinking. We've talked about that a little bit, where we're seeing declines in deposits are very large for us, very large deposits, over $10 million, for example. When we look at our deposit outflows for the year, those occurred [ on balance ] in the account relationships that had more than $10 million. And the relationships with under $10 million, which would be a little more akin to the smaller businesses. Those deposits on a net basis have actually grown over the course of the year. And again, I see that as an important leading indicator for credit. To the extent our borrowers are cash flow positive, and they're adding to that -- an indication of that is adding to their deposits, we see that as a good indicator of credit. That being said, we're paying a lot of attention. We're sort of stress testing where we can, trying to understand where the next cracks may come from, as you would imagine. And right now, we feel really good about our borrowers across the spectrum.

Any other questions?

[indiscernible] going back to margin [indiscernible].

Yes. We've got 5 minutes, go for it.

Yes. I guess I'd ask Paul [indiscernible] drive a greater sense of urgency to sort of neutralize your structural assets [indiscernible] more than it is today? And is it conceivable that maybe [indiscernible] your prior comments and like we saw in 2Q that maybe environmentally -- organically, we just get part of the way there, anyway, whether it's [indiscernible] next year, like how are you thinking about it?

Yes. So the question, just to repeat it is, is there anything that creates a [ mischaracterize ]. But is there anything that might create a greater sense of urgency in pulling down that asset sensitivity and/or do we expect structural changes to sort of help us get there? And the answer, I think, lies in the back part of that question. I think the margin of error on interest rate risk modeling is actually pretty broad. We provide a lot of precise predictions for where we think things are going to be. But the key determinant and outcome of interest rate sensitivity is behavior of deposits. It's behavior of volumes and behavior of rates. And I would argue, if you get down into the mid- to low single digits in terms of asset sensitivity, you're really bordering around 0. And that key determinant, the behavior of deposits will ultimately determine where you end up, whether it be a little bit liability sensitive or a little bit asset sensitive. I think we have now achieved the point where we'll continue to add swaps to replace the swaps that are running off, I think we'll continue to manage. It could be an [ awkward ] decision, but my expectation is, we'll continue to manage toward neutrality, understanding that it's not a precise target. There's a range of outcomes, and I think we're kind of in that range or getting very close to it.

Paul, you had this question earlier in the day, and I really liked your response. It was that typical bank M&A question, how do you think Zions is positioned? And your response?

I don't remember what I said. It was brilliant. You can say it. I'll give you my current off-the-cuff answer, which is I think we are positioned well if we chose that path. I don't think -- M&A is not an important part of our business model. We don't need M&A to make things work over the -- in my experience at Zions, when we have looked at potential opportunities, and there's been a few opportunities that have come up. One of the key artifacts that we have paid a lot of attention to is the quality of the deposit portfolio. For us, the quality of deposit portfolio has been such an important driver of value for us for such a long time that we were -- have been really careful not to dilute that, right? And so -- now we're seeing the benefit of that, right? Now that rates are starting to inflate, you're seeing the yield curve steepen or even flatten at a higher rate. Now you're seeing the differentiation in a high-quality deposit portfolio and the other portfolios. And so the focus on that, I think, has been very well placed. Looking ahead, we think of relative valuation, we think of the operational risk of an acquisition, particularly in the context of a core deposit system transformation, which is we're in the very final, very final portions of that project. I would characterize any sort of strategic acquisition to be pretty unlikely in the near term for all of those reasons.

That was your response [indiscernible]. And maybe one last question. Just talk about capital management, your TCE ratio now 9.6%. The Board approved another buyback a couple of days after earnings. What are your thoughts on capital...?

Well, a slight correction tangible -- I'm sorry.

CET1.

CET1 ratio is a little over 9.5%. Our goal in capital management is to have -- our goal on the balance sheet is to have a better-than-average risk profile. And I think we've achieved that. If we get into a recession, I think we'll be able to demonstrate that pretty handily. So a better-than-average risk profile and then a better-than-average capitalization or capital position. And so when you look at our peer banks, we're slightly better than the median when I look ahead and I think about the growth in PPNR that we've been able to achieve and we'll continue to, I think, be able to achieve a grow due to that latent and emergent sensitivity that we just discussed, plus maybe additional loan growth on top of that, Our ability to generate capital through earnings is significant and significantly stronger today than it was 2 years ago. So we'll continue to build capital from that perspective. Anything that we don't need to support buyback -- I'm sorry, anything that we don't need to support growth or risk, or dividends will be returned in the form of share repurchases. But we haven't -- that's the Board's decision. We haven't announced anything there. But those are the -- and that's the hierarchy as we think about it. If we wanted to support growth first, we need to be able to maintain the appropriate risk-capital balance. We need to be able to maintain our dividends and then sort of the remainder is what would be available for share repurchase.

So with that, I want to thank you both for your time and we'll move on with the day. Thank you, guys.

Thanks, Terry.