SmartFinancial, Inc. (NYSE:SMBK) Q4 2023 Earnings Conference Call January 23, 2024 10:00 AM ET
Company Participants
Nate Strall – Vice President, Director of Strategy and Corporate Development
Miller Welborn – Chairman
Billy Carroll – President and Chief Executive Officer
Rhett Jordan – Chief Credit Officer
Ron Gorczynski – Executive Vice President, Chief Financial Officer
Conference Call Participants
Stephen Scouten – Piper Sandler
Matt Olney – Stephens
Feddie Strickland – Janney Montgomery
Brett Rabatin – Hovde Group
Steve Moss – Raymond James
Catherine Mealor – KBW
Operator
Hello, everyone, and welcome. My name is Drew, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the SmartFinancial Fourth Quarter 2023 Earnings Release and Conference Call. [Operator Instructions] After the speakers remarks, there will be a question-and-answer session. [Operator Instructions]
I will now turn the call over to your host, Nate Strall, please go ahead.
Nate Strall
Good morning, everyone, and thank you for joining us for SmartFinancial’s fourth quarter 2023 earnings conference call. During today’s call, we will reference the slides and press release that are available within the Investor Relations section on our website, smartbank.com.
Chairman, Miller Welborn, will begin the call, followed by Billy Carroll, our President and Chief Executive Officer; Ron Gorczynski, Chief Financial Officer; and Rhett Jordan, Chief Credit Officer, will also provide commentary. We will be available to answer your questions at the end of the call.
Our comments include forward-looking statements. These statements are subject to risks and uncertainties and actual results could vary materially. We list the factors that might cause these results to differ materially in our press release and in our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements because of new information, early developments or otherwise, except as may be required by law.
During the call, we will reference non-GAAP financial measures related to the company’s performance. You may see the reconciliation of these measures in the appendixes of the earnings release and investor presentation filed on January 22, 2024, with the SEC.
And now I’ll turn it over to Chairman, Miller Welborn to open our call.
Miller Welborn
Thanks, Nate. The fourth quarter of 2023 was another quarter of incredibly busy activity for SmartBank. As we all know, last year was a very challenging year for our entire industry, and we couldn’t be more proud of how our team performed. We have made a strong effort to improve every line of business that we operate, and I do sincerely believe we are poised for a bright future. The economy in our Southeastern footprint remains strong and we’re very optimistic about every aspect of our company as we begin a new year. I’m proud of the entire team for the focus and continued improvements we made in the fourth quarter.
With that, I’m going to turn it over to Billy.
Billy Carroll
Thanks, Miller, and good morning, everyone. Great to be with you today. I’m going to jump right into this morning and discuss our fourth quarter highlights. You’ll see most of these on slide three of our deck. I will say it was good to put a bow on 2023, an unusual year for our industry and one where we had impacts from higher rates. This quarter went as we had forecasted with some stabilization in margin and an inflection point in our revenue line coming after a couple of quarters of contraction. That was very nice to see.
As usual, I’ll be discussing primarily non-GAAP operating metrics today, and Ron will dive into more financial details momentarily. We came in at $0.41 on operating EPS or $6.9 million in net income. We continue to grow both sides of the balance sheet with both loans and deposits increasing 8% and 2% annualized, respectively, during the quarter. Our loan-to-deposit ratio was staying healthy at right around 81%, and our liquidity position remains very sound, continuing to give us nice flexibility on growth.
Credit is strong with an NPA ratio of only 20 basis points. That number did tick up slightly from last quarter related to an Alabama credit moving to substandard and a little weakness in our trucking sector for fountain equipment. Rhett will dive into these metrics more in a moment, but we continue to feel very good about the quality of our loan book.
And a key number we focus on here, our tangible book value continues to increase. Now at $22.29, excluding the impact of AOCI and $20.76 including it. You will note we had a couple of non-recurring items this quarter. We had a great opportunity to assist one of our rural Alabama markets with the donation of a former office location. This was a nice win-win helping the community with a qualifying CRE donation. The other was an accrual on a lingering legal matter that we’re working to finalize. Ron is going to provide a little bit of color on those in a moment.
We did feel the ship begin to turn back on net interest income after a couple of quarters of tightening. Deposit rates have stabilized. And as we continue to grow loan balances and reprice assets, it did feel good to see that revenue line bounce back. As I look back at 2023, I was not happy with the revenue contraction we saw. Revenue growth and EPS growth are key to what we look to accomplish every year. The rate environment hampered that over the last few quarters, but I’m confident now we’re trending back. We have built an outstanding foundation at this company that will allow us to gain earnings momentum as these rates stabilize.
We did accomplish some key initiatives that will benefit our bank as we look to the coming year. We made a number of operational changes to better position our $5 billion company, including a new data aggregating and reporting system KlariVis. Also, our commercial loan platform is now fully utilizing nCino, as well as their pricing and profitability system. We are also moving to nCino’s consumer platform in Q1 to help us gain better efficiencies on smaller loans. All in all, a good quarter where we shipped our focus for growth to 2024, and I’ll close with some additional comments in a moment, but let me first hand it over to Rhett to discuss the loan portfolio and then on to Ron for a deeper dive into the numbers.
Rhett?
Rhett Jordan
Thank you, Billy. The bank had a really strong production quarter annualized organic loan growth of 8% quarter-over-quarter and continuing to maintain strong overall composite and geographic diversification across our product sectors. We saw a slight increase in our C&I space, which was a primary focus of our growth efforts throughout the year, while other categories remained level, except for reductions in C&D loans and a slight increase in nonowner-occupied CRE due primarily to existing construction projects completing and transitioning into permanent financing basis.
The overall composition of the portfolio transitioned as we had expected through this approach cycle. While we continue to see improved price parameters and an overall 9 basis point increase in the average portfolio yield. Our construction portfolio continued to decline in outstanding balances as expected and was down about $63 million quarter-over-quarter, reducing from 11% to 9% of total loans and down from 84% to 72% of total capital.
As we had mentioned in prior quarters, with higher interest rate environments and continued above normal construction costs, creating more challenging project metrics in the commercial construction space start for slower during 2023, and these changes in balance positions are an expected result of those dynamics. Our nonowner-occupied non-construction CRE portfolio grew very slightly in outstanding balances for the quarter from completion of construction projects, as previously mentioned, that held relatively steady at 27% of total loans.
The total CRE ratio came in at 280% of total capital, down about 5% from last period. Again, steady performance with diversified production results and strategic movement in the targeted segments of the portfolio. As you will note, we did see a minor increase in our NPA and delinquency ratios for the fourth quarter period. This movement was the result of two very specific factors.
First, the small trucking segment of our fountain equipment subsidiary saw above normal levels in past dues and classified as the year progressed. While some operators in this part of the fountain portfolio experienced some challenging conditions in 2023, we did observe a flattening of the trend line in both problem account activity and valuations of the underlying equipment assets in the marketplace as the second-half of the year progressed. I think it’s important to recognize that outside of this minor subset of our fountain trucking segment, the majority of the fountain portfolio performed quite well. And overall, our fountain equipment subsidiary had a very strong performance year with solid profitability an average portfolio yield above 10% at year-end.
The second driver for our NPA movement last quarter was the direct result of a single credit relationship in our Alabama footprint was held with a large multistate mortgage broker operation for whom we have some equipment and real estate assets finance. Our exposure to the operator was secured term debt and format, minimal in size for our portfolio and a very small as a percentage of total debt that company held with its overall creditor base.
We have positioned what we believe to be a satisfactory reserve allocation for this exposure and are working through the collection process presently. This was an isolated relationship within a space to which we have a minimal exposure in our portfolio. Outside of the impact from those two specific matters, our general portfolio credit metrics continued to show very strong performance. Delinquencies, NPAs and classified assets all saw reductions to prior quarter when excluding the impact of the two aforementioned items.
CRE concentrations continue to reduce, and our overall diversification and general performance of the portfolio held strong. Our annualized loss ratio held steady to prior period at 0.04% in fourth quarter, with 99% of those fourth quarter losses and 72% of the annual losses we did realize concentrated to the small trucking segment of our fountain subsidiary. As to our allowance positioning, overall we saw a slight increase from 1% to 1.02% of total loans.
Realized provision for the quarter that drove this increase resulted predominantly from the specific reserve we are holding against the Alabama credit until that is fully resolved. Combine that with the impact from our loan production balance growth in fourth quarter and normal CECL model input factor movements in the model, that is the basis for our 1.02% increase in the reserve. Overall, loan demand continues to be good with a positive outlook as we progress into 2024.
While we did see some very isolated matters in Q4 that caused some undesired impact in our credit ratios for the quarter. We do not believe this is systemic in any way, and we are beginning 2024 with a continued commitment in maintaining our bank’s long history of top-of-class credit quality, pristine portfolio management and targeted profitable portfolio growth.
Now I’ll turn the call over to Ron to discuss direct deposit composition, liquidity and other key financial measures. Ron?
Ron Gorczynski
Thanks, Rhett, and good morning, everyone. Let’s start on slide 10. During the fourth quarter, we had continued deposit growth of over $21 million and year-over-year growth of over $190 million or 6% annualized and keeping our loan-to-deposit ratio at 81%.
Moving into 2024, we anticipate momentum in our expansion market areas, coupled with growth in our legacy markets that will drive mid-single-digit deposit growth. As expected, we did see continued migration from non-interest-bearing deposits into interest-bearing accounts but at a much slower pace. Our total deposit costs increased 15 basis points to 2.35% and were 2.40% for the month of December. Looking ahead, we do expect some additional migration, but at a muted pace, which will continue to relieve the upward pressure on funding costs.
On slides 11 and 12, you’ll see the details of cash flows from our securities and loans over the next 24 months. As we’ve mentioned for several quarters, we have $110 million maturing later this quarter, which we are currently reviewing strategies for its deployment. In total, we have over $420 million in assets with a weighted average rate of 3.94%, maturing or repricing by year-end. With nearly 10% of the bank’s earning asset base set to reprice this year, we look forward to continued profitability improvement.
On slides 13 and 14, we provide an overview of the bank’s liquidity sources and our liquidity position, which, including cash and securities remained unchanged at 22% of total assets. Net interest margin was 2.86% for the quarter representing a 5 basis point quarter-over-quarter improvement. For Q4, the weighted cost of new deposit production was 3.96% and the weighted average yield on commercial loan originations was 7.63%. Our contractual yield on loans expanded 9 basis points to 5.61% versus 5.52% last quarter.
While we were pleased to see the yield on interest-earning assets outpace the cost of interest-bearing liabilities, we caution that deposit migration and competitive pressures can quickly impact these improvements. To counter this, we continue to exercise careful loan pricing discipline and thoughtful deployment of excess proceeds from our asset repositioning. As our margin stabilization continues, we project operating revenue to remain in the lower $39 million range and gradually return to our previous $42 million plus quarterly run rate in the second-half of 2024.
On slide 15, we have our interest rate sensitivity information. We have approximately 42% of loan portfolio at a variable rate with $829 million repricing within three months. For our deposits, we have 35% of our interest-bearing deposits that will reprice immediately in conjunction with any movements to the Fed rate along with $208 million of CDs repricing during this current quarter.
We have details of our noninterest income and expenses on slide 16 and 17. Both operating non-interest income and expense were in line with previously provided guidance at $7.6 million and $28.8 million, respectively. We are pleased with the non-interest income revenue streams and remain focused on capturing customer relationship income opportunities as they present themselves.
As with non-interest income, we anticipate continued expense consistency going into 2024 as well as having our efficiency ratio to start trending downward over the next several quarters. Looking ahead, we expect first quarter non-interest income in the mid-$7 million range and non-interest expense in the $28.5 million to $29 million range, with salary and benefit expenses making up $16.5 million to $17 million of those expenses.
And finishing off on slide 18, total capital grew $13 million during the quarter to almost $460 million, driven by both earnings and $8 million from the decrease in ASCI losses due to interest rate changes. Over the past 12-months, we’ve made significant progress repositioning our balance sheet through various liquidity and capital management strategies. We remain in a strong, well-capitalized position and most importantly, continue to execute on our primary mission to grow and defend tangible book value.
With that said, I’ll turn it back over to Billy.
Billy Carroll
Thanks, Ron. As you all can see with our trends, we are positioned well we knew that ’23 was going to be a holding serve year, which we didn’t like, but was still the case. But even with that, we had nice balance sheet growth. And as I stated earlier, we had some very good operational accomplishments that are going to make us more efficient. With the stabilization we’ve discussed, more clarity on the rate forecast and our disciplined spending, I feel confident we have metric improvements on the horizon.
My outlook for growth is still fairly bullish. As we continue to see nice pipelines. We are lending and feel we continue at the same pace, the same mid-single-digit pace. With that, deposits we anticipate growing at around that same pace. And we feel like we can continue to fund our growth internally.
Summarizing a few key areas. We’ve built a great foundation over the last several years through both M&A and organic growth. And as a result, we have a very strong balance sheet that is diversified and granular as well as a lot of strength in the liquidity we have available. As you’ve heard, we do have some outsized cash flows coming back to us in 2024 and that will have a very positive impact for us. To say that again, we have a very nice balance sheet.
As we discuss our footprint, our company operates in some of the best markets in the Southeast, and that will continue to provide a tailwind for us. Geography matters. And as I travel our regions, the vibrancy is real. When you have a couple of those markets, we have some — we have a couple of those markets that just have got some outstanding teams that we’ve built over the years, and we’re going to continue to build those. And when you look at us holistically, we have a very nice value proposition.
A couple of other items I noted at close, we added a great executive to our senior team, Martin Schrodt. Martin joined us recently as Chief Banking Officer during the last quarter and comes to us with an outstanding background in regional and community in large community banks. We’re very excited to have Martin on our team. We are also excited to move to the New York Stock Exchange in December. We look forward to working with the NYSE and having a great long-term partnership with them.
I’ll close with a big thank you to our 600-plus outstanding associates that we have in this company. These team members have worked extremely hard during the last year, and they continue to build a great culture for SmartFinancial.
So I’ll stop there, and we’ll open it up for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question today comes from Stephen Scouten from Piper Sandler. Your line is now open.
Stephen Scouten
Yes, hey, good morning, everyone. How are you doing? I guess one question I have, I guess, I just had one question around the news around the South Alabama Panhandle team. I’m just kind of wondering what the total size of that team was from what you brought on in ‘21 and kind of what that loan book, how much of those folks remain just kind of if there’s any material risk to any outflows from that respect?
Billy Carroll
Yes. First, no material risk and outflows. We did have — we had basically seen we had two producers leave that represented two marks in that coastal region. And as you know, we’ve had very little of that in our history. I’ll all say to it is sometimes folks fill but they’ll fit better in other places. And when that’s the case, it’s been my experience that it usually works out best for everybody. We’ve got a nice plan in place. We feel we’re better positioned as we wrap up some near-term recruiting efforts and we see no real impact from those departures. We’ve got a good strategy, and we had a good backup plan.
Stephen Scouten
Okay. Great. And apologies if I missed any commentary on this, but the non-interest-bearing deposits, it looks like the pace of decline has kind of slowed, which is good. but still moving downward. Do you expect to see that continue? Do you think the mix shift can kind of stabilize from here on the deposit side.
Ron Gorczynski
Yes, that’s a good question. We are seeing the slowdown of the rate of increase. We do expect the mix shift to probably hopefully floor at 20%. So I think from here, we’re seeing a lot of stabilization over the last quarter and looking forward. So not much more on the deposit side, but we still will have a little bit of still deposit creep going forward or expense creep going forward.
Stephen Scouten
Okay. Got it. Makes sense. Okay, and then just last thing for me is you guys are talking about this 2024 profitability recovery and seeing the trajectory, which is great and definitely can see that from what you saw in 2023 on a profitability standpoint, what do you think the possibility is to return to what sort of level in maybe ’24 or 25 ‘from my numbers are correct, maybe like a 73 basis point ROA here this year in full?
Ron Gorczynski
Yes. At this point, with our repricing that’s occurring in our production, we should see — we’ll see the lift starting second half of this year. But getting back to that 1% pre-downward rate looking — excuse me, pre-downward ROA probably like the second half of 2025, I think we’ll be back on plan. That’s what we’re expecting.
Billy Carroll
Stephen, I’ll add. We’ve looked at, obviously, that’s where we want to get back to where we were just about 18 months ago. not unlike others, you get a little bit of a squeeze. But we feel really good about kind of where the company is positioned now. As Ron has alluded to, the repricing, you throw in some asset growth. And what we’re looking at, we’re kind of modeling a lot of this in kind of a flat rate scenario. We’re trying to take a look at a fairly conservative approach.
If you get — if the market projections hold true, and you get a little bit of a downward shift. I think that accelerates that recovery. for us and gets us back to those normalized metrics even faster. So we feel pretty good about it. We know we can get there. It will just be a little bit of a function of what the Fed does.
Stephen Scouten
Got it. Makes sense. And does that imply like a really big ramp from an operating revenue perspective, like that kind of $42 million number? Does that need to ramp pretty significantly in ’25 to get to that level? Because it just feels like a pretty big jump back in a relatively short period of time.
Ron Gorczynski
Well, I think from going forward, we’ll consecutively, quarter-over-quarter increases, we’re looking in the mid-2025, we’re probably starting to hit the $50 million net revenue bogey. So yes, we will have considerable ramp. But again, with all the repricing that’s occurring, we feel confident we’ll get there.
Stephen Scouten
Okay, that’s extremely helpful. Thanks, guys. Appreciate the time.
Ron Gorczynski
Thanks, Stephen.
Operator
Our next question comes from Matt Olney from Stephens. Your line is now open.
Matt Olney
Hey, great. Good morning, everybody. I want to ask more about the balance sheet liquidity. You mentioned you’ve got some nice cash flows coming due here pretty quickly. And we’ve talked about this for a while. It does provide some nice optionality. Any updated thoughts you can provide us with around what you expect to do with the improved liquidity?
Ron Gorczynski
Sure. We — ultimately, we’d like to fund loan growth with it, but being that we’re still targeting our 12% asset to security ratio. So we are strategizing pretty much to put $100 million to work over the next month or two to kind of buffer that 12% bogey that we’re trying to get to or maintain — so we will have investment purchases over the next two months.
Matt Olney
Okay. So loan growth and partially into securities, and on the loan growth front, I heard some commentary on that. I heard the deposit growth guidance. Any — I may have missed the loan growth guidance. What’s the range of expectations for loan growth this year?
Billy Carroll
Yes. Matt, I think we’re projecting kind of — we’re staying in the kind of that mid-singles. I think we can be somewhere there, hopefully north of 5%. Our bogey internally is about 7%-ish on both sides of the balance sheet. When you look at balance sheet growth, we’ve got — again, we feel good about the way the year is starting. I mean pipelines continue to look good. as we sit down with our regional presidents and look at our growth prospects, we feel good about getting that. So we’re still kind of in that kind of in that upper not — I wouldn’t say high singles, but kind of mid-plus single balance sheet growth for the year.
Matt Olney
Okay. That’s helpful. And then as far as the Alabama credit that was mentioned before, any more color you can provide on this, just the size of that loan and it sounds like you feel good about the collateral. What is that — what type of collateral is that?
Ron Gorczynski
Yes. Rhett, you want to walk into that?
Billy Carroll
You got some mix collateral in it.
Rhett Jordan
Total size of — I mean, it wasn’t a single loan. It was a group of loans, but the total size of all of them is about $3 million in balances. And the collateral is predominantly real estate and then there was some office equipment associated with some of that as well.
Matt Olney
Okay. And as far as resolution of that type of credit, is that a near-term event? Or could this drag out for a little while, you think?
Rhett Jordan
I don’t think it will drag out for a long period, Matt. I mean it may take us up in a quarter or a little more, just depending on the some of the legal process we go through, but — and the positioning of location of some of those assets. But I don’t think it’s going to be a drug out thing. And like I said, we went ahead and positioned in allowance of factor against what we believe to be the risk there. So we feel pretty good about where we’re positioned at this point.
Matt Olney
Okay, okay, guys, that’s all for me. Thank you.
Rhett Jordan
Thanks, Matt.
Billy Carroll
Thanks, Matt.
Operator
Our next question today comes from Feddie Strickland from Janney Montgomery. Please go ahead.
Feddie Strickland
Hey, good morning, gentlemen. Just wanted to ask, there’s — I know there’s been some discussion, and I appreciate the detail and the securities rolling off. What kind of yields are you getting on new securities that you’re reinvesting into, just so we can have a sense of maybe how much pickup you could have on the securities book over time?
Ron Gorczynski
At this point, we’re looking probably — it’s over probably 5.25% range, somewhere plus or minus depending on the exact security we’re getting into, but it’s definitely over 5% that we’re looking to reinvest into.
Feddie Strickland
Got you. So we should just kind of pay attention to whatever Fed funds does and use as a bit of a barometer?
Ron Gorczynski
I would think. Yes, 5, 10 basis points, maybe below that Fed funds, but yes.
Feddie Strickland
Got you. And then you mentioned…
Billy Carroll
You’re right thinking about it. It’s funds move. Yes. I was going to say, Feddie, I think its funds move, obviously, we’re, again, trying to figure out you go ahead and ladder out a little bit of duration in a market where you’re seeing the curve kind of move a little bit on you. So again, trying to balance that kind of short-term versus long-term benefits. But as Ron said, we’re still going to get decent yields on the [indiscernible]
Feddie Strickland
Yes. That makes sense. And I wanted to switch gears. If we do start to see rate cuts next year, will we likely see a bit of a lag on deposit repricing at least in the sorry, consumer and commercial side until potentially a second cut, but maybe a faster benefit on municipal deposits repricing. Just trying to understand how the deposit portfolio would act on the way down.
Billy Carroll
Yes. And Ron, I think Ron gave a little bit of guidance there just kind of on what we’ve got this repricing immediately on the liability side. But I think it’s a mix. I think we are in a position with our liquidity that can allow us to move rates maybe a little quicker than some. We’ve done a little of that. One of the things with our deposit growth being a little bit softer this quarter. Some of that was because we pushed — there were some higher cost stuff that we just didn’t want to match and move some things out. I think for us, we’ve got some flexibility there. But yes, there might be a little lag, but we’re going to we’re going to try to push as hard as we can push. But Ron, I don’t know if you’ve got any other comments.
Ron Gorczynski
No, exactly. As Bill indicated, push hard the first cut or two and then see what the market will bear. But it’s — we definitely want to take advantage of it.
Billy Carroll
It’s kind of like — and Feddie, it’s kind of like when we saw rates going up, I mean you end up kind of fighting for that rate-sensitive core. And so I think we’re going to look at some of that kind of more market by market and client by client. But at the end of the day, we want to make sure we’re retaining. We know what the market is, and we want to retain those — the core business, but we’re going to be as aggressive as we can on the way down.
Feddie Strickland
Got it. That’s helpful. One last quick one. Just curious if you’ve given a second look to the bank term funding program. I know some banks have used some arbitrage there. Just not sure if that’s something you guys have looked at or not.
Ron Gorczynski
We have been looking at it. And again, we’re developing a lot of strategy over the next $100 million that we’re going to deploy and that is a consideration in our thought process. We haven’t really picked the ideal purchases yet or how we’re going to do it, but that’s part of the candidates.
Operator
Our next question comes from Brett Rabatin from Hovde Group.
Q – Brett Rabatin
Guys, good morning. Wanted to start with the fee income outlook. I know you wanted to start with the fee income outlook. I know you mentioned $7.5 million in the first quarter. Billy, can you maybe talk about — I know you’ve got some initiatives and some thoughts on some products and maybe SBA. Are there any variables that would lead to a stronger fee income performance in ’24 relative to ’23, any initiatives that might push that kind of mid-single-digit number higher in ’24?
Billy Carroll
Yes. Brett, I guess, you’re speaking to just that noninterest income line. Yes, I think there could be. Obviously, we’ve continued to put resources into our SmartBank Investments group as well as insurance. I think that — I think that could be a big piece of it. Again, if we can continue to grow that AUM, our investments group now has about $1.2 billion in AUM, and it’s starting to become a little more — you see it becoming a little more impactful on our income statement.
And insurance, while still relatively small, could provide some upside, too. I think bigger things for us, TM and treasury are important. We’re continuing to put much more in the way of resources behind that, especially in an environment where we’re really looking to grow deposits and those corporate deposits are big. So the TM side of it is very important. I’d also mentioned our new Chief Banking Officer, Ad Martin Schrodt. Martin has got some great ideas related to experience he’s had in some of the regional banks that he’s worked with that I think could provide some upside there. So I think it’s a variety of things at the end of the day. Can I think we can improve on. Ron has gotten to absolutely swap fees, too.
When you look at our Capital Markets group, this curve continues to stay a little bit in get some inversion in the curve. Using swaps to lock in some lower longer rates for clients with us floating them are out there as well. So I’m throwing a bunch of stuff out there. I think it’s a little bit of all of it, I guess, is my — to answer your question at the end of the day. But the great thing about it is we built these different business lines. We’ve got a number of different levers that we can do. So I think it will just be a function of kind of what the market gives us, but I do think there’s nice upside there.
Brett Rabatin
Okay. And you specifically mentioned insurance, and I know we’ve talked about it. I know you like the business. Any thoughts on what some of the — some other folks have done in terms of monetizing high valuations to redeploy capital in the core bank business?
Billy Carroll
Yes. We’ve seen that. We’ve watched I know Nate and I talk about it, that it works a lot on that side with me. And we talk about it a lot. Again, like the business think that we’ve got the ability to continue to grow it and grow that revenue line. But we’re aware of what’s going on in the markets, and we’re keeping an eye on that.
Brett Rabatin
Okay. And then just lastly for me, I know you guys have a lot of experience in trucking and several board members are involved. What — can you maybe give us an outlook on what you’re seeing specifically in the trucking industry and kind of core outlook from just a fundamental perspective for that business?
Billy Carroll
Miller is still fairly involved in that number, why don’t you take that, just kind of your trucking outlook.
Miller Welborn
Thank you. I’m very optimistic about the trucking and transportation industry and specifically the bigger, more stable carriers that have been in it for years. I think you have some excess capacity came into the market with some inexperienced operators, kind of COVID area — pushed COVID era, pushed up a little bit of the demand, but I think that is kind of sorted out now. And I would say I’m probably bullish on the industry as a whole. It’s just such a vital part of the economy. The stable operators will do better and margin will continue to improve for them. So no worries at all about that industry.
Brett Rabatin
Well, appreciate the color.
Miller Welborn
Thanks.
Billy Carroll
Thanks, Brett.
Operator
Our next question today comes from Steve Moss from Raymond James. Please go ahead.
Steve Moss
Good morning. Maybe just starting off on the revenue guide here. Ron, you mentioned Ron, you mentioned $42 million in total operating revenue for the second half of ’24. Just wondering if you’re incorporating any rate cuts into that guidance.
Ron Gorczynski
No, we’re not. We’re assuming a flat rate environment and any rate cuts will make our performance that much better. So we want to be conservative in our looking forward guidance.
Steve Moss
Okay. Great. And just on that related subject, just curious, I missed the number. You mentioned — I missed how much of your interest-bearing deposits are indexed.
Ron Gorczynski
Sure. I think we’re doing 35% or 1.1 million — excuse me, $1.1 billion are indexed to — and we also have another $300 million that it’s to an internal index, but we feel confident that we can go ahead and follow the Fed rate cuts as appropriate.
Steve Moss
Okay. Great. That’s helpful. And then in terms of the Bill, your upbeat on the loan pipeline here. Just curious what you’re seeing for the underlying business mix here going forward into 2024. It sounds like more C&I and maybe owner-occupied commercial real estate.
Billy Carroll
Yes. I think it’s a good mix. I don’t know, Rhett you got — can add any color you want to. But yes, I think it’s a mix. Obviously, we looked at a little more C&I growth in ’23, we think we will want to continue that same pace. Yes. But we’re still — when you look at our CRE ratios, right, you can speak to those. We’re still seeing some nice a fairly lower risk CRE opportunities out there, too. So I don’t know if you got any color you want to add?
Rhett Jordan
I would agree completely, Bill. I think as far as pipeline currently and most of what our teams are out finding opportunities in is still predominantly C&I owner-occupied type of projects. To Bill’s point, I do think as we go through the year, if we do see some of the interest rate movements that are forecast it will help the CRE aspect just because of the metrics associated with underwriting performance on income-producing properties that might create some opportunities in this space that are just a little stronger in the profile than what we saw with rigs going up at the pace they did last year. So it could be a really good mix as we go through the year.
Steve Moss
Okay. Great. That’s helpful. And then in terms of just the — on credit here. Just curious, how large is the small trucking piece of the fountain portfolio that you guys talked about where you’re seeing some stress?
Rhett Jordan
The overall portfolio for fountain, it’s the trucking industry is about 40% of the weight. But the ones the challenged operators that we were working with and through as the year progressed is about a little over 1.5% of their total portfolio. So it’s a small group of operators. We feel like we have identified the vast majority. I can’t say there won’t be one or two here or there that may that may have an issue as we go through ’24. But we think the majority of the ones that are that are at a higher risk point we’ve identified or working through those. Most of the challenge just simply comes in the valuation of the underlying assets in the marketplace.
Those have fluctuated as the year went. But as I stated, we certainly have seen that plateau and we think it’s going to hold a little more soundly as we go through this next year.
Steve Moss
Very minimal. Okay. Great. And maybe just curious also, is that what — are any of those credits appearing in the line item in the release of restructured loans and leases not included in nonperforming assets, I see that’s up to $4.2 million. Just wondering if that’s the driver there.
Rhett Jordan
No. That’s all included in the nonperforming aspect.
Steve Moss
Okay. And then maybe just what is driving that bucket there? Of restructured loans and leases?
Rhett Jordan
I’m sorry. I think your question was what’s driving that. Was that right?
Steve Moss
Yes. Correct. What’s driving the bucket of restructured loans and leases not included in nonperforming. You’re trying to think as far as restructured on the leases, I’m going to have to get back to you off the top of my head. I’m not sure what I have to look at that specific metric I’ll get you that information. I’m not my head. I’m not — I don’t have that drop.
Operator
Our next question today comes from Catherine Mealor from KBW. Your line is now open.
Catherine Mealor
It feels like just from some of your commentary on the call so far. So look, we’ve got some really good revenue momentum, especially if we get cuts, especially as we kind of move into ’25 with the loan repricing opportunity. And so as we think about improving revenue through the back half of this year and into next, how do you think we should balance that with expense growth?
Do you think expense growth accelerates a little bit of that revenue rebound? Or is this going to be a really kind of big switch in your profitability to get some bigger operating leverage as we move into next year?
Billy Carroll
Yes, I’ll start and then Ron, you chime in. I think, Catherine, obviously, expenses or yes, I think we’ve done a nice job. When you look at our efficiency ratio, ratio is elevated just because of net interest income got a little echo there. I’m sorry. But I think at the end of the day, I think we can control a lot of those expenses. There’s not a lot — we’ll have a little bit of occupancy add this year with some branches that we’ve got adding down in Alabama and particularly.
But — and then there’s obviously some variable component in there and that salary line related to incentives, but those only those typically are going to be — that should ramp as revenue ramp. So yes, I think at the end of the day, we’ll see some increase in there, but we’re going to work very hard to make sure that, that’s contained and Ron, I don’t know if you’ve got any just comments related to expense growth.
Ron Gorczynski
Yes. Really, as a percent of revenues, in the first quarter, we’re estimating the noninterest expense to revenues at 72% and that we’re expecting that to widen out. So meaning that by the time of our Q4 2024, it represents 67%, 68% of the revenue. So the revenues will widen out quicker than the expenses will increase. Does that make sense?
Catherine Mealor
It does. That’s great. And are there any kind of expense investments, either teams, technology, processes, anything that you’ve been holding back on while we’ve been in this constrained revenue environment that we may see? Or you kind of feel like you’ve got the infrastructure that you need to move revenue where you see going?
Billy Carroll
Yes. I think we’ve got a pretty good spot. We’re continuing to evaluate some tech options with some digital platforms. There are some things that we have got on the horizon that we don’t necessarily have in our ’24 forecast because we want to make — number one, we want to make sure that the revenue growth comes back as we project. But not a lot, not a ton of spend out there. Our systems are in place. There’ll be a little bit here and there, but with nCino being in, KlariVis being in. We’ve got a lot of this stuff already built in and built into our run rate.
So there’s a couple of broader strategic things that we might want to look at as we get into the later part of the year. related to potential upgrades of some digital platforms. You got to stay relevant, and you know that. I mean, so we’ve got to make sure that we’ve got the right tools but we feel like most of that’s already into the run rate. And we’ll evaluate as the year goes on and see how the revenue line if — making sure the revenue line comes coming back like we anticipate. Ron, I don’t know if you’ve got any other color.
Ron Gorczynski
No, exactly, Bill. Operationally, we’re sound, were solid. I think it’s more IT related to for fraud-related items software. And also as we keep our infrastructure customer focused. So we’ll always have opportunities to enhance it. But right now, we’re in a good spot.
Operator
Our final question today comes from Stephen Scouten from Piper Sandler.
Stephen Scouten
I just wanted to jump in for a follow-up. I think you had said you might have some color around that litigation issue. I’m not sure if I might have missed that, but just was wondering if there’s any information you lend on that front?
Billy Carroll
Ron, you want to?
Ron Gorczynski
Really, as Bill indicated, the accrual is nonrecurring. It relates to a pending litigation that we expect to be resolved during the first — during this quarter. No other material amounts will be accrued for. Honestly, nothing unusual here. It’s sort of litigation that many banks have been seeing lately. And it’s kind of — that’s pretty much not more much more to say on that.
Operator
I’d like to turn the session back over to Miller Welborn for any final remarks.
Miller Welborn
Thanks, Drew, and thanks again to each of you for joining us today. As always, if you have any additional questions, please feel free to reach out to any of us directly with any questions you might have and hope you have a great week. Goodbye.
Operator
That concludes today’s SmartFinancial Fourth Quarter 2023 Earnings Release and Conference Call. You may now disconnect your lines.
