Q4 2023 SmartFinancial Inc Earnings Call

Participants

William Carroll; President, Chief Executive Officer, Director; SmartFinancial Inc

Presentation

Operator

Hello, everyone, and welcome. My name is Ger, 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)
I will now turn the call over to your host, Nate Strall. Please go ahead.

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 appendices 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.

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 are 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.

William Carroll

Thanks, Miller, and good morning, everyone. Great to be with you today. I'm going to jump right this morning and discuss our fourth-quarter highlights. You'll see most of these on slide 3 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 forecast, 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. We're $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 impacts 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 former office location. This was a nice win-win, helping the community with a qualifying CRA donation. The other was an accrual on a lingering legal matter that we're working to finalize Ron's going to provide a little bit of color on those in a moment, we did build 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 2320 23. 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 in a $5 billion company, including a new data aggregating and reporting system player was also air low air commercial loan platform is now fully utilizing and CNO as well as their pricing and profitability system. We are we are also moving to incentives consumer platform in Q1 to help us gain better efficiencies on smaller loans. All in all, a good quarter, where we shift 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 Ray to discuss the loan portfolio and then on to Ron for a deeper dive into the numbers. Brett?

Thank you, Billy. The bank had a really strong production quarter with annualized organic loan growth of 8% quarter over quarter and continuing to maintain strong overall composite and geographic diversification across all products. 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 growth cycle, while we continued to see improved pricing parameters and an overall nine basis point increase in average portfolio yield.
Our construction portfolio continued to decline in outstanding balances. As expected, it 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 cost, creating more challenging project metrics in the commercial construction space starts were slower during 2023, and these changes in balanced positions or unexpected result of those dynamics.
Our nonowner-occupied nonconstruction 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 Mountain 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 problematic 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 for solid profitability and 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 who we had 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 positions 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 had 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 also reductions to prior quarter when excluding the impact of the two aforementioned items. Cre concentrations continued to reduce our overall diversification and general performance of the portfolio held strong and our annualized loss ratio held steady to prior period at 0.04% in Q4 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 position. Overall, we saw a slight increase from 1% to 1.02% of total loans. Realize 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 balanced growth in fourth quarter and normal seasonal model input factor movements in the model that is the basis for our 0.2 or 0.02% increase in the reserve. Overall loan demand continues to be good with a positive outlook as we progress into 24. 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 matters.

William Carroll

Right.

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 a loan 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 noninterest-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 on 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 five basis point quarter-over-quarter improvement for Q4. The weighted average 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 nine basis points to 5.61% versus 5.52% last quarter. While we were pleased to see the yield on interest-earning assets outpaced 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 stable as our margin stabilization continues. We project operating revenue to remain in the lower 39, $39 million range and gradually returning 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 than 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 200 million of CDs repricing during this current quarter.
We have details of our non-interest income and expenses on slide 16 and 17, both operating noninterest income and expense were in line with previous provided guidance of $7.6 million and $28.8 million, respectively. We are pleased with the noninterest income revenue streams and remain focused on capturing customer relationship income opportunities as they present themselves.
As with noninterest 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 noninterest income in the mid 7 million range and noninterest expense in the 28.5 to 29 million range with salary and benefit expenses making up 16.5 to 17 million of those expenses.
And finishing off on slide 18, total 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.

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 until we continue at the same pace this 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 and 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 us a very positive impact for us, 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 that traveler regions, the vibrancy is real. When you have a couple of those markets, we have some we have a couple of those markets. It just I've 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. To note is that close, we added a great executive to our senior team, Martin Schroeter. Martin joined us recently as Chief Banking Officer during last quarter and comes to us with an outstanding background and regional and community in large community banks. We're very excited to have Martin on our team. We're also that 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 there are 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 smart financial. So I'll stop there and we'll open it up for questions.
Thank you.

Question and Answer Session

Operator

We will now start today's Q&A session. If you would like to ask a question, please press star, followed by one on your telephone keypad. Now if you change your mind, please press star followed by two. Our first question today comes from Stephen Scouten from Piper Sandler Your line is now open.

Yes, good morning, everyone.

Hey, Dan.

I guess one question I have is I guess I just had one question around this. 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 was that loan book how much of those folks remain just kind of if there's any material risk to any outflows from that respect?

Yes, approach, no, no, no material risk and outflow. We did have we had basically we had to have two producers leave and that represented to march in that coastal region. And as you know, we've had very little of that in our history I'll say to the sometimes folks feel that they'll or they'll fit better in other places. And when that's the case has been my experience that usually works out best for everybody we got a nice plan in place. I 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, good, good strategy, and we had a good good backup plan.

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 down.

Would you expect to see that continue?

Or do you think the mix shift can kind of stabilize from here on the deposit side?

Yes, it's a good question. We some we are seeing the slowdown of the rate of increase of we do expect a mix shift probably hopefully a floor at 20%. So I think from here where we're seeing a lot of stabilization over the last quarter and looking forward, so not much now much more on the deposit side, but we still will have a little bit of of still deposit creep going forward, only expense creep going forward.

Okay.

Got it.

Makes sense.

William Carroll

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, you know, from what you saw in 2023 on a profitability standpoint, what do you think the possibility is to to return to what sort of level and maybe 24, 25 from my numbers are correct, maybe like a 73 basis point ROA here this year in full?
Yes.

At this point, we with our with our repricing that's occurring in our production. We should see we will see the lift starting second half of this year, but getting back to that 1% free from pre downward rate looking at excuse me, free downward ROA for like the second half of 2025?
I think we'll be back on plan. That's what we're a spin out.

And Steve and Al, as we've looked at, obviously, that's that's where we want to get back to where we were just about 18 months ago. And yet not unlike others, you get a little bit of squeeze, but we feel really good about kind of where the Company is positioned. Now, as Ron 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 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 feel pretty good about it. We know we can get there. It will just be a little bit a function of what the Fed does.

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 amount period of time.

Well, I think from a going forward, we'll work constructively with quarter-over-quarter increases. We're looking in the mid to 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 on, we feel confident we'll get there.

William Carroll

Okay.

That's extremely helpful. Thanks, guys.

Appreciate the time.

Operator

And actually, thanks to our next question comes from Matt Olney from Stephens.

Your line is now open up a great for everybody, and I want to add more about them about.
Good morning. 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. Does provide some nice optionality. Any updated thoughts you can you can provide us with around of what you what you expect to do with the improved liquidity?

Yes, your we know ultimately, we'd like to fund loan growth with it. But being that we we're still targeting our 12% on asset to security ratio. So we are strategizing a pretty much a 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, two months.

Okay. So So loan growth and partially into securities on and on the loan growth front on, 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 X that patience for loan growth this year?

Yes, Matt, I think we're projecting kind of we're staying in kind of that mid singles. I think we can we can be somewhere there. Hopefully north of 5% or maybe internally is about 7% ish on both sides of the balance sheet.
When you look at balance sheet growth on we've got again, we feel we feel good about the way the year starting. I mean, pipelines continue to continue to look good as we sit down with our regional presidents and look at our growth prospects on it, we feel still feel good about getting that thought. We're still kind of in that kind of in that that upper not I wouldn't say high singles, but kind of mid mid plus singles, our balance sheet growth for the year.

Okay. That's helpful. Thank you for that. And then as far as the the Alabama credit that was that was mentioned before. Any more color you can provide on this just to the size of that loan on it sounds like you feel good about the collateral. What is that what type of collateral that?
Yes, yes.

Right. You want to you want to walk in walk in and say it's a mix make you get some mixed collateral and a total size of it was it was it was a single loan.

It was it was of group loans, but the total size of all of those about $3 million in balances and on the collateral is predominantly real estate and then there was some office equipment associated with some of that as well.
Okay. And as far as resolution of that, type of a credit. Is that a near-term event or could this drag out sort of what you're saying?
I don't think it will drag out for a long period.
Matt, I mean it may take us. So it might take us up in the quarter a little more understanding on the of some of the legal process we go through but done and the positioning of location, some of those assets. But I don't think it's going to be a drug out thing. Like I said, we went ahead and position in allowance of factor against the what we believe to be the risk there. So we feel pretty good about where we're positioned at this point.
Okay. Okay, guys, that's all for me.

Thank you.

William Carroll

Thanks.

Magma.

Operator

Our next question today comes from Freddy Strickland from Janney Montgomery Scott. Please go ahead.

Hey, good morning, gentlemen. And then I just wanted to ask if there's I know there's been some discussion and I appreciate the detail on the securities rolling off and 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 Al you could have on on the securities book over time at this point where we're looking probably it's over probably five, 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.

Yes, just so we should just kind of pay attention to whatever Fed funds does and use that as a bit of a Walter, I would think, yes, probably five, 10 basis points, maybe below that Fed funds.

But yes.

Got you.

And then you mentioned the asset, any asset and you're right thinking about it. But yes, beyond mode as funds move, yes, there's no site study. I think, as funds move. Obviously, we're again trying to figure out you go ahead and ladder out a little bit of duration and in a market where you're seeing the curve kind of move a little bit on.

William Carroll

Yes.

So again, trying to balance that kind of short term versus long term benefits. But as Rod said, we're still good at. We're still going to get at these yields on the here.

That makes sense. Thanks for the color on that. 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 from the committee, but sorry, consumer and commercial side until potentially a second cut, but maybe a faster benefit on municipal deposits repricing? Just trying to understand and how does deposit portfolio on the down.

Yes. And Rod, 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 issue. I think we're at we are in a position with our liquidity that can allow us to move rates may be a little quicker than some. And yes, and we've done we've done that a lot of things with our deposit growth being a little bit softer this quarter. Some of that was because we pushed there were some some higher cost stuff that we just didn't want to match and move some things out. And yes, I think for us, we've got some flexibility there. But yes, at there might be a little lag, but we're going to we're going to trying to push as hard as we can push brought out. Have you got any other comments?

No, exactly. And as Bill indicated, push hard, the first cut or two and then see what the market, what the market will bear, but it's Tom. We definitely take advantage of it.

Just kind of like in theory, it's kind of like when we saw rates going up, I mean, you end up you end up kind of fighting for that rate sensitive core. And so I think we're going to we're going to look at some of that kind of more market by market and client by client, but it did the day. We want to make sure we're retaining. We don't what the market is. We want to retain those the core business, but we're going to be as aggressive as we can on the way down.
Got it.

That's helpful. And one last quick one. I'm just curious if you've given a second look to the bank term funding program and as some banks have used some arbitrage there, I'm just not sure if that's something you guys have looked at or not what we have been looking at and again, we're developing a lot of strategy over the next 100 million that we're going to deploy.

And that is that is a consideration and 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 it. That's part of the candidates.

Got it.

Thanks, Ron. Thanks for taking my call.

Operator

Expanding on your question.
Our next question comes from Brett Rabatin from.
Great. Your line is now open.

Hey, guys, good morning. Wanted to wanted to start with the high income outlook I know you guys wanted to start with the fee income outlook. I know you mentioned 7.5 million in the first quarter. 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 stronger fee income performance in 24 relative to 23? Any initiatives that might push that, that kind of mid-single digit number HIGHER and 24?

Yes. Brady, I guess you're speaking to just that, that that non-interest income line.
Yes, I think there could be obviously, we've continued to put on put resources into our smart bank investments group as well as insurance. And I think that's a that's that I think that could be that could be a big piece of it. Again, if we continue to grow that, the better you immunoassay 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 on the on our income statement and insurance, while still relatively small could provide some upside to?
Yes, I think bigger things for us, UTM 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 were big sets. The TM side of it is very important. It also mentioned their new Chief Banking Officer and Martin Schroeter, Martin's got some great ideas related to experience he had and some of the regional banks that he's worked with and that I think, you know, that could provide some upside there. So I think it's a variety of things at the end of the day. Can I think can I think we can improve on on Ron jobs? Absolutely. Swap these two, when you look at our capital markets group, this curve continues to be a little bit invert. It gets some inversion in the curve and yet you're using swaps to lock in some lower longer rates for clients with us, floating number 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 but the great thing about it is we built we built these with 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.

Okay. You specifically mentioned insurance, and I know we've talked about it and I like the business. Any thoughts on what some of other some other folks have done in terms of monetizing the high valuations to redeploy capital and in the core bank business?

Yes. Yes, we've seen that we've watched and have night not talk about at night worked a lot on that side with me, and we talk about it a lot. And again, like the business, I 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.
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 Tom can you maybe give us an outlook on what you're seeing specifically in the trucking industry and kind of core outlook from a just a fundamental perspective for that for that business.

Ms. Miller Miller still fairly involved that number once you take that just kind of your trucking outlook.

Thank you. I am 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 push. 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 is just such a vital part of the economy. Stable operators will do better in margin will continue to improve for them. So and no worries at all about that industry.
Okay. I appreciate the color. Thanks.

Thanks, Brett.

Operator

Our next question today comes from Steve Moss from Raymond James.

Please go and good morning.

Maybe just starting off on the revenue guide here. Ron, you mentioned more than Ron, you mentioned 42 million and total operating revenue for the second half of 24. Just wondering if you're incorporating any rate cuts into that guidance?

No, we're not where we're assuming a flat rate environment and any rate cuts will make our performance stock that much better. So we want to be conservative in our in our looking forward guidance.

Okay, great.

And just on that related, sort of just curious I missed the number you mentioned I missed how much of your interest bearing deposits are indexed?

Sharon, I think we're doing about 35% or $1.1 million excuse me, $1.1 billion are indexed two, and we also have another 300 million debt down to an internal index. But though we feel confident that we can go ahead and follow the Fed rate cuts as appropriate.

Okay.

Great.

That that's helpful. And then in terms of the yes, the US is still you're 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 CRE and maybe owner-occupied commercial real estate.

Yes. I think it's I think it's a good mix of red. You've got the adding color you want to. But I think it's a mix of obviously, as we look to do more C&I growth in 2023. We think we want to continue that same pace, but we're still when you look at our CRE ratios are at you speak to those we still we're still seeing some some nice of a fairly low lower risk CRE opportunities out there to somebody.

You got any color you want out of what degree was it really, I think a bit as far as pipeline currently and most of what so what our team throughout. So finding opportunities in is still predominantly C&I, owner-occupied type of projects, but 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 CRES back up just because of the metrics associated with underwriting, our performance will make on income-producing properties that might create some more some opportunities in this space that are just a little stronger in the profile than what we saw with rates going up at the pace they did last year. So it could be up. It can be a really good mix as we go through the year.
Okay.

Great. That's that's helpful. And then in terms of just the on on on credit here, just curious how large is the small trucking piece of the fountain portfolio.

Can you guys talk about where you've seen some stress overall portfolio for foundry, which is the trucking industry is about up about 40% of the weight on both the ones. The so the challenge, the operators that we were working with and through as the year progressed, is about a little about a little over 1.5% of their total portfolio. So it's a small group of operators. We feel like we'd have identified the vast majority I can or can't say there won't be one or two here or there that may that they have an issue as we go through 24. But we think the majority of the ones that are off of that about a higher risk point we've identified are working through. Those are most of the challenges just simply comes in the valuation of the underlying asset in the marketplace, although it fluctuated as the year went. But as I've stated, we certainly have seen that plateaus and we think it's going to we're going to hold a little more soundly as we go through this next year at bare minimum Okay, great. Maybe just curious also, you know, is that what are any of those credits appearing in the Glenn, I'm the release of restructured loans and leases not included in nonperforming assets, I see up to $4.2 million on something that's the driver there.
No, yes. No, that's included in the or in the nonperforming assets.
Okay.

And then maybe just what is science from that bucket there?

Restructured loans and leases?
I'm sorry, are you there costs are also what state?

And I think your question was what's driving that? Was that right?
Yes, correct.

What's driving the bucket of restructured loans and leases?
It's not included in our performance. I'm just trying to think of some stores restructured long leases. Again, we'll have to get back to your money you had. I'm not sure what that has looked at specific metrics on that, but I'll get you that information. And I'm not again, I'm not I don't have it in front of it.

Appreciate all the color.

Thank you very much, guys.

Bankston.

Operator

I'd say our next question today comes from Catherine Mealor from KP W. Your line is now open.

Thanks. Good morning.

Good morning.

Operator

I have never had deals like just from some of your commentary on the call so far. I think 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 as that revenue rebound? Or is this going to be a really kind of big, which in your profitability you get some bigger operating leverage as we move into next year?

Yes, I'll start and then, Ron, you chime in. As I think, Kevin, obviously the expenses are typically I think we've done a nice job when you look at when you look at when you look at our efficiency ratio to currency ratios already just because of net interest income because limited time I'm getting 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. You know, there's not a lot we'll have a little bit of occupancy add this year with some some branches that we've got adding down in Alabama and particularly, but then there's obviously some variable component and they are in that salary line related to incentives with those only those typically are going to be a that should that should ramp as revenue ramps?

So yes, I think at the end of the day, we'll see some some increase in there, but we're going to work very hard to make sure that that's contained and for I don't know if you've got any comments related to expense growth as it really as a percent of revenues from first quarter estimating noninterest expense to revenues at 72%, and that though we're expecting that to widen out. So meaning that by the time of our Q4 of 2024, it represents 67, 68% of the revenue. So the revenues will widen out quicker than the expenses will increase. So that makes sense.

Operator

It does. That's great. And are there any kind of expense investments, your team technology processes, anything that you've then holding back on your 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 in the revenue where you where you see go on interest?

We yes, we I think we've got a pretty good spot work. We're continuing to evaluate some tech options with with some digital platforms. There are some things that we have got on the horizon that we don't necessarily have in her 24 forecast. And we want to make number one, want to make sure that the revenue growth comes back as we as we project. But I'm not a lot not a ton of spend out there with our systems are in place. There will be a little bit here and there, but within scene and Zeno being in claim as being in. We've got a lot of this stuff's already already built in and built into our run rate. So yes, there's a couple of broader strategic things that we might want to look at as we get into later part of the year related to potential upgrades of some digital platforms and you got to stay relevant in, 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. We'll evaluate as the year goes on and see how the revenue line, if the right making sure the revenue lines come coming back, like we like we anticipate, Ron, I don't know if you've got any other color.

I know you know, exactly. Billy home operationally were sound were solid. I think it's more IT related to two for fraud related items for software. And also as we 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

Great. Very helpful. Thank you.

Thanks, Kathleen and Scott.

Operator

Our final question today comes from Stephen Scouten from Piper Sandler. Your line is now open.

I guess 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 any information you could did lend on that front as you brought up you want to.

Yes, you really as Bill indicated, the accrual is nonrecurring relates to a pending litigation that we expect to be resolved during the first during this quarter. And no other material amounts will be will be accrued for honestly, nothing unusual here at sort of litigation that many banks have been seeing lately. And it's kind of that's pretty much the no more have much more to say on that.

Okay.

Thanks for letting me hop back.
Thanks, Dave.

Appreciate it.

Operator

I'd like have a session back over to Miller Welborn for any final remarks.

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 SMART Financial Fourth Quarter 2023 Earnings Release and Conference Call. You may now disconnect your lines.