SmartFinancial - Q4 2023
January 23, 2024
Transcript
Operator (participant)
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. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. To ask a question, please press Star followed by one on your telephone keypad. To withdraw your question, please press Star followed by two. I will now turn the call over to your host, Nate Strall. Please go ahead.
Nate Strall (VP and Director of Strategy & Corporate Development)
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.
Miller Welborn (Chairman)
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.
Billy Carroll (President and CEO)
Thanks, Miller, and good morning, everyone. Great to be with you today. I'm going to jump right in this morning and discuss our fourth quarter highlights. You'll see most of these on slide three of our deck. I will say it, 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 is 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.
A key number we focus on here, 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 a 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 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 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 Rhett to discuss the loan portfolio and then on to Ron for a deeper dive into the numbers. Rhett?
Rhett Jordan (Chief Credit Officer)
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 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 non-owner-occupied CRE, due primarily to existing construction projects completing and transitioning into permanent financing phases. 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 9 basis point increase in 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, starts were slower during 2023, and these changes in balance positions are an expected result of those dynamics. Our non-owner-occupied, non-construction CRE portfolio grew very slightly in outstanding balances for the quarter from completion of construction projects, as previously mentioned, but 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 classifieds 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 and 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 multi-state mortgage broker operation, for whom we had some equipment and real estate assets financed. Our exposure to the operator was secured term debt and for that matter, 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 continued 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 through 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 0.20-0.02% 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 (CFO)
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 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 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 9 basis points to 5.61% versus 5.52% last quarter. While we were pleased to see the yield and 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-$39 million range and gradually return to our previous $42 million+ 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 non-interest income and expenses on slide 16 and 17. Both operating non-interest income and expense were in line with previous 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-$29 million range, with salary and benefit expenses making up $16.5 million-$17 million of those expenses. 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 AOCI 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 (President and CEO)
Thanks, Ron. As you all can see with our trends, we are positioned well. We knew that 2023 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 this same pace, this same mid-single digits 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 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 to note as I close. We added a great executive to our senior team, Martin Schroeder. Martin joined us recently as Chief Banking Officer during the last quarter and comes to us with an outstanding background in regional and community, and large community banks. We're very excited to have Martin on our team. We're 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+ 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. I'll stop there, and we'll open it up for questions.
Operator (participant)
Thank you. 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.
Stephen Scouten (Managing Director and Senior Research Analyst)
Yeah. Hey, good morning, everyone. How are you doing? I guess one question I have,
Billy Carroll (President and CEO)
Good morning, Steve.
Stephen Scouten (Managing Director and Senior Research Analyst)
Thanks. I guess I just had one question around this, you know, 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 2021 and kind of-... you know, what that, what that loan book, how much of those folks remain? Just kind of if, if there's any material risk to any outflows from that respect.
Billy Carroll (President and CEO)
Yeah, of course, no, no, no material risk and outflows. We had basically two producers leave that represented two markets in that coastal region. And as you know, we've had very little of that in our history. All I'll say to it is sometimes folks feel that 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, 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 (Managing Director and Senior Research Analyst)
Okay, great. 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, or do you think the mix shift can kind of stabilize from here on the deposit side?
Ron Gorczynski (CFO)
Yeah, that's a good question. We, we are seeing the slowdown of the rate of increase. We do expect a mix shift to probably, hopefully, floor at 20%. So, I, I think from here, we're, we're seeing a lot of stabilization over the last quarter and looking forward. So, not much, not much more on the deposit side, but we, we still will have a little bit of still deposit creep going forward or expense creep going forward.
Stephen Scouten (Managing Director and Senior Research Analyst)
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. Well, you know, 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 2024 or 2025 from, if my numbers are correct, maybe like a 73 basis point ROA here this year in full?
Ron Gorczynski (CFO)
Yeah. At this point, you know, with our repricing that's occurring in our production, we should see, you know, we'll see the lift starting, you know, second half of this year. But getting back to that 1%, pre-downward ROA, probably like the second half of 2025, I think we'll be back on plane.
Billy Carroll (President and CEO)
Yeah.
Ron Gorczynski (CFO)
That's what we're expecting at this point.
Billy Carroll (President and CEO)
And Steven, I'll add, you know, we've looked at—obviously, that's where we want to get back to where we were, you know, just about 18 months ago. And, yeah, not unlike others, you know, you get a little bit of squeeze, but we feel really good about kind of where the company is positioned now, as Ron's alluded to, you know, 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.
You know, if you get, you know, 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 feel pretty good about it. We know we can get there. It'll just be a little bit of function of what the Fed does.
Stephen Scouten (Managing Director and Senior Research Analyst)
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 2025 to get to that level? Because that... It just feels like a pretty big jump back in a relatively short a mere period of time.
Ron Gorczynski (CFO)
Well, I think from going forward, we'll consecutively quarter-over-quarter increase it. You know, we're looking in the mid in 2025, we're probably starting to hit the $50 million net revenue bogey. So yeah, we will have considerable ramp, but again, with all the repricing that's occurring, we feel confident we'll get there.
Stephen Scouten (Managing Director and Senior Research Analyst)
Okay. That's extremely helpful. Thanks, guys. Appreciate the time.
Ron Gorczynski (CFO)
Thanks, Steve.
Billy Carroll (President and CEO)
Thanks, Steve.
Operator (participant)
Our next question comes from Matt Olney from Stephens. Your line is now open.
Matt Olney (Managing Director)
Hey, Greg. Good morning, everybody. Hey, I want to ask more about-
Billy Carroll (President and CEO)
Good morning, Matt.
Matt Olney (Managing Director)
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. 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 that improved liquidity?
Ron Gorczynski (CFO)
Sure. We, you know, ultimately, we'd like to fund loan growth with it, but being that we you know, 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 (Managing Director)
Okay. So loan growth and partially into securities. And on the loan growth front, I heard some commentary on that, and 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 (President and CEO)
Yeah, Matt, I think we're projecting kinda—we're staying in that mid singles. You know, I think we can be somewhere there, hopefully north of 5%. You know, our bogey internally is about 7%-ish on both sides of the balance sheet. You know, when you look at balance sheet growth, you know, we've got, again, we feel good about the way the year's starting. I mean, pipelines continue to look good as we sit down with our regional presidents and look at our growth prospects. Yeah, we feel good about getting that.
So, you know, we're still kind of in that, kind of in that, that upper, not—I wouldn't say high singles, but kinda mid, mid plus singles, balance sheet growth for the year.
Matt Olney (Managing Director)
Okay. That's helpful. Thank you for that. 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 type of collateral is that?
Billy Carroll (President and CEO)
Yeah. Rhett, do you want to walk into that?
Rhett Jordan (Chief Credit Officer)
Yeah.
Billy Carroll (President and CEO)
I think it's a mix, you got some mixed collateral in it.
Rhett Jordan (Chief Credit Officer)
Total size of, I mean, it was, 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. The collateral is predominantly real estate, and then there was some office equipment associated with some of that as well.
Matt Olney (Managing Director)
Okay. And as far as re-resolution of that type of a credit, is that a near-term event, or could this drag out for a little while, you think?
Rhett Jordan (Chief Credit Officer)
I don't think it'll drag out for a long period, Matt. I mean, it may take us up, you know, a quarter or a little more, just depending on the, you know, some of the legal process we go through, but and the positioning and location of some of those assets. But I don't think it's gonna be a drag out thing. And like I said, we went ahead and positioned an allowance of a factor against the—what we believe to be the risk there. So we feel pretty good about where we're positioned at this point.
Matt Olney (Managing Director)
Okay. Okay, guys. That's all for me. Thank you.
Billy Carroll (President and CEO)
Thanks, Matt.
Rhett Jordan (Chief Credit Officer)
Thanks, Matt.
Operator (participant)
Our next question today comes from Freddy Strickland from Janney Montgomery Scott. Please go ahead.
Feddie Strickland (Senior Analyst of Equity Research)
Hey, good morning, gentlemen.
Billy Carroll (President and CEO)
Morning.
Rhett Jordan (Chief Credit Officer)
Morning, Freddy.
Feddie Strickland (Senior Analyst of Equity Research)
Just, just wanted to ask, you know, there's, I know there's been some discussion, and I appreciate the detail on 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, on the securities book over time.
Ron Gorczynski (CFO)
At this point, we're looking probably, it's over probably 5.25 range, somewhere ±, depending on the exact security we're getting into, but it's definitely over 5% that we're looking to reinvest into.
Feddie Strickland (Senior Analyst of Equity Research)
Gotcha. So we should just kind of pay attention to, you know, whatever Fed Funds does and use that as a bit of a barometer?
Ron Gorczynski (CFO)
I would think, yeah, probably, you know, 5-10 basis points, maybe below that Fed Funds, but yeah.
Feddie Strickland (Senior Analyst of Equity Research)
Gotcha. And then you mentioned-
Billy Carroll (President and CEO)
Yeah, Freddy, I think you're right, thinking about it.
Rhett Jordan (Chief Credit Officer)
Yeah.
Billy Carroll (President and CEO)
But as funds move. Yeah, I was going to say, Freddy, I think as funds move, obviously, you know, we're again trying to figure out, do you go ahead and ladder out a little bit of duration in a market where you're seeing the curve kind of, you know, move a little bit on you? So again, trying to balance that kind of short-term versus long-term benefits. But as Ron said, you know, we're still gonna get decent yields on these.
Ron Gorczynski (CFO)
Mm-hmm. Yeah.
Feddie Strickland (Senior Analyst of Equity Research)
That makes sense. Thanks for the color on that. And wanted to switch gears. You know, if we do start to see rate cuts next year, will we likely see a bit of a lag on deposit repricing, at least on the consumer and commercial side until potentially a second cut, but maybe a faster benefit on municipal deposits repricing? Just trying to understand, you know, how the deposit portfolio would act on the way down.
Billy Carroll (President and CEO)
Yeah. 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. You know, I think we're at we are in a position with our liquidity that can allow us to move rates maybe a little quicker than some. You know, and 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, you know, there was some higher cost stuff that we just didn't want to match and move some things out. Yeah, I think for us, you know, we've got some flexibility there.
But yeah, there might be a little lag, but we're gonna try to push as hard as we can push. But Ron, I don't know if you've got any other comments.
Ron Gorczynski (CFO)
No, exactly. As Billy indicated, push hard the first cut or two, and then see what the market, you know, what the market will bear. But it's, we definitely want to take advantage of it.
Billy Carroll (President and CEO)
It's kinda like, and Freddy, it's kinda like, you know, when we saw, you know, rates going up, I mean, you end up, you end up kinda fighting for that rate-sensitive core, you know? And so I think, you know, we're gonna, you know, we're gonna look at some of that kind of more market by market and client by client. But at the end of the day, we wanna make sure we're retaining. We know what the market is, and we want to retain those, the core business, but we're gonna be as aggressive as we can on the way down.
Feddie Strickland (Senior Analyst of Equity Research)
Got it. That's, that's helpful. One, one last quick one. Just curious if you've given a second look to the Bank Term Funding Program. I know some banks have, have used some arbitrage there. Just not sure if that's something you guys have looked at or not.
Billy Carroll (President and CEO)
We have been looking at it, and again, we're developing a lot of strategy over the next $100 million that we're gonna deploy. And that is, you know, that is a consideration in our thought process. We haven't really picked the ideal purchases yet or how we're gonna do it, but that's part of, that's part of the candidates.
Feddie Strickland (Senior Analyst of Equity Research)
Got it. Thanks, Ron. Thanks for taking my question.
Billy Carroll (President and CEO)
Thanks, Ben.
Miller Welborn (Chairman)
Thanks.
Operator (participant)
Our next question comes from Brett Rabatin from Hovde Group. Your line is now open.
Brett Rabatin (Managing Director and Head of Research)
Hey, guys. Good morning. Wanted to start with the-
Billy Carroll (President and CEO)
Hi, Brett
Brett Rabatin (Managing Director and Head of Research)
... fee income outlook, and I know you— Hey, guys. 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 stronger fee income performance in 2024 relative to 2023? You know, any initiatives that might push that, you know, kind of mid-single-digit number higher in 2024?
Billy Carroll (President and CEO)
Yeah, Brett, yeah, I guess you're speaking to just that non-interest income line. Yeah, I think, yeah, there could be. Obviously, you know, we've continued to put, you know, put resources into our SmartBank investments group, as well as insurance. You know, I think that's, that's-- I think that could be a big piece of it. You know, again, you know, if we can continue to grow that AUM, you know, our investments group now has about $1.2 billion in AUM, and it's starting to become a little more impactful, you see it becoming a little more impactful on our income statement. And insurance, while still relatively small, could provide some upside too.
Yeah, I think bigger things for us, you know, TM and Treasury are important. You know, 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, you know, the TM side of it is very important. You know, I'd also mention our new Chief Banking Officer, Martin Schroeder. Martin's got some great ideas, you know, related to experience he's had in some of the regional banks that he's worked with, that I think, you know, they could provide some upside there. So, you know, I think it's a variety of things at the end of the day.
I think, I think we can improve on Ron's guidance? Absolutely. Swap fees, too. You know, when you look at our capital markets group, you know, if this curve continues to stay a little bit inverted, get some inversion in the curve, you know, using swaps to lock in some lower, longer rates for clients with us floating them or 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, it, I guess, is my answer to answer your question at the end of the day. But the great thing about it is we built, you know, we built these different business lines. We've got a number of different levers that we can do.
I think it'll just be a function of kind of what the market gives us, but, I do think there's nice upside there.
Brett Rabatin (Managing Director and Head of Research)
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 other folks have done in terms of monetizing high valuations to redeploy capital in the core bank business?
Billy Carroll (President and CEO)
Yeah. Yeah, we've seen that. You know, we've watched, I know Nate and I talk about it. Nate 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, you know, we're keeping an eye on that.
Brett Rabatin (Managing Director and Head of Research)
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, you know, kind of core outlook from a just a fundamental perspective for that business?
Billy Carroll (President and CEO)
You know, Miller, Miller is still fairly involved in that. Miller, why don't you take that, just kind of your trucking outlook?
Miller Welborn (Chairman)
Yeah. 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 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, yeah, no, no worries at all about that industry.
Brett Rabatin (Managing Director and Head of Research)
Okay. Great, appreciate the color.
Miller Welborn (Chairman)
Thanks.
Billy Carroll (President and CEO)
Thanks, Brett.
Operator (participant)
Our next question today comes from Steve Moss, from Raymond James. Please go ahead.
Steve Moss (Managing Director)
Good morning. Maybe just starting off on the revenue guide here.
Operator (participant)
Yeah, Steve.
Steve Moss (Managing Director)
Morning, Ron. You mentioned $42 million in total operating revenue for the second half of 2024. Just wondering if you're incorporating any rate cuts into that guidance?
Ron Gorczynski (CFO)
No, we're not. We're assuming a flat rate environment, and any rate cuts will make our performance that much better. So, want to be conservative in our looking forward guidance.
Steve Moss (Managing Director)
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 (CFO)
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 you know, we feel confident that we can go ahead and follow the Fed rate cuts as appropriate.
Steve Moss (Managing Director)
Okay. Great. That's, that's helpful. And then in terms of, you know, the, you know, Billy, you're upbeat on the loan pipeline here. Just curious, you know, what you're seeing for the underlying business mix here going forward into 2024. Sounds like more C&I and maybe owner-occupied commercial real estate.
Billy Carroll (President and CEO)
Yeah, I think it's a good mix. I don't know if you got any color you want to add, but, yeah, I think it's a mix. Obviously, yes, we looked at a little more C&I growth in 2023. We think we will want to continue that same pace. Yeah, but we're still, you know, when you look at our CRE ratios, right? You can speak to those. We're still seeing some nice, fairly low, lower risk CRE opportunities out there, too. So I don't know if you got any color you want to add.
Rhett Jordan (Chief Credit Officer)
Yeah, I would agree completely, Billy. 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 Billy'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, you know, underwriting performance on income-producing properties that might create some opportunities in the space that are just, you know, 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 a really good mix as we go through the year.
Steve Moss (Managing Director)
Okay, great. That's, that's helpful. And then in terms of just the, on, on credit here, just curious, you know, how large is the small trucking piece of the Fountain portfolio that you guys talked about where you're seeing some stress?
Rhett Jordan (Chief Credit Officer)
Overall portfolio for Fountain, the trucking industry is about 40% of the weight. But 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, you know, the vast majority. I can't, you know, I can't say there won't be one or two here or there that may have an issue as we go through 2024, but we think the majority of the ones that are at a higher risk point we've identified are working through those.
Most of the challenge just simply comes in the valuation of the underlying asset 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.
Billy Carroll (President and CEO)
Yeah, very minimal.
Steve Moss (Managing Director)
Okay, great. And maybe just curious also, you know, is that what—are any of those credits appearing in the, the line item, 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 (Chief Credit Officer)
No. Yeah-
Billy Carroll (President and CEO)
No.
Rhett Jordan (Chief Credit Officer)
That's all-
Steve Moss (Managing Director)
Okay
Rhett Jordan (Chief Credit Officer)
... included in the, in the nonperforming aspect.
Steve Moss (Managing Director)
Okay. And then maybe just what is driving, driving that bucket there of restructured loans and leases?
Rhett Jordan (Chief Credit Officer)
I'm sorry, yeah.
Billy Carroll (President and CEO)
I'm sorry. I'll say, what, Steven, I think your question was what's driving that? Was that right?
Steve Moss (Managing Director)
Yes. Correct. What's driving the bucket of restructured loans and leases, not included in nonperforming?
Rhett Jordan (Chief Credit Officer)
Just trying to think. As far as restructured loans and leases, I have to. I'm going to have to get back to you. Off the top of my head, I'm not sure what. I'd have to look at that specific metric. But I'll, I will get you that information. I'm not. Off the top of my head, I'm not. I don't have that in front of me.
Steve Moss (Managing Director)
Okay. I appreciate all the color. Thank you very much, guys.
Billy Carroll (President and CEO)
Thanks, Steve.
Rhett Jordan (Chief Credit Officer)
Thanks, Steve.
Operator (participant)
Our next question today comes from Catherine Mealor from KBW. Your line is now open.
Catherine Mealor (Managing Director of Equity Research)
Thanks. Good morning.
Billy Carroll (President and CEO)
Good morning, Catherine.
Rhett Jordan (Chief Credit Officer)
Good morning, Catherine.
Catherine Mealor (Managing Director of Equity Research)
It feels like, just from some of your commentary on the call so far, it feels like we've got some really good revenue momentum, especially if we get cuts, you know, 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, you know, bigger operating leverage as we move into next year?
Billy Carroll (President and CEO)
Yeah, I'll start, and then Ron, you chime in. I think, Catherine, obviously, expenses are. Yeah, I think we've done a nice job. You know, when you look at our efficiency ratio, the efficiency ratio is elevated just because of net interest income. 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 branches that we've got adding down in Alabama in particular.
But then there's obviously some variable component in there in that salary line related to incentives, but those typically are gonna be that should ramp as revenue ramps. So yeah, I think at the end of the day, we'll see some increase in there, but we're gonna 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 (CFO)
Yeah, really as a percent of revenues, you know, for first quarter, we're estimating the non-interest expense to revenues at 72%, and that we're expecting that to widen out. So meaning that by the time we're at Q4 of 2024, it represents, you know, 67%-68% of the revenue. So the revenues will widen out quicker than the expenses will increase. Does that make sense?
Catherine Mealor (Managing Director of Equity Research)
It does. That's great. And were there any kind of expense investments, either teams, technology, processes, anything that you've been holding back on, you know, 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 it going?
Billy Carroll (President and CEO)
You know, in interest. We. Yeah, we're, I think we've got a pretty good spot. You know, we're continuing to evaluate some tech options with, you know, with some digital platforms. There are some things that we have got on the horizon that we don't necessarily have in our 2024 forecast. Because, you know, we wanna make, number one, we wanna make sure that the revenue growth comes back as we project. But, not a lot, not a ton of spend out there. We, you know, our systems are in place. There'll be a little bit here and there, but with nCino being in, KlariVis being in, you know, we've got a lot of this stuff's already built in and built into our run rates.
So, yeah, there's a couple of broader strategic things that we might want to look at as we get in the later part of the year, you know, related to potential upgrades of some digital platforms. You got to stay relevant, and you know that. I mean, so we, 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 is coming back like we anticipate. Ron, I don't know if you've got any other color.
Ron Gorczynski (CFO)
No, you know, exactly, Billy. You know, operationally, we're sound, we're solid. I think it's more IT related to you know, for fraud-related items, software, and also as we keep our infrastructure, you know, customer focused. So we'll always have opportunities to enhance it, but right now we're in a good spot.
Catherine Mealor (Managing Director of Equity Research)
Great. Very helpful. Thank you.
Billy Carroll (President and CEO)
Thanks, Catherine.
Miller Welborn (Chairman)
Thanks, Catherine.
Operator (participant)
Our final question today comes from Stephen Scouten, from Piper Sandler. Your line is now open.
Stephen Scouten (Managing Director and Senior Research Analyst)
Hey, guys. 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 could lend on that front?
Billy Carroll (President and CEO)
Ron, you wanna-
Ron Gorczynski (CFO)
You know, it really, as you know, as Billy indicated, the accrual is nonrecurring, relates to a pending litigation that we expect to be resolved during the first, you know, 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 you know, it's kind of. That's pretty much, there's not much more to say on that.
Stephen Scouten (Managing Director and Senior Research Analyst)
Okay, great. Thanks for letting me hop back in.
Billy Carroll (President and CEO)
Thanks, Stephen. Appreciate it.
Operator (participant)
I'd like to turn the session back over to Miller Welborn for any final remarks.
Miller Welborn (Chairman)
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 (participant)
That concludes today's SmartFinancial fourth quarter 2023 earnings release and conference call. You may now disconnect your line.