Earnings Call Transcript
Smartfinancial Inc. (SMBK)
Earnings Call Transcript - SMBK Q4 2023
Operator, 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. After the speakers' remarks, there will be a question-and-answer session. I will now turn the call over to your host, Nate Strall, please go ahead.
Nate Strall, Host
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, 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'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, CEO
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. 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 felt 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 shifted 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 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 started to slow 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 the 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 held with a large multistate mortgage broker operation for whom we have some equipment and real estate assets financed. Our exposure to the operator was secured term debt and format, minimal in size for our portfolio and very small 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 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 the fourth quarter, with 99% of those fourth quarter losses and 72% of the annual losses we did realize concentrated in 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, 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 to 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 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 our 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 slides 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, CEO
Thanks, Ron. As you can see from our trends, we are in a good position. We anticipated that 2023 would be a year of holding steady, which we were not pleased with, but it turned out to be true. Despite this, we achieved solid growth in our balance sheet. Additionally, we accomplished significant operational efficiencies. With the stabilization we've discussed, more clarity on the rate forecast, and our careful spending, I am optimistic about upcoming improvements in our metrics. My outlook for growth remains positive as we continue to see promising pipelines. We are lending and expect to maintain a steady pace in the mid-single digits. Consequently, we expect deposits to grow at a similar rate, which allows us to continue funding our growth from within. To summarize a few key points, we have established a robust foundation over the years through mergers and acquisitions as well as organic growth. This has resulted in a strong, diversified balance sheet and substantial liquidity. As you've heard, we anticipate significant cash flows returning to us in 2024, which will positively impact our operations. To emphasize, we have a solid balance sheet. Regarding our footprint, our company operates in some of the best markets in the Southeast, providing us with favorable conditions. Geography is important, and as I travel through our regions, I can see the vibrancy is evident. We have some remarkable markets supported by exceptional teams we've built over the years, and we will continue to strengthen these teams. Looking at us as a whole, we offer a compelling value proposition. I also want to mention that we've added a valuable executive to our senior team, Martin Schrodt, who recently joined us as Chief Banking Officer. He comes with an impressive background in both regional and large community banks, and we're thrilled to have him with us. Furthermore, we are excited to join the New York Stock Exchange in December and look forward to building a strong long-term partnership with them. Lastly, I want to express my gratitude to our 600-plus associates who have worked tirelessly over the past year to foster a great culture at SmartFinancial. I'll stop here and invite any questions.
Operator, Operator
Our first question today comes from Stephen Scouten from Piper Sandler. Your line is now open.
Stephen Scouten, Analyst
Yes, hey, good morning, everyone. How are you doing? I guess one question I have, I just wanted to ask about 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, CEO
Yes. First, there is no material risk and no outflows. We had two producers leave from that coastal region, which is uncommon for us. Sometimes individuals may feel they are better suited elsewhere, and when that happens, it often turns out beneficial for everyone involved. We have a solid plan in place and feel better positioned as we complete our near-term recruiting efforts, with no significant impact from these departures. We have a strong strategy and a good backup plan.
Stephen Scouten, Analyst
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, CFO
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 deposit creep going forward or expense creep going forward.
Stephen Scouten, Analyst
Okay. Got it. Makes sense. 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, CFO
Yes. With our current repricing in production, we expect to see an improvement starting in the second half of this year. However, it may take until the second half of 2025 to return to a 1% pre-downward rate of return on assets, which aligns with our expectations.
Billy Carroll, CEO
We've looked at the goal of returning to where we were about 18 months ago. Similar to others, we are experiencing some pressure, but we are confident about the company’s current position. As mentioned by Ron, with the repricing and some asset growth, we are modeling much of this on a flat rate scenario and adopting a conservative approach. If market projections hold and we see a slight downturn, this could actually speed up our recovery and help us return to normalized metrics more quickly. We feel optimistic about our path forward and believe we can achieve this, although it will depend somewhat on the Federal Reserve's actions.
Stephen Scouten, 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 '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, CFO
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, Analyst
Okay, that's extremely helpful. Thanks, guys. Appreciate the time.
Ron Gorczynski, CFO
Thanks, Stephen.
Operator, Operator
Our next question comes from Matt Olney from Stephens. Your line is now open.
Matt Olney, Analyst
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, CFO
Sure. Ultimately, we would like to use it to fund loan growth, but we are still targeting our 12% asset to security ratio. Therefore, we are planning to allocate $100 million over the next month or two to help us achieve or maintain that 12% target. We will have investment purchases in the next two months.
Matt Olney, Analyst
Okay. Regarding loan growth and some movement in securities, I heard some comments about loan growth. I also heard the deposit growth guidance. I might have missed the loan growth guidance. What are the expectations for loan growth this year?
Billy Carroll, CEO
Yes, Matt, we expect to stay in the mid-single digits and hopefully exceed 5%. Internally, we're aiming for around 7% on both sides of the balance sheet. We feel optimistic about the start of the year, with strong pipelines. As we discuss growth opportunities with our regional presidents, we are confident in achieving this target. Overall, we're anticipating mid-single digit balance sheet growth for the year.
Matt Olney, Analyst
That's helpful. Can you provide more details about the Alabama credit that was mentioned earlier, specifically the size of the loan and your confidence in the collateral? What type of collateral is involved?
Ron Gorczynski, CFO
Yes. Rhett, you want to walk into that?
Billy Carroll, CEO
You've got some mixed collateral in it.
Rhett Jordan, Chief Credit Officer
The total size was not a single loan, but a group of loans with an aggregate balance of approximately $3 million. The collateral for these loans is mainly real estate, along with some office equipment related to a portion of the loans.
Matt Olney, Analyst
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, Chief Credit Officer
I don't expect it to take a long time, Matt. It might take us a quarter or a bit longer, depending on the legal processes we go through and the positioning of some of those assets. However, I don't believe it will be prolonged. As I mentioned, we have already set aside an allowance for what we see as the associated risk. Therefore, we feel confident about our current situation.
Matt Olney, Analyst
Okay, okay, guys, that's all for me. Thank you.
Rhett Jordan, Chief Credit Officer
Thanks, Matt.
Billy Carroll, CEO
Thanks, Matt.
Operator, Operator
Our next question comes from Feddie Strickland from Janney Montgomery. Please go ahead.
Feddie Strickland, Analyst
Good morning, everyone. I wanted to ask about the yields on new securities that you're reinvesting in, considering the recent discussions and details on the securities rolling off. I'm curious how much increase we might expect in the securities book over time.
Ron Gorczynski, CFO
At this point, we're looking at a range probably over 5.25%, give or take depending on the specific security we're considering, but it's definitely over 5% that we're aiming to reinvest into.
Feddie Strickland, Analyst
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, CFO
I would think. Yes, 5, 10 basis points, maybe below that Fed funds, but yes.
Billy Carroll, CEO
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 investments.
Feddie Strickland, Analyst
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, CEO
Yes. Ron provided some guidance regarding our immediate repricing on the liability side. We are in a good position with our liquidity, which may allow us to adjust rates a bit faster than others. We have already made some moves in that direction. Our deposit growth has been somewhat softer this quarter, partly because we chose not to match certain higher-cost options. We do have some flexibility in this area. While there may be a slight delay in adjustments, we will do our best to push forward. Ron, do you have any additional comments?
Ron Gorczynski, CFO
No, exactly. As Bill indicated, push hard the first cut or two and then see what the market will bear. But we definitely want to take advantage of it.
Billy Carroll, CEO
It's similar to when we noticed rates increasing; we find ourselves competing for that rate-sensitive core. We're assessing this on a market-by-market and client-by-client basis. Ultimately, our goal is to ensure retention. We understand the market dynamics, and we aim to maintain our core business, while being as aggressive as possible during the downward phase.
Feddie Strickland, Analyst
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, CFO
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, Operator
Our next question comes from Brett Rabatin from Hovde Group. Brett Rabatin: Good morning, everyone. I wanted to begin by discussing the fee income outlook. I understand you mentioned $7.5 million in the first quarter. Billy, could you elaborate on your initiatives and thoughts regarding certain products, including SBA? Are there any factors that could contribute to a stronger fee income performance in 2024 compared to 2023? Are there initiatives that might increase that mid-single-digit figure in 2024?
Billy Carroll, CEO
Yes, Brett, you're referring to the noninterest income line. I believe there's potential for growth. We have been investing more in our SmartBank Investments group and insurance, which I think could significantly contribute. If we can keep growing our assets under management, our investments group currently has about $1.2 billion in AUM, and it's beginning to have a noticeable impact on our income statement. Although our insurance segment is still relatively small, it also has potential for growth. Additionally, focusing on treasury management is crucial, and we are allocating more resources to that, particularly as we aim to increase deposits, especially corporate deposits. The TM aspect is very important. Furthermore, I want to highlight our new Chief Banking Officer, Martin Schrodt, who brings valuable insights from his experience at regional banks that could enhance our efforts. Overall, I think there are several factors we can improve upon. Ron has also been addressing swap fees. In our Capital Markets group, we are seeing some inversion in the yield curve, and we're utilizing swaps to secure lower long-term rates for clients. So, I believe it encompasses a range of initiatives. We've built diverse business lines, providing us with multiple opportunities. Ultimately, it will depend on market conditions, but I see promising potential for growth.
Brett Rabatin, Analyst
Okay. You specifically mentioned insurance, and I know we've discussed it before. I understand you have a positive view of the business. Do you have any thoughts on how others have managed to capitalize on high valuations to reinvest in the core banking operations?
Billy Carroll, CEO
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, 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.
Brett Rabatin, Analyst
Okay. And lastly, could you provide an outlook on what you are observing specifically in the trucking industry and your fundamental perspective on that business?
Miller Welborn, Chairman
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 no worries at all about that industry.
Brett Rabatin, Analyst
Well, appreciate the color.
Billy Carroll, CEO
Thanks, Brett.
Operator, Operator
Our next question comes from Steve Moss from Raymond James. Please go ahead.
Steve Moss, Analyst
Good morning. Maybe just starting off on the revenue guide here. 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, CFO
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, Analyst
Okay. Great. I'm curious, I missed the number you mentioned about how much of your interest-bearing deposits are indexed.
Ron Gorczynski, CFO
Sure. I think we're doing 35% or $1.1 billion indexed to an external benchmark, and we also have another $300 million tied to an internal index. We feel confident that we can follow the Fed rate cuts as needed.
Steve Moss, Analyst
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, CEO
Yes, I think it's a good mix. Rhett, if you want to add anything, feel free. We see more growth in C&I for 2023 and want to maintain that pace. Additionally, our CRE ratios show that there are still some attractive lower risk CRE opportunities available. Do you have anything you would like to add?
Rhett Jordan, Chief Credit Officer
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 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, Analyst
Okay, that's helpful. I'm curious, how large is the small trucking segment of the fountain portfolio where you're noticing some stress?
Rhett Jordan, Chief Credit Officer
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 have an issue as we go through '24. But we think the majority of the ones 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, Analyst
Very minimal. Okay. Great. And I'm just curious, are any of those credits showing up in the line item for restructured loans and leases that are not included in nonperforming assets? I see that amount is up to $4.2 million. I'm just wondering if that's the reason behind it.
Rhett Jordan, Chief Credit Officer
No. That's all included in the nonperforming aspect.
Steve Moss, Analyst
Okay. And then maybe just what is driving that bucket there? Of restructured loans and leases?
Rhett Jordan, Chief Credit Officer
I'm sorry. I think your question was what's driving that. Was that right?
Operator, Operator
Our next question comes from Catherine Mealor from KBW. Your line is now open.
Catherine Mealor, Analyst
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, CEO
Yes, I'll begin and then Ron can add his thoughts. Catherine, we've managed expenses well. Our efficiency ratio is higher mainly because net interest income has experienced some fluctuations. However, I believe we can effectively manage those expenses. We'll have some increase in occupancy costs this year due to new branches in Alabama, and there are also variable components related to salaries and incentives, but those should rise in line with our revenue growth. So, while we expect some increase in expenses, we are committed to keeping them under control. Ron, do you have any comments regarding expense growth?
Ron Gorczynski, CFO
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, Analyst
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, CEO
Yes, I believe we are in a solid position. We are still assessing certain technology options with digital platforms. There are some developments on the horizon that aren't included in our '24 forecast because we want to ensure that revenue growth returns as we expect. However, we are not planning significant spending. Our systems are already in place; there will be minor expenses here and there, but with nCino and KlariVis integrated, much of this is already accounted for in our run rate. There are a few broader strategic initiatives we might explore later in the year regarding possible upgrades to digital platforms. It's important to stay relevant. We need to ensure we have the right tools, but we feel that most of this is already incorporated into our run rate. We will continue to evaluate throughout the year, particularly to see how revenue performs, ensuring it rebounds as we anticipate. Ron, do you have anything else to add?
Ron Gorczynski, CFO
No, exactly, Bill. Operationally, we're sound, were solid. I think it's more IT-related to 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, Operator
Our final question today comes from Stephen Scouten from Piper Sandler.
Stephen Scouten, Analyst
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, CEO
Ron, you want to?
Ron Gorczynski, CFO
As Bill mentioned, the accrual is nonrecurring and is related to a pending litigation that we expect to resolve this quarter. There won't be any other significant amounts accrued. Overall, there isn't anything unusual about this situation; it's the kind of litigation that many banks have been experiencing recently. There's not much more to add on that.
Operator, Operator
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, Operator
That concludes today's SmartFinancial Fourth Quarter 2023 Earnings Release and Conference Call. You may now disconnect your lines.