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spk01: 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 Smart Financial 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 start followed by one on your telephone keypad. To withdraw your question, please press start followed by two. I will now turn the call over to your host, Nate Stroll. Please go ahead.
spk04: Good morning, everyone, and thank you for joining us for Smart Financial'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-Wellborn will begin the call, followed by Billy Carroll, our president and chief executive officer. Ron Krasinski, 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 maybe they're 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 22nd, 2024 with the SEC. And now, I'll turn it over to Chairman Miller-Wellborn to open our call.
spk03: Thanks, Nate. The fourth quarter of 2023 was another quarter of incredibly busy activity for smart banks. 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.
spk06: 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 41 cents 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 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 are 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, Clarivus. Also, our commercial loan platform is now fully utilizing Encino, as well as their pricing and profitability system. We're 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 Rhett to discuss the loan portfolio and then on to Ron for a deeper dive into the numbers.
spk03: Rhett? 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 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 continue 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 and was down about 63 million quarter over quarter, reducing from 11% to 9% of total loans and down from 84% to 72% of total capital. As we had mentioned in prior quarters, with higher interest rate environments and continued above normal construction costs, creating more challenging project metrics in the commercial construction space, start for slower during 2023, and these changes in balance positions are an expected result of those dynamics. Our non-owner-occupied, non-construction CRE portfolio grew very slightly in outstanding balances for the quarter from completion of construction projects, as previously mentioned, that held relatively steady at 27% of total loans. The total CRE ratio came in at 280% of total capital, down about 5% from last period. Again, steady performance with diversified production results and strategic movement in the targeted segments of the portfolio. As you will note, we did see a minor increase in our NPA and delinquency ratios for the fourth quarter period. This movement was the result of two very specific factors. First, the small trucking segment of our fountain equipment subsidiary saw above normal levels in past dues and 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 format, minimal in size for our portfolio and a very small as a percentage of total debt that company held with its overall creditor base. We have positioned what we believe to be a satisfactory reserve allocation for this exposure and are working through the collection process presently. This was an isolated relationship within a space to which we have a minimal exposure in our portfolio. Outside of the impact from those two specific matters, our general portfolio credit metrics continue 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 to the small trucking segment of our fountain subsidiary. As to our allowance positioning, overall we saw a slight increase from 1% to 1.02% of total loans. Realized provision for the quarter that drove this increase resulted predominantly from the specific reserve we were 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 0.02% 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 all right thanks rhett and good morning everyone let's start on slide 10. during the fourth quarter
spk05: 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 we're 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. The 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 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 million range and gradually return to our previous 42 million plus quarterly run rate in the second half of 2024. On slide 15, we have our interest rate sensitivity information. We have approximately 42% of loan portfolio at a variable rate with $829 million repricing within three months. For our deposits, We have 35% of our interest-bearing deposits that will reprice immediately in conjunction with any movements to the Fed rate, along with $208 million of CDs repricing during this current quarter. We have details of our 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 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 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.
spk06: 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 discipline 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 can 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 Shrope. Martin joined us recently as chief banking officer during the last quarter and comes to us with an outstanding background in regional 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-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.
spk01: Thank you. We will now start today's Q&A session. If you would like to ask a question, please press start followed by one on your telephone keypad now. If you change your mind, please press start followed by two. Our first question today comes from Stephen Skelton from Piper Sandler. Your line is now open.
spk11: Yeah, hey, good morning, everyone. How you doing? I guess one question I have. 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 21 and kind of, you know, 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.
spk06: Yeah, of course, no material risk and outflows. We did have, we had basically, see, we had two producers leave that represented two marks in that coastal region. And as you know, we've had very little of that in our history. 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.
spk09: Okay, great.
spk11: 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 mixed shift can kind of stabilize from here on the deposit side?
spk05: Yeah, that's a good question. We are seeing the slowdown of the rate of increase. We do expect the mixed shift to probably hopefully floor at 20%. so uh i think from here we're seeing a lot of stabilization over the last quarter and looking forward so uh not much not much more on the deposit side but we we still will have a little bit of uh of still deposit uh creep going forward an expense creep going forward okay got it makes sense okay and then just last thing for me is you guys are talking about this
spk11: 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 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?
spk05: 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, you know, pre downward rate looking, excuse me, pre downward ROA, probably like the second half of 2025. I think we'll be back on plane. That's what we're expecting at this point.
spk06: Steven, I'll add, we've looked at, obviously, that's where we want to get back to where we were just about 18 months ago. Not unlike others, you get a little bit of 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 Fed does.
spk11: 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.
spk05: Well, I think from going forward, we'll consecutively quarter over quarter increase it. You know, we're looking in the mid 2025. We're probably starting to hit the 50 million dollar 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.
spk11: OK, that's extremely helpful. Thanks, guys. Appreciate the time.
spk02: Thanks, Stephen.
spk01: Our next question comes from Matt Olney from Stevens. Your line is now open.
spk09: Hey, Greg. Good morning, everybody. Hey, I want to ask more about balance sheet liquidity. And 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 improved liquidity?
spk05: Sure. Ultimately, we'd like to fund loan growth with it, but being that we're still targeting our 12% asset to security ratio, so we are strategizing pretty much to put $100 million to work over the next month or two to kind of buffer that 12% bogey that we're trying to get to or maintain. So we will have investment purchases over the next two months.
spk09: Okay. So loan growth and partially into securities. And on the loan growth front, I heard some commentary on that. I heard the deposit growth guidance. I may have missed the loan growth guidance. What's the range of expectations for loan growth this year?
spk06: Yeah, Matt, I think we're, we're projecting kind of, we're, we're staying in a kind of that mid singles. You know, I think we can, we can be somewhere there, hopefully north of 5%, you know, our, our, our bogey internally is about 7% ish. on both sides of the balance sheet. When you look at balance sheet growth, we've got, again, we feel good about the way the year's starting. Pipelines continue to look good as we sit down with our regional presidents and look at our growth prospects. We feel good about getting that. We're still kind of in that kind of in that upper, I wouldn't say high singles, but kind of mid plus singles balance sheet growth for the year.
spk09: 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 is that? What type of collateral is that?
spk06: Yeah, right. You want to walk into that. I think it's a mix. You got some mixed collateral in it.
spk03: Total size of, I mean, it wasn't a single loan. It was a group of loans, but the total size of all of them is about $3 million in balances. Okay. The collateral is predominantly real estate. And then there was some office equipment associated with some of that as well.
spk09: 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?
spk03: I don't think it'll drag out for a long period, Matt. I mean, it may take us up a quarter or a little more, just depending on some of the legal process we go through and the positioning location, some of those assets. But I don't think it's going to be a drug out thing. And like I said, we went ahead and positioned an allowance factor against what we believe to be the risk there. So we feel pretty good about where we're positioned at this point.
spk09: Okay. Okay, guys. That's all for me. Thank you.
spk03: Thanks, Matt. Thanks, Matt.
spk01: Our next question today comes from Freddie Strickland from Janie Montgomery Scott. Please go ahead.
spk08: Hey, good morning, gentlemen.
spk02: Good morning.
spk08: Just wanted to ask, I know there's been some discussion. I appreciate the detail and the securities rolling off. What kind of yields are you getting on new securities that you're reinvesting into, just so we can have a sense of maybe how much pickup you could have on the securities book over time?
spk05: At this point, we're We're looking probably, it's over probably 525 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.
spk08: 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.
spk05: I would think, yeah, probably, you know, 5, 10 basis points, maybe below that Fed funds, but yeah.
spk08: Gotcha.
spk06: And then you mentioned, yeah, Teddy, I think you're right thinking about it. As funds move. Yeah, I was going to say, Teddy, 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 going to get decent yields on these. Yeah.
spk08: That makes sense. Thanks for the color on that. And I 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.
spk06: Yeah, and Rod, I think Rod 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 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. You know, I think for us, you know, we've got some flexibility there. But, yeah, there might be a little lag, but we're going to try to push as hard as we can push. But, Ron, I don't know if you've got anything. Any other comments?
spk05: No, exactly. As Billy 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.
spk06: It's kind of like, and Fetty, it's kind of like when we saw rates going up. I mean, you end up kind of fighting for that rate sensitive core. And so I think we're going to look at some of that kind of more market by market and client by client. But at the end of the day, we want to make sure we're retaining We know what the market is, and we want to retain the core business, but we're going to be as aggressive as we can on the way down.
spk08: Got it. That's helpful. One last quick one. I'm just curious if you've given a second look to the bank term funding program. I know some banks have used some arbitrage there. I'm just not sure if that's something you guys have looked at or not.
spk05: 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.
spk08: Got it. Thanks, Ron. Thanks for taking my questions.
spk01: Our next question comes from Brett from Hobbs Group. Your line is now open.
spk07: Hey, guys. Good morning. Wanted to start with the fee income outlook. 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 24 relative to 23? Any initiatives that might push that kind of mid-single-digit number higher in 24?
spk06: Yeah, I guess you're speaking to just that non-interested income line. Yeah, I think there could be. Obviously, you know, we've continued to put, you know, put resources into our smart bank investments group as well as insurance. I think that could be a big piece of it. Again, if we can continue to grow that AUM, our investments group now has about $1.2 billion in AUM, and it's starting to become a little more, you see it becoming a little more impactful on our income statement. And insurance, while still relatively small, could provide some upside too. I think bigger things for us, 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 their new chief banking officer, Ad Martin Shrote. 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, that could provide some upside there. So, you know, I think it's a variety of things. At the end of the day, can I think we can improve on Ron's guidance? Absolutely. Swap these two. You know, when you look at our capital markets group, you know, this curve continues to stay a little bit in, get some inversion in the curve, you know, using swaps to lock in. some lower, longer rates for clients with us floating them or, or, or, or out there as well. So I I'm throwing a bunch of stuff out there. I think it's a little bit of all of it. I guess is my answer your question at the end of the day, but, but the great thing about it is we built, you know, we built these, we, these different business lines. We've got a number of different levers that we can do. So 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.
spk07: Okay. 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?
spk06: Yeah. Yeah, we've seen that. 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 we're keeping an eye on that.
spk07: Okay. And then just lastly for me, I know you guys have a lot of experience in trucking and several board members are involved. Can you maybe give us an outlook on what you're seeing specifically in the trucking industry and kind of core outlook from just a fundamental perspective for that business.
spk06: Miller is still fairly involved. Miller, why don't you take that, just kind of your trucking outlook?
spk03: 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.
spk07: Okay, great. Appreciate the caller.
spk09: Thanks. Thanks, Brett.
spk01: Our next question today comes from Steve Moss from Raymond James. Please go ahead.
spk10: Good morning. Maybe just starting off on the revenue guide here. Ron, you mentioned morning. 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.
spk05: 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.
spk10: 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.
spk05: Sure. I think we were doing 35% or 1.1 million, excuse me, 1.1 billion are indexed to, and we also have another 300 million that are indexed 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.
spk10: Okay. Great. That's helpful. And then in terms of, you know, the, you know, Bill, your upbeat on the loan pipeline here, just curious, you know, what you're seeing for the underlying business mix here going forward into 2024. It sounds like more CNI and maybe unoccupied commercial real estate.
spk06: Yeah, I think it's a good mix. I don't know, Red, if you've got any color you want to, but yeah, I think it's a mix. Obviously, yes, we looked at a little more C&I growth in 23. We think we will want to continue that same pace, but we're still, when you look at our CRE ratios, you can speak to those, we're still seeing some nice, fairly low lower risk CRE opportunities out there too. Simon, you got any color you want to add?
spk03: 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 underwriting performance on income-producing properties that might create some opportunities in the space that are just a little stronger in the profile than what we saw with Rich going up at the pace they did last year. So it could be a really good mix as we go through the year.
spk10: Okay, great. That's helpful. In terms of just on credit here, just curious, how large is the small trucking piece of the fountain portfolio that you guys talked about where you're seeing some stress?
spk03: Overall portfolio for fountains, the trucking industry is about 40% of the weight, but the the challenge to operators that we were working with and through as the year progressed is about a little over one and a half percent 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 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've 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. Very minimal.
spk10: Okay. Great. Maybe just curious also, you know, is that what – are any of those credits appearing in the line item the release of restructured loans and leases not included in non-performing assets i see that's up to 4.2 million um just one of the bets the driver there no yeah no that's all included in the uh in the non-performing aspect okay and then maybe just what is driving that bucket there of restructure loans and leases i'm sorry i i
spk06: I think your question was, what's driving that? Was that right?
spk10: Yes. Correct. What's driving the bucket of restructured loans and leases? Not included and not performing.
spk03: I'm trying to think. As far as restructured loans and leases, 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 will get you that information. I'm not – I don't have that in front of me.
spk10: Okay. I appreciate all the callers. Thank you very much, guys. Thanks, Steve. Thanks, Steve.
spk01: Our next question today comes from Catherine Kneeler from KBW. Your line is now open.
spk00: Thanks. Good morning.
spk10: Good morning.
spk00: 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 rebounds 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?
spk06: Yeah, I'll start, and then Ron, you chime in. I think, Catherine, obviously, you know, expenses are – yeah, I think we've done a nice job. You know, when you look at our efficiency ratio, our 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. There's not a lot. We'll have a little bit of occupancy add this year with some branches that we've got adding down in Alabama and particularly. And then there's obviously some variable component in there and that salary line related to incentives, but those only Those typically are going to be that should that should ramp as revenue ramp. So, yeah, 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 I don't know if you've got any just comments related to expense growth.
spk05: 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 67%, 68% of the revenue. So the revenues will widen out quicker than the expenses will increase. Does that make sense?
spk00: 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 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?
spk06: to move revenue where you see going. I think we've got a pretty good spot. We're continuing to evaluate some tech options with some digital platforms. There are some things that we have got on the horizon that we don't necessarily have in our 24 forecast because we want to make, number one, we want to make sure that the revenue growth comes back as we project. Not a lot, not a ton of spend out there. Our systems are in place. There'll be a little bit here and there, but with Encino being in, Clarivus being in, we've got a lot of this stuff already built in and built into our run rates. So there's a couple of broader strategic things that we might want to look at as we get into the later part of the year related to potential upgrades of some digital platforms. um 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 uh but we feel like most of that's already into the run rate we'll evaluate as the year goes on and uh see how the revenue line if they're making sure the revenue line comes coming back like we like we anticipate ron i don't know if you've got any other color no you know exactly billy um you know operationally we're sound we're solid uh i think it's more it related to uh
spk05: 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. Great. Very helpful. Thank you.
spk02: Thanks, Kathy. Thanks, Kathy.
spk01: Our final question today comes from Stephen Skelton from Piper Sandler. Your line is now open.
spk02: 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.
spk11: 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.
spk10: Ron, you want to?
spk05: You know, really, as Billy indicated, the accrual is non-recurring. It relates to a pending litigation that we expect to be resolved 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 – not much more to say on that. Okay, great.
spk02: Thanks for letting me hop back in. Thanks, David. Appreciate it.
spk01: I'd like to turn the session back over to Miller Wellburn for any final remarks.
spk03: 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 I hope you have a great week. Goodbye.
spk01: That concludes today's Smart Financial fourth quarter 2023 earnings release and conference call. You may now disconnect your line.
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