SmartFinancial - Earnings Call - Q1 2025

Executive Summary

• SmartFinancial delivered a stronger Q1 2025: diluted EPS $0.67 (+18% QoQ, +22% YoY) on total revenue of $46.8M; NIM dipped 3 bps to 3.21% as liquidity rose with 10% annualized deposit growth.
• EPS materially beat Wall Street consensus from S&P Global by ~$0.12; revenue was essentially in line/slight miss versus consensus, reflecting definitional differences and modest NIM compression; management guided to sequential NIM expansion and tighter expense control through 2025 [values from S&P Global]*.
• Balance sheet growth was healthy: net organic loan growth $86M (9% annualized) and deposits +$122M (10% annualized), with loan-to-deposit ratio at 83% and asset quality solid (NPAs/Assets 0.19%, net charge-offs 0.01% annualized).
• Guidance raised on noninterest income and lowered effective tax rate; margin outlook improved to ~3.25% in Q2, reinforcing the path to a ~$50M quarterly revenue run-rate by Q4 2025, a catalyst for re-rating if delivered.
• Near-term stock narrative catalysts: sustained NIM expansion, continued organic deposit gathering at attractive costs, stable credit (including equipment finance), and potential buybacks with ~$1.5M remaining under authorization (opportunistic).

What Went Well and What Went Wrong

What Went Well

• Earnings leverage: EPS $0.67 with operating revenue $46.8M and flat noninterest expenses at $32.3M, demonstrating operating discipline amid growth.
• Core growth with attractive pricing: 9% annualized loan growth; new originations at 7.29% yield while deposit costs declined (total deposit cost 2.37%, interest-bearing deposits 2.92%).
• Management confidence and strategic execution: “We are successfully moving into the leveraging phase of growth… focus on continued EPS growth and return targets,” and talent additions (5 revenue producers in Private Banking/Treasury).

What Went Wrong

• NIM compression: tax-equivalent NIM fell 3 bps QoQ to 3.21% due to lower earning asset yields and elevated liquidity; loan portfolio yield slipped 7 bps to 5.97% FTE.
• Fee headwinds: noninterest income down $433K QoQ to $8.6M, driven by lower insurance commissions, interchange, and “other,” partially offset by investment services.
• Mix shift in deposits: decline in noninterest-bearing deposits ($81.3M) partly offset by increases in money market, time deposits, and brokered, which can pressure funding costs if not managed.

Transcript

Operator (participant)

Hello everyone, and welcome to the SmartFinancial Q1 2025 earnings release and conference call. My name is Ezra, and I will be your coordinator today. If you would like to ask a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. We will be taking questions at the end of the call. I will now hand over to Nathan Strall, Director of Investor Relations, to begin. Nathan, please go ahead.

Nathan Strall (Director of Investor Relations)

Thank you, Ezra. Good morning, everyone, and thank you for joining us for SmartFinancial Q1 2025 earnings conference call. During today's call, we will reference the slides and press release that are available in the Investor Relations section on our website, smartbank.com. Billy Carroll, our President and Chief Executive Officer, will begin our call, followed by Ron Gorczynski, our Chief Financial Officer, who will provide some additional commentary. We will be available to answer your questions at the end of our call. Our comments include forward-looking statements. These statements are subject to risks and uncertainties, and the 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 obligations 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 April 21st, 2025, with the SEC. I will turn it over to Billy Carroll to open our call.

Billy Carroll (President and CEO)

Thanks, Nate. Good morning, everyone. Great to be with you, and thank you for joining us today and for your interest in SMBK. I'll open our call today with some commentary and hand it over to Ron to walk through the numbers in some greater detail. After our prepared comments, we'll open it up with Ron, Nate, Rhett, Miller, and myself available for Q&A. Let's jump right in. Another very nice quarter for us as we kick off 2025 and continue executing on what we've been messaging. The start of the year has been a bit more volatile than any of us would prefer, and while the uncertainty is making it a little more difficult to plan longer term, we're not letting that deter us from our objectives.

As you'll hear on this call, this company is continuing to execute and we're remaining very bullish on where we're headed. For the quarter, we posted net income GAAP and operating of $11.3 million, or $0.67 per diluted share. I continue to be very proud of the way our team is performing, and I'm excited to watch us gain operating leverage as we've anticipated. Jumping into the highlights, I'll be referring to the first few pages in our deck. First, and in my opinion, one of the most important metrics, we continue to increase the tangible book value of our company, moving up to $23.61 per share, including the impacts of AOCI, and $24.76 excluding that impact. That's over 9% annualized quarter over quarter, excluding the AOCI movement.

Looking at the graph on the lower right on page five, you'll see the value increase we continue to deliver for our shares. On balance sheet growth, we had a very solid start of the year. On the loan side, we grew at a 9% annualized pace for Q1, right on top of our expectations as our market teams are continuing to add outstanding new relationships. On the deposit side of the balance sheet, growth was also found at 10% quarter over quarter annualized. While we did have some mixed shift, which is common for the first quarter of the year, I was pleased with the team's focus on bringing in new deposit clients. Ron will provide some more detail on that in a moment. Our history of strong credit continues, with the metric at just 19 basis points in NPAs.

Credit is always a focus for our company, and I'm proud to see these numbers continue at exceptionally low levels. Total revenue came in at $46.8 million as net interest income continued to expand as we had anticipated. We also had another very nice non-interest income quarter. Non-interest expenses held to the same level as last quarter at just over $32 million. I feel we continue to hold expense growth to very reasonable levels during 2025. That operating leverage we've talked about is happening as we continue to grow the revenue line with manageable investment on the expense end. Looking at the charts on pages four and five, you'll see very nice trends. All of those charts are great graphics to illustrate what we've been messaging, and I look forward and are expecting to see those trends continue. Just a couple of additional high-level comments from me on growth.

We have executed well over the last several quarters, and it is a direct result of the outstanding work of our sales teams. In regard to loans, a nice start to the year, particularly after posting outsized growth in Q4. As I stated, we grew our loan book at 9% annualized quarter over quarter. The sales momentum in our company is very good, and it's balanced across all regions. Our average portfolio yield, including fees and accretion, was 5.97%, down just slightly from Q4, but still very solid after absorbing the fourth quarter Fed rate cuts. New loan production continues to come onto the books, accretive to our total portfolio yield levels. In regard to deposits, I mentioned it a moment ago, I'm very pleased with the deposit growth we've seen, particularly during a quarter where we normally see some seasonality.

Our loan-to-deposit ratios held from year-end at 83%, which is a nice spot for us, and this strong position gives us continued flexibility to leverage that strong deposit base. Our balance sheet pipelines continue to feel solid. I'm holding to our past guidance of mid to high single digits on growth as we look forward, and I also think we can pace deposits organically to fund this growth. All in all, a very nice way to start the year. I'm going to stop there. I'm going to hand it over to Ron and let him dive into some additional details. Ron?

Ron Gorczynski (EVP and CFO)

Thanks, Billy, and good morning, everyone. I'll start by highlighting some key deposit results. During the quarter, we achieved non-broker deposit growth of $114 million, over 10% on an annualized basis, resulting in a loan-to-deposit ratio of 83%. The rated average cost of non-broker production was 3.39%. Total interest-bearing costs decreased 10 basis points to 2.92% and were 2.96% for the month of March. The composition of our deposit portfolio remained largely stable, with a minor reduction in non-interest-bearing deposits. As noted on the last call, there were some transitory non-interest-bearing deposits included in our year-end totals. Coupled with a few clients utilizing some excess cash liquidity throughout the quarter, we finished with an average non-interest-bearing to total average deposit ratio of 19%. Net interest margin was 3.21%, slightly down from last quarter, but in line with our previous guidance.

Our loan portfolio experienced a favorable 7.29% rate of average yield on new loan originations. However, the impact of those originations was offset by the full effect of the prior quarter rate cuts, resulting in a decrease to our total loan portfolio yield of 7 basis points to 5.97%. Additionally, we experienced an elevation in our liquidity levels from our deposit growth, which also impacted our margin. Despite having two fewer days in the quarter, net interest income increased by $455,000, with our average interest-earning assets growing over $185 million, which was primarily driven by our net balance loan growth during the quarter. With our sustained low loan-to-deposit ratio, we remain in an advantageous position to fund our loan production. Looking ahead, we anticipate 2-3 basis points of margin expansion quarterly throughout 2025.

While we expect our overall deposit portfolio costs to increase throughout the year, primarily from higher cost of new production, our new loan production, coupled with the amortization and maturities of our lower-yielding fixed and adjustable-rate loans, will drive margin expansion. With these factors and given current market conditions, we are forecasting a second quarter 2025 margin in the 3.25% range. Our quarterly provision expense for credit losses totaled $979,000, primarily due to increased loan growth. Net charge-off to average loans were 0.101% on an annualized basis. Overall, the bank's asset quality remains strong with non-performing total assets at 0.19%, and the allowance for credit losses remained steady at 0.96% of total loans. Operating non-interest income for the quarter totaled $8.6 million, which was above our guidance. The outperformance was primarily driven by stronger-than-forecasted insurance and mortgage banking revenues, along with continued strong activity from our capital markets group.

Operating expenses were $32.3 million, unchanged from the previous quarter. There were slight positive and negative movements within several expense categories, but overall, we were pleased that we held expenses flat quarter over quarter. Non-interest income growth and expense containment continue to be primary objectives as we focus on fully leveraging our infrastructure. For the second quarter, we are forecasting non-interest income in the low to mid $8 million range, and non-interest expense in the range of $32.5 million-$33 million, with salary and benefit expenses in the range of $19.5 million-$20 million. It is important to note that accruals for incentive-based compensation will fluctuate based on performance and may vary throughout the year. Our effective corporate tax rate for the quarter was approximately 17%.

Despite some fluctuations since the establishment of our real estate investment trust, we anticipate our tax rate will stabilize and are forecasting an effective tax rate between 18%-19% going forward. I will conclude with capital. The company's consolidated TC ratio increased to 7.6%, and our total risk-based capital ratio remained well above regulatory well-capitalized standards at 11.2%. Overall, we believe our capital ratios remain optimally balanced to continue to support growth while maximizing returns on equity. With that said, I'll turn it back over to Billy.

Billy Carroll (President and CEO)

Thanks, Ron. I want to reiterate again the value proposition with our company. Drawing your attention back to page seven of our deck, we are successfully moving into the leveraging phase of growth for our company. We're seeing the inflection in the movement in our numbers, and we have clear vision of our return targets after absorbing the investments we've made. We're building a great franchise. We're in arguably some of the best and most attractive markets in the country, and have put together a team that is rapidly moving us forward. You've heard me say before, and I believe this, we are one of the brightest stories in the Southeast. Outstanding markets, strong experienced bankers, coupled with a just as experienced and strong operational and support team, along with some great complementary business lines.

We expect the rest of 2025 to have a similar look as we focus on continued growth in our EPS line and hitting our near-term revenue and return targets. I also wanted to make some comments on talent acquisition. One of the areas where we are focusing, and one that I continue to be very excited about, is our ability to recruit outstanding new team members. The majority of the expense growth in our company in the coming years should come primarily from talent-related expenses, along with some appropriate investment in our platform. On adding revenue-producing team members, we have brought on five over the last couple of months with this specific group targeted with just private banking and treasury management areas. We focus here to complement some of the commercial banking talent we added in 2024.

We are always looking to add revenue-producing associates that fit with our culture, and we have several currently in our talent pipeline. I believe we're included in a very small handful of banks that have built a culture where outstanding regional bankers want to work. We will continue to look for these organic growth opportunities and remain very focused on recruiting. To summarize, I love where we're sitting. We are executing, growing that revenue line while staying prudent on expense growth, even while dealing with a little bit of uncertainty in the economy. We remain optimistic around our margin as new production stays strong and as we see the tailwind coming from the rate resets in our loan portfolio over the next couple of years. Credit continues to be very sound, and we're seeing great new client acquisitions with sales energy that is outstanding.

All said, a great way to start the year for our company as we continue to build a profitable and attractive franchise. I also want to take an opportunity to welcome our newest board member, Kelli Shomaker. Kelli is the CFO at Auburn University, brings a great skill set to our board, and gives us great perspective throughout Alabama and the entire Southeast. Kelli, welcome. I also appreciate the work of our SmartFinancial and SmartBank team and the efforts of our over 600 associates. I'm very proud of the work that we have going on here at SMBK. We'll stop there and open it up for questions.

Operator (participant)

Thank you very much. If you would like to ask a question, please press star followed by one on your telephone keypad now. Please ensure your device is unmuted locally. If you change your mind or your question has already been answered, please press star followed by two. Our first question comes from Stephen Scouten with Piper Sandler. Stephen, your line is now open. Please go ahead.

Stephen Scouten (Managing Director)

Great. Thanks so much. Appreciate the time this morning, guys. Really good quarter. It feels like things are all kind of moving in the right direction now, which obviously is a little bit different from what the market's trying to tell us. Can you talk a little bit about what you're seeing at a ground level with your customers, kind of what customer sentiment looks like, and why you would continue to have belief around that ability to hit that loan growth kind of strength of your markets a little bit more would be great, Billy?

Billy Carroll (President and CEO)

Yeah. Stephen, I'll start, and then I'll let Rhett chime in as we've tried to stay pretty close to clients during a little bit of the volatility that we've experienced. Overall, again, it kind of goes back to markets. Our markets just continue to be really strong. We're talking to a lot of clients, staying plugged in. Obviously, you've got a lot of conversation going on around tariffs, which are we going to have them or are we not? It's really a back and forth. As we talk to our clients, their businesses all seem to be doing well. Now, I do think they're going to continue to watch and be cautious, but I still feel good about our prospects to grow at the pace that we've given. It really is one of those things that we feel pretty excited about where we are.

A lot of it is continuing to add business coming from these team members that we've added over the course of the last several years. We're bringing in business that's seasoned. We're bringing in businesses that have been around for a long time. I think all those things bode well for us and our ability to continue to grow. Rhett, you might give some color. I know as you guys have talked a little bit with our credit team members and our production team members about client take on the current environment. Do you want to give some color there?

Rhett Jordan (EVP and Chief Credit Officer)

Sure. We did, as Billy's comment, as the tariff matter unfolded, we reached out to clients that were either in specific industries that we felt like might have a higher impact or that we were aware had some degree of international components in their receivables, suppliers, etc. The overall feedback we've gotten has been really optimistically positive in regard to expected impact. Most of them are providing us commentary that they're not seeing any degree of decline in order volume. They're not expecting any significant changes in pricing in the near term, either from the supply side or certainly nothing that they don't feel like they would be able to continue to, for lack of a better word, pass through in their normal operations of business. We don't, at this point in time, feel like it's a major deterrent for our client base.

We don't have a lot that would have been directly impacted. It seems at this point in time to be, I think there's a little bit of a wait-and-see perspective from a lot of them, but thus far, with what we have gotten feedback on, it seems to be really positive.

Miller Welborn (Chairman of the Board)

I can comment.

Ron Gorczynski (EVP and CFO)

Yeah.

Miller Welborn (Chairman of the Board)

Stephen this is Miller, I also want to add this isn't secondhand information or anecdotal information that we're gleaning from other people. I can't stress enough about how hands-on our market leaders are and our executive team is in visiting these different markets and how many different clients, current clients, prospective clients we have been in front of on a continual basis. We do that all the time. It's not just this past quarter. I mean, we are very visible in our markets and have, I believe, firsthand real-time knowledge of where these markets are, and they are all performing pretty doggone strong.

Stephen Scouten (Managing Director)

That's great. That's helpful color, guys. How should we think about expectations around maybe levering up the balance sheet from here? I mean, a lot of room in the loan-to-deposit ratio in theory, but just kind of wondering what your level of comfort is of taking that appreciably higher, kind of the securities book balance there and just kind of the moving parts around balance sheet trends, where you see the mix going.

Billy Carroll (President and CEO)

Yeah. It's a good question, Steven. We've got some space. I think the words that we use around here, it's really just good, strong, prudent growth. I do think we are seeing competition. We're seeing some different structure and rate competition. We've kind of held and stuck our guns on rates and structure. We've seen a little bit of pressure in some of those areas. I think as we go through the year, especially if growth is a little bit softer, I think we could see us actually, I think we've tried to hedge kind of that mid to high singles as far as our growth goes.

I think we've got a team that could really produce, but at the same time, we want to make sure that we're putting on business that's getting us the right return level, that it's structured with the appropriate loan and credit structures we want. I really like where we're sitting because we're getting growth. We're getting it the way we want it. We do have the ability to kind of keep our foot on the accelerator a little bit if we want to. At the same time, I think we can get the growth that we want and continue to hold to the return targets that we set out to do. Ron, I don't know if you want to talk a little bit about just kind of the utilization of kind of the cash and what you're thinking there.

Ron Gorczynski (EVP and CFO)

Yeah. I think at this point, we're pretty solid on our investment percentage to assets. We are setting out a little extra cash, as I said, probably about $150 million more that we could lend out of the cash portfolio. We'll probably see some mixed shift going forward on the balance sheet, but nothing drastic. We're in a pretty good position, as Billy said, to fund our loan growth. Not much more.

Stephen Scouten (Managing Director)

Okay. Extremely helpful there. Then just last thing for me, obviously, volatility for the industry has taken stock prices down significantly. Your stock's back down to about $20.10, give or take. How do you think about share repurchases at these levels? Can you remind me what your authorization might look like today and just kind of the priority of that versus other potential capital actions?

Ron Gorczynski (EVP and CFO)

Yeah. For the authorization, we have about $1.5 million left to purchase. We're on the backside of it. Once we get near that level, we'll probably start talking about repurchasing more over that.

Billy Carroll (President and CEO)

Yeah. For us, I mean, traditionally, when we've looked at that, obviously, the whole sector is kind of, I think, in a pretty good spot from a valuation standpoint with a lot of upside potential. We've typically not looked to buy back until we get a little bit closer to that book value number. That's been traditionally with us. That's probably kind of where we are. Probably kind of stay here right now, but we are positioned to do some purchases if we need to.

Stephen Scouten (Managing Director)

Great. Thanks for all the color. Congrats on a great start to the year.

Billy Carroll (President and CEO)

Thank you.

Miller Welborn (Chairman of the Board)

Thanks, Steven.

Operator (participant)

Our next question comes from Catherine Mealor with KBW. Catherine, your line is now open. Please go ahead.

Catherine Mealor (Managing Director)

Thanks. Good morning.

Miller Welborn (Chairman of the Board)

Good morning, Catherine.

Catherine Mealor (Managing Director)

I wanted to start maybe just on the margin and just to see how we should be thinking about if we do start to see the Fed cut rates at the June meeting, how that could impact your guide. I'm assuming the two to three basis points of NIM expansion per quarter. Just kind of curious what that means in terms of the Fed backdrop and if that is better or worse if we see more left cuts.

Billy Carroll (President and CEO)

Ron, you want to take that?

Ron Gorczynski (EVP and CFO)

Yeah. Good morning, Catherine. Being slightly liability sensitive, we're pretty much matched. We see for Fed cuts, we will benefit from it slightly. We don't have material movements from any of these either down or up. So we're pretty good positioned. We gave guidance on thinking it's going to be probably in the September range that we'd have a rate cut. I think we'll be pretty much neutral but benefit on the way on the rate cut down.

Catherine Mealor (Managing Director)

Great. Okay. If we get earlier cuts in September, there could be a little bit of maybe upside of that two to three basis points expansion.

Ron Gorczynski (EVP and CFO)

Probably. Yes. Yes, it will be if we get it earlier than September. Correct.

Catherine Mealor (Managing Director)

Okay. Okay. Great. You may have missed what I was talking about in the beginning, but I may have missed it. In terms of new loan pricing, can you talk about what that looks like today? I feel like we've heard anecdotally that that's become a lot more competitive over the past few months. I'm just kind of curious what you're seeing on loan pricing today.

Billy Carroll (President and CEO)

Yeah. Ron, what did we, I guess, what did we have new production for the quarter?

Ron Gorczynski (EVP and CFO)

For the quarter, it was 7.29.

Yeah. 7.29%.

Billy Carroll (President and CEO)

Rhett, I think as we look on the pipeline, and again, I spoke about this, we're still coming in around that 7% number, Catherine. That's kind of what we've got in the pipeline currently. Now, that's obviously a mix of fixed and float, but coming in at around 7%. We feel pretty good about that 7% plus minus number a little bit. We are seeing some a little bit more competitive pressure in the markets. As I spoke with our last question, we've been able to kind of hold and stick our guns on the pricing and structure that we want, and it's not really deterred us from getting the growth. We are going to try to keep holding that pace at that plus minus 7%.

It would not surprise me to see as we continue through the year with folks really pushing and stretching for some growth that we could see that number kind of come down a little bit. I think we are okay in the 7%-ish range here near term, but TBD on what that looks like as the year goes forward.

Rhett Jordan (EVP and Chief Credit Officer)

You're dead on, though. We are hearing and seeing some competitors really pushing some pricing and getting awful competitive out there.

Catherine Mealor (Managing Director)

On the deposit side, it feels like that continues to be a better story. Maybe your net margin for new incremental growth is still kind of where are new deposits coming on about right now?

Miller Welborn (Chairman of the Board)

Yeah. Ron, where do we come in?

Ron Gorczynski (EVP and CFO)

The CDs were coming in around the 350, 360-ish. Money markets, probably very similar. Other than that, we've been quite fortunate. We've been pretty stable. We're looking at two to three basis points of, again, growth in the deposit costs quarter over quarter. Depending on the market movement or competitors, we're seeing it's really pretty relaxed at this point, the uptick.

Catherine Mealor (Managing Director)

Great. Okay. Still, new production for both loans and deposits combined is still kind of coming on higher than your current 320 margin, which is great. That kind of then be the outlook for the margin to continue to expand.

Billy Carroll (President and CEO)

Yeah. Yeah. Net.

Catherine Mealor (Managing Director)

Okay. Great.

Billy Carroll (President and CEO)

Yeah. No, you're right, Catherine. Yeah. Net net, we're still coming in a pretty good to where we are today on new.

Catherine Mealor (Managing Director)

Great. Okay. That's all I got. Thank you.

Billy Carroll (President and CEO)

Thank you.

Operator (participant)

Our next question comes from Russell Gunther with Stephens. Russell, your line is now open. Please go ahead.

Russell Gunther (Managing Director)

Hey. Good morning, guys. Wanted to focus on, hey, wanted to spend a minute on expenses. Trend's really good, and you guys gave us a near-term look at how that's expected to go. Maybe just bigger picture, as you think about the rest of the year, how are you expecting the trajectory to progress? Is there anything underlying the strong results in terms of a specific expensive initiative? If not, is that something contemplated in how you're thinking about the overall growth rate for the year?

Billy Carroll (President and CEO)

Yeah. Let me start with just some kind of high-level comments. Ron, if you want to maybe dive into that a little more detail. Yeah. Russell, for us, and I think Ron and I both kind of said it in our comments. Yeah. I think for us, we have really, really focused on trying to get this expense line to be fairly stable. Obviously, we're going to have some growth, but I do think all of that is manageable. When you look back last year, we still had some new branches that were coming online. We were adding some staff to staff those and some of that. When you look at the growth that we had last year, it was a little more, but a lot of that was just kind of new. There was some net new branches, net new teams that we needed to add.

I think for us now, we're really not looking to do any of that. I think most of the investments that we've made in all these markets with the teams has been done. We are seeing incremental growth that we had, as I alluded to, as we continue to recruit some new team members, particularly on the revenue-producing side. We'll see a little bit of growth there. Our tech spend is relatively stable with a little bit of new potentially coming on. All in all, I think that's the reason it gives us some confidence that our expense growth can be fairly stable as we look at over the next couple of quarters. Ron, I mean, once you dive in and go a little bit deeper on any of those specific lines.

Ron Gorczynski (EVP and CFO)

Yeah. I'm actually going to go back to last quarter. We gave guidance that we should see expense growth in the 2.5%-3% range. I mean, our guidance still stands. I mean, we're able to control our expenses without impeding our growth. We're in a good shape. We're not looking at, we're really going to hold our expenses within that band. Again, going forward, we should be able to achieve that.

Russell Gunther (Managing Director)

Got it. Okay. Super helpful, and I appreciate the context. Just switching gears, last one for me. You touched around it broadly, but as we think about the potential impact from tariffs, a lot of good granularity in your deck around the loan portfolios. Would love to get a sense for anything that you're paying closer attention to today that may have borrowers with some outside exposure to the tariff volatility that's going on, and if you could size up what that exposure would be. Thank you.

Billy Carroll (President and CEO)

Yeah. Rhett, I'll ask you to kind of chime in as well. I don't think we've kind of looked at it fairly broadly, Russell. I don't think there's any particular area that we're focusing on more than others. We do, I would say, probably if there's an area that we have, we've still got a little bit of the, we've got a little bit of trust and get exposure through our Fountain subsidiary, but those are typically smaller credits. We also have, we've done a lot with our dealer floor plan. We've got some auto, got a little bit of auto exposure both on dealer side as well as the manufacturing side. We're staying close to those suppliers, getting their take on the way they see these tariffs playing out. Those are the first two that come to mind to me, Rhett.

I don't know if there's anything that you want to add to that or if there's anything that you think might warrant a little extra attention.

Rhett Jordan (EVP and Chief Credit Officer)

No. I think those are certainly two of the primary ones that we have on the radar screen. Then just the other side of that is, as I mentioned earlier, clients that we know have any degree of primary supply chain sourcing or clients that are international in format. We're staying in touch with them just to see if and when they start seeing any changes coming either from their supply side or from their client order volume. That. I guess on the backside, we're also just keeping an eye on any impacts that tariffs could have on, I'd call it, broader scale scenarios like construction materials, things of that nature that could impact some construction costs, things of that nature down the road.

Miller Welborn (Chairman of the Board)

I also think it's good to add here that we, being a stronger credit bank as we are and always being a credit-first bank, I don't know that we're looking at these any stronger than we do every quarter in every segment of the bank. I mean, we are highly engaged in the credit process and the credit of our client base.

Russell Gunther (Managing Director)

I appreciate you, H, for taking a stab at the question, and that's it for me. Thank you.

Billy Carroll (President and CEO)

All right. Thank you, Russell.

Operator (participant)

Our next question comes from Brett Rabatin with Hovde Group. Brett, your line is now open. Please go ahead.

Brett Rabatin (Director of Research)

Hey, guys. Good morning. Wanted to start with fee income. If I heard the guidance correctly, it was low to mid-eights for 2Q. Within that, wanted to see maybe your thoughts on investment services and insurance and where those businesses might trend kind of given their 1Q performance and anything else that might be keeping the fee income fairly flattish from here.

Billy Carroll (President and CEO)

Yeah. Ron, I'll take a stab. I know just kind of high level, obviously, with an investment side, with a little more fee-based business, you get a little bit of an AUM drop with market tail back. Some of that recurring fee might be a little bit lower. Q1 is typically a pretty strong quarter for our insurance group. We've got typically contingency revenue payouts occur there in Q1. We had a little bit more there. Those two items probably help bolster the first quarter a little bit more, Brett, than normal. Ron, anything else that you want to touch on?

Ron Gorczynski (EVP and CFO)

Yeah. The only other item that we should see an uptick going forward is our mortgage banking revenue. We are looking at hiring lenders in that space. That is probably one that will be more variable going forward. Other than that, we just have built a steady cash flow here on our income.

Brett Rabatin (Director of Research)

Okay. That's helpful. I wanted to go back to the mid to high single-digit loan growth. Just looking at the first quarter, a lot of the growth was in commercial real estate. I wanted to see what the appetite was for C&D from here. Just any thoughts on the C&I book and if there's any visibility of poultry with that or if that's the one area that's hard to predict with the tariffs and whatnot.

Billy Carroll (President and CEO)

Yeah. I'll let Rhett kind of chime in on just kind of the way our production pipeline is looking from a split standpoint. Overall, we still are maintaining a fairly balanced approach to our growth. I think, and Rhett can give you some details on pipelines and where we think it's coming, but it's probably going to mirror kind of where we are from a percentage as it sits today. I don't think there's one particular sector that we're leaning into any heavier. Obviously, we look to grow that C&I book as much as we can. We've had some good opportunities with some real estate. We've been able to take those over the last couple of quarters too. Rhett, anything on kind of pipelines and how you see the pipelines breaking down?

Rhett Jordan (EVP and Chief Credit Officer)

No, Billy, you did it. You look at our pipeline as it sits today, just the mix of what's out there. It's very similar. I would say what we have been seeing for the past several quarters. It's diverse geographically. It's diverse across our product mix as broken down into deck. Nothing that really that I've seen in our pipeline is going to swing us one way or another in regard to mix. We do have some C&D in the pipeline, but it's pretty spread across the footprint. We're still continuing to see good supply and demand metrics across our market areas for both housing and for development on the commercial side as well. I mean, it's still a pretty it's still in line with what we have historically been seeing for the past number of quarters.

Brett Rabatin (Director of Research)

Okay. Great. Appreciate all the call, guys.

Billy Carroll (President and CEO)

Thanks, Brett. All right.

Operator (participant)

Our next question comes from Steve Moss with Raymond James. Steve, your line is now open. Please go ahead.

Steve Moss (Managing Director)

Good morning, guys.

Billy Carroll (President and CEO)

Hey, Steve. Good morning.

Steve Moss (Managing Director)

I want to ask about the morning. I want to ask about the on the revenue side, you guys have talked about $50 million by the fourth quarter 2025. I guess just given where the margin is, the loan growth you guys have had and seeing some shaking out where it is, seems like the third quarter is probably a reasonable crossing point in your estimation these days.

Billy Carroll (President and CEO)

I'll let Ron answer that. We're trying to, we're still holding it currently in our quarter-over-quarter speed.

Miller Welborn (Chairman of the Board)

Yeah. I'm curious.

Billy Carroll (President and CEO)

I will say our trends are good. I guess the caveat is just kind of what happens, especially as you get into the second half with growth and with rates. Yeah, there's still a little bit. Kind of based on what we have built in our forecast, we still think that fourth quarter number is, and that's really kind of what we said. We've reiterated it on these calls. We've reiterated it around our team. Again, this was a year that we really wanted to kind of get these numbers where we needed them to be, leveraging everything that we built and bought over the course of the last several years. All that is playing out, and we're just kind of keeping our head down, grinding through.

Hopefully, we get there a little bit faster, but we're still holding our guidance.

Steve Moss (Managing Director)

Okay. I figured I'd ask. In terms of on the credit front here, I take it that we're, are we pretty much through the charge-offs on the Fountain portfolio? Charge-offs in slightly over the last two quarters and obviously starting to impact the provision expense here.

Billy Carroll (President and CEO)

Yeah. Yeah. Rhett can kind of speak to that. I think we're getting closer, but you want to dive into what we're seeing in Fountain?

Rhett Jordan (EVP and Chief Credit Officer)

Yeah. Done with might be a strong statement, but I certainly think we have seen it slow down, as you see in the numbers. We were certainly seeing a direct slowdown, and we're optimistic prior to some of what we've been talking about a little bit earlier on potential impact, depending on the longevity, the duration, the size, and such of the tariffs and how those might impact just the supply chain and smaller transportation operators. We do not believe it will be at a pace like we saw last year. I do believe we'll still have a few stragglers here and there that we'll be dealing with as the year goes on. We do not anticipate it to be in line with what we saw last year.

Billy Carroll (President and CEO)

Yeah. Teams have a good job. Rhett and our Fountain team have done a really nice job of trying to manage through that. It is still all relatively small in the overall scheme of things, but that is, yeah, we are still working through a couple of those. May see a little bit more, but hopefully, that is coming to an end here relatively quickly.

Steve Moss (Managing Director)

Got it. Appreciate that. Just one other thing, maybe just on the M&A front here, just kind of curious if you guys have any updated thoughts around doing a deal. Seems like organic growth's going pretty well, so maybe that's on the back burner, but just want to take your temperature there.

Billy Carroll (President and CEO)

Yeah. It is interesting. Obviously, with the valuation pullback, that may have changed some different folks' thoughts. For us, we're still just kind of head down focusing on our organic strategy. That's where we are. That's where we want to be. Obviously, when deals pop up, we get called or asked about them, but there's nothing really that we think is going to really greatly deter us from just kind of hitting this organic stride that we've got going over the next little bit. That's 1-A. Obviously, we'll look for anything that made a lot of sense, but for us, it really is primarily focused on adding talent and growing organically right now.

Miller Welborn (Chairman of the Board)

Yeah. I would say organic's probably 1-A and 1-B.

Billy Carroll (President and CEO)

Right now. Yeah.

Miller Welborn (Chairman of the Board)

Based on the way the currency is, it would be hard to do a deal, but we're always looking and always interested, but it's organic today.

Steve Moss (Managing Director)

Got it. I appreciate all the call here, guys. Thank you very much.

Nice quarter.

Billy Carroll (President and CEO)

Thanks.

Rhett Jordan (EVP and Chief Credit Officer)

Thanks.

Operator (participant)

Thank you very much. Just as a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad now. Our next question comes from Christopher Marinac, Janney Montgomery Scott. Christopher, your line is now open. Please go ahead.

Christopher Marinac (Director of Research)

Hey, thanks for hosting us all this morning. I just had a quick question on equipment financing and finance leasing and just curious on that business line. Would you do more there, and are you happy so far with the results looking back on that transaction several quarters ago?

Billy Carroll (President and CEO)

Yeah. That's a great question, Chris. I'll stop. Rhett kind of oversees that line for us. I'll let him chime in too. Short answer is yes. I mean, it's been a great little business line that we added. When we bought it, when we bought the one, and we've kept it, and we've been able to grow it from mid-$50 million in outstanding now to about $140 million over the last little bit. The growth that we've had, the yields that we've had, it has been a really, really good transaction. We really like it, still like it. Yeah. You took a couple little bumps with some of the trucking business as we kind of looked back last year. Even factoring that into the equation, this has been a very, very good acquisition for us. We like it.

We've been a little more selective in the trucking credits that we've added over the course of the last little bit. We've pulled back in that area in that particular segment. Overall, been very pleased with it. I don't know, Rhett, any color as to kind of add in and talk a little bit about kind of where we see the growth coming moving forward?

Rhett Jordan (EVP and Chief Credit Officer)

Yeah. No, Billy, I think you nailed it. I mean, for purposes of the general question, Chris, I would say yes, absolutely. I mean, I go back to Billy's point. I mean, we have grown the portfolio segment considerably. We have added talent there as well. We'll continue, just like we do on the bank side. When we find a very seasoned, very strong producer in that space, we will look to bring them on board. We have made some adjustments, tweaks here or there on some credit profiles, kind of what our general metrics are for credit standards and what we look to do. Yes. It is a somewhat concentrated line of business, and we do have concentrations in transportation and construction predominantly, and that would be expected in the equipment finance segment.

When I think about would I continue would I have done the transaction again, or would I continue to seek to grow it? I kind of look at that as a bottom-line factor. From that perspective, absolutely, it's still a profitable line of business for the bank, continues to be. We have a very positive outlook for it.

Christopher Marinac (Director of Research)

Great. Thanks for all that background. I appreciate it. Just a quick follow-up on M&A, just going a little deeper than prior question. Would you ever consider doing a deposit kind of based acquisition where the lending market may not be attractive to you, but the deposits would be and might be smaller institutions, smaller than you've looked at in the past? Is that at all a possibility as the next several years develop?

Billy Carroll (President and CEO)

Yeah. I think we would. Obviously, deposits in today's world, as we all know, the deposit piece of these equations is really important. We've got some great—the good thing about it, the folks that we've added over the last several years are great generators on both sides of the balance sheet. I think that's what gives us a lot of confidence in our ability to grow. We're not just hiring lenders. We're hiring really good bankers. What we've been able to do there, obviously, the lending opportunities, we could probably put a little more gas on that fire. Yeah, if we had the opportunity to do something like that, that would probably be something attractive. Again, as we've said, really not looking to do much of that. Right now, we're kind of just funding organically as we grow.

If the right situation presented itself, it would be something that we could entertain.

Christopher Marinac (Director of Research)

Great. Thank you, Billy. Thank you, Miller, too. Appreciate it.

Billy Carroll (President and CEO)

Thanks, Chris.

Rhett Jordan (EVP and Chief Credit Officer)

Thanks, Chris. Appreciate it.

Operator (participant)

Thank you very much. That concludes our Q&A session. I will now hand back over to Miller Welborn, Chairman of the Board, to close the call.

Miller Welborn (Chairman of the Board)

Thanks, Ezra. Thanks, everybody, for joining us today. We appreciate your time. We appreciate your interest and support of SMBK, and we look forward to talking to you again in the near future. Have a great day.

Operator (participant)

Thank you very much, Miller, and thank you to everyone for joining. This concludes today's conference call. You may now disconnect.