KBRA Affirms Ratings for SmartFinancial, Inc.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Knoxville, Tennessee based SmartFinancial, Inc. (NYSE: SMBK) (“the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for its subsidiary, SmartBank. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by SMBK’s favorable funding profile, one that remains primarily core deposit funded (89% of the total funding base) and reflects a conservative loan-to-deposit ratio of 86%, which, in our opinion, allows the company a greater degree of financial flexibility. That said, the company has not been immune to climbing deposit costs amid the higher interest rate environment which has weighed on earnings in contemporary periods with an ROA at 72 bps for 9M24 compared to a 5-year average near 1%. Though we note that earnings have incrementally improved through 9M24 supported by a 4 bp increase in NIM (2.94%), as the rise in loan yields (+ 35 bps) has kept pace with climbing deposit costs (+34 bps) in conjucnction with solid loan growth. Prospectively, SMBK appears well positioned to benefit from the decline in interest rates with ~40% of deposits that adjust with every rate movement, partly offsetting potential declines in average loan yields within variable rate loans. Additionally, the company has $197 million of fixed rate loans likely to reprice higher through 2025, which, combined with continued loan growth, is expected to benefit NIM throughout 2025. Despite cyclical interest rate pressures within its spread lending business, KBRA continues to appreciate the diversity of SMBK’s noninterest income sources, which include investment service fees, insurance commissions, and interchange fees, with less reliance on more volatile sources such as mortgage banking. Regarding asset quality, SMBK’s prudent underwriting and overall conservative operating philosophy has resulted in a strong credit foundation with minimal NCOs - averaging just 2 bps over the past five years – and classified and criticized loans remain well contained (<1% if total loans). Management noted weakness in equipment finance, driving the slight uptick in NCOs to 0.15% in 3Q24, though maintains conservative underwriting criteria. SMBK maintains ample LLR balances covering NPAs by 3x, and the company’s operating markets throughout the Southeast are viewed favorably with respect to comparatively strong local economic conditions and demographic trends. While capital ratios have historically tracked below peer averages (3Q24 CET1 ratio of 10.1%), we view the company’s capital profile as adequate for its risk profile.

Rating Sensitivities

A rating upgrade is not likely over the medium term, although over the longer-term horizon, continued credit quality outperformance, along with earnings performance and capital ratios in line with higher rated peers, would be viewed favorably. Should consolidated CET1 ratio be consistently managed below 10%, unexpected credit quality issues arise, substantial degradation in the funding profile occur, or if there is a material shift in risk appetite, the ratings could become pressured.

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