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 and reflects a lower than peer loan-to-deposit ratio of 85%, which, in our opinion, allows the company a greater degree of financial flexibility (all things equal). That said, the competitive deposit environment has resulted in deposit migration from NIB deposits into higher yielding products, contributing to a rise in deposit costs (+138 bps) that has outpaced climbing average loans yields (+56 bps) through 9M23, ultimately pressuring NIM and weighing on overall earnings. Despite interest rate pressures within its spread lending business, KBRA continues to appreciate the relative 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 income. While capital ratios have historically tracked below peer averages (3Q23 CET1 ratio of 10.1%), we view the company’s capital profile as adequate for its risk profile and relatively less levered balance sheet. Even so, though we expect capital ratios to trend slightly upwards through 2024 on slower loan growth, we recognize that management’s longer term CET1 target of 10.5% would still be below peer levels. 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% of total loans). The company maintains ample LLR balances covering NPAs by 6x, and the company’s operating markets throughout the Southeast are viewed favorably with respect to comparatively strong local economic conditions and demographic trends. Additionally, SMBK has successfully acquired and integrated several banks, and we note that acquired loans have yet to result in any material credit losses or an increase in NPLs.

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 the consolidated CET1 ratio be consistently managed below 10%, unexpected credit quality issues arise, substantial degradation occur in the funding profile, or if there is a material shift in risk appetite, negative rating action could occur.

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