KBRA Releases Surveillance Report for The First Bancshares, Inc.

On April 7, 2023, KBRA affirmed the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Hattiesburg, Mississippi-based The First Bancshares, Inc. (NASDAQ: FBMS) ("the company"). In addition, KBRA affirmed 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 The First Bank ("the bank"), the main subsidiary. The Outlook for all long-term ratings is Stable.

The ratings are supported by FBMS' strong risk-adjusted earnings metrics historically, which are, in part, driven by the company's below average balance sheet risk density (73% RWA / total assets as of 1Q23). FBMS has historically managed RWAs at the lower-end of the peer group, indicative of the company’s relatively conservative balance sheet management. This is expected to continue as the company digests the bank mergers with HSBI and BBI. Further supporting the ratings is FBMS’ prudent management of capital over the past several years (CET1 ratio regularly ~100 bps or more above peers, though only 50 bps above peer in 1Q23, post-mergers), which is also symbolic of the company’s conservative stance as it pertains to the balance sheet. We expect capital ratios to be similarly managed in the near term and to trend upwards in 2023. KBRA positively views FBMS’ funding profile which is primarily supported by a strong core deposit franchise (91% of total funding as of 1Q23) and a manageable level of uninsured deposits (~35% of deposits). The strong funding profile generates lower than peer deposit costs (0.72% in 1Q23, 71 bps lower than the peer average). Moreover, the company has solid primary and contingent liquidity to cover potential outflows of uninsured deposits. FBMS has consistently had elevated NPAs relative to peers, though a majority of NPAs are associated with loans acquired in prior bank acquisitions for which the company is fully reserved. Moreover, charge-offs have been minimal (net recoveries in 2022, 0.01% NCO ratio in 1Q23). While the company’s acquisitive growth strategy has expanded its presence, which encompasses a multi-state footprint, and has supported earnings growth, integration risks persist as FBMS continues to execute on this strategy. However, we note that management has successfully integrated several bank acquisitions throughout its operating history.

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