KBRA Affirms Ratings for The First Bancshares, 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 Hattiesburg, Mississippi based The First Bancshares, Inc. (NASDAQ: FBMS) (“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, The First Bank. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

Over the past ~15 years, The First Bancshares, Inc. has evolved from a Mississippi centric community bank operating in legacy markets to more of a regional bank with meaningful scale throughout a diversified operating footprint in the Southeast, including higher growth MSAs (Atlanta, Tampa, and New Orleans). While we recognize that the company has grown significantly, largely through M&A (24% CAGR from 2010-2023), we also acknowledge that the management team has a proven track record with regard to effectively integrating acquisitions. Moreover, we have a favorable view of the target banks, which have reflected sound financial metrics and strong core deposit franchises to date. Given this, FBMS has been able to maintain a favorable deposit position in its rating category with regard to mix and cost (29% in NIB; average cost of 1.10% for 2023, 84 bps lower than the peer average). That said, the company has not been immune to the competitive deposit environment and higher interest rates pressuring funding costs, resulting in 33 bps of core NIM (excluding purchase accounting accretion) compression through 2023, slightly weighing on earnings. Nonetheless, earnings continue to be supported by FBMS’ noninterest income sources representing nearly 20% of total revenue, comprised of durable fee income sources with less reliance on more volatile sources such as mortgage banking income. Additionally, despite the considerable growth over the years, the management team has upheld a conservative stance with regard to liquidity and capital management, evidenced by a low loan-to-core deposit ratio (85% at YE23) and above peer CET1 ratio (12.1% at YE23 vs. peers at 11.2%). While FBMS maintains a commercial focus, investor CRE relative to total risk-based capital remains well below peers at 206%, which supports a lower risk-weighted density, which we view favorably. With regard to FBMS' office exposure, the investor office portfolio is in line with peers at 4% of total loans, is very granular with an average loan size of ~$730 thousand, and is conservatively underwritten. Additionally, office buildings are primarily located in suburban markets and have less than 4 stories. With respect to credit quality, FBMS continues to experience positive credit migration trends with NPAs at a 5-year low as of 4Q23 at 0.39% and relatively low levels of classified and criticized loans representing 2% of total loans. Moreover, charge-offs have been minimal, averaging 5 bps over the past 5 years, supported by a granular loan portfolio and the comparatively solid economic conditions of the Southeast in which the bank operates.

Rating Sensitivities

Over the longer-term, continued growth and expansion of the franchise while maintaining capital metrics consistent with the higher rating category, along with continued credit outperformance and earnings above peer averages would be viewed favorably. Material deterioration in credit quality adversely impacting earnings, deteriorating capital levels inconsistent with the rating category, or significant runoff of core deposits could result in negative rating action.

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Methodologies