KBRA Affirms Ratings for Renasant Corporation; Places Ratings for The First Bancshares, Inc. on Watch Upgrade Following Acquisition Announcement

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Tupelo, Mississippi-based Renasant Corporation (NYSE: RNST) ("Renasant") following the recently proposed merger announcement with The First Bancshares, Inc. (NASDAQ: FBMS) ("The First"). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for its subsidiary, Renasant Bank. The Outlook for all long-term ratings is Stable. KBRA also places on Watch Upgrade 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. In addition, KBRA places on Watch Upgrade the deposit and senior unsecured debt ratings of BBB+ and the subordinated debt rating of BBB and affirms the short-term deposit and debt ratings of K2 for the bank subsidiary, The First Bank.

Key Credit Considerations

On July 29, 2024, Renasant Corporation (NYSE: RNST) (“Renasant”) and The First Bancshares, Inc. (NASDAQ: FBMS) (“First Bancshares”) announced its definitive merger agreement under which Renasant Corporation will acquire The First Bancshares, Inc. With respect to deal terms, the all-stock transaction was valued at approximately $1.2 billion, or 1.84x P/TBV (a 20% premium to FBMS’s stock price as of close of markets on 7/26/24) at merger announcement, which we would consider an attractive yet appropriate multiple for the institution relative to recently announced deals given its strong core deposit franchise. In conjunction with the merger, RNST closed its common stock offering of $200 million at $32.00 per share on July 31, 2024. Following this, pro-forma ownership is estimated to be composed of roughly 65% RNST shareholders and 35% FBMS shareholders. The combined company’s Board will reflect a similar composition with the addition of four FBMS directors and no anticipated changes to RNST’s executive management team. The transaction is expected to close in 1H25.

The proposed deal is expected to create a pro-forma institution with $25 billion of assets, $21 billion of deposits, and $18 billion of loans. Moreover, the combined company will operate 250+ branch locations across a six-state footprint, including a meaningful increase in deposit market share in its home state of Mississippi (estimated to remain #4 overall). The addition of FBMS provides geographic expansion for Renasant into southern Mississippi along the I-10 corridor that includes South Alabama, Georgia and new representation into the Tampa, Florida, market. Overall, the combined institution will reflect a diversified operating footprint in rural markets with lower-cost funding and some presence in higher growth MSAs.

KBRA views the proposed transaction positively, including the combined institution reflecting a favorable core deposit base with below average deposit costs (2.25% on a combined basis for 2Q24), notably benefitting from the legacy FBMS business. RNST’s liquidity position, at least measured by the loan-to-deposit ratio, will also provide continued capacity for future loan growth with a pro-forma metric of 86% for the combined institution. Moreover, both institutions operated with similar business models with a sound credit culture. In our view, the RNST management team completed an in-depth due diligence process and is recognizing a credit mark of 1.50% of total loans compared to The First’s current LLR to total loans of 1.05%, which we view as conservative. The pro-forma loan portfolio is not expected to change meaningfully, though will benefit from FBMS’ higher level of owner occupied CRE. Moreover, the CRE concentration is projected to remain appropriate in the context of the rating group and below regulatory guidance levels at just under 280% of total risk-based capital. While we recognize that this measure is higher than RNST’s legacy book has reflected historically, we believe Renasant to be conservative credit underwriters. RNST’s earnings power is expected to be enhanced (assuming a successful integration and the full achievement of anticipated cost saves), with ROA modeled at 1.3% and an efficiency ratio of ~56% with fully baked into cost saves. The capital position is not expected to be materially impacted despite the meaningful interest rate marks (projected for 3.6% or ~$190 million on FBMS’ loan portfolio) given the aforementioned successful completion of RNST’s common equity raise. The original CET1 ratio was forecasted for 10.8% at closing including the exercise of the 15% over-allotment, though given the stronger demand (originally projected $150 million), capital ratios should come in at a stronger level. Additionally, given the enhanced earnings capacity, we believe the combined company will be able to generate internal capital at a relatively quicker pace. In common with any deal of this size, KBRA believes there is an inherent level of integration risk involved, though these risks are somewhat mitigated by RNST’s demonstrated track record as a successful acquirer.

Rating Sensitivities

The Watch Upgrade status for FBMS assumes that the transaction receives the required regulatory, shareholder, and other approvals to close in a timely manner, and recognizes that FBMS will be merging with and into a larger and more diversified institution. Conversely, if the transaction were to be terminated, FBMS’ ratings would likely be maintained at current levels assuming the transaction did not present any undue burden on overall financial performance. The affirmation of RNST’s ratings reflects our continued favorable opinion of the its earnings performance and credit quality. KBRA expects RNST to successfully close and integrate its proposed acquisition of FBMS, and subsequent to closing, we anticipate maintenance of a sound capital position and the potential for higher capital ratios over the medium term through its stronger earnings capacity. In the event that the transaction was terminated the ratings may be revisited.

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