KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Mount Olive, NC-based Southern BancShares ( N.C.), Inc. (OTC: SBNC) (“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 Southern Bank and Trust Company, the main subsidiary. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

SBNC’s ratings are supported by a conservative credit and growth culture, which is a function, in our view, of the company’s ownership profile (one family and related members have owned half or more of SBNC since the late 1960s). As such, we consider SBNC less inclined than public peers to chase outsized growth, and management is generally reluctant to concede on underwriting standards or credit quality for the sake of growth or margin. Correspondingly, the bank’s asset quality performance during and since the global financial crisis (GFC) has been excellent, and NCOs have averaged 0.02% over the past five years. Furthermore, SBNC remained profitable throughout the GFC and never recorded an annual loss. A strong funding profile also supports SBNC’s ratings, with the company 89% core deposit funded. The company’s attractive funding mix, combined with solid market share in its core operating geographies, contributes to a low-cost deposit base (71 bps at 1Q23 compared to 127 bps for the KBRArated universe of publicly traded banks) that has displayed durability through multiple rate cycles and compares favorably to the rating group. SBNC holds an on-balance sheet investment in equity securities of ~$220 million that is marked-to-market each quarter under ASU 2016-01 accounting standards which creates GAAP earnings exposed to volatile market valuations. As a result, the company’s earnings metrics display a greater degree of variability than rated peers. Still, accounting nuances aside, KBRA views SBNC’s earnings profile as adequate for the rating category, and we estimate the company’s average “core” ROA was 1.09% over the previous nine quarters.

Rating Sensitivities

Increased revenue diversification in the form of stable and recurring fee income sources and further geographic diversification, when combined with the maintenance of strong capital, credit and liquidity profiles, could lead to positive rating momentum over time. A material shift in the company’s conservative credit and growth culture, a more aggressive capital management policy, or a dramatic shift in the company’s underlying risk profile could pressure ratings.

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Methodologies

Financial Institutions: Bank & Bank Holding Company Global Rating Methodology

ESG Global Rating Methodology

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

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