KBRA Affirms Ratings for Southern BancShares (N.C.), 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 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 bank"), 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). Correspondingly, the bank’s asset quality performance has been solid despite market volatility with minimal credit losses evidenced by an average NCO ratio over the last five years of 0.00%. Moreover, despite past M&A activity, the bank is focused on organic growth within its markets which should, in turn, benefit capital as negative AOCI balances represent ~37% of shareholder equity, though a somewhat steady interest rate environment will likely drive incremental improvements in the TCE ratio. SBNC displays a strong funding profile which we attribute to the company’s footprint in robust smaller North Carolina and Virginia markets. As of 1Q24, the company was 84% core deposit funded combined with a loan-to-core deposit ratio of 83%, providing balance sheet flexibility. Additionally, the bank’s attractive funding mix has contributed to a low-cost deposit base of 129 bps at 1Q24 compared to 236 bps for the KBRA-rated universe of publicly traded banks. Overall, the company has exhibited durability through multiple rate cycles and compares favorably to the rating group. SBNC holds an on-balance sheet investment in equity securities of $364 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 have displayed a greater degree of variability than rated peers. Still, the company has adequate noninterest income revenue while the company’s average ‘core’ ROA is in line with similarly rated peers.

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. Conversely, 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