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

The ratings are supported by SBNC's 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 track record has been solid despite market volatility with negligible credit losses evidenced by an average of 0 bps of NCOs over the last five years. Another key credit strength is SBNC’s strong funding profile which we attribute to the company’s footprint in robust smaller North Carolina and Virginia markets. The company's earnings have been supported by SBNC's attractive funding profile as core deposits account for 90% of the funding base and NIB deposits make up a solid 31% of total deposits. Moreover, SBNC has a loan-to-core deposit ratio of 78% and a loan-to-deposit ratio of 72%, providing balance sheet flexibility. In addition, the bank’s attractive funding mix has contributed to a low-cost deposit base of 129 bps at 1Q25 compared to 212 bps for the KBRA-rated universe of publicly traded banks. However, the NIM has historically tracked below peers which can primarily be attributed to lower yielding interest earning assets reflective of SBNC’s conservative earnings asset mix evidenced by its average loan-to-average earning assets of 59% at 1Q25 compared to similarly rated peers of 78%. The company also holds 31% of total assets in its investment securities portfolio which KBRA estimates to yield 1.61%, somewhat constraining the growth of the earnings portfolio and the NIM. Overall, the company has exhibited durability through multiple rate cycles and compares favorably to the rating group aided by adequate noninterest income contributions supporting a ‘core’ ROA that is more in line with similarly rated peers. Moreover, SBNC holds an on-balance sheet investment in equity securities of $414.5 million that is marked-to-market each quarter under ASU 2016-01 accounting standards, which creates GAAP earnings that are exposed to volatile market valuations. As a result, the company’s earnings metrics display a greater degree of variability than rated peers. That said, while negative AOCI balances represent ~26% of shareholder equity, a somewhat steady interest rate environment should drive incremental improvements in the TCE ratio.

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