KBRA Assigns Ratings to Southern BancShares (N.C.), Inc.

NEW YORK (June 10, 2021) – Kroll Bond Rating Agency (KBRA) assigns a senior unsecured debt rating of BBB, a subordinated debt rating of BBB-, and a short-term debt rating of K3 for Mount Olive, North Carolina based Southern BancShares (N.C.), Inc. (OTC: SBNC) (“the company”). In addition, KBRA assigns deposit and senior unsecured debt ratings of BBB+, a subordinated debt rating of BBB, and short-term deposit and debt ratings of K2 for the subsidiary bank, Southern Bank and Trust Company. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

SBNC’s ratings are supported by a conservative credit and growth culture – a function, in our opinion, of the company’s ownership profile (the Holding family and related members have owned a controlling interest of SBNC since the late 1960s). In this regard, we consider SBNC less inclined to pursue portfolio growth in anything but a disciplined manner, as management is 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 GFC has been excellent, and NCOs have averaged just 0.05% 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 being 97% 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 (8 bps at 1Q21) that has displayed durability through multiple rate cycles and compares quite favorably to the rating group.

SBNC’s equity investment portfolio totaled $186 million at 1Q21 and is primarily concentrated in the common stock of First Citizens BancShares (NASDAQ: FCNCA), a broadly diversified nationwide bank holding company. Per ASU 2016-1 accounting standards, this portfolio is MTM each quarter, resulting in GAAP earnings being exposed to volatile market valuations. As such, the company’s earnings metrics display a greater degree of variability than rated peers. Accounting nuances aside, KBRA views SBNC’s earnings profile as adequate for the rating category, and we estimate average “core” ROA at ~1.10% over the 2018-2020 period. SBNC’s adoption of ASU 2016-01 in 2018 resulted in a $58.1 million upward adjustment to retained earnings and propelled capital levels noticeably higher to levels more in line with rating category peers.

Rating Sensitivities

Increased revenue diversification via stable and recurring fee income sources, the continued build out of the company’s risk management systems, and further geographic diversification, if combined with the maintenance of strong credit and liquidity profiles, could lead to positive rating momentum. Alternatively, 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 caused by a strategic misstep, whether it be in the form of a high-risk transaction or issues with the company’s expansion into more urban markets, could pressure the ratings.

ESG Considerations

KBRA’s ratings incorporate all material credit factors including those that relate to Environmental, Social and Governance (ESG) factors. While ESG factors may influence ratings, it is important to underscore that KBRA’s ratings do not incorporate value-based judgments. Throughout our analysis, KBRA captures the impact of ESG factors in the same manner as all other credit-relevant factors. More information on KBRA’s approach to ESG risk management can be found here. ESG factors that impacted this rating analysis were SBNC’s appropriate governance practices, in common with most banks.

To access ratings and relevant documents, click here.

The ratings are based on KBRA’s Bank & Bank Holding Company Global Rating Methodology published on October 16, 2019.

Disclosures

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 pursuant to the Temporary Registration Regime. 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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