Southern BancShares N C : Annual Report – 2022

Mission

Founded in 1901, Southern Bank is a customer-focused community bank serving eastern North Carolina and southeastern Virginia. Our mission is to be the bank of preference for consumers and businesses in the markets that we serve.

Genuine concern for the customer is our top priority, striving to create and deliver superior value in the financial services we provide by exceeding the expectations of our customers.

We are dedicated to the communities we serve, both in spirit and support. We provide a progressive and rewarding working environment for our employees that encourages the investment of their time, energy, and talents to the betterment of their communities.

We embrace sound banking philosophies that incorporate dedication to relationships, strong business values, and financial integrity while advocating the maintenance of quality assets and reasonable return on shareholder investment.

Contents

Letter to Shareholders2

Financial Summary and Selected Financial Data4

Independent Auditor's Report5

Consolidated Balance Sheets6

Directors and Officers8

Branch Locations12

Annual Report 2022

Letter to Shareholders

March 27, 2023

Dear Shareholder,

As I sit to write this annual letter, Southern is in its 122nd year and I've been fortunate enough to participate in 25 of those years. I am listening to the financial pundits breathlessly describing recent bank failures and the Federal Reserve Board's influence on our industry and economy. Everything old is new again.

In an effort to offer an executive summary, the company you are kind enough to support remains fundamentally sound, with strong core operating earnings, liquidity, and capital. We remain steadfastly focused on providing an exceptional and unique customer experience that we believe will serve all of our stakeholders well over time. That said, there have been a myriad of items that have impacted our 2022 results including the economic fallout of our government's aggressive measures to combat the pandemic and the arcane rules of modern accounting. I will attempt to clarify and simplify where possible in this year's letter.

After two years of pandemic-related distraction, 2022 represented a return to near-normal operations for our markets in general and more specifically for our company. The return to in-person operations in all branch and departmental offices, as well as to daily life in our communities, brought back a welcome familiarity to how we do business and serve our clients.

The consensus estimate is that the federal government inserted over $4.0 trillion dollars in stimulus in the economy, and thereby into the banking system, and now the Federal Reserve is aggressively moving to squelch the subsequent price and wage inflation. The Federal Reserve raised its benchmark federal funds rate at a pace that our industry has not experienced in over 40 years. As of today, the federal funds rate has increased by 4.50 percent in less than 12 months. These rapid increases in rates have affected loan pricing, deposit rates, and the value of our available-for-sale investment securities portfolio. These increases have also resulted in depositors becoming more rate sensitive and elevating competition for deposits as cash has begun exiting the banking system. This shift reminds us of the value of a diversified and relationship-based deposit portfolio.

As stated in our letter last year, banks generally perform better in a rising interest rate environment. Funding costs for banks are generally driven by the short end of the interest rate curve, while assets, such as loans and investments are priced based on the middle or longer end of the interest rate curve. However, this is currently not the case due to the rapid increase in short-term rates, coupled with uncertainty about the long-term trajectory of our economy. This dynamic has caused the interest rate curve to invert, where short-term rates are higher than long-term rates, to levels not seen in decades. The current interest rate curve inversion not only compresses net interest margins, but also traditionally has been a strong leading indicator for recessions.

As is our historic practice, Southern maintains a significant portfolio of available-for-sale securities 100 percent guaranteed by the United States Government. Given the rapid increase in market rates in 2022, we have seen the value of these investments decline as has a vast majority of the banking industry. While the change in value of our available-for-sale investment portfolio does not impact earnings or regulatory capital, the available-for-sale investment portfolio is 'marked to market,' which reduces shareholders' equity. As a result, our book value per share declined from the $5,861 per share reported at December 31, 2021 to $3,620 per share at December 31, 2022. Excluding this accounting adjustment, book value per share would have been $6,263 at December 31, 2022, a per share growth of over $400. Changes in the market values of securities owned have existed in the banking system since its inception; however, they are now inextricably adjusted out of bank book capital while no corresponding valuation is made to the more significant loan and deposit portfolios. Our Company views this decline in value as a temporary byproduct of the existing economic climate. We have the ability and intent to hold these investments to maturity and recover the full value of each investment.

We continue to hold a sizable equity securities portfolio, which is recorded at fair value. As illustrated on page 4, during 2022, the portfolio declined in value by $13.3 million, after tax, compared to a $45.4 million after tax increase in value during 2021. Our company has a $26.9 million cost basis in these investments and they have a $173.2 million fair value as of December 31, 2022. As I have outlined in previous letters, thoughtfully holding these assets has been a significant benefit to our shareholders over the long-term but their current accounting treatment presents volatility to our annual income which distorts the operating results of our company. The majority of the holdings in our Company's equity securities portfolio have been held for many decades, which has contributed to our Company's stability and performance over the long term.

The Company reported total earnings of $29.9 million during 2022 and core earnings, which excludes the impact of the decline in value of our equity securities portfolio, of $43.2 million. This represents a return on average shareholders' equity of 8.78 percent, or 12.19 percent on a core earnings basis.

2 Letter to Shareholders

Annual Report 2022

Our loan portfolio grew by 16.8 percent during 2022, and during a year where many of our competitors saw deposits decline, our core deposit franchise increased by approximately 4 percent. Despite a significant increase in mortgage rates, we saw another year of near record demand for mortgage services. Southern Investment Services also enjoyed another successful year, growing assets under management by 13 percent.

We continued to increase the level of investment in our people. We implemented new coaching and career development programs to improve the pace of their personal and professional growth. This remains a cornerstone of our Company's success. In the spirit of that commitment, we completed construction and moved into a state-of-the-art Learning and Development Center in Greenville, North Carolina. With the completion of this facility, we now have a central hub through which to host local and regional events, as well as to support virtual learning for our associates.

Additionally, we began work on two new branch locations in Manteo, North Carolina, and Chesapeake, Virginia. Both offices opened in the first quarter of 2023 and allowed us to enhance our ability to provide better service and convenience to our clients in those communities.

In 2022, we also completed a multi-year project to build a centralized credit support team that will allow our lenders and management to focus more of their time and attention on meeting the needs of our clients and communities. The SBCU (Small Business & Consumer Underwriting) department was successfully launched and has enhanced service levels while increasing operating efficiencies related to all levels of credit services.

The year 2023 has started with considerable uncertainty. The Federal Reserve continues to focus on inflation control, and there remains a reasonable expectation of additional interest rate increases and a potential recession. However, what is assured is the strength of Southern BancShares and Southern Bank and Trust Company. We have 122 years of demonstrated success navigating uncertainty. We remain focused on our disciplined approach to banking and we continue to believe that focusing on community banking principles is the bedrock of our success. We are confident about the future and the part we will play in that future.

We wish to express our sincere gratitude to our clients, associates and stakeholders for their dedication and loyalty to our company.

Sincerely,

Drew Covert

Chairman / Chief Executive Officer Southern BancShares (N.C.), Inc. & Southern Bank and Trust Company

3