form10q.htm
UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

 (Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________
 
Commission file number 0-12247

SOUTHSIDE BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
 
TEXAS
  
75-1848732
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
 
  
 
1201 S. Beckham, Tyler, Texas
  
75701
(Address of principal executive offices)
  
(Zip Code)
903-531-7111
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x    No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer o
Accelerated filer  x
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x
 
The number of shares of the issuer's common stock, par value $1.25, outstanding as of July 27, 2012 was 17,358,651 shares.
 
 
 
 
 
TABLE OF CONTENTS
 
PART I.  FINANCIAL INFORMATION
  
1
34
53
54
PART II.  OTHER INFORMATION
  
55
55
55
55
55
55
56
57
58
EXHIBIT 31.1 – CERTIFICATION PURSUANT TO SECTION 302
  
EXHIBIT 31.2 – CERTIFICATION PURSUANT TO SECTION 302
  
EXHIBIT 32 – CERTIFICATION PURSUANT TO SECTION 906
  
 
 
PART I.   FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share amounts)
   
June 30,
    
December 31,
  
   
2012
    
2011
  
ASSETS
            
             
Cash and due from banks
   $ 46,479     $ 40,989  
Interest earning deposits
     59,757       2,249  
Total cash and cash equivalents
     106,236       43,238  
Investment securities:
                
Available for sale, at estimated fair value
     418,215       282,956  
Held to maturity, at amortized cost
     1,010       1,496  
Mortgage-backed and related securities:
                
Available for sale, at estimated fair value
     1,204,759       716,126  
Securities carried at fair value through income
     –       647,759  
Held to maturity, at amortized cost
     330,138       365,631  
FHLB stock, at cost
     34,334       33,869  
Other investments, at cost
     2,064       2,064  
Loans held for sale
     1,447       3,552  
Loans:
                
Loans
     1,183,200       1,087,230  
Less:  allowance for loan losses
     (20,194 )     (18,540 )
Net Loans
     1,163,006       1,068,690  
Premises and equipment, net
     50,250       50,595  
Goodwill
     22,034       22,034  
Other intangible assets, net
     416       522  
Interest receivable
     17,929       19,426  
Deferred tax asset
     3,478       –  
Unsettled trades to sell securities
     1,071       –  
Other assets
     44,569       45,859  
TOTAL ASSETS
   $ 3,400,956     $ 3,303,817  
LIABILITIES AND SHAREHOLDERS’ EQUITY
                
Deposits:
                
Noninterest bearing
   $ 641,139     $ 505,594  
Interest bearing
     1,754,733       1,816,077  
Total deposits
     2,395,872       2,321,671  
Short-term obligations:
                
Federal funds purchased and repurchase agreements
     1,948       2,945  
FHLB advances
     241,246       361,811  
Other obligations
     219       219  
Total short-term obligations
     243,413       364,975  
Long-term obligations:
                
FHLB  advances
     366,989       260,724  
Long-term debt
     60,311       60,311  
Total long-term obligations
     427,300       321,035  
Deferred tax liability
     –       3,458  
Unsettled trades to purchase securities
     42,300       1,196  
Other liabilities
     28,715       32,555  
TOTAL LIABILITIES
     3,137,600       3,044,890  
                 
Off-Balance-Sheet Arrangements, Commitments and Contingencies (Note 10)
                
                 
Shareholders' equity:
                
Common stock - $1.25 par, 40,000,000 shares authorized, 19,382,489 shares issued in 2012 and 18,517,101 shares issued in 2011
     24,228       23,146  
Paid-in capital
     193,994       176,791  
Retained earnings
     66,565       72,646  
Treasury stock (2,023,838 shares at cost)
     (28,377 )     (28,377 )
Accumulated other comprehensive income
     6,946       14,721  
TOTAL SHAREHOLDERS' EQUITY
     263,356       258,927  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
   $ 3,400,956     $ 3,303,817  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
  
Three Months
    
Six Months
  
(in thousands, except per share data)
  
Ended June 30,
    
Ended June 30,
  
   
2012
    
2011
    
2012
    
2011
  
                         
Interest income
                        
Loans
   $ 17,526     $ 17,130     $ 34,296     $ 34,401  
Investment securities – taxable
     20       20       51       38  
Investment securities – tax-exempt
     2,961       3,209       5,628       6,438  
Mortgage-backed and related securities
     8,872       13,310       21,035       24,607  
FHLB stock and other investments
     54       52       133       132  
Other interest earning assets
     9       3       15       13  
Total interest income
     29,442       33,724       61,158       65,629  
Interest expense
                                
Deposits
     2,765       4,051       6,160       8,087  
Short-term obligations
     1,734       1,705       3,326       3,434  
Long-term obligations
     2,398       3,401       5,131       7,282  
Total interest expense
     6,897       9,157       14,617       18,803  
Net interest income
     22,545       24,567       46,541       46,826  
Provision for loan losses
     2,174       1,860       5,226       3,998  
Net interest income after provision for loan losses
     20,371       22,707       41,315       42,828  
Noninterest income
                                
Deposit services
     3,838       4,028       7,586       7,907  
Gain on sale of securities available for sale
     3,297       3,920       9,269       5,471  
(Loss) gain on sale of securities carried at fair value through income
     (13 )     84       (498 )     338  
                                 
Total other-than-temporary impairment losses
     (21 )     –       (21 )     –  
Portion of loss recognized in other comprehensive income (before taxes)
     (19 )     –       (160 )     –  
Net impairment losses recognized in earnings
     (40 )     –       (181 )     –  
                                 
Fair value gains – securities
     –       2,456       –       4,083  
FHLB advance option impairment charges
     (1,364 )     –       (1,836 )     –  
Gain on sale of loans
     298       282       429       565  
Trust income
     669       645       1,346       1,296  
Bank owned life insurance income
     254       261       520       547  
Other
     1,123       959       2,234       2,064  
Total noninterest income
     8,062       12,635       18,869       22,271  
Noninterest expense
                                
Salaries and employee benefits
     12,142       11,622       23,975       23,313  
Occupancy expense
     1,851       1,778       3,609       3,499  
Equipment expense
     554       525       1,064       1,018  
Advertising, travel & entertainment
     603       550       1,207       1,103  
ATM and debit card expense
     287       266       566       481  
Director fees
     273       200       541       391  
Supplies
     222       161       381       385  
Professional fees
     390       457       941       1,012  
Postage
     182       186       357       365  
Telephone and communications
     445       345       851       682  
FDIC Insurance
     414       735       884       1,498  
Other
     1,733       1,291       3,242       3,101  
Total noninterest expense
     19,096       18,116       37,618       36,848  
                                 
Income before income tax expense
     9,337       17,226       22,566       28,251  
Provision for income tax expense
     1,608       4,100       4,698       5,886  
Net income
     7,729       13,126       17,868       22,365  
Less: Net income attributable to the noncontrolling interest
     –       (493 )     –       (1,358 )
Net income attributable to Southside Bancshares, Inc.
   $ 7,729     $ 12,633     $ 17,868     $ 21,007  
Earnings per common share – basic
   $ 0.45     $ 0.73     $ 1.03     $ 1.22  
Earnings per common share – diluted
   $ 0.45     $ 0.73     $ 1.03     $ 1.22  
Dividends paid per common share
   $ 0.20     $ 0.17     $ 0.38     $ 0.34  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
  
Three Months
    
Six Months
  
(UNAUDITED)
  
Ended June 30,
    
Ended June 30,
  
(in thousands)
  
2012
    
2011
    
2012
    
2011
  
                         
Net income
   $ 7,729     $ 13,126     $ 17,868     $ 22,365  
                                 
Other comprehensive (loss) income:
                                
Unrealized holding (losses) gains on available for sale securities during the period
     863       20,126       (4,023 )     26,280  
                                 
Noncredit portion of other-than-temporary impairment losses on the AFS securities
     19       –       160       –  
                                 
Reclassification adjustment for gain on sale of available for sale securities included in net income
     (3,297 )     (3,920 )     (9,269 )     (5,471 )
                                 
Reclassification of other-than-temporary impairment charges on available for sale securities included in net income
     40       –       181       –  
                                 
Amortization of net actuarial loss, included in net periodic benefit cost
     512       366       1,011       732  
                                 
Amortization of prior service credit included in net periodic benefit cost
     (12 )     (10 )     (22 )     (21 )
Other comprehensive (loss) income
     (1,875 )     16,562       (11,962 )     21,520  
                                 
Income tax benefit (expense) related to other items of comprehensive income
     656       (5,797 )     4,187       (7,532 )
                                 
Other comprehensive income (loss), net of tax
     (1,219 )     10,765       (7,775 )     13,988  
                                 
Comprehensive income
   $ 6,510     $ 23,891     $ 10,093     $ 36,353  

The accompanying notes are an integral part of these consolidated financial statements.


SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)
                
Accu-
              
(in thousands, except share amounts)
                
mulated-
              
   
Common
Stock
    
Paid In
Capital
    
Retained
Earnings
    
Treasury
Stock
    
Other
Compre-
hensive
Income
(Loss)
    
Noncon-
trolling
Interest
    
Total
Equity
  
                                           
Balance at December 31, 2010
   $ 22,075     $ 162,877     $ 64,179     $ (28,377 )   $ (6,293 )   $ 1,113     $ 215,574  
Net Income
                     21,007                       1,358       22,365  
Other comprehensive income
                                     13,988               13,988  
Issuance of common stock (28,869 shares)
     36       531                                       567  
Stock compensation expense
             26                                       26  
Tax benefits related to stock compensation
             2                                       2  
Capital distribution to noncontrolling interest shareholders
                                             (475 )     (475 )
Dividends paid on common stock ($0.34 per share)
                     (5,453 )                             (5,453 )
Stock dividend declared
     981       15,014       (15,995 )                             –  
Balance at June 30, 2011
   $ 23,092     $ 178,450     $ 63,738     $ (28,377 )   $ 7,695     $ 1,996     $ 246,594  
                                                         
Balance at December 31, 2011
   $ 23,146     $ 176,791     $ 72,646     $ (28,377 )   $ 14,721     $ –     $ 258,927  
Net Income
                     17,868                               17,868  
Other comprehensive loss
                                     (7,775 )             (7,775 )
Issuance of common stock (30,436 shares)
     38       595                                       633  
Stock compensation expense
             133                                       133  
Tax benefits related to stock compensation
             11                                       11  
Net issuance of common stock under employee stock plans
     10       39       (54 )                             (5 )
Dividends paid on common stock ($0.38 per share)
                     (6,436 )                             (6,436 )
Stock dividend declared
     1,034       16,425       (17,459 )                             –  
Balance at June 30, 2012
   $ 24,228     $ 193,994     $ 66,565     $ (28,377 )   $ 6,946     $ –     $ 263,356  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(in thousands)
   
Six Months Ended
June 30,
  
   
2012
    
2011
  
             
OPERATING ACTIVITIES:
            
Net income
   $ 17,868     $ 22,365  
Adjustments to reconcile net income to net cash provided by operations:
                
Depreciation
     1,778       1,646  
Amortization of premium
     22,864       16,782  
Accretion of discount and loan fees
     (2,399 )     (2,327 )
Provision for loan losses
     5,226       3,998  
Stock compensation expense
     133       26  
Deferred tax (benefit) expense
     (2,743 )     1,467  
Excess tax benefits from stock-based compensation
     (11 )     –  
Loss (gain) on sale of securities carried at fair value through income
     498       (338 )
Gain on sale of securities available for sale
     (9,269 )     (5,471 )
Net other-than-temporary impairment losses
     181       –  
Fair value gain – securities
     –       (4,083 )
FHLB advance option impairment charges
     1,836       –  
Loss on sale of assets
     –       3  
Loss on retirement of assets
     –       90  
Impairment on other real estate owned
     –       145  
Gain on sale of other real estate owned
     (3 )     (221 )
Net change in:
                
Interest receivable
     1,497       (1,370 )
Other assets
     27       (2,593 )
Interest payable
     (458 )     (575 )
Other liabilities
     (2,393 )     2,364  
Loans held for sale
     2,105       3,845  
Net cash provided by operating activities
     36,737       35,753  
                 
INVESTING ACTIVITIES:
                
Securities held to maturity:
                
Purchases
     –       (6,394 )
Maturities, calls and principal repayments
     32,331       23,373  
Securities available for sale:
                
Purchases
     (1,213,923 )     (350,206 )
Sales
     448,725       326,701  
Maturities, calls and principal repayments
     163,809       138,176  
Securities carried at fair value through income:
                
Purchases
     (57,606 )     (344,728 )
Sales
     675,255       16,248  
Maturities, calls and principal repayments
     25,279       13,919  
Proceeds from redemption of FHLB stock
     10,292       14,811  
Purchases of FHLB stock and other investments
     (10,757 )     (5,623 )
Net (increase) decrease in loans
     (100,529 )     32,740  
Purchases of premises and equipment
     (1,433 )     (2,169 )
Proceeds from sales of premises and equipment
     –       6  
Proceeds from sales of other real estate owned
     112       306  
Proceeds from sales of repossessed assets
     2,070       2,767  
Net cash used in investing activities
     (26,375 )     (140,073 )

(continued)


SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED) (continued)
(in thousands)
   
Six Months Ended
June 30,
  
   
2012
    
2011
  
             
FINANCING ACTIVITIES:
            
Net increase in demand and savings accounts
     198,420       87,107  
Net (decrease) increase in certificates of deposit
     (124,695 )     22,511  
Net decrease in federal funds purchased and repurchase agreements
     (997 )     (767 )
Proceeds from FHLB advances
     9,133,164       3,349,032  
Repayment of FHLB advances
     (9,147,464 )     (3,378,823 )
Net capital distributions to noncontrolling interest in consolidated entities
     –       (475 )
Excess tax benefits from stock-based compensation
     11       2  
Proceeds from the issuance of common stock
     633       567  
Dividends paid
     (6,436 )     (5,453 )
Net cash provided by financing activities
     52,636       73,701  
                 
Net increase (decrease) in cash and cash equivalents
     62,998       (30,619 )
Cash and cash equivalents at beginning of period
     43,238       79,073  
Cash and cash equivalents at end of period
   $ 106,236     $ 48,454  
                 
                 
                 
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
                
                 
Interest paid
   $ 15,075     $ 19,378  
Income taxes paid
   $ 9,200     $ 3,500  
                 
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
                
                 
Acquisition of other repossessed assets and real estate through foreclosure
   $ 2,621     $ 2,779  
Adjustment to pension liability
   $ (989 )   $ (711 )
5% stock dividend
   $ 17,459     $ 15,995  
Unsettled trades to purchase securities
   $ (42,300 )   $ (9,145 )
Unsettled trades to sell securities
   $ 1,071     $ 31,919  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS

1. 
Basis of Presentation

In this report, the words “the Company,” “we,” “us,” and “our” refer to the combined entities of Southside Bancshares, Inc. and its subsidiaries.  The words “Southside” and “Southside Bancshares” refer to Southside Bancshares, Inc.  The words “Southside Bank” and “the Bank” refer to Southside Bank (which, subsequent to the internal merger of Fort Worth National Bank (“FWNB”) with and into Southside Bank, includes FWNB).  “FWBS” refers to Fort Worth Bancshares, Inc., a bank holding company acquired by Southside of which FWNB was a wholly-owned subsidiary.  “SFG” refers to SFG Finance, LLC (formerly Southside Financial Group, LLC) which is a wholly-owned subsidiary of the Bank as of July 15, 2011.  “SSI” refers to Southside Securities, Inc., which is a wholly-owned subsidiary of Southside Bancshares, Inc.

The consolidated balance sheet as of June 30, 2012, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows and notes to the financial statements for the three and six month periods ended June 30, 2012 and 2011 are unaudited; in the opinion of management, all adjustments necessary for a fair statement of such financial statements have been included.  Such adjustments consisted only of normal recurring items.  All significant intercompany accounts and transactions are eliminated in consolidation.  The preparation of these consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires the use of management’s estimates.  These estimates are subjective in nature and involve matters of judgment.  Actual amounts could differ from these estimates.

Interim results are not necessarily indicative of results for a full year.  These financial statements should be read in conjunction with the financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2011.  All share data has been adjusted to give retroactive recognition to stock splits and stock dividends.  For a description of our significant accounting and reporting policies, refer to Note 1 of the Notes to Financial Statements in our Annual Report on Form 10K for the year ended December 31, 2011.

Accounting Standards

ASU No. 2011-03, “Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreements.”  ASU 2011-03 is intended to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity.  ASU 2011-03 removes from the assessment of effective control (i) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (ii) the collateral maintenance guidance related to that criterion.  ASU 2011-03 became effective for us on January 1, 2012 and did not have a significant impact on our consolidated financial statements.

ASU 2011-04, “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.”  ASU 2011-04 amends Topic 820, “Fair Value Measurements and Disclosures,” to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards.  ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures.  ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011, and did not have a significant impact on our consolidated financial statements.  See “Note 9 - Fair Value Measurement.”

ASU 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income.”  ASU 2011-05 amends Topic 220, “Comprehensive Income,” to require that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements.  Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented.  The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated.   ASU 2011-05 is effective for annual and interim periods beginning after December 15, 2011; however, certain provisions related to the presentation of reclassification adjustments have been deferred by ASU 2011-12 “Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.”  ASU 2011-05 did not have a significant impact on our consolidated financial statements.  See “Consolidated Statements of Comprehensive Income” directly following our Consolidated Statements of Income in our consolidated financial statements.
 
 
ASU 2011-08, “Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment.” ASU 2011-08 amends Topic 350, “Intangibles – Goodwill and Other,” to give entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.  However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit.  ASU 2011-08 is effective for annual and interim impairment tests beginning after December 15, 2011, and did not have a significant impact on our consolidated financial statements.

ASU 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.”  ASU 2011-11 amends Topic 210, “Balance Sheet,” to require an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement.  ASU 2011-11 is effective for annual and interim periods beginning on January 1, 2013, and is not expected to have a significant impact on our consolidated financial statements.

2. 
Earnings Per Share

Earnings per share attributable to Southside Bancshares, Inc. on a basic and diluted basis have been adjusted to give retroactive recognition to stock splits and stock dividends and is calculated as follows (in thousands, except per share amounts):

   
Three Months
    
Six Months
   
Ended June 30,
    
Ended June 30,
   
2012
    
2011
    
2012
    
2011
Basic and Diluted Earnings:
                      
Net income – Southside Bancshares, Inc.
   $ 7,729     $ 12,633     $ 17,868     $ 21,007  
                                 
Basic weighted-average shares outstanding
     17,341       17,263       17,334       17,255  
Add:   Stock options
     12       6       10       5  
Diluted weighted-average shares outstanding
     17,353       17,269       17,344       17,260  
                                 
Basic Earnings Per Share:
                                
Net Income - Southside Bancshares, Inc.
   $ 0.45     $ 0.73     $ 1.03     $ 1.22  
                                 
Diluted Earnings Per Share:
                                
Net Income - Southside Bancshares, Inc.
   $ 0.45     $ 0.73     $ 1.03     $ 1.22  

On March 29, 2012, our board of directors declared a 5% stock dividend to common stock shareholders of record as of April 18, 2012, and payable on May 9, 2012.

During the second quarter of 2011, our board of directors approved equity grants in the form of stock options and restricted stock units.  These equity grants were made pursuant to the shareholder-approved Southside Bancshares, Inc. 2009 Incentive Plan.

For the three and six month periods ended June 30, 2012, there were approximately 4,000 and 9,000 antidilutive options, respectively.  For the three and six month periods ended June 30, 2011, there were approximately 3,000 and 6,000 antidilutive options, respectively.
 
 
3. 
Comprehensive (Loss) Income

The components of other comprehensive (loss) income are as follows (in thousands):
 
   
Six Months Ended June 30, 2012
  
   
Before-Tax
    
Tax (Expense)
    
Net-of-Tax
  
   
Amount
    
Benefit
    
Amount
  
Unrealized losses on securities:
                  
Unrealized holding losses arising during period
   $ (4,023 )   $ 1,408     $ (2,615 )
Noncredit portion of other-than-temporary impairment losses on the AFS securities
     160       (56 )     104  
Less:  reclassification adjustment for gain on sale of AFS securities included in net income
     9,269       (3,244 )     6,025  
Less:  reclassification of other-than-temporary impairment charges of AFS securities included in net income
     (181 )     63       (118 )
Net unrealized losses on securities
     (12,951 )     4,533       (8,418 )
Change in pension plans
     989       (346 )     643  
Other comprehensive loss
   $ (11,962 )   $ 4,187     $ (7,775 )

   
Three Months Ended June 30, 2012
  
   
Before-Tax
    
Tax (Expense)
    
Net-of-Tax
  
   
Amount
    
Benefit
    
Amount
  
Unrealized losses on securities:
                  
Unrealized holding gains arising during period
   $ 863     $ (302 )   $ 561  
Noncredit portion of other-than-temporary impairment losses on the AFS securities
     19       (7 )     12  
Less:  reclassification adjustment for gain on sale of AFS securities included in net income
     3,297       (1,154 )     2,143  
Less:  reclassification of other-than-temporary impairment charges of AFS securities included in net income
     (40 )     14       (26 )
Net unrealized losses on securities
     (2,375 )     831       (1,544 )
Change in pension plans
     500       (175 )     325  
Other comprehensive loss
   $ (1,875 )   $ 656     $ (1,219 )

   
Six Months Ended June 30, 2011
  
   
Before-Tax
    
Tax
    
Net-of-Tax
  
   
Amount
    
Expense
    
Amount
  
Unrealized gains on securities:
                  
Unrealized holding gains arising during period
   $ 26,280     $ (9,198 )   $ 17,082  
Less:  reclassification adjustment for gain on sale of AFS securities included in net income
     5,471       (1,915 )     3,556  
Net unrealized gains on securities
     20,809       (7,283 )     13,526  
Change in pension plans
     711       (249 )     462  
Other comprehensive income
   $ 21,520     $ (7,532 )   $ 13,988  

   
Three Months Ended June 30, 2011
  
   
Before-Tax
    
Tax
    
Net-of-Tax
  
   
Amount
    
Expense
    
Amount
  
Unrealized gains on securities:
                  
Unrealized holding gains arising during period
   $ 20,126     $ (7,044 )   $ 13,082  
Less:  reclassification adjustment for gain on sale of AFS securities included in net income
     3,920       (1,372 )     2,548  
Net unrealized gains on securities
     16,206       (5,672 )     10,534  
Change in pension plans
     356       (125 )     231  
Other comprehensive income
   $ 16,562     $ (5,797 )   $ 10,765  

 
4. 
Securities

The amortized cost and estimated fair value of investment and mortgage-backed securities as of June 30, 2012 and December 31, 2011, are reflected in the tables below (in thousands):
 
   
June 30, 2012
  
          Gross              
   
Amortized
    
Unrealized
    
Gross Unrealized Losses
    
Estimated
  
AVAILABLE FOR SALE:
   Cost     Gains     OTTI     Other     Fair Value  
Investment Securities:
                              
State and Political Subdivisions
   $ 390,601     $ 24,699     $ –     $ 403     $ 414,897  
Other Stocks and Bonds
     5,404       35       2,121       –       3,318  
Mortgage-backed Securities:
                                        
U.S. Government Agencies
     114,274       3,556       –       85       117,745  
Government-Sponsored Enterprises
     1,070,507       18,033       –       1,526       1,087,014  
Total
   $ 1,580,786     $ 46,323     $ 2,121     $ 2,014     $ 1,622,974  
 
   
June 30, 2012
  
          Gross              
 
  
Amortized
    
Unrealized
    
Gross Unrealized Losses
    
Estimated
  
HELD TO MATURITY:
   Cost     Gains     OTTI     Other     Fair Value  
Investment Securities:
                              
State and Political Subdivisions
   $ 1,010     $ 122     $ –     $ –     $ 1,132  
Mortgage-backed Securities:
                                        
U.S. Government Agencies
     21,763       1,301       –       11       23,053  
Government-Sponsored Enterprises
     308,375       10,738       –       4       319,109  
Total
   $ 331,148     $ 12,161     $ –     $ 15     $ 343,294  
 
   
December 31, 2011
  
          Gross              
   
Amortized
    
Unrealized
    
Gross Unrealized Losses
    
Estimated
  
AVAILABLE FOR SALE:
   Cost     Gains     OTTI     Other     Fair Value  
Investment Securities:
                              
State and Political Subdivisions
   $ 251,281     $ 31,221     $ –     $ 45     $ 282,457  
Other Stocks and Bonds
     2,925       –       2,426       –       499  
Mortgage-backed Securities:
                                        
U.S. Government Agencies
     99,974       7,158       –       80       107,052  
Government-Sponsored Enterprises
     589,687       20,127       –       740       609,074  
Total
   $ 943,867     $ 58,506     $ 2,426     $ 865     $ 999,082  
 
   
December 31, 2011
  
          Gross              
   
Amortized
    
Unrealized
    
Gross Unrealized Losses
    
Estimated
  
HELD TO MATURITY:
   Cost     Gains     OTTI     Other     Fair Value  
Investment Securities:
                              
State and Political Subdivisions
   $ 1,010     $ 196     $ –     $ –     $ 1,206  
Other Stocks and Bonds
     486       15       –       –       501  
Mortgage-backed Securities:
                                        
U.S. Government Agencies
     22,999       1,159       –       43       24,115  
Government-Sponsored Enterprises
     342,632       14,848       –       11       357,469  
Total
   $ 367,127     $ 16,218     $ –     $ 54     $ 383,291  


Securities carried at fair value through income were as follows (in thousands):

   
At June 30,
    
At December 31,
  
   
2012
    
2011
  
Mortgage-backed Securities:
            
U.S. Government Agencies
   $ –     $ 30,413  
Government-Sponsored Enterprises
     –       617,346  
Total
   $ –     $ 647,759  

Net gains and losses on securities carried at fair value through income were as follows (in thousands):

    Six Months Ended June 30,  
    2012     2011  
Net (loss) gain on sales transactions
   $ (498 )   $ 338  
Net mark-to-market gains
     –       4,083  
Net (loss) gain on securities carried at fair value through income
   $ (498 )   $ 4,421  

    Three Months Ended June 30,  
    2012     2011  
Net (loss) gain on sales transactions
   $ (13 )   $ 84  
Net mark-to-market gains
     –       2,456  
Net (loss) gain on securities carried at fair value through income
   $ (13 )   $ 2,540  

The following table represents the unrealized loss on securities for the six months ended June 30, 2012 and year ended December 31, 2011 (in thousands):

   
Less Than 12 Months
    
More Than 12 Months
    
Total
  
         
Unrealized
          
Unrealized
          
Unrealized
  
   
Fair Value
    
Loss
    
Fair Value
    
Loss
    
Fair Value
    
Loss
  
As of June 30, 2012:
                                    
                                     
Available for Sale
                                    
State and Political Subdivisions
   $ 66,858     $ 403     $ –     $ –     $ 66,858     $ 403  
Other Stocks and Bonds
     –       –       623       2,121       623       2,121  
Mortgage-Backed Securities
     420,684       1,587       2,409       24       423,093       1,611  
Total
   $ 487,542     $ 1,990     $ 3,032     $ 2,145     $ 490,574     $ 4,135  
                                                 
Held to Maturity
                                                
Mortgage-Backed Securities
   $ 3,455     $ 12     $ 375     $ 3     $ 3,830     $ 15  
Total
   $ 3,455     $ 12     $ 375     $ 3     $ 3,830     $ 15  
                                                 
As of December 31, 2011:
                                                
                                                 
Available for Sale
                                                
State and Political Subdivisions
   $ 1,668     $ 42     $ 307     $ 3     $ 1,975     $ 45  
Other Stocks and Bonds
     –       –       499       2,426       499       2,426  
Mortgage-Backed Securities
     148,171       754       5,322       66       153,493       820  
Total
   $ 149,839     $ 796     $ 6,128     $ 2,495     $ 155,967     $ 3,291  
                                                 
Held to Maturity
                                                
Mortgage-Backed Securities
   $ 8,918     $ 54     $ –     $ –     $ 8,918     $ 54  
Total
   $ 8,918     $ 54     $ –     $ –     $ 8,918     $ 54  

When it is determined that a decline in fair value of Held to Maturity (“HTM”) and Available for Sale (“AFS”) securities is other-than-temporary, the carrying value of the security is reduced to its estimated fair value, with a corresponding charge to earnings for the credit portion and the noncredit portion to other comprehensive income.  In estimating other-than-temporary impairment losses, management considers, among other things, the length of time and the extent to which the fair value has been less than cost and the financial condition and near-term prospects of the issuer.  Additionally, we do not currently intend to sell the securities and it is not more likely than not that we will be required to sell the security before the anticipated recovery of its amortized cost basis.
 
 
The turmoil in the capital markets had a significant impact on our estimate of fair value for certain of our securities.  We believe the fair values are reflective of illiquidity and credit impairment.  At June 30, 2012, we have in AFS Other Stocks and Bonds, $2.7 million amortized cost basis in pooled trust preferred securities (“TRUPs”).  Those securities are structured products with cash flows dependent upon securities issued by U.S. financial institutions, including banks and insurance companies.  Our estimate of fair value at June 30, 2012 for the TRUPs is approximately $623,000 and reflects the market illiquidity.  With the exception of the TRUPs, to the best of management’s knowledge and based on our consideration of the qualitative factors associated with each security, there were no securities in our investment and mortgage-backed securities portfolio at June 30, 2012 with an other-than-temporary impairment.

Given the facts and circumstances associated with the TRUPs we performed detailed cash flow modeling for each TRUP using an industry-accepted cash flow model.  Prior to loading the required assumptions into the model we reviewed the financial condition of each of the underlying issuing banks within the TRUP collateral pool that had not deferred or defaulted as of June 30, 2012.  Management’s best estimate of a deferral assumption was assigned to each issuing bank based on the category in which it fell.  Our analysis of the underlying cash flows contemplated various default, deferral and recovery scenarios to arrive at our best estimate of cash flows.  Based on that detailed analysis, we have concluded that the other-than-temporary impairment, which captures the credit component, was estimated at $3.3 million at June 30, 2012 and $3.1 million at December 31, 2011. The noncredit charge to other comprehensive income was estimated at $2.1 million and $2.4 million at June 30, 2012 and December 31, 2011, respectively.  The carrying amount of the TRUPs was written down with $75,000 and $3.0 million recognized in earnings for the years ended December 31, 2010 and 2009, respectively.  There was an additional write-down of the TRUPs recognized in earnings in the amount of approximately $40,000 and $181,000 for the three and six months ended June 30, 2012, respectively.  The cash flow model assumptions represent management’s best estimate and consider a variety of qualitative factors, which include, among others, the credit rating downgrades, the severity and duration of the mark-to-market loss, and the structural nuances of each TRUP.  Management believes that the detailed review of the collateral and cash flow modeling support the conclusion that the TRUPs had an other-than-temporary impairment at June 30, 2012.  We will continue to update our assumptions and the resulting analysis each reporting period to reflect changing market conditions.  Additionally, we do not currently intend to sell the TRUPs and it is not more likely than not that we will be required to sell the TRUPs before the anticipated recovery of their amortized cost basis.

The table below provides more detail on the TRUPs at June 30, 2012 (in thousands).

TRUP
    
Par
    
Credit
Loss
    
Amortized
Cost
    
Fair
Value
    
Tranche
    
Credit
Rating
  
                                       
1     $ 2,000     $ 1,256     $ 744     $ 117     C1    
Ca
  
2       2,000       550       1,450       234     B1     C  
3       2,000       1,450       550       272     B2     C  
      $ 6,000     $ 3,256     $ 2,744     $ 623              

The following tables present a roll forward of the credit losses recognized in earnings, on AFS debt securities
(in thousands).

   
Six Months Ended
  
   
June 30, 2012
    
June 30, 2011
  
Balance, beginning of period
   $ 3,075     $ 3,075  
Additions for credit losses recognized on debt securities that had no previous impairment losses
     –       –  
Additions for credit losses recognized on debt securities that had previously incurred impairment losses
     181       –  
Balance, end of period
   $ 3,256     $ 3,075  

   
Three Months Ended
  
   
June 30, 2012
    
June 30, 2011
  
Balance, beginning of period
   $ 3,216     $ 3,075  
Additions for credit losses recognized on debt securities that had no previous impairment losses
     –       –  
Additions for credit losses recognized on debt securities that had previously incurred impairment losses
     40       –  
Balance, end of period
   $ 3,256     $ 3,075  

 
Interest income recognized on securities for the periods presented (in thousands):

   
Six Months Ended
  
   
June 30, 2012
    
June 30, 2011
  
U.S. Treasury
   $ –     $ 6  
State and Political Subdivisions
     5,642       6,452  
Other Stocks and Bonds
     37       18  
Mortgage-backed Securities
     21,035       24,607  
Total interest income on securities
   $ 26,714     $ 31,083  

   
Three Months Ended
  
   
June 30, 2012
    
June 30, 2011
  
U.S. Treasury
   $ –     $ 5  
State and Political Subdivisions
     2,968       3,215  
Other Stocks and Bonds