body_10q.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, 2007

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
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
 
1201 S. Beckham, Tyler, Texas
75701
 
 
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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer o                     Accelerated filer  x            Non-accelerated filer  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o .   No  x .

The number of shares of the issuer's common stock, par value $1.25, outstanding as of July 26, 2007 was 13,081,616 shares.


 



TABLE OF CONTENTS


PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4.  CONTROLS AND PROCEDURES
PART II.  OTHER INFORMATION
ITEM 1.  LEGAL PROCEEDINGS
ITEM 1A.  RISK FACTORS
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5.  OTHER INFORMATION
ITEM 6.  EXHIBITS
SIGNATURES
Exhibit Index
Certification Pursuant to Section 302
Certification Pursuant to Section 302
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,
 
ASSETS
 
2007
   
2006
 
Cash and due from banks
  $
43,762
    $
52,537
 
Interest earning deposits
   
544
     
550
 
Federal funds sold
   
11,850
     
1,925
 
Total cash and cash equivalents
   
56,156
     
55,012
 
Investment securities:
               
Available for sale, at estimated fair value
   
88,566
     
98,952
 
Held to maturity, at cost
   
1,353
     
1,351
 
Mortgage-backed and related securities:
               
Available for sale, at estimated fair value
   
599,326
     
643,164
 
Held to maturity, at cost
   
207,262
     
226,162
 
Federal Home Loan Bank stock, at cost
   
15,540
     
25,614
 
Other investments, at cost
   
881
     
882
 
Loans held for sale
   
5,042
     
3,909
 
Loans:
               
Loans
   
768,739
     
759,147
 
Less:  allowance for loan losses
    (7,367 )     (7,193 )
Net Loans
   
761,372
     
751,954
 
Premises and equipment, net
   
35,268
     
32,641
 
Interest receivable
   
9,921
     
10,110
 
Deferred tax asset
   
10,456
     
8,678
 
Other assets
   
30,633
     
32,547
 
TOTAL ASSETS
  $
1,821,776
    $
1,890,976
 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Deposits:
               
Noninterest bearing
  $
328,361
    $
325,771
 
Interest bearing
   
1,007,989
     
956,704
 
Total Deposits
   
1,336,350
     
1,282,475
 
Short-term obligations:
               
Federal funds purchased
   
     
5,675
 
FHLB Dallas advances
   
239,826
     
322,241
 
Other obligations
   
1,511
     
1,605
 
Total Short-term obligations
   
241,337
     
329,521
 
Long-term obligations:
               
FHLB Dallas advances
   
89,393
     
129,379
 
Long-term debt
   
20,619
     
20,619
 
Total Long-term obligations
   
110,012
     
149,998
 
Other liabilities
   
18,583
     
18,378
 
TOTAL LIABILITIES
   
1,706,282
     
1,780,372
 
                 
       Off-Balance-Sheet Arrangements, Commitments and Contingencies (Note 9)
               
                 
Shareholders' equity:
               
Common stock:  ($1.25 par, 20,000,000 shares authorized,
               
14,805,225 and 14,075,653 shares issued)
   
18,507
     
17,594
 
Paid-in capital
   
114,462
     
100,736
 
Retained earnings
   
21,392
     
29,648
 
Treasury stock (1,724,857 and 1,718,737 shares at cost)
    (22,983 )     (22,850 )
Accumulated other comprehensive loss
    (15,884 )     (14,524 )
TOTAL SHAREHOLDERS' EQUITY
   
115,494
     
110,604
 
                 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $
1,821,776
    $
1,890,976
 

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

1


SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
   
Three Months
   
Six Months
 
   
Ended June 30,
   
Ended June 30,
 
 
 
2007
   
2006
   
2007
   
2006
 
Interest income
 
 
   
 
   
 
   
 
 
Loans
  $
12,733
    $
11,328
    $
25,247
    $
21,956
 
Investment securities – taxable
   
616
     
594
     
1,452
     
1,337
 
Investment securities – tax-exempt
   
505
     
490
     
1,012
     
1,089
 
Mortgage-backed and related securities
   
10,163
     
11,149
     
21,097
     
21,386
 
Federal Home Loan Bank stock and other investments
   
330
     
350
     
700
     
694
 
Other interest earning assets
   
33
     
14
     
69
     
32
 
Total interest income
   
24,380
     
23,925
     
49,577
     
46,494
 
Interest expense
                               
Deposits
   
10,025
     
7,404
     
19,590
     
13,658
 
Short-term obligations
   
2,776
     
4,037
     
6,722
     
7,587
 
Long-term obligations
   
1,518
     
1,947
     
3,178
     
4,143
 
Total interest expense
   
14,319
     
13,388
     
29,490
     
25,388
 
Net interest income
   
10,061
     
10,537
     
20,087
     
21,106
 
Provision for loan losses
   
217
     
448
     
334
     
729
 
Net interest income after provision for loan losses
   
9,844
     
10,089
     
19,753
     
20,377
 
Non interest income
                               
Deposit services
   
4,270
     
3,947
     
8,198
     
7,416
 
Gain on sale of securities available for sale
   
6
     
101
     
435
     
224
 
Gain on sale of loans
   
724
     
469
     
1,069
     
842
 
Trust income
   
576
     
403
     
1,040
     
807
 
Bank owned life insurance income
   
268
     
265
     
532
     
509
 
Other
   
818
     
782
     
1,526
     
1,267
 
Total non interest income
   
6,662
     
5,967
     
12,800
     
11,065
 
Non interest expense
                               
Salaries and employee benefits
   
7,298
     
7,310
     
14,402
     
14,730
 
Occupancy expense
   
1,190
     
1,201
     
2,358
     
2,374
 
Equipment expense
   
242
     
225
     
470
     
428
 
Advertising, travel & entertainment
   
449
     
472
     
870
     
924
 
ATM and debit card expense
   
242
     
275
     
496
     
445
 
Director fees
   
141
     
167
     
268
     
312
 
Supplies
   
188
     
168
     
336
     
352
 
Professional fees
   
240
     
318
     
551
     
633
 
Postage
   
155
     
155
     
303
     
305
 
Telephone and communications
   
193
     
191
     
384
     
354
 
Other
   
1,118
     
1,081
     
2,254
     
2,140
 
Total non interest expense
   
11,456
     
11,563
     
22,692
     
22,997
 
 
                               
Income before income tax expense
   
5,050
     
4,493
     
9,861
     
8,445
 
Provision for income tax expense
   
463
     
950
     
1,511
     
1,674
 
Net Income
  $
4,587
    $
3,543
    $
8,350
    $
6,771
 
Earnings per common share –basic
  $
0.35
    $
0.28
    $
0.64
    $
0.53
 
Earnings per common share –diluted
  $
0.34
    $
0.27
    $
0.62
    $
0.51
 
Dividends declared per common share
  $
0.12
    $
0.11
    $
0.23
    $
0.22
 

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

2


SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(in thousands, except share amounts)

 
 
Compre-hensive
Income
   
Common Stock
   
Paid-in Capital
   
Retained Earnings
   
Treasury Stock
   
Accumulated
Other
Compre-
hensive
Income (Loss)
   
Total Share-holders
Equity
 
                                           
Balance at
December 31, 2005
 
 
    $
16,633
    $
87,962
    $
32,054
    $ (22,850 )   $ (4,509 )   $
109,290
 
Net Income
  $
6,771
                     
6,771
                     
6,771
 
Other comprehensive loss, net of tax
                                                       
Unrealized losses on securities, net of
                                                       
    reclassification   
    adjustment
   (see Note 3)
    (9,167 )                                     (9,167 )     (9,167 )
Comprehensive loss
  $ (2,396 )                                                
Common stock issued (94,803 shares)
           
119
     
714
                             
833
 
Stock compensation expense
                   
14
                             
14
 
Tax benefit of incentive stock options
                   
41
                             
41
 
Dividends paid on common stock
                            (2,626 )                     (2,626 )
Stock dividend
           
728
     
10,978
      (11,706 )                    
 
Balance at June 30, 2006
          $
17,480
    $
99,709
    $
24,493
    $ (22,850 )   $ (13,676 )   $
105,156
 
                                                         
Balance at
December 31, 2006
          $
17,594
    $
100,736
    $
29,648
    $ (22,850 )   $ (14,524 )   $
110,604
 
Net Income
  $
8,350
                     
8,350
                     
8,350
 
Other comprehensive income, net of tax
                                                       
Unrealized losses on securities, net of
                                                       
reclassification adjustment
(see Note 3)
    (1,533 )                                     (1,533 )     (1,533 )
Adjustment to net periodic
                                                       
benefit cost
(see Note 3)
   
173
                                     
173
     
173
 
Comprehensive Income
  $
6,990
                                                 
Common stock issued (108,634 shares)
           
137
     
788
                             
925
 
Stock compensation expense
                   
14
                             
14
 
Tax benefit of incentive stock options
                   
21
                             
21
 
Dividends paid on common stock
                            (2,927 )                     (2,927 )
Purchase of 6,120 shares of common stock
                                    (133 )             (133 )
Stock dividend
           
776
     
12,903
      (13,679 )                    
 
Balance at June 30, 2007
          $
18,507
    $
114,462
    $
21,392
    $ (22,983 )   $ (15,884 )   $
115,494
 
 
The accompanying notes are an integral part of these consolidated financial statements.

3


SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
   
Six Months Ended
June 30,
 
 
 
2007
   
2006
 
 
 
 
   
 
 
OPERATING ACTIVITIES:
 
 
   
 
 
Net income
  $
8,350
    $
6,771
 
Adjustments to reconcile net income to net cash provided by operations:
               
Depreciation
   
1,085
     
1,132
 
Amortization of premium
   
2,445
     
3,066
 
Accretion of discount and loan fees
    (1,314 )     (929 )
Provision for loan losses
   
334
     
729
 
Stock compensation expense
   
14
     
14
 
Decrease (increase) in interest receivable
   
189
      (659 )
Decrease in other assets
   
1,585
     
208
 
Net change in deferred taxes
    (1,077 )     (176 )
(Decrease) increase in interest payable
    (134 )    
338
 
Decrease in other liabilities
    (434 )     (4,378 )
Increase in loans held for sale
    (1,133 )     (2,839 )
Gain on sale of available for sale securities
    (435 )     (224 )
Gain on sale of assets
   
      (1 )
Loss on sale of other real estate owned
   
1
     
 
Net cash provided by operating activities
   
9,476
     
3,052
 
 
               
INVESTING ACTIVITIES:
               
Proceeds from sales of investment securities available for sale
   
4,953
     
39,197
 
Proceeds from sales of mortgage-backed securities available for sale
   
51,430
     
30,651
 
Proceeds from maturities of investment securities available for sale
   
57,891
     
14,175
 
Proceeds from maturities of mortgage-backed securities available for sale
   
50,874
     
53,060
 
Proceeds from maturities of mortgage-backed securities held to maturity
   
20,596
     
16,683
 
Proceeds from redemption of Federal Home Loan Bank stock
   
10,729
     
2,019
 
Purchases of investment securities available for sale
    (51,789 )     (23,027 )
Purchases of investment securities held to maturity
   
      (1,348 )
Purchases of mortgage-backed securities available for sale
    (60,474 )     (157,067 )
Purchases of mortgage-backed securities held to maturity
    (2,180 )     (33,749 )
Purchases of Federal Home Loan Bank stock and other investments
    (654 )     (657 )
Net increase in loans
    (10,048 )     (45,119 )
Purchases of premises and equipment
    (3,712 )     (933 )
Proceeds from sales of premises and equipment
   
     
1
 
Proceeds from sales of other real estate owned
   
334
     
45
 
Proceeds from sales of repossessed assets
   
191
     
185
 
Net cash provided by (used in) investing activities
   
68,141
      (105,884 )

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


4


SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED)
(in thousands)
 
 
Six Months Ended
 
 
 
June 30,
 
 
 
2007
 
 
2006
 
FINANCING ACTIVITIES:
 
 
 
 
 
 
 Net increase in demand and savings accounts
 
 
21,773
 
 
 
5,388
 
 Net increase in certificates of deposit
 
 
31,944
 
 
 
78,801
 
 Net (decrease) increase in federal funds purchased
 
 
(5,675
)
 
 
10,600
 
 Proceeds from FHLB Advances
 
 
2,786,999
 
 
 
3,608,804
 
 Repayment of FHLB Advances
 
 
(2,909,400
)
 
 
(3,603,261
)
 Tax benefit of incentive stock options
 
 
21
 
 
 
41
 
 Purchases of common stock
   
(133
)
   
 
 Proceeds from the issuance of common stock
 
 
925
 
 
 
833
 
 Dividends paid
 
 
(2,927
)
 
 
(2,626
)
      Net cash (used in) provided by financing activities
 
 
(76,473
)
 
 
98,580
 
 
 
 
   
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
 
1,144
 
 
 
(4,252
)
Cash and cash equivalents at beginning of period
 
 
55,012
 
 
 
51,829
 
Cash and cash equivalents at end of period
 
$
56,156
 
 
$
47,577
 
 
 
 
   
 
 
 
 
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
 
 
   
 
 
 
 
 Interest paid
 
$
29,624
 
 
$
25,050
 
 Income taxes paid
 
 
2,000
 
 
 
1,150
 
 
 
 
   
 
 
 
 
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
   
 
 
 
 
 Acquisition of other repossessed assets and real estate through foreclosure
 
$
197
 
 
$
957
 
 Payment of 5% stock dividend
 
 
13,679
 
 
 
11,706
 
 Adjustment to pension liability
 
 
(262
)
 
 
 
Unsettled trades to purchase securities
   
941
     
 

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



5



SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS

1.  Basis of Presentation

The term “Company” is used throughout this report to refer to Southside Bancshares, Inc. and its subsidiaries.  The term “Bank” is used to refer to Southside Bank wherever a distinction between Southside Bancshares, Inc. and Southside Bank aids in the understanding of this report.

The consolidated balance sheet as of June 30, 2007, and the related consolidated statements of income, shareholders' equity and cash flows and notes to the financial statements for the three and six month periods ended June 30, 2007 and 2006 are unaudited; in the opinion of management, all adjustments necessary for a fair presentation 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, 2006.  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 10-K for the year ended December 31, 2006.

2.  Earnings Per Share

Earnings per share on a basic and diluted basis has 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,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2007
 
 
2006
 
 
2007
 
 
2006
 
    Basic Earnings and Shares:
 
 
 
 
 
 
 
 
 
 
 
 
       Net Income
 
$
4,587
 
 
$
3,543
 
 
$
8,350
 
 
$
6,771
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
       Weighted-average basic shares outstanding
 
 
13,035
 
 
 
12,853
 
 
 
13,008
 
 
 
12,830
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    Basic Earnings Per Share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
       Net Income
 
$
0.35
 
 
$
0.28
 
 
$
0.64
 
 
$
0.53
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    Diluted Earnings and Shares:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
       Net Income
 
$
4,587
 
 
$
3,543
 
 
$
8,350
 
 
$
6,771
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
       Weighted-average basic shares outstanding
 
 
13,035
 
 
 
12,853
 
 
 
13,008
 
 
 
12,830
 
       Add:   Stock options
 
 
401
 
 
 
484
 
 
 
421
 
 
 
496
 
       Weighted-average diluted shares outstanding
 
 
13,436
 
 
 
13,337
 
 
 
13,429
 
 
 
13,326
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    Diluted Earnings Per Share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
       Net Income
 
$
0.34
 
 
$
0.27
 
 
$
0.62
 
 
$
0.51
 

For the three and six month periods ended June 30, 2007 and 2006, there were no antidilutive options.

6



3.  Comprehensive Income (Loss)

The components of other comprehensive income (loss) are as follows (in thousands):

   
Six Months Ended June 30, 2007
 
 
 
Before-Tax
   
Tax (Expense)
   
Net-of-Tax
 
 
 
Amount
   
Benefit
   
Amount
 
Unrealized losses on securities:
 
 
   
 
   
 
 
Unrealized holding losses arising during period
  $ (1,888 )   $
642
    $ (1,246 )
Less:  reclassification adjustment for gains
                       
  included in net income
   
435
      (148 )    
287
 
Net unrealized losses on securities
    (2,323 )    
790
      (1,533 )
 Adjustment to net periodic benefit cost
   
262
      (89 )    
173
 
Other comprehensive loss
  $ (2,061 )   $
701
    $ (1,360 )


   
Three Months Ended June 30, 2007
 
 
 
Before-Tax
   
Tax (Expense)
   
Net-of-Tax
 
 
 
Amount
   
Benefit
   
Amount
 
Unrealized losses on securities:
 
 
   
 
   
 
 
Unrealized holding losses arising during period
  $ (5,556 )   $
1,889
    $ (3,667 )
Less:  reclassification adjustment for gains
                       
  included in net income
   
6
      (2 )    
4
 
Net unrealized losses on securities
    (5,562 )    
1,891
      (3,671 )
 Adjustment to net periodic benefit cost
   
104
      (35 )    
69
 
Other comprehensive loss
  $ (5,458 )   $
1,856
    $ (3,602 )


   
Six Months Ended June 30, 2006
 
 
 
Before-Tax
   
Tax (Expense)
   
Net-of-Tax
 
 
 
Amount
   
Benefit
   
Amount
 
Unrealized losses on securities:
 
 
             
Unrealized holding losses arising during period
  $ (13,665 )   $
4,646
    $ (9,019 )
Less:  reclassification adjustment for gains
                       
  included in net income
   
224
      (76 )    
148
 
Net unrealized losses on securities
    (13,889 )    
4,722
      (9,167 )
 
                       
Other comprehensive loss
  $ (13,889 )   $
4,722
    $ (9,167 )


   
Three Months Ended June 30, 2006
 
 
 
Before-Tax
   
Tax (Expense)
   
Net-of-Tax
 
 
 
Amount
   
Benefit
   
Amount
 
Unrealized losses on securities:
                 
Unrealized holding losses arising during period
  $ (5,982 )   $
2,034
    $ (3,948 )
Less:  reclassification adjustment for gains
                       
  included in net income
   
101
      (34 )    
67
 
Net unrealized losses on securities
    (6,083 )    
2,068
      (4,015 )
 
                       
Other comprehensive loss
  $ (6,083 )   $
2,068
    $ (4,015 )


7


4.  Securities

The amortized cost and estimated market value of investment and mortgage-backed securities as of June 30, 2007 and December 31, 2006, are reflected in the tables below (in thousands):

       
   
June 30, 2007
 
AVAILABLE FOR SALE:
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Estimated Market Value
 
Investment Securities:
                       
   U.S. Treasury
  $
18,157
    $
    $
1,051
    $
17,106
 
   Government Sponsored Enterprise Debentures
   
8,999
     
     
2
     
8,997
 
   State and Political Subdivisions
   
54,361
     
1,077
     
480
     
54,958
 
   Other Stocks and Bonds
   
7,591
     
9
     
95
     
7,505
 
Mortgage-backed Securities:
                               
   U.S. Government Agencies
   
73,596
     
274
     
1,669
     
72,201
 
   Government Sponsored Enterprises
   
527,797
     
896
     
8,196
     
520,497
 
   Other Private Issues
   
6,711
     
39
     
122
     
6,628
 
Total
  $
697,212
    $
2,295
    $
11,615
    $
687,892
 

HELD TO MATURITY:
                       
Investment Securities:
                       
   Other Stocks and Bonds
  $
1,353
    $
14
    $
    $
1,367
 
Mortgage-backed Securities:
                               
   U.S. Government Agencies
   
28,228
     
     
621
     
27,607
 
   Government Sponsored Enterprises
   
179,034
     
44
     
3,485
     
175,593
 
Total
  $
208,615
    $
58
    $
4,106
    $
204,567
 

       
   
December 31, 2006
 
AVAILABLE FOR SALE:
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Estimated Market Value
 
Investment Securities:
                       
   U.S. Treasury
  $
27,104
    $
    $
721
    $
26,383
 
   Government Sponsored Enterprise Debentures
   
9,923
     
     
     
9,923
 
   State and Political Subdivisions
   
54,037
     
1,488
     
390
     
55,135
 
   Other Stocks and Bonds
   
7,611
     
12
     
112
     
7,511
 
Mortgage-backed Securities:
                               
   U.S. Government Agencies
   
72,183
     
425
     
1,209
     
71,399
 
   Government Sponsored Enterprises
   
570,777
     
1,250
     
7,377
     
564,650
 
   Other Private Issues
   
7,190
     
20
     
95
     
7,115
 
Total
  $
748,825
    $
3,195
    $
9,904
    $
742,116
 

HELD TO MATURITY:
                       
Investment Securities:
                       
   Other Stocks and Bonds
  $
1,351
    $
7
    $
16
    $
1,342
 
Mortgage-backed Securities:
                               
   U.S. Government Agencies
   
30,788
     
     
407
     
30,381
 
   Government Sponsored Enterprises
   
195,374
     
97
     
3,104
     
192,367
 
Total
  $
227,513
    $
104
    $
3,527
    $
224,090
 
 
The Bank concluded that, based on the creditworthiness of the issuer, the unrealized loss on each security in the above table represents a temporary impairment and does not require adjustment to the carrying amount of any of the individual securities. Additionally, the Bank has the ability and the intent to hold such securities through recovery of the unrealized losses.

Investment and mortgage-backed securities with book values of $322.9 million at June 30, 2007 and $454.6 million at December 31, 2006 were pledged to collateralize FHLB advances, public funds, trust deposits, repurchase agreements and for other purposes, as required or permitted by law.
8



5.  Loans and Allowance for Probable Loan Losses

The following table sets forth loan totals by category for the periods presented (in thousands):


 
 
At
   
At
 
 
 
June 30,
   
December 31,
 
 
 
2007
   
2006
 
 
 
 
       
Real Estate Loans:
 
 
   
 
 
   Construction
  $
46,876
    $
39,588
 
   1-4 Family Residential
   
223,996
     
227,354
 
   Other
   
177,918
     
181,047
 
Commercial Loans
   
125,609
     
118,962
 
Municipal Loans
   
110,416
     
106,155
 
Loans to Individuals
   
83,924
     
86,041
 
Total Loans
  $
768,739
    $
759,147
 

The summaries of the Allowance for Loan Losses are as follows (in thousands):

 
 
Three Months
Ended June 30,
 
 
Six Months
Ended June 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2007
 
 
2006
 
 
2007
 
 
2006
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
7,261
 
 
$
7,193
 
 
$
7,193
 
 
$
7,090
 
Provision for loan losses
 
 
217
 
 
 
448
 
 
 
334
 
 
 
729
 
Loans charged off
 
 
(616
)
 
 
(744
)
 
 
(1,209
)
 
 
(1,447
)
Recoveries of loans charged off
 
 
505
 
 
 
449
 
 
 
1,049
 
 
 
974
 
Balance at end of period
 
$
7,367
 
 
$
7,346
 
 
$
7,367
 
 
$
7,346
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


9



6.  Employee Benefit Plans

The components of net periodic benefit cost are as follows (in thousands):

 
 
Six Months Ended June 30,
 
 
 
Defined Benefit
 
 
 
 
 
 
 
 
 
Pension Plan
 
 
Restoration Plan
 
 
 
2007
 
 
2006
 
 
2007
 
 
2006
 
Service cost
 
$
665
 
 
$
669
 
 
$
31
 
 
$
34
 
Interest cost
 
 
1,156
 
 
 
1,095
 
 
 
84
 
 
 
92
 
Expected return on assets
 
 
(1,264
)
 
 
(1,162
)
 
 
 
 
 
 
Transition obligation recognition
 
 
 
 
 
 
 
 
1
 
 
 
1
 
Net loss recognition
 
 
241
 
 
 
392
 
 
 
42
 
 
 
90
 
Prior service credit amortization
 
 
(21
)
 
 
(21
)
 
 
(1
)
 
 
(1
)
Net periodic benefit cost
 
$
777
 
 
$
973
 
 
$
157
 
 
$
216
 

 
 
Three Months Ended June 30,
 
 
 
Defined Benefit
 
 
 
 
 
 
 
 
 
Pension Plan
 
 
Restoration Plan
 
 
 
2007
 
 
2006
 
 
2007
 
 
2006
 
Service cost
 
$
356
 
 
$
347
 
 
$
16
 
 
$
16
 
Interest cost
 
 
566
 
 
 
548
 
 
 
39
 
 
 
43
 
Expected return on assets
 
 
(631
)
 
 
(581
)
 
 
 
 
 
 
Transition obligation recognition
 
 
 
 
 
 
 
 
 
 
 
 
Net loss recognition
 
 
105
 
 
 
203
 
 
 
10
 
 
 
40
 
Prior service credit amortization
 
 
(11
)
 
 
(21
)
 
 
 
 
 
(1
)
Net periodic benefit cost
 
$
385
 
 
$
496
 
 
$
65
 
 
$
98
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Employer Contributions

We previously disclosed in our financial statements for the year ended December 31, 2006, that we expected to contribute $3.0 million to our defined benefit pension plan and $88,000 to our post retirement benefit plan in 2007.  As of June 30, 2007, we had contributed $3.0 million to the defined benefit pension plan, and $40,000 of contributions had been made to the post retirement benefit plan.

10



7.  Incentive Stock Options

In April 1993, we adopted the Southside Bancshares, Inc. 1993 Incentive Stock Option Plan ("the ISO Plan"), a stock-based incentive compensation plan.  The ISO Plan expired March 31, 2003.  Prior to January 1, 2006, we applied APB Opinion 25 and related Interpretations in accounting for the ISO Plan and disclosed the pro forma information required by SFAS 123 and SFAS 148.  There was no compensation expense recognized for the stock options prior to January 1, 2006.

A summary of the status of our nonvested shares as of June 30, 2007 is as follows:

 
 
Six Months Ended
June 30, 2007
 
 
 
Number of Options
 
 
Weighted Average Grant-Date Fair Value
 
Nonvested at beginning of the period
 
 
12,257
 
 
$
4.91
 
Vested
 
 
(6,127
)
 
$
4.91
 
Cancelled
   
(383
)
 
$
4.91
 
Nonvested at end of period
 
 
5,747
 
 
$
4.91
 

For the three and six months ended June 30, 2007 and 2006, we recorded approximately $7,000 and $14,000, respectively, of stock-based compensation expense.  As of June 30, 2007 and 2006, there was $20,000 and $47,000, respectively, of total unrecognized compensation cost related to the ISO Plan for nonvested options granted in March 2003.  The cost is expected to be recognized over a weighted-average period of 9 months.

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes method of option pricing with the following weighted-average assumptions for grants in 2003:  dividend yield of 1.93%; risk-free interest rate of 4.93%; expected life of 6 years; and expected volatility of 28.90%.

Under the ISO Plan, we were authorized to issue shares of common stock pursuant to "Awards" granted in the form of incentive stock options (intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended).  Before the ISO Plan expired, awards were granted to selected employees and directors.  No stock options have been available for grant under the ISO Plan since its expiration in March 2003.  Currently, we do not offer share-based payment programs to our employees.

The ISO Plan provided that the exercise price of any stock option not be less than the fair market value of the common stock on the date of grant.  The outstanding stock options have contractual terms of 10 years.  All options vest on a graded schedule, 20% per year for 5 years, beginning on the first anniversary date of the grant date.

A summary of the status of our stock options as of June 30, 2007 and the changes during the six months ended on those dates is presented below:

 
 
Number of Options
   
Weighted Average Exercise Prices
   
Weighted Average
Remaining Contract Life (Years)
   
Aggregate Intrinsic Value
(in thousands)
 
Outstanding at December 31, 2006
   
604,281
    $
5.76
             
Exercised
    (90,601 )   $
5.43
             
Cancelled
    (383 )   $
12.61
             
Outstanding at June 30, 2007
   
513,297
    $
5.82
     
2.60
    $
8,278
 
Exercisable at June 30, 2007
   
507,550
    $
5.74
     
2.56
    $
8,226
 

The total intrinsic value (i.e., the amount by which the fair value of the underlying common stock exceeds the exercise price of a stock option on exercise date) of stock options exercised during the six months ended June 30, 2007 and 2006 were $1.5 million and $1.1 million, respectively.

Cash received from stock option exercises for the six months ended June 30, 2007 and 2006 was $360,000 and $396,000, respectively.  The tax benefit realized for the deductions related to the stock option exercises were $21,000 and $41,000 for the six months ended June 30, 2007 and 2006, respectively.

11

8.  Accounting Pronouncements

Statements of Financial Accounting Standards

SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115.”  SFAS 159, issued by the Financial Accounting Standards Board (“FASB”) in February 2007, allows entities to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities that are not otherwise required to be measured at fair value, with changes in fair value recognized in earnings as they occur.  SFAS 159 also requires entities to report those financial assets and financial liabilities measured at fair value in a manner that separates those reported fair values from the carrying amounts of similar assets and liabilities measured using another measurement attribute on the face of the statement of financial position.  Lastly, SFAS 159 establishes presentation and disclosure requirements designed to improve comparability between entities that elect different measurement attributes for similar assets and liabilities.  SFAS 159 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted if an entity also early adopts the provisions of SFAS 157.  We intend to adopt SFAS 159 on January 1, 2008.  We have not yet determined if, or to what extent, we will elect to use the fair value option to value our financial assets and liabilities or the impact that the implementation of SFAS 159 will have on our consolidated financial statements.

SFAS No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 is effective for us on January 1, 2008 and is not expected to have a material impact on our consolidated financial statements.

SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140.” SFAS 155 amends SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 permits, but does not require, fair value accounting for hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation in accordance with SFAS 133.  SFAS 155 also eliminated the temporary exemption for interests in securitized financial assets provided for by SFAS 133, Derivatives Implementation Group (“DIG”) Issue D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” However, in January 2007, the FASB issued interpretive guidance in SFAS 133, DIG Issue B40, “Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets.” In DIG Issue B40, the FASB concluded that a securitized interest in prepayable financial assets was not subject to the bifurcation requirements of SFAS 155 provided that the interest met both the following criteria: (1) the right to accelerate the settlement of the securitized interest cannot be controlled by the investor; and (2) the securitized interest itself does not contain an embedded derivative for which bifurcation would be required other than an embedded derivative that results solely from the embedded call options in the underlying financial assets. The guidance in DIG Issue B40 is effective upon the adoption of SFAS 155. SFAS 155 was effective for all financial instruments acquired or issued after December 31, 2006 as well as to those hybrid financial instruments that had been previously bifurcated under SFAS 133. The adoption of SFAS 155 did not have a material impact on our consolidated financial statements.

Emerging Issues Task Force Consensuses

In September 2006, the Emerging Issues Task Force (“EITF”) reached a final consensus on Issue 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.”  EITF 06-4 requires that for a split-dollar life insurance arrangement, an employer should recognize a liability for future benefits in accordance with SFAS 106, “Employers' Accounting for Postretirement Benefits Other Than Pensions.”  Under the guidance, the purchase of an endorsement type policy does not constitute a settlement since the policy does not qualify as nonparticipating because the policyholders are subject to the favorable and unfavorable experience of the insurance company.  EITF 06-4 is effective for fiscal years beginning after December 15, 2007.  We are currently assessing the impact of the adoption of EITF 06-4 on our consolidated financial statements.

In September 2006, the EITF reached a final consensus on Issue 06-5, “Accounting for Purchases of Life Insurance.”  EITF 06-5 provides guidance on FASB Technical Bulletin No. 85-4, “Accounting for Purchases of Life Insurance.”  Under the guidance, the policyholder should consider any additional amounts included in the contractual terms of the policy in determining the amount that could be realized under the insurance contract.  In addition, the policyholder should also determine the amount that could be realized under the life insurance contract assuming the surrender of an individual-life by individual-life policy.  EITF 06-5 was effective for fiscal years beginning after December 15, 2006.  The adoption of EITF 06-5 did not have a material impact on our consolidated financial statements.

12



Financial Accounting Standards Board Staff Positions and Interpretations

FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109.” FASB Interpretation No. 48 (“FIN 48”) prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. Interpretation 48 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties.

We adopted the provisions of FIN 48 on January 1, 2007. As of the date of adoption, we had no unrecognized tax benefits and thus had accrued no interest or penalties on such benefits.  At adoption, we did not anticipate a significant increase in unrecognized tax benefits during the subsequent 12 months.  As of January 1, 2007, our 2003 through 2006 tax years were open to examination by the Internal Revenue Service and state taxing jurisdictions. There were no material changes in these items during the current quarter.  While we typically do not incur significant interest or penalties on income tax liabilities, it is our policy to classify such amounts as interest expense and miscellaneous expense, respectively. We did not change our policy on classification of interest and penalties upon adoption of FIN 48.

9.  Off-Balance-Sheet Arrangements, Commitments and Contingencies

Financial Instruments with Off-Balance-Sheet-Risk. In the normal course of business, we are a party to certain financial instruments, with off-balance-sheet risk, to meet the financing needs of our customers.  These off-balance-sheet instruments include commitments to extend credit and standby letters of credit.  These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount reflected in the financial statements.  The contract or notional amounts of these instruments reflect the extent of involvement and exposure to credit loss we have in these particular classes of financial instruments.

Commitments to extend credit are agreements to lend to a customer provided that the terms established in the contract are met.  Commitments generally have fixed expiration dates and may require payment of fees.  Since some commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party.  These guarantees are primarily issued to support public and private borrowing arrangements.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.

We had outstanding unused commitments to extend credit of $118.0 million and $99.5 million at June 30, 2007 and 2006, respectively.  Each commitment has a maturity date and the commitment expires on that date with the exception of credit card and ready reserve commitments, which have no stated maturity date.  Unused commitments for credit card and ready reserve at June 30, 2007 and 2006 were $9.3 million and $7.9 million, respectively, and are reflected in the due after one year category.  We had outstanding standby letters of credit of $3.9 million and $3.6 million at June 30, 2007 and 2006, respectively.

The scheduled maturities of unused commitments as of June 30, 2007 and 2006 were as follows (in thousands):
 
 
June 30,
 
 
 
2007
 
 
2006
 
Unused commitments:
 
 
 
 
 
 
Due in one year or less
 
$
87,271
 
 
$
57,812
 
Due after one year
 
 
30,691
 
 
 
41,697
 
Total
 
$
117,962
 
 
$
99,509
 
 
 
 
 
 
 
 
 
 
We apply the same credit policies in making commitments and standby letters of credit as we do for on-balance-sheet instruments.  We evaluate each customer's credit worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary, upon extension of credit is based on management's credit evaluation of the borrower.  Collateral held varies but may include cash or cash equivalents, negotiable instruments, real estate, accounts receivable, inventory and property, plant, and equipment.

13

Lease Commitments. We lease certain branch facilities and office equipment under operating leases.  It is expected that certain leases will be renewed or equipment replaced with new leased equipment as these leases expire.

Securities. In the normal course of business we buy and sell securities.  There were $941,000 of unsettled trades to purchase and no unsettled trades to sell securities at June 30, 2007.  At December 31, 2006, there were no unsettled trades to purchase or sell securities.

Litigation. We are subject to litigation in the normal course of business.  Management, after consulting with our legal counsel, believes that any liability resulting from litigation will not have a material effect on our financial position and results of operations or our liquidity.


14



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of the consolidated financial condition, changes in financial condition, and results of our operations, and should be read and reviewed in conjunction with the financial statements, and the notes thereto, in this presentation and in our Annual Report on Form 10-K for the year ended December 31, 2006.

We reported an increase in net income for the three months and six months ended June 30, 2007 compared to the same periods in 2006.  Net income for the three and six months ended June 30, 2007 was $4.6 million and $8.4 million, respectively, compared to $3.5 million and $6.8 million, respectively, for the same periods in 2006.

All share data has been adjusted to give retroactive recognition to stock splits and stock dividends.

Forward Looking Statements

Certain statements of other than historical fact that are contained in this document and in written material, press releases and oral statements issued by or on behalf of Southside Bancshares, Inc., a bank holding company, may be considered to be “forward-looking statements” within the meaning of and subject to the protections of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date.  These statements may include words such as "expect," "estimate," "project," "anticipate," “appear,” "believe," "could," "should," "may," "intend," "probability," "risk," "target," "objective," “plans,” “potential,” and similar expressions.  Forward-looking statements are statements with respect to our beliefs, plans, expectations, objectives, goals, anticipations, assumptions, estimates, intentions and future performance, and are subject to significant known and unknown risks and uncertainties, which could cause our actual results to differ materially from the results discussed in the forward-looking statements.  For example, discussions of the effect of our expansion, trends in asset quality and earnings from growth, and certain market risk disclosures are based upon information presently available to management and are dependent on choices about key model characteristics and assumptions and are subject to various limitations.  By their nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occurs in the future.  As a result, actual income gains and losses could materially differ from those that have been estimated.  Other factors that could cause actual results to differ materially from forward-looking statements include, but are not limited to, the following:

 
·
general economic conditions, either globally, nationally, in the State of Texas, or in the specific markets
 
in which we operate;
 
·
legislation, regulatory changes or changes in monetary or fiscal policy that adversely affect the businesses in which we are engaged;
 
·
adverse changes in the status or financial condition of the Government Sponsored Enterprises (the “GSEs”) impacting the GSEs’ guarantees or ability to pay or issue debt;
 
·
economic or other disruptions caused by acts of terrorism in the United States, Europe or other areas;
 
·
changes in the interest rate yield curve such as flat, inverted or steep yield curves, or changes in the interest rate environment that impact interest margins and may impact prepayments on the mortgage-backed securities portfolio;
 
·
unexpected outcomes of existing or new litigation involving us;
 
·
changes impacting the leverage strategy;
 
·
significant increases in competition in the banking and financial services industry;
 
·
changes in consumer spending, borrowing and saving habits;
 
·
technological changes;
 
·
our ability to increase market share and control expenses;
 
·
the effect of changes in federal or state tax laws;
 
·
the effect of compliance with legislation or regulatory changes;
 
·
the effect of changes in accounting policies and practices;
 
·
the costs and effects of unanticipated litigation;
 
·
risks of mergers and acquisitions including the related time and cost of implementing transactions and the potential failure to achieve expected gains, revenue growth or expense savings; and
 
·
failure of assumptions underlying allowance for loan losses and other estimates.

Additional information concerning us and our business, including additional factors that could materially affect our financial results, is included in our filings with the Securities and Exchange Commission.  All written or oral forward-looking statements made by us or attributable to us are expressly qualified by this cautionary notice.  We disclaim any obligation to update any factors or to announce publicly the result of revisions to any of the forward-looking statements included herein to reflect future events or developments.

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Critical Accounting Estimates

Our accounting and reporting estimates conform with accounting principles generally accepted in the United States and general practices within the financial services industry.  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts rep