Edgar Filing: SOUTHSIDE BANCSHARES INC

form_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 March 31, 2009

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
(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 o 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 April 24, 2009 was 14,845,817 shares.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except share amounts)

	March 31,			December 31,
ASSETS	2009			2008
Cash and due from banks	$	44,391		$	64,067
Interest earning deposits		33,554			557
Federal funds sold		8,000			2,150
Total cash and cash equivalents		85,945			66,774
Investment securities:
Available for sale, at estimated fair value		154,756			278,378
Held to maturity, at cost		478			478
Mortgage-backed and related securities:
Available for sale, at estimated fair value		1,136,827			1,026,513
Held to maturity, at cost		223,876			157,287
Federal Home Loan Bank stock, at cost		39,459			39,411
Other investments, at cost		2,063			2,065
Loans held for sale		3,882			511
Loans:
Loans		1,012,460			1,022,549
Less: allowance for loan loss		(17,432	)		(16,112	)
Net Loans		995,028			1,006,437
Premises and equipment, net		43,925			42,722
Goodwill		22,034			22,034
Other intangible assets, net		1,377			1,479
Interest receivable		13,686			16,352
Deferred tax asset		1,829			2,852
Other assets		38,707			36,945
TOTAL ASSETS	$	2,763,872		$	2,700,238
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing	$	377,356		$	390,823
Interest bearing		1,302,588			1,165,308
Total Deposits		1,679,944			1,556,131
Short-term obligations:
Federal funds purchased and repurchase agreements		10,853			10,629
FHLB advances		85,037			229,385
Other obligations		3,033			1,857
Total Short-term obligations		98,923			241,871
Long-term obligations:
FHLB advances		657,864			655,489
Long-term debt		60,311			60,311
Total Long-term obligations		718,175			715,800
Other liabilities		90,367			25,347
TOTAL LIABILITIES		2,587,409			2,539,149

Off-Balance-Sheet Arrangements, Commitments and Contingencies (Note 12)

Shareholders' equity:
Common stock - $1.25 par, 20,000,000 shares authorized, 16,592,417 shares		20,740			19,695
issued in 2009 (including 707,808 shares declared on April 9, 2009 as a stock dividend) and 15,756,096 shares issued in 2008
Paid-in capital		144,564			131,112
Retained earnings		32,836			34,021
Treasury stock (1,762,261 and 1,731,570 shares at cost)		(23,545	)		(23,115	)
Accumulated other comprehensive income (loss)		1,635			(1,096	)
TOTAL SOUTHSIDE BANCSHARES, INC. SHAREHOLDERS' EQUITY		176,230			160,617
Noncontrolling interest		233			472
TOTAL SHAREHOLDERS’ EQUITY		176,463			161,089
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	2,763,872		$	2,700,238

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

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(in thousands, except per share data)

	Three Months
	Ended March 31,
	2009			2008
Interest income
Loans	$	18,313		$	18,296
Investment securities – taxable		319			680
Investment securities – tax-exempt		1,494			818
Mortgage-backed and related securities		16,404			11,973
Federal Home Loan Bank stock and other investments		104			262
Other interest earning assets		26			67
Total interest income		36,660			32,096
Interest expense
Deposits		6,372			10,755
Short-term obligations		1,165			3,300
Long-term obligations		6,886			2,671
Total interest expense		14,423			16,726
Net interest income		22,237			15,370
Provision for loan losses		3,590			2,239
Net interest income after provision for loan losses		18,647			13,131
Noninterest income
Deposit services		4,035			4,417
Gain on sale of securities available for sale		13,796			2,092

Total other-than-temporary impairment losses		(5,627	)		-
Portion of loss recognized in other comprehensive income (before taxes)		4,727			-
Net impairment losses recognized in earnings		(900	)		-

Gain on sale of loans		335			465
Trust income		563			593
Bank owned life insurance income		301			310
Other		784			825
Total noninterest income		18,914			8,702
Noninterest expense
Salaries and employee benefits		10,484			8,713
Occupancy expense		1,418			1,388
Equipment expense		375			312
Advertising, travel & entertainment		509			464
ATM and debit card expense		299			288
Director fees		146			144
Supplies		212			177
Professional fees		630			434
Postage		188			184
Telephone and communications		281			258
FDIC Insurance		536			236
Other		1,439			1,705
Total noninterest expense		16,517			14,303

Income before income tax expense		21,044			7,530
Provision for income tax expense		6,146			1,936
Net Income		14,898			5,594
Less: Net income attributable to the noncontrolling interest		(753	)		(48	)
Net income attributable to Southside Bancshares, Inc.	$	14,145		$	5,546
Earnings per common share – basic	$	0.96		$	0.38
Earnings per common share – diluted	$	0.95		$	0.37
Dividends paid per common share	$	0.13		$	0.12

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

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(UNAUDITED)

(in thousands, except share amounts)

	Compre-hensive Income		Common Stock		Paid-in Capital		Retained Earnings			Treasury Stock			Accumu-lated Other Compre- hensive Income (Loss)			Non- controlling Interest			Total Equity

Balance at December 31, 2007			$	18,581	$	115,250	$	26,187		$	(22,983	)	$	(4,707	)	$	498		$	132,826
Net Income	$	5,594						5,546									48			5,594
Other comprehensive income, net of tax Unrealized gains on securities, net of reclassification adjustment (see Note 3)		5,723												5,723						5,723
Adjustment to net periodic benefit cost (see Note 3)		193												193						193
Comprehensive income	$	11,510
Common stock issued (18,634 shares)				23		241														264
Stock compensation expense						7														7
Tax benefit of incentive stock options						14														14
Cumulative effect of adoption of a new accounting principle on January 1, 2008								(351	)											(351	)
Dividends paid on common stock								(1,577	)											(1,577	)
Capital distribution																	(286	)		(286	)
Stock dividend				824		13,422		(14,246	)											-
Balance at March 31, 2008			$	19,428	$	128,934	$	15,559		$	(22,983	)	$	1,209		$	260		$	142,407

Balance at December 31, 2008			$	19,695	$	131,112	$	34,021		$	(23,115	)	$	(1,096	)	$	472		$	161,089
Net Income	$	14,898						14,145									753			14,898
Other comprehensive income, net of tax Unrealized gains on securities, net of reclassification adjustment (see Note 3)		2,522												2,522						2,522
Adjustment to net periodic benefit cost (see Note 3)		209												209						209
Comprehensive income	$	17,629
Common stock issued (128,513 shares)				160		668														828
Tax benefit of incentive stock options						164														164
Dividends paid on common stock								(1,825	)											(1,825	)
Purchase of 30,691 shares of common stock											(430	)								(430	)
Capital distribution																	(992	)		(992	)
Stock dividend declared				885		12,620		(13,505	)											-
Balance at March 31, 2009			$	20,740	$	144,564	$	32,836		$	(23,545	)	$	1,635		$	233		$	176,463

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

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

	Three Months Ended March 31,
	2009			2008

OPERATING ACTIVITIES:
Net income	$	14,898		$	5,594
Adjustments to reconcile net income to net cash provided by operations:
Depreciation		601			604
Amortization of premium		2,193			1,914
Accretion of discount and loan fees		(995	)		(1,114	)
Provision for loan losses		3,590			2,239
Stock compensation expense		-			7
Decrease (increase) in interest receivable		2,666			(585	)
Decrease in other assets		670			396
Net change in deferred taxes		(455	)		(61	)
Decrease in interest payable		(498	)		(367	)
Increase in other liabilities		8,708			1,245
Increase in loans held for sale		(3,371	)		(55	)
Gain on sale of securities available for sale		(13,796	)		(2,092	)
Net other-than-temporary impairment losses		900			-
Loss on sale of assets		-			2
Loss on sale of other real estate owned		1			6
Net cash provided by operating activities		15,112			7,733

INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale		124,567			9,341
Proceeds from sales of mortgage-backed securities available for sale		53,170			95,755
Proceeds from maturities of investment securities available for sale		40,800			31,114
Proceeds from maturities of mortgage-backed securities available for sale		48,759			28,394
Proceeds from maturities of mortgage-backed securities held to maturity		9,653			7,877
Purchases of investment securities available for sale		(30,720	)		(100,812	)
Purchases of mortgage-backed securities available for sale		(184,673	)		(116,652	)
Purchases of mortgage-backed securities held to maturity		(41,461	)		(1,664	)
Purchases of FHLB stock and other investments		(46	)		(6,325	)
Net decrease (increase) in loans		4,715			(21,614	)
Purchases of premises and equipment		(1,804	)		(652	)
Proceeds from sales of premises and equipment		-			358
Proceeds on bank owned life insurance		511			-
Proceeds from sales of other real estate owned		217			75
Proceeds from sales of repossessed assets		594			860
Net cash provided by (used in) investing activities		24,282			(73,945	)

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

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(UNAUDITED)

(in thousands)

	Three Months Ended
	March 31,
	2009			2008
FINANCING ACTIVITIES:
Net decrease in demand and savings accounts		(19,520	)		(2,084	)
Net increase (decrease) in certificates of deposit		143,301			(86,679	)
Net increase in federal funds purchased and repurchase agreements		224			1,997
Proceeds from FHLB Advances		1,195,000			4,012,699
Repayment of FHLB Advances		(1,336,973	)		(3,871,772	)
Net capital distributions from non-controlling interest in consolidated entities		(992	)		(286	)
Tax benefit of incentive stock options		164			14
Purchase of common stock		(430	)		-
Proceeds from the issuance of common stock		828			264
Dividends paid		(1,825	)		(1,577	)
Net cash (used in) provided by financing activities		(20,223	)		52,576

Net increase (decrease) in cash and cash equivalents		19,171			(13,636	)
Cash and cash equivalents at beginning of period		66,774			76,004
Cash and cash equivalents at end of period	$	85,945		$	62,368

SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
Interest paid	$	14,921		$	17,093
Income taxes paid		500			500

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of other repossessed assets and real estate through foreclosure	$	4,238		$	1,240
5% stock dividend		13,505			14,246
Adjustment to pension liability		(321	)		(121	)
Unsettled trades to purchase securities		(58,307	)		(6,899	)
Unsettled trades to sell securities		-			19,287

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). The word “FWBS” refers to Fort Worth Bancshares, Inc. The word “SFG” refers to Southside Financial Group, LLC., of which Southside owns a 50% interest and consolidates for financial reporting.

The consolidated balance sheet as of March 31, 2009, and the related consolidated statements of income, shareholders' equity and cash flows and notes to the financial statements for the three month period ended March 31, 2009 and 2008 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, 2008. 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, 2008.

On April 9, 2009, we declared a 5% stock dividend payable to shareholders of record as of April 28, 2009, and payable on May 14, 2009. All share data has been adjusted to give retroactive recognition to stock splits and stock dividends.

2. Earnings Per Share

Earnings per share attributable to Southside Bancshares, Inc. 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
	Ended March 31,

	2009		2008
Basic and Diluted Earnings:
Net Income - Southside Bancshares, Inc.	$	14,145	$	5,546

Basic weighted-average shares outstanding		14,750		14,496
Add: Stock options		210		372
Diluted weighted-average shares outstanding		14,960		14,868

Basic Earnings Per Share:
Net Income - Southside Bancshares, Inc.	$	0.96	$	0.38

Diluted Earnings Per Share:
Net Income - Southside Bancshares, Inc.	$	0.95	$	0.37

For the three month period ended March 31, 2009 and 2008, there were no antidilutive options.

3. Comprehensive Income

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

	Three Months Ended March 31, 2009
	Before-Tax				Tax (Expense)				Net-of-Tax
	Amount				Benefit				Amount
Unrealized gains on securities:
Unrealized holding gains arising during period		$	16,776			$	(5,872	)		$	10,904
Less: reclassification adjustment for gains
included in net income			13,796				(4,829	)			8,967
Less: other-than-temporary impairment charges on AFS securities included in net income			(900	)			315				(585	)
Net unrealized gains on securities			3,880				(1,358	)			2,522
Change in pension plans			321				(112	)			209
Other comprehensive income		$	4,201			$	(1,470	)		$	2,731

	Three Months Ended March 31, 2008
	Before-Tax			Tax (Expense)				Net-of-Tax
	Amount			Benefit				Amount
Unrealized gains on securities:
Unrealized holding gains arising during period		$	10,963		$	(3,880	)		$	7,083
Less: reclassification adjustment for gains
included in net income			2,092			(732	)			1,360
Net unrealized gains on securities			8,871			(3,148	)			5,723
Change in pension plans			121			72				193
Other comprehensive income		$	8,992		$	(3,076	)		$	5,916

4. Securities

The amortized cost and estimated market value of investment and mortgage-backed securities as of March 31, 2009 and December 31, 2008, are reflected in the tables below (in thousands):

	March 31, 2009
AVAILABLE FOR SALE:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Market Value
Investment Securities:
U.S. Treasury	$	4,972	$	14	$	-	$	4,986
Government Sponsored Enterprise Debentures		30,402		129		1		30,530
State and Political Subdivisions		119,599		1,302		2,485		118,416
Other Stocks and Bonds		5,811		-		4,987		824
Mortgage-backed Securities:
U.S. Government Agencies		163,414		4,782		1		168,195
Government Sponsored Enterprises		941,657		27,196		221		968,632
Total	$	1,265,855	$	33,423	$	7,695	$	1,291,583

	March 31, 2009
HELD TO MATURITY:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Market Value
Investment Securities:
Other Stocks and Bonds	$	478	$	-	$	17	$	461
Mortgage-backed Securities:
U.S. Government Agencies		21,358		481		-		21,839
Government Sponsored Enterprises		202,518		3,651		59		206,110
Total	$	224,354	$	4,132	$	76	$	228,410

	December 31, 2008
	Amortized		Gross Unrealized		Gross Unrealized		Estimated Market
AVAILABLE FOR SALE:	Cost		Gains		Losses		Value
Investment Securities:
U.S. Treasury	$	5,008	$	23	$	–	$	5,031
Government Sponsored Enterprise Debentures		60,325		227		1		60,551
State and Political Subdivisions		203,052		10,154		1,612		211,594
Other Stocks and Bonds		6,711		–		5,509		1,202
Mortgage-backed Securities:
U.S. Government Agencies		166,123		2,405		229		168,299
Government Sponsored Enterprises		841,737		17,984		1,507		858,214
Total	$	1,282,956	$	30,793	$	8,858	$	1,304,891

	December 31, 2008
	Amortized			Gross Unrealized			Gross Unrealized			Estimated Market
HELD TO MATURITY:	Cost			Gains			Losses			Value
Investment Securities:
Other Stocks and Bonds		$	478		$	9		$	–		$	487
Mortgage-backed Securities:
U.S. Government Agencies			22,778			300			–			23,078
Government Sponsored Enterprises			134,509			1,890			26			136,373
Total		$	157,765		$	2,199		$	26		$	159,938

The following table represents the unrealized loss on securities for the three months ended March 31, 2009 and year ended December 31, 2008 (in thousands):

	Less Than 12 Months				More Than 12 Months				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
As of March 31, 2009:

Available for Sale
Government Sponsored Enterprise Debentures	$	4,993	$	1	$	–	$	–	$	4,993	$	1
State and Political Subdivisions		54,904		2,012		6,944		473		61,848		2,485
Other Stocks and Bonds		–		–		824		4,987		824		4,987
Mortgage-Backed Securities		34,157		164		12,976		58		47,133		222
Total	$	94,054	$	2,177	$	20,744	$	5,518	$	114,798	$	7,695

Held to Maturity
Other Stocks and Bonds	$	461	$	17	$	–	$	–	$	461	$	17
Mortgage-Backed Securities		11,276		59		–		–		11,276		59
Total	$	11,737	$	76	$	–	$	–	$	11,737	$	76

As of December 31, 2008:

Available for Sale
Government Sponsored Enterprise Debentures	$	29,999	$	1	$	–	$	–	$	29,999	$	1
State and Political Subdivisions		45,686		1,496		1,193		116		46,879		1,612
Other Stocks and Bonds		253		89		949		5,420		1,202		5,509
Mortgage-Backed Securities		116,616		1,517		17,174		219		133,790		1,736
Total	$	192,554	$	3,103	$	19,316	$	5,755	$	211,870	$	8,858

Held to Maturity
Mortgage-Backed Securities	$	1,212	$	1	$	4,540	$	25	$	5,752	$	26
Total	$	1,212	$	1	$	4,540	$	25	$	5,752	$	26

The turmoil in the capital markets had a significant impact on our estimate of fair value for certain of our securities. We believe the market values are reflective of a combination of illiquidity and credit impairment. At March 31, 2009 we have, in Available for Sale (“AFS”) Other Stocks and Bonds, $5.1 million 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 March 31, 2009 for the TRUPs is approximately $373,000 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 March 31, 2009 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 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 March 31, 2009. 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 in compliance with the new Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”), SFAS 115-2 and SFAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” was estimated at $900,000 at March 31, 2009 and the non credit charge to other comprehensive income was estimated at $4.7 million. Therefore, the carrying amount of the TRUPs was written down with $900,000 recognized in earnings as of March 31, 2009. 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, severity and duration of the mark-to-market loss, and structural nuances of each TRUP. Management believes the detailed review of the collateral and cash flow modeling support the conclusion that the TRUPs had an other-than-temporary impairment at March 31, 2009. 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 (dollars in thousands).

TRUP		Par		Credit Loss		Amortized Cost		Fair Value	Tranche	Credit Rating

1	$	2,000	$	200	$	1,800	$	87	C1	Ca
2		2,000		50		1,950		169	B1	Ca
3		2,000		650		1,350		117	B1	Ca

Amounts related to credit losses recognized in earnings as of March 31, 2009 are as follows (in thousands):

Beginning Balance	$	–

Addition for the amount related to credit loss for which an other-than-temporary impairment was not previously recognized		900

Ending balance of amount related to credit losses on debt securities held by the entity at the end of the period for which a portion of an other-than-temporary impairment was recognized in comprehensive income	$	900

There were no securities transferred from AFS to HTM during the three months ended March 31, 2009 and 2008. There were no sales from the HTM portfolio during the three months ended March 31, 2009 or 2008. There were $224.4 million of securities classified as HTM for the three months ended March 31, 2009. There were $157.8 million of securities classified as HTM for the year ended December 31, 2008.

Of the $13.8 million in net securities gains from the AFS portfolio for the three months ending March 31, 2009, there were $13.9 million in realized gains and $0.1 million in realized losses. Of the $2.1 million in net securities gains from the AFS portfolio for the three months ending March 31, 2008, there were $2.1 million in realized gains and $3,000 in realized losses.

The amortized cost and fair value of securities at March 31, 2009, are presented below by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities are presented in total by category due to the fact that mortgage-backed securities typically are issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with varying maturities. The characteristics of the underlying pool of mortgages, such as fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the certificate holder. The term of a mortgage-backed pass-through security thus approximates the term of the underlying mortgages and can vary significantly due to prepayments.

	March 31, 2009
	Amortized Cost		Fair Value
	(in thousands)

Available for sale securities:

Investment Securities
Due in one year or less	$	38,990	$	39,190
Due after one year through five years		12,304		12,601
Due after five years through ten years		21,915		22,175
Due after ten years		87,575		80,790
		160,784		154,756
Mortgage-backed securities		1,105,071		1,136,827
Total	$	1,265,855	$	1,291,583

	Amortized Cost		Fair Value
	(in thousands)

Held to maturity securities:

Investment Securities
Due in one year or less	$	–	$	–
Due after one year through five years		–		–
Due after five years through ten years		478		461
Due after ten years		–		–
		478		461
Mortgage-backed securities		223,876		227,949
Total	$	224,354	$	228,410

Investment and mortgage-backed securities with book values of $932.1 million at March 31, 2009 and $952.6 million at December 31, 2008 were pledged to collateralize Federal Home Loan Bank (“FHLB”) advances, repurchase agreements, public funds and trust deposits or for other purposes as required by law.

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
	March 31,			December 31,
	2009			2008
Real Estate Loans:
Construction		$	109,842	$	120,153
1-4 Family Residential			238,403		238,693
Other			182,838		184,629
Commercial Loans			164,331		165,558
Municipal Loans			136,533		134,986
Loans to Individuals			180,513		178,530
Total Loans		$	1,012,460	$	1,022,549

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

	Three Months Ended March 31,
	Three Months Ended March 31,
	2009			2008
Allowance for Loan Losses

Balance at beginning of period	$	16,112		$	9,753
Provision for loan losses		3,590			2,239
Loans charged off		(2,704	)		(1,858	)
Recoveries of loans charged off		434			477
Balance at end of period	$	17,432		$	10,611

Reserve for Unfunded Loan Commitments

Balance at beginning of period	$	7		$	50
Provision for losses on unfunded loan commitments		–			20
Balance at end of period	$	7		$	70

6. Goodwill and Core Deposit Intangible Assets

Goodwill. Goodwill totaled $22.0 million at March 31, 2009 and December 31, 2008.

We measured our goodwill for impairment at December 31, 2008. As a result of merging FWNB into Southside Bank in the third quarter of 2008, we have identified Southside Bank as the sole operating segment and reporting unit for our impairment assessment.

Step one of the impairment test involves comparing the fair value of the reporting unit which, in our case, is the entire entity, to the carrying value of the reporting unit. If the fair value of the reporting unit is greater than the carrying value of the reporting unit, no additional testing is required. If the fair value of the reporting unit is less than the carrying value of the reporting unit, step two of the impairment test must be performed. At December 31, 2008, the fair value of the reporting unit was greater than the carrying value of the reporting unit. As a result, we did not record any goodwill impairment for the year ended December 31, 2008. As of March 31, 2009, there were no trigger events to warrant an updated impairment analysis.

During the fourth quarter of 2007, we recorded core deposit intangibles totaling $2.0 million in connection with the acquisition of FWBS. Core deposit intangibles are amortized on an accelerated basis over their estimated lives, which range from four to ten years.

Core Deposit Intangibles. Core deposit intangible assets were as follows (in thousands):

	Gross Intangible Assets		Accumulated Amortization			Net Intangible Assets


March 31, 2009
Core deposits	$	2,047	$	(670	)	$	1,377
	$	2,047	$	(670	)	$	1,377

December 31, 2008
Core deposits	$	2,047	$	(568	)	$	1,479
	$	2,047	$	(568	)	$	1,479

For the three months ended March 31, 2009 and 2008, amortization expense related to intangible assets totaled $102,000 and $117,000, respectively. The estimated aggregate future amortization expense for intangible assets remaining as of March 31, 2009 is as follows (in thousands):

Remainder of 2009	$	281
2010		319
2011		255
2012		198
2013		146
Thereafter		178
	$	1,377

7. Long-term Obligations

Long-term obligations are summarized as follows (in thousands):

	March 31,		December 31,
	2009		2008
Federal Home Loan Bank Advances (1)
Varying maturities to 2028	$	657,864	$	655,489

Long-term Debt (2)
Southside Statutory Trust III Due 2033 (3)		20,619		20,619
Southside Statutory Trust IV Due 2037 (4)		23,196		23,196
Southside Statutory Trust V Due 2037 (5)		12,887		12,887
Magnolia Trust Company I Due 2035 (6)		3,609		3,609
Total Long-term Debt		60,311		60,311
Total Long-term Obligations	$	718,175	$	715,800

(1) At March 31, 2009, the weighted average cost of these advances was 3.63%.

(2)

This long-term debt consists of trust preferred securities that qualify under the risk-based capital guidelines as Tier 1 capital, subject to certain limitations.

(3)

This debt carries an adjustable rate of 4.16% through June 29, 2009 and adjusts quarterly at a rate equal to three-month LIBOR plus 294 basis points.

(4)

This debt carries a fixed rate of 6.518% through October 30, 2012 and thereafter, adjusts quarterly at a rate equal to three-month LIBOR plus 130 basis points.

(5)

This debt carries a fixed rate of 7.48% through December 15, 2012 and thereafter, adjusts quarterly at a rate equal to three-month LIBOR plus 225 basis points.

(6)

This debt carries an adjustable rate of 3.05063% through May 25, 2009 and thereafter, adjusts quarterly at a rate equal to three-month LIBOR plus 180 basis points.

8. Employee Benefit Plans

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

	Three Months Ended March 31,
	Defined Benefit
	Pension Plan						Restoration Plan
	2009			2008			2009			2008
Service cost	$	339		$	327		$	23		$	15
Interest cost		641			618			60			45
Expected return on assets		(678	)		(732	)		–			–
Net loss recognition		293			113			39			19
Prior service credit amortization		(10	)		(10	)		(1	)		(1	)
Net periodic benefit cost	$	585		$	316		$	121