Edgar Filing: SOUTHSIDE BANCSHARES INC

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, 2011

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 31, 2011 was 16,450,207 shares.

TABLE OF CONTENTS

			Page
PART I. FINANCIAL INFORMATION

	ITEM 1.	FINANCIAL STATEMENTS	1

	ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	31

	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	49

	ITEM 4.	CONTROLS AND PROCEDURES	50

PART II. OTHER INFORMATION

	ITEM 1.	LEGAL PROCEEDINGS	50

	ITEM 1A.	RISK FACTORS	50

	ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	50

	ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	50

	ITEM 4.	(REMOVED AND RESERVED)	50

	ITEM 5.	OTHER INFORMATION	50

	ITEM 6.	EXHIBITS	50

SIGNATURES			52

Exhibit Index

Exhibit 10.1 – Form of Nonstatutory Stock Option Award Certificate under the Southside Bancshares, Inc. 2009 Incentive Plan

Exhibit 10.2 – Form of Restricted Stock Unit Award Certificate under the Southside Bancshares, Inc. 2009 Incentive Plan

Exhibit 31.1 – Certification Pursuant to Section 302

Exhibit 31.2 – Certification Pursuant to Section 302

Exhibit 32 – Certification Pursuant to Section 906

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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	2011			2010
Cash and due from banks	$	46,090		$	56,188
Interest earning deposits		2,364			22,885
Total cash and cash equivalents		48,454			79,073
Investment securities:
Available for sale, at estimated fair value		302,038			299,344
Held to maturity, at amortized cost		1,996			1,495
Mortgage-backed and related securities:
Available for sale, at estimated fair value		1,136,961			946,043
Held to maturity, at amortized cost		395,728			417,862
FHLB stock, at cost		25,524			34,712
Other investments, at cost		2,064			2,064
Loans held for sale		2,738			6,583
Loans:
Loans		1,038,808			1,077,920
Less: allowance for loan losses		(19,409	)		(20,711	)
Net Loans		1,019,399			1,057,209
Premises and equipment, net		50,568			50,144
Goodwill		22,034			22,034
Other intangible assets, net		642			777
Interest receivable		19,403			18,033
Deferred tax asset		–			6,677
Other assets		87,659			57,571
TOTAL ASSETS	$	3,115,208		$	2,999,621
LIABILITIES AND EQUITY
Deposits:
Noninterest bearing	$	515,591		$	423,304
Interest bearing		1,723,946			1,711,124
Total Deposits		2,239,537			2,134,428
Short-term obligations:
Federal funds purchased and repurchase agreements		3,077			3,844
FHLB advances		254,803			189,094
Other obligations		2,909			2,651
Total Short-term obligations		260,789			195,589
Long-term obligations:
FHLB advances		277,979			373,479
Long-term debt		60,311			60,311
Total Long-term obligations		338,290			433,790
Deferred tax liability		1,255			–
Other liabilities		30,862			20,378
TOTAL LIABILITIES		2,870,733			2,784,185

Off-Balance-Sheet Arrangements, Commitments and Contingencies (Note 10)

Shareholders' equity:
Common stock - $1.25 par, 40,000,000 shares authorized, 18,474,045 shares issued in 2011 and 17,660,312 shares issued in 2010		23,092			22,075
Paid-in capital		178,450			162,877
Retained earnings		61,472			64,567
Treasury stock (2,023,838 shares at cost)		(28,377	)		(28,377	)
Accumulated other comprehensive income (loss)		7,842			(6,819	)
TOTAL SHAREHOLDERS' EQUITY		242,479			214,323
Noncontrolling interest		1,996			1,113
TOTAL EQUITY		244,475			215,436
TOTAL LIABILITIES AND EQUITY	$	3,115,208		$	2,999,621

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

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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,
	2011			2010			2011			2010
Interest income
Loans	$	17,130		$	17,437		$	34,401		$	35,202
Investment securities – taxable		20			26			38			52
Investment securities – tax-exempt		3,209			3,017			6,438			5,843
Mortgage-backed and related securities		13,310			10,282			24,607			24,559
FHLB stock and other investments		52			59			132			141
Other interest earning assets		3			4			13			15
Total interest income		33,724			30,825			65,629			65,812
Interest expense
Deposits		4,051			4,733			8,087			9,738
Short-term obligations		1,705			1,867			3,434			3,547
Long-term obligations		3,401			4,855			7,282			10,081
Total interest expense		9,157			11,455			18,803			23,366
Net interest income		24,567			19,370			46,826			42,446
Provision for loan losses		1,860			2,260			3,998			6,127
Net interest income after provision for loan losses		22,707			17,110			42,828			36,319
Noninterest income
Deposit services		4,028			4,400			7,907			8,464
Gain on sale of securities available for sale		4,004			6,661			5,809			15,016

Total other-than-temporary impairment losses		–			–			–			(39	)
Portion of loss recognized in other comprehensive income (before taxes)		–			–			–			(36	)
Net impairment losses recognized in earnings		–			–			–			(75	)

Gain on sale of loans		282			399			565			680
Trust income		645			561			1,296			1,091
Bank owned life insurance income		261			285			547			570
Other		959			864			2,064			1,797
Total noninterest income		10,179			13,170			18,188			27,543
Noninterest expense
Salaries and employee benefits		11,622			11,215			23,313			22,157
Occupancy expense		1,778			1,662			3,499			3,305
Equipment expense		525			472			1,018			909
Advertising, travel & entertainment		550			544			1,103			1,081
ATM and debit card expense		266			212			481			379
Director fees		200			216			391			393
Supplies		161			206			385			476
Professional fees		457			539			1,012			945
Postage		186			231			365			417
Telephone and communications		345			346			682			719
FDIC Insurance		735			689			1,498			1,368
Other		1,291			1,647			3,101			3,282
Total noninterest expense		18,116			17,979			36,848			35,431

Income before income tax expense		14,770			12,301			24,168			28,431
Provision for income tax expense		3,241			2,530			4,457			6,485
Net income		11,529			9,771			19,711			21,946
Less: Net income attributable to the noncontrolling interest		(493	)		(519	)		(1,358	)		(1,049	)
Net income attributable to Southside Bancshares, Inc.	$	11,036		$	9,252		$	18,353		$	20,897
Earnings per common share – basic	$	0.67		$	0.56		$	1.12		$	1.26
Earnings per common share – diluted	$	0.67		$	0.56		$	1.12		$	1.26
Dividends paid per common share	$	0.17		$	0.17		$	0.34		$	0.34

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

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(UNAUDITED)

(in thousands, except share amounts)

	Six Months Ended June 30,
	2011			2010
Common Stock
Balance, beginning of period	$	22,075		$	20,928
Issuance of common stock (28,869 shares in 2011 and 106,936 shares in 2010)		36			134
Stock dividend declared		981			943
Balance, end of period		23,092			22,005
Paid-in capital
Balance, beginning of period		162,877			146,357
Issuance of common stock (28,869 shares in 2011 and 106,936 shares in 2010)		531			767
Stock compensation expense		26			–
Tax benefit of incentive stock options		2			316
Stock dividend declared		15,014			14,570
Balance, end of period		178,450			162,010
Retained earnings
Balance, beginning of period		64,567			53,812
Net income attributable to Southside Bancshares, Inc.		18,353			20,897
Dividends paid on common stock ($0.34 per share in 2011 and $0.34 per share in 2010)		(5,453	)		(5,241	)
Stock dividend declared		(15,995	)		(15,513	)
Balance, end of period		61,472			53,955
Treasury Stock
Balance, beginning of period		(28,377	)		(23,545	)
Purchase of common stock (1,101 shares in 2010)		–			(24	)
Balance, end of period		(28,377	)		(23,569	)
Accumulated other comprehensive (loss) income
Balance, beginning of period		(6,819	)		4,229
Net unrealized gains on available for sale securities, net of tax		17,975			9,008
Reclassification adjustment for gains on sales of available for sale securities included in net income, net of tax		(3,776	)		(9,760	)
Noncredit portion of other-than-temporary impairment losses on available for sale securities, net of tax		–			23
Reclassification of other-than-temporary impairment charges on available for sale securities included in net income, net of tax		–			49
Adjustment to net periodic benefit cost, net of tax		462			407
Net change in accumulated other comprehensive income (loss)		14,661			(273	)
Balance, end of period		7,842			3,956
Total shareholders’ equity		242,479			218,357
Noncontrolling interest
Balance, beginning of period		1,113			468
Net income attributable to noncontrolling interest shareholders		1,358			1,049
Capital distribution to noncontrolling interest shareholders		(475	)		(310	)
Balance, end of period		1,996			1,207
Total equity	$	244,475		$	219,564

Comprehensive income
Net income	$	19,711		$	21,946
Net change in accumulated other comprehensive income (loss)		14,661			(273	)
Comprehensive income		34,372			21,673
Comprehensive income attributable to the noncontrolling interest		(1,358	)		(1,049	)
Comprehensive income attributable to Southside Bancshares, Inc.	$	33,014		$	20,624

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

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

	Six Months Ended June 30,
	2011			2010

OPERATING ACTIVITIES:
Net income	$	19,711		$	21,946
Adjustments to reconcile net income to net cash provided by operations:
Depreciation		1,646			1,568
Amortization of premium		16,782			18,038
Accretion of discount and loan fees		(2,327	)		(2,545	)
Provision for loan losses		3,998			6,127
Stock compensation expense		26			–
(Increase) decrease in interest receivable		(1,370	)		1,098
Increase in other assets		(2,593	)		(1,513	)
Net change in deferred taxes		38			171
Decrease in interest payable		(575	)		(548	)
Increase in other liabilities		2,364			2,799
Decrease (increase) in loans held for sale		3,845			(681	)
Gain on sale of securities available for sale		(5,809	)		(15,016	)
Net other-than-temporary impairment losses		–			75
Loss (gain) on sale of assets		3			(7	)
Loss on retirement of assets		90			–
Impairment on other real estate owned		145			20
Gain on sale of other real estate owned		(221	)		(12	)
Net cash provided by operating activities		35,753			31,520

INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale		28,213			40,746
Proceeds from sales of mortgage-backed securities available for sale		314,736			758,901
Proceeds from maturities of investment securities available for sale		14,037			9,804
Proceeds from maturities of mortgage-backed securities available for sale		136,701			199,778
Proceeds from maturities of mortgage-backed securities held to maturity		24,730			38,012
Proceeds from redemption of FHLB stock		14,811			2,638
Purchases of investment securities available for sale		(32,131	)		(54,317	)
Purchases of investment securities held to maturity		(500	)		–
Purchases of mortgage-backed securities available for sale		(662,803	)		(721,114	)
Purchases of mortgage-backed securities held to maturity		(5,894	)		(258,935	)
Purchases of FHLB stock and other investments		(5,623	)		(105	)
Net decrease in loans		32,740			8,995
Purchases of premises and equipment		(2,169	)		(3,600	)
Proceeds from sales of premises and equipment		6			38
Proceeds from sales of other real estate owned		306			722
Proceeds from sales of repossessed assets		2,767			2,740
Net cash (used in) provided by investing activities		(140,073	)		24,303

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

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(UNAUDITED)

(in thousands)

	Six Months Ended
	June 30,
	2011			2010
FINANCING ACTIVITIES:
Net increase in demand and savings accounts		87,107			135,317
Net increase (decrease) in certificates of deposit		22,511			(57,713	)
Net decrease in federal funds purchased and repurchase agreements		(767	)		(9,552	)
Proceeds from FHLB advances		3,349,032			4,261,610
Repayment of FHLB advances		(3,378,823	)		(4,387,008	)
Net capital distributions to noncontrolling interest in consolidated entities		(475	)		(310	)
Tax benefit of incentive stock options		2			316
Purchase of common stock		–			(24	)
Proceeds from the issuance of common stock		567			901
Dividends paid		(5,453	)		(5,241	)
Net cash provided by (used in) financing activities		73,701			(61,704	)

Net decrease in cash and cash equivalents		(30,619	)		(5,881	)
Cash and cash equivalents at beginning of period		79,073			52,166
Cash and cash equivalents at end of period	$	48,454		$	46,285

SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
Interest paid	$	19,378		$	23,914
Income taxes paid		3,500			4,650

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of other repossessed assets and real estate through foreclosure	$	2,779		$	3,747
5% stock dividend		15,995			15,513
Adjustment to pension liability		(711	)		(626	)
Unsettled trades to purchase securities		(9,145	)		(2,280	)
Unsettled trades to sell securities		31,919			24,396

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

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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 Southside Financial Group, LLC, of which Southside Bank owned a 50% interest as of June 30, 2011 and consolidates for financial reporting. On July 15, 2011, Southside Bank acquired the remaining 50% interest in SFG.

The consolidated balance sheet as of June 30, 2011, and the related consolidated statements of income, equity and cash flows and notes to the financial statements for the three and six month periods ended June 30, 2011 and 2010 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, 2010. 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, 2010.

Accounting Standards

ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures About Fair Value Measurements.” ASU 2010-06 requires expanded disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements. ASU 2010-06 further clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (ii) company should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy became effective for us on January 1, 2011. The remaining disclosure requirements and clarifications made by ASU 2010-06 became effective for us on January 1, 2010. See Note 9 – Fair Value Measurement.

ASU No. 2010-20, “Receivables (Topic 310) - Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” ASU 2010-20 requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment. The required disclosures include, among other things, a roll forward of the allowance for credit losses as well as information about modified, impaired, nonaccrual and past due loans and credit quality indicators. ASU 2010-20 became effective for our financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period became effective for our financial statements that include periods on or after January 1, 2011.

ASU No. 2011-01, “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20 (Topic 310)”, was issued January 2011 deferring the new disclosure requirements (paragraphs 310-10-50-31 through 50-34 of the FASB Accounting Standards Codification) about troubled debt restructurings to be concurrent with the effective date of the guidance for determining what constitutes a troubled debt restructuring, as presented in proposed Accounting Standards Update, Receivables (Topic 310): Clarifications to Accounting for Troubled Debt Restructurings by Creditors. As a result of the issuance of Update 2011-02, the provisions of Update 2011-01 are effective for the first interim or annual period beginning on or after June 15, 2011 or September 30, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. We do not expect the adoption of the Update to have a material effect on our financial statements at the date of adoption.

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ASU No. 2011-02, “Receivables (Topic 310) - A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” ASU 2011-02 clarifies which loan modifications constitute troubled debt restructurings and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude, under the guidance clarified by ASU 2011-02, that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. ASU 2011-02 will be effective on July 1, 2011, and applies retrospectively to restructurings occurring on or after January 1, 2011. Adoption of ASU 2011-02 is not expected to have a significant impact on our financial statements.

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 will be effective for us on January 1, 2012 and is not expected to 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 annual periods beginning after December 15, 2011, and is not expected to have a significant impact on our consolidated financial statements.

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 periods beginning after December 15, 2011, and is not expected to have a significant impact on our consolidated financial statements.

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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,
	2011		2010		2011		2010
Basic and Diluted Earnings:
Net Income - Southside Bancshares, Inc.	$	11,036	$	9,252	$	18,353	$	20,897

Basic weighted-average shares outstanding		16,439		16,605		16,432		16,573
Add: Stock options		6		30		5		48
Diluted weighted-average shares outstanding		16,445		16,635		16,437		16,621

Basic Earnings Per Share:
Net Income - Southside Bancshares, Inc.	$	0.67	$	0.56	$	1.12	$	1.26

Diluted Earnings Per Share:
Net Income - Southside Bancshares, Inc.	$	0.67	$	0.56	$	1.12	$	1.26

On March 31, 2011, our board of directors declared a 5% stock dividend to common stock shareholders of record as of April 20, 2011, and payable on May 11, 2011.

During the second quarter, 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, 2011, there were approximately 6,000 and 12,000 antidilutive options, respectively. For the three and six months ended June 30, 2010, there were no antidilutive options.

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3. Comprehensive Income (Loss)

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

	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	$	27,653	$	(9,678	)	$	17,975
Less: reclassification adjustment for gains included in net income		5,809		(2,033	)		3,776
Net unrealized gains on securities		21,844		(7,645	)		14,199
Change in pension plans		711		(249	)		462
Other comprehensive income	$	22,555	$	(7,894	)	$	14,661

	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	$	24,289	$	(8,501	)	$	15,788
Less: reclassification adjustment for gains included in net income		4,004		(1,402	)		2,602
Net unrealized gains on securities		20,285		(7,099	)		13,186
Change in pension plans		356		(125	)		231
Other comprehensive income	$	20,641	$	(7,224	)	$	13,417

	Six Months Ended June 30, 2010
	Before-Tax			Tax (Expense)			Net-of-Tax
	Amount			Benefit			Amount
Unrealized losses on securities:
Unrealized holding gains arising during period	$	13,859		$	(4,851	)	$	9,008
Noncredit portion of other-than-temporary impairment losses on the AFS securities		36			(13	)		23
Less: reclassification adjustment for gains included in net income		15,016			(5,256	)		9,760
Less: reclassification of other-than-temporary impairment charges on AFS securities included in net income		(75	)		26			(49	)
Net unrealized losses on securities		(1,046	)		366			(680	)
Change in pension plans		626			(219	)		407
Other comprehensive loss	$	(420	)	$	147		$	(273	)

	Three Months Ended June 30, 2010
	Before-Tax		Tax			Net-of-Tax
	Amount		Expense			Amount
Unrealized gains on securities:
Unrealized holding gains arising during period	$	12,998	$	(4,550	)	$	8,448
Noncredit portion of other-than-temporary impairment losses on the AFS securities		–		–			–
Less: reclassification adjustment for gains included in net income		6,661		(2,332	)		4,329
Less: reclassification of other-than-temporary impairment charges on AFS securities included in net income		–		–			–
Net unrealized gains on securities		6,337		(2,218	)		4,119
Change in pension plans		379		(133	)		246
Other comprehensive income	$	6,716	$	(2,351	)	$	4,365

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4. Securities

The amortized cost and estimated market value of investment and mortgage-backed securities as of June 30, 2011 and December 31, 2010, are reflected in the tables below (in thousands):

	June 30, 2011
			Gross		Gross Unrealized Losses
	Amortized		Unrealized		Noncredit					Estimated
AVAILABLE FOR SALE:	Cost		Gains		OTTI		Other			Fair Value
Investment Securities:
State and Political Subdivisions	$	292,413	$	10,379	$	–		$	1,711		$	301,081
Other Stocks and Bonds		2,925		–		1,968			–			957
Mortgage-backed Securities:
U.S. Government Agencies		155,582		7,446		–			112			162,916
Government-Sponsored Enterprises		952,460		23,006		–			1,421			974,045
Total	$	1,403,380	$	40,831	$	1,968		$	3,244		$	1,438,999

	June 30, 2011
			Gross		Gross Unrealized Losses
	Amortized		Unrealized		Noncredit				Estimated
HELD TO MATURITY:	Cost		Gains		OTTI		Other		Fair Value
Investment Securities:
U.S. Treasury	$	500	$	–	$	–	$	–	$	500
State and Political Subdivisions		1,011		123		–		–		1,134
Other Stocks and Bonds		485		16		–		–		501
Mortgage-backed Securities:
U.S. Government Agencies		19,780		1,034		–		–		20,814
Government-Sponsored Enterprises		375,948		15,363		–		7		391,304
Total	$	397,724	$	16,536	$	–	$	7	$	414,253

	December 31, 2010
			Gross		Gross Unrealized Losses
	Amortized		Unrealized		Noncredit				Estimated
AVAILABLE FOR SALE:	Cost		Gains		OTTI		Other		Fair Value
Investment Securities:
U.S. Treasury	$	4,700	$	–	$	–	$	–	$	4,700
State and Political Subdivisions		296,357		4,445		–		6,540		294,262
Other Stocks and Bonds		3,117		1		2,736		–		382
Mortgage-backed Securities:
U.S. Government Agencies		149,402		5,311		–		179		154,534
Government-Sponsored Enterprises		777,921		16,049		–		2,461		791,509
Total	$	1,231,497	$	25,806	$	2,736	$	9,180	$	1,245,387

	December 31, 2010
			Gross		Gross Unrealized Losses
	Amortized		Unrealized		Noncredit					Estimated
HELD TO MATURITY:	Cost		Gains		OTTI		Other			Fair Value
Investment Securities:
State and Political Subdivisions	$	1,012	$	44	$	–		$	–		$	1,056
Other Stocks and Bonds		483		14		–			–			497
Mortgage-backed Securities:
U.S. Government Agencies		21,888		631		–			55			22,464
Government-Sponsored Enterprises		395,974		8,743		–			609			404,108
Total	$	419,357	$	9,432	$	–		$	664		$	428,125

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The following table represents the unrealized loss on securities for the six months ended June 30, 2011 and year ended December 31, 2010 (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 June 30, 2011:

Available for Sale
State and Political Subdivisions		$	66,071		$	1,672		$	271		$	39		$	66,342		$	1,711
Other Stocks and Bonds			–			–			957			1,968			957			1,968
Mortgage-Backed Securities			210,478			1,470			8,534			63			219,012			1,533
Total		$	276,549		$	3,142		$	9,762		$	2,070		$	286,311		$	5,212

Held to Maturity
Mortgage-Backed Securities		$	568		$	7		$	–		$	–		$	568		$	7
Total		$	568		$	7		$	–		$	–		$	568		$	7

As of December 31, 2010:

Available for Sale
State and Political Subdivisions	$	136,671	$	6,501	$	270	$	39	$	136,941	$	6,540
Other Stocks and Bonds		–		–		189		2,736		189		2,736
Mortgage-Backed Securities		312,985		2,475		21,779		165		334,764		2,640
Total	$	449,656	$	8,976	$	22,238	$	2,940	$	471,894	$	11,916

Held to Maturity
Mortgage-Backed Securities	$	52,676	$	644	$	1,104	$	20	$	53,780	$	664
Total	$	52,676	$	644	$	1,104	$	20	$	53,780	$	664

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 market values are reflective of illiquidity and credit impairment. At June 30, 2011, we have in AFS Other Stocks and Bonds, $2.9 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, 2011 for the TRUPs is approximately $957,000 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, 2011 with an other-than-temporary impairment.

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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, 2011. 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 FASB ASC Topic 320, “Investments – Debt and Equity Securities,” was estimated at $3.1 million at both June 30, 2011 and December 31, 2010. The noncredit charge to other comprehensive income was estimated at $2.0 million and $2.7 million at June 30, 2011 and December 31, 2010, respectively. The carrying amount of the TRUPs was written down with $75,000 and $3.0 million recognized in earnings for the six months ended June 30, 2010 and for the year ended December 31, 2009, respectively. There was no additional write-down of the TRUPs recognized in earnings for the six months ended June 30, 2011. 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, 2011. 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, 2011 (in thousands).

TRUP	Par		Credit Loss		Amortized Cost		Fair Value		Tranche	Credit Rating

1	$	2,000	$	1,075	$	925	$	300	C1	Ca
2		2,000		550		1,450		354	B1	C
3		2,000		1,450		550		303	B2	C
	$	6,000	$	3,075	$	2,925	$	957

The following table presents the impairment activity related to credit loss, which is recognized in earnings, and the impairment activity related to all other factors, which are recognized in other comprehensive income (in thousands).

	Six Months Ended June 30, 2011
	Impairment Related to Credit Loss		Impairment Related to All Other Factors		Total Impairment

Balance, beginning of the period	$	3,075	$	2,694	$	5,769
Charges on securities for which other-than-temporary impairment charges were not previously recognized		–		–		–
Additional charges on securities for which other-than-temporary impairment charges were previously recognized		–		–		–
Balance, end of the period	$	3,075	$	2,694	$	5,769

	Three Months Ended June 30, 2011
	Impairment Related to Credit Loss		Impairment Related to All Other Factors		Total Impairment

Balance, beginning of the period	$	3,075	$	2,694	$	5,769
Charges on securities for which other-than-temporary impairment charges were not previously recognized		–		–		–
Additional charges on securities for which other-than-temporary impairment charges were previously recognized		–		–		–
Balance, end of the period	$	3,075	$	2,694	$	5,769

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

	Six Months Ended
	June 30, 2011		June 30, 2010
U.S. Treasury	$	6	$	4
State and Political Subdivisions		6,452		5,864
Other Stocks and Bonds		18		27
Mortgage-backed Securities		24,607		24,559
Total interest income on securities	$	31,083	$	30,454

	Three Months Ended
	June 30, 2011		June 30, 2010
U.S. Treasury	$	5	$	2
State and Political Subdivisions		3,215		3,028
Other Stocks and Bonds		9		13
Mortgage-backed Securities		13,310		10,282
Total interest income on securities	$	16,539	$	13,325

There were no securities transferred from AFS to HTM during the six months ended June 30, 2011 or 2010. There were no sales from the HTM portfolio during the six months ended June 30, 2011 or 2010. There were $397.7 million of securities classified as HTM for the six months ended June 30, 2011 compared to $419.4 million of securities classified as HTM for the year ended December 31, 2010.

Of the $5.8 million in net securities gains from the AFS portfolio for the six months ended June 30, 2011, there were $5.9 million in realized gains and $115,000 in realized losses. Of the $15.0 million in net securities gains from the AFS portfolio for the six months ended June 30, 2010, there were $17.2 million in realized gains and $2.2 million in realized losses.

The amortized cost and fair value of securities at June 30, 2011 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.

	June 30, 2011
	Amortized Cost		Fair Value
	(in thousands)
Available for sale securities:

Investment Securities
Due in one year or less	$	2,636	$	2,661
Due after one year through five years		7,001		7,188
Due after five years through ten years		25,640		26,728
Due after ten years		260,061		265,461
		295,338		302,038
Mortgage-backed securities		1,108,042		1,136,961
Total	$	1,403,380	$	1,438,999

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	June 30, 2011
	Amortized Cost		Fair Value
	(in thousands)
Held to maturity securities:

Investment Securities
Due in one year or less	$	500	$	500
Due after one year through five years		–		–
Due after five years through ten years		485		501
Due after ten years		1,011		1,134
		1,996		2,135
Mortgage-backed securities		395,728		412,118
Total	$	397,724	$	414,253

Investment and mortgage-backed securities with book values of $907.9 million at June 30, 2011 and $977.4 million at December 31, 2010 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.

Securities with limited marketability, such as FHLB stock and other investments, are carried at cost, which approximates its fair value and assessed for other-than-temporary impairment. These securities have no maturity date.

5. Loans and Allowance for Probable Loan Losses

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

	At June 30,			At December 31,
	2011			2010
Real Estate Loans:
Construction		$	108,851	$	115,094
1-4 Family residential			221,283		219,031
Other			193,341		200,723
Commercial loans			134,197		148,761
Municipal loans			200,537		196,594
Loans to individuals			180,599		197,717
Total loans		$	1,038,808	$	1,077,920

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Allowance for Loan Losses

The allowance for loan losses is based on the most current review of the loan portfolio and is validated by multiple processes. First, the bank utilizes historical data to establish general reserve amounts for each class of loans. While we track several years of data, we primarily review one year data because we found during the 1980’s that longer periods would not respond quickly enough to market conditions. Second, our lenders have the primary responsibility for identifying problem loans and estimating necessary reserves based on customer financial stress and underlying collateral. These recommendations are reviewed by the Senior lender, the Special Assets department, and the Loan Review department and are signed off on by the President. Third, the Loan Review department does independent reviews of the portfolio on an annual basis. The Loan Review department follows a board-approved annual loan review scope. The loan review scope encompasses a number of metrics that takes into consideration the size of the loan, the type of credit extended, the seasoning of the loan and the performance of the loan. The loan review scope as it relates to size, focuses more on larger dollar loan relationships, typically, for example, aggregate debt of $500,000 or greater. The Loan Review officer also tracks specific reserves for loans by type compared to general reserves to determine trends in comparative reserves as well as losses not reserved for prior to charge off to determine the efficiency of the specific reserve process.

At each review, a subjective analysis methodology is used to grade the respective loan. Categories of grading vary in severity from loans that do not appear to have a significant probability of loss at the time of review to loans that indicate a probability that the entire balance of the loan will be uncollectible. If full collection of the loan balance appears unlikely at the time of review, estimates of future expected cash flows or appraisals of the collateral securing the debt are used to allocate the necessary allowances. The internal loan review department maintains a list of all loans or loan relationships that are graded as having more than the normal degree of risk associated with them. In addition, a list of specifically reserved loans or loan relationships of $50,000 or more is updated on a quarterly basis in order to properly allocate necessary allowances and keep management informed on the status of attempts to correct the deficiencies noted with respect to the loan.

For loans to individuals the methodology associated with determining the appropriate allowance for losses on loans primarily consists of an evaluation of individual payment histories, remaining term to maturity and underlying collateral support.

Industry experience indicates that a portion of our loans will become delinquent and a portion of the loans will require partial or entire charge-off. Regardless of the underwriting criteria utilized, losses may be experienced as a result of various factors beyond our control, including, among other things, changes in market conditions affecting the value of properties used as collateral for loans and problems affecting the credit of the borrower and the ability of the borrower to make payments on the loan. Our determination of the adequacy of allowance for loan losses is based on various considerations, including an analysis of the risk characteristics of various classifications of loans, previous loan loss experience, specific loans which would have loan loss potential, delinquency trends, estimated fair value of the underlying collateral, current economic conditions, the views of the bank regulators (who have the authority to require additional allowances), and geographic and industry loan concentration.

Consumer loans at SFG are reserved for based on general estimates of loss at the time of purchase for current loans. SFG loans experiencing past due status or extension of maturity characteristics are reserved for at significantly higher levels based on the circumstances associated with each specific loan. In general the reserves for SFG are calculated based on the past due status of the loan. For reserve purposes, the portfolio has been segregated by past due status and by the remaining term variance from the original contract. During repayment, loans that pay late will take longer to pay out than the original contract. Additionally, some loans may be granted extensions for extenuating payment circumstances. The remaining term extensions increase the risk of collateral deterioration and accordingly, reserves are increased to recognize this risk.

For SFG automobile loan pools purchased after August 1, 2010, additional reserve methods have been added. New pools purchased are reserved at their estimated annual loss. Thereafter, the reserve is adjusted based on the actual performance versus projected performance. Additionally, during the fourth quarter of 2010, data mining measures were further enhanced to track migration within risk tranches. Reserves are adjusted quarterly to match the migration metrics.

Credit Quality Indicators

We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We use the following definitions for risk ratings:

Satisfactory (Rating 1 – 4) – This rating is assigned to all satisfactory loans. This category, by definition, should consist of completely acceptable credit. Credit and collateral exceptions should not be present, although their presence would not necessarily prohibit a loan from being rated Satisfactory, if deficiencies are in process of correction. These loans will not be included in the Watch List.

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Satisfactory (Rating 5) – Special Treatment Required – (Pass Watch) – These loans require some degree of special treatment, but not due to credit quality. This category does not include loans specially mentioned or adversely classified by the Loan Review Officer or regulatory authorities; however, particular attention must be accorded such credits due to characteristics such as:

A lack of, or abnormally extended payment program;

A heavy degree of concentration of collateral without sufficient margin;

A vulnerability to competition through lesser or extensive financial leverage;

A dependence on a single, or few customers, or sources of supply and materials without suitable substitutes or alternatives.

Special Mention (Rating 6) – A Special Mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard (Rating 7) – Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful (Rating 8) – Loans classified Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation, in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

Loss (Rating 9) – Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

Loans not meeting risk ratings six through nine are reserved for as a group of similar type pass rated credits and included in the general portion of the allowance for loan losses.

The general portion of the loan loss allowance is reflective of historical charge-off levels for similar loans adjusted for changes in current conditions and other relevant factors. These factors are likely to cause estimated losses to differ from historical loss experience and include:

Changes in lending policies or procedures, including underwriting, collection, charge-off, and recovery procedures;

Changes in local, regional and national economic and business conditions including entry into new markets;

Changes in the volume or type of credit extended;

Changes in the experience, ability, and depth of lending management;

Changes in the volume and severity of past due, nonaccrual, restructured, or classified loans;

Changes in loan review or Board oversight; and,

Changes in the level of concentrations of credit.

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The following table details activity in the Allowance for Loan Losses by portfolio segment for the periods presented (in thousands):

	Six Months Ended June 30, 2011
	Real Estate
	Construction			1-4 Family Residential			Other			Commercial Loans			Municipal Loans		Loans to Individuals			Unallocated		Total

Balance at beginning of period	$	2,585		$	1,988		$	3,354		$	3,746		$	607	$	7,978		$	453	$	20,711
Provision for loan losses		210			181			(524	)		(231	)		3		3,288			1,071		3,998
Loans charged off		(9	)		(383	)		(80	)		(927	)		–		(5,672	)		–		(7,071	)
Recoveries of loans charged off