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 September 30, 2010

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
(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 October 22, 2010 was 15,615,780 shares.


 
 
 


 
TABLE OF CONTENTS
   
   
 
 
 
 
 
                ITEM 4.  CONTROLS AND PROCEDURES
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 

PART I.   FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share amounts)
   
September 30,
    
December 31,
  
ASSETS
  
2010
    
2009
  
Cash and due from banks
   $ 43,046     $ 50,350  
Interest earning deposits
     36,126       1,816  
Total cash and cash equivalents
     79,172       52,166  
Investment securities:
                
Available for sale, at estimated fair value
     245,509       265,060  
Held to maturity, at amortized cost
     1,495       1,493  
Mortgage-backed and related securities:
                
Available for sale, at estimated fair value
     1,026,869       1,238,182  
Held to maturity, at amortized cost
     440,133       242,665  
FHLB stock, at cost
     36,130       38,629  
Other investments, at cost
     2,065       2,065  
Loans held for sale
     6,098       2,857  
Loans:
                
Loans
     1,037,208       1,033,576  
Less:  allowance for loan loss
     (18,731 )     (19,896 )
      Net Loans
     1,018,477       1,013,680  
Premises and equipment, net
     49,631       46,477  
Goodwill
     22,034       22,034  
Other intangible assets, net
     851       1,096  
Interest receivable
     15,065       18,482  
Deferred tax asset
     944       1,611  
Other assets
     73,054       77,791  
TOTAL ASSETS
   $ 3,017,527     $ 3,024,288  
LIABILITIES AND EQUITY
                
Deposits:
                
Noninterest bearing
   $ 438,892     $ 394,001  
Interest bearing
     1,580,081       1,476,420  
Total Deposits
     2,018,973       1,870,421  
Short-term obligations:
                
Federal funds purchased and repurchase agreements
     3,811       13,325  
FHLB advances
     280,123       322,351  
Other obligations
     2,250       2,760  
Total Short-term obligations
     286,184       338,436  
Long-term obligations:
                
FHLB  advances
     389,499       532,519  
Long-term debt
     60,311       60,311  
Total Long-term obligations
     449,810       592,830  
Other liabilities
     39,042       20,352  
TOTAL LIABILITIES
     2,794,009       2,822,039  
                 
       Off-Balance-Sheet Arrangements, Commitments and Contingencies (Note 10)
                
                 
Shareholders' equity:
                
Common stock - $1.25 par, 40,000,000 shares authorized, 17,633,418 shares
     22,042       20,928  
 issued in 2010 and 16,742,835 shares issued in 2009
                
Paid-in capital
     162,335       146,357  
Retained earnings
     62,328       53,812  
Treasury stock (2,017,638 and 1,762,261 shares at cost)
     (28,261 )     (23,545 )
Accumulated other comprehensive income
     3,615       4,229  
TOTAL SHAREHOLDERS' EQUITY
     222,059       201,781  
Noncontrolling interest
     1,459       468  
TOTAL EQUITY
     223,518       202,249  
TOTAL LIABILITIES AND EQUITY
   $ 3,017,527     $ 3,024,288  

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
    
Nine Months
  
   
Ended September 30,
    
Ended September 30,
  
   
2010
    
2009
    
2010
    
2009
  
Interest income
                        
Loans
   $ 16,926     $ 17,121     $ 52,128     $ 53,316  
Investment securities – taxable
     20       402       72       1,010  
Investment securities – tax-exempt
     2,366       2,266       8,209       5,139  
Mortgage-backed and related securities
     13,378       15,509       37,937       47,988  
FHLB stock and other investments
     59       43       200       195  
Other interest earning assets
     4       58       19       138  
Total interest income
     32,753       35,399       98,565       107,786  
Interest expense
                                
Deposits
     4,874       5,474       14,612       17,532  
Short-term obligations
     2,086       1,020       5,633       3,355  
Long-term obligations
     4,504       6,242       14,585       19,544  
Total interest expense
     11,464       12,736       34,830       40,431  
Net interest income
     21,289       22,663       63,735       67,355  
Provision for loan losses
     3,201       2,973       9,328       9,980  
Net interest income after provision for loan losses
     18,088       19,690       54,407       57,375  
Noninterest income
                                
Deposit services
     4,280       4,543       12,744       12,995  
Gain on sale of securities available for sale
     8,008       6,706       23,024       26,413  
                                 
Total other-than-temporary impairment losses
     –       –       (39 )     (5,627 )
Portion of loss recognized in other comprehensive income (before taxes)
     –       (993 )     (36 )     3,197  
Net impairment losses recognized in earnings
     –       (993 )     (75 )     (2,430 )
                                 
Gain on sale of loans
     517       392       1,197       1,274  
Trust income
     645       693       1,736       1,830  
Bank owned life insurance income
     297       325       867       1,362  
Other
     931       847       2,728       2,376  
Total noninterest income
     14,678       12,513       42,221       43,820  
Noninterest expense
                                
Salaries and employee benefits
     10,891       10,219       33,048       31,163  
Occupancy expense
     1,720       1,701       5,025       4,684  
Equipment expense
     532       453       1,441       1,242  
Advertising, travel & entertainment
     616       546       1,697       1,549  
ATM and debit card expense
     223       328       602       988  
Director fees
     197       168       590       480  
Supplies
     189       254       665       672  
Professional fees
     418       572       1,363       1,657  
Postage
     195       247       612       627  
Telephone and communications
     349       409       1,068       1,053  
FDIC Insurance
     804       719       2,172       3,180  
Other
     1,521       2,135       4,803       5,261  
Total noninterest expense
     17,655       17,751       53,086       52,556  
                                 
Income before income tax expense
     15,111       14,452       43,542       48,639  
Provision for income tax expense
     3,811       3,620       10,296       13,021  
Net income
     11,300       10,832       33,246       35,618  
Less: Net income attributable to the noncontrolling interest
     (252 )     (335 )     (1,301 )     (1,599 )
Net income attributable to Southside Bancshares, Inc.
   $ 11,048     $ 10,497     $ 31,945     $ 34,019  
Earnings per common share – basic
   $ 0.70     $ 0.67     $ 2.02     $ 2.18  
Earnings per common share – diluted
   $ 0.70     $ 0.66     $ 2.02     $ 2.16  
Dividends paid per common share
   $ 0.17     $ 0.14     $ 0.51     $ 0.41  


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

 
2
 

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

   
Nine Months Ended
September 30,
  
   
2010
    
2009
  
Common Stock
            
Balance, beginning of period
   $ 20,928     $ 19,695  
Issuance of common stock (136,419 shares in 2010 and 232,226 shares in 2009)
     171       291  
Stock dividend
     943       886  
Balance, end of period
     22,042       20,872  
Paid-in capital
                
Balance, beginning of period
     146,357       131,112  
Issuance of common stock (136,419 shares in 2010 and 232,226 shares in 2009)
     1,080       1,426  
Tax benefit of incentive stock options
     328       547  
Stock dividend
     14,570       12,641  
Balance, end of period
     162,335       145,726  
Retained earnings
                
Balance, beginning of period
     53,812       34,021  
Net income attributable to Southside Bancshares, Inc.
     31,945       34,019  
Dividends paid on common stock ($0.51 per share in 2010 and $0.41 per share in 2009)
     (7,916 )     (5,996 )
Stock dividend
     (15,513 )     (13,527 )
Balance, end of period
     62,328       48,517  
Treasury Stock
                
Balance, beginning of period
     (23,545 )     (23,115 )
Purchase of common stock (255,377 shares in 2010 and 30,691 shares in 2009)
     (4,716 )     (430 )
Balance, end of period
     (28,261 )     (23,545 )
Accumulated other comprehensive (loss) income
                
Balance, beginning of period
     4,229       (1,096 )
Net unrealized gains on available for sale securities, net of tax
     13,669       29,192  
Reclassification adjustment for gains on sales of available for sale securities included in net income, net of tax
     (14,966 )     (17,168 )
Non-credit portion of other-than-temporary impairment losses on available for sale securities, net of tax
     23       (2,078 )
Reclassification of other-than-temporary impairment charges on available for sale securities included in net income, net of tax
     49       1,579  
Adjustment to net periodic benefit cost, net of tax
     611       666  
Net change in accumulated other comprehensive (loss) income
     (614 )     12,191  
Balance, end of period
     3,615       11,095  
Total shareholders’ equity
     222,059       202,665  
Noncontrolling interest
                
Balance, beginning of period
     468       472  
Net income attributable to noncontrolling interest shareholders
     1,301       1,599  
Capital distribution to noncontrolling interest shareholders
     (310 )     (1,367 )
Balance, end of period
     1,459       704  
Total equity
   $ 223,518     $ 203,369  
                 
Comprehensive income
                
Net income
   $ 33,246     $ 35,618  
Net change in accumulated other comprehensive (loss) income
     (614 )     12,191  
Comprehensive income
     32,632       47,809  
Comprehensive income attributable to the noncontrolling interest
     (1,301 )     (1,599 )
Comprehensive income attributable to Southside Bancshares, Inc.
   $ 31,331     $ 46,210  


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)
   
Nine Months Ended
September 30,
  
   
2010
    
2009
  
             
OPERATING ACTIVITIES:
            
Net income
   $ 33,246     $ 35,618  
Adjustments to reconcile net income to net cash provided by operations:
                
Depreciation
     2,397       2,101  
Amortization of premium
     25,982       10,491  
Accretion of discount and loan fees
     (3,497 )     (2,933 )
Provision for loan losses
     9,328       9,980  
Decrease in interest receivable
     3,417       807  
Increase in other assets
     (4,726 )     (799 )
Net change in deferred taxes
     998       (1,116 )
Decrease in interest payable
     (696 )     (1,669 )
Increase (decrease) in other liabilities
     3,504       (431 )
Increase in loans held for sale
     (3,241 )     (3,806 )
Gain on sale of securities available for sale
     (23,024 )     (26,413 )
Net other-than-temporary impairment losses
     75       2,430  
Gain on sale of assets
     (7 )     –  
Loss on disposal of assets
     -       43  
Impairment on other real estate owned
     20       530  
Gain on sale of other real estate owned
     (26 )     (18 )
Net cash provided by operating activities
     43,750       24,815  
                 
INVESTING ACTIVITIES:
                
Proceeds from sales of investment securities available for sale
     103,953       204,813  
Proceeds from sales of mortgage-backed securities available for sale
     956,496       512,458  
Proceeds from maturities of investment securities available for sale
     17,271       55,913  
Proceeds from maturities of mortgage-backed securities available for sale
     263,335       205,156  
Proceeds from maturities of mortgage-backed securities held to maturity
     55,656       40,338  
Proceeds from redemption of FHLB stock
     2,638       3,141  
Purchases of investment securities available for sale
     (75,697 )     (231,078 )
Purchases of investment securities held to maturity
     -       (1,014 )
Purchases of mortgage-backed securities available for sale
     (1,026,453 )     (887,176 )
Purchases of mortgage-backed securities held to maturity
     (258,935 )     (119,611 )
Purchases of FHLB stock and other investments
     (139 )     (568 )
Net increase in loans
     (15,193 )     (5,070 )
Purchases of premises and equipment
     (5,582 )     (5,903 )
Proceeds from sales of premises and equipment
     38       –  
Proceeds on bank owned life insurance
     -       1,086  
Proceeds from sales of other real estate owned
     948       864  
Proceeds from sales of repossessed assets
     3,713       2,003  
Net cash provided by (used in) investing activities
     22,049       (224,648 )


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)
   
Nine Months Ended
  
   
September 30,
  
   
2010
    
2009
  
FINANCING ACTIVITIES:
            
 Net increase in demand and savings accounts
    
117,405
      
53,373
  
 Net increase in certificates of deposit
    
49,927
      
162,784
  
 Net (decrease) increase in federal funds purchased and repurchase agreements
    
(9,514
)
    
36,354
  
 Proceeds from FHLB advances
    
6,119,530
      
5,249,074
  
 Repayment of FHLB advances
    
(6,304,778
)
    
(5,319,144
)
 Net capital distributions to non-controlling interest in consolidated entities
    
(310
)
    
(1,367
)
 Tax benefit of incentive stock options
    
328
      
547
  
 Purchase of common stock
    
(4,716
)
    
(430
)
 Proceeds from the issuance of common stock
    
1,251
      
1,717
  
 Dividends paid
    
(7,916
)
    
(5,996
)
      Net cash (used in) provided by financing activities
    
(38,793
)
    
176,912
  
                 
Net increase (decrease) in cash and cash equivalents
    
27,006
      
(22,921
)
Cash and cash equivalents at beginning of period
    
52,166
      
66,774
  
Cash and cash equivalents at end of period
  
$
79,172
    
$
43,853
  
                 
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
                
 Interest paid
  
$
35,525
    
$
42,100
  
 Income taxes paid
    
9,550
      
12,500
  
                 
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
                
 Acquisition of other repossessed assets and real estate through foreclosure
  
$
5,416
    
$
7,214
  
 5% stock dividend
    
15,513
      
13,527
  
 Adjustment to pension liability
    
(939
)
    
(1,024
)
 Unsettled trades to purchase securities
    
(18,160
)
    
(2,158
)
 Unsettled trades to sell securities
    
18,723
      
6,168
  
 Unsettled issuances of brokered CDs
    
–
      
14,875
  

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

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 owns a 50% interest and consolidates for financial reporting.

The consolidated balance sheet as of September 30, 2010, and the related consolidated statements of income, equity and cash flows and notes to the financial statements for the three and nine month periods ended September 30, 2010 and 2009 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, 2009.  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, 2009.

 
Accounting Standards
 

 
Accounting Standards Update (ASU) No. 2009-16, “Transfers and Servicing (Topic 860) - Accounting for Transfers of Financial Assets.” ASU 2009-16 amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. ASU 2009-16 eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. ASU 2009-16 also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The provisions of ASU 2009-16 became effective on January 1, 2010 and did not have a significant impact on our consolidated financial statements.
 

 
ASU No. 2009-17, “Consolidations (Topic 810) - Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.” ASU 2009-17 amends prior guidance to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. ASU 2009-17 requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements.  The provisions of ASU 2009-17 became effective on January 1, 2010 and did not have a significant impact on our consolidated financial statements.
 

 
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’s should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value

 
6
 

 
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 will be required for us beginning 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 Measurements.
 

ASU No. 2010-18 “Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset”.  ASU 2010-18 provides that modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. ASU 2010-18 does not affect the accounting for loans under the scope of Subtopic 310-30 that are not accounted for within pools. Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting provisions within Subtopic 310-40.  ASU 2010-18 is effective prospectively for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. Early application is permitted. Upon initial adoption of ASU 2010-18, an entity may make a one-time election to terminate accounting for loans as a pool under Subtopic 310-30. This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration.  The provisions of ASU 2010-18 did not have a significant impact on our consolidated financial statements.

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, non-accrual and past due loans and credit quality indicators. ASU 2010-20 will be 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 will be required for our financial statements that include periods beginning on or after January 1, 2011.

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
    
Nine Months
  
   
Ended September 30,
    
Ended September 30,
  
   
2010
    
2009
    
2010
    
2009
  
    Basic and Diluted Earnings:
                        
       Net Income - Southside Bancshares, Inc.
   $ 11,048     $ 10,497     $ 31,945     $ 34,019  
                                 
      Basic weighted-average shares outstanding
     15,753       15,659       15,772       15,587  
       Add:   Stock options
     9       112       34       159  
       Diluted weighted-average shares outstanding
     15,762       15,771       15,806       15,746  
                                 
    Basic Earnings Per Share:
                                
       Net Income - Southside Bancshares, Inc.
   $ 0.70     $ 0.67     $ 2.02     $ 2.18  
                                 
    Diluted Earnings Per Share:
                                
       Net Income - Southside Bancshares, Inc.
   $ 0.70     $ 0.66     $ 2.02     $ 2.16  

On March 18, 2010, our board of directors declared a 5% stock dividend to common stock shareholders of record as of April 8, 2010, and payable on April 29, 2010.

For the three and nine month periods ended September 30, 2010 and 2009, there were no antidilutive options.

 
7
 

3.  Comprehensive (Loss) Income

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

 
Nine Months Ended September 30, 2010
  
 
Before-Tax
  
Tax (Expense)
  
Net-of-Tax
  
 
Amount
  
Benefit
  
Amount
  
Unrealized losses on securities:
            
Unrealized holding gains arising during period
   $ 21,029     $ (7,360 )   $ 13,669  
Non credit portion of other-than-temporary
impairment losses on the AFS securities
     36       (13 )     23  
Less:  reclassification adjustment for gains included in net income
     23,024       (8,058 )     14,966  
Less:  reclassification of other-than-temporary impairment charges on AFS securities included in net income
     (75 )     26       (49 )
Net unrealized losses on securities
     (1,884 )     659       (1,225 )
   Change in pension plans
     939       (328 )     611  
Other comprehensive loss
   $ (945 )   $ 331     $ (614 )



 
Three Months Ended September 30, 2010
  
 
Before-Tax
  
Tax (Expense)
  
Net-of-Tax
  
 
Amount
  
Benefit
  
Amount
  
Unrealized losses on securities:
            
Unrealized holding gains arising during period
   $ 7,170     $ (2,509 )   $ 4,661  
Non credit portion of other-than-temporary
impairment losses on the AFS securities
     –       –       –  
Less:  reclassification adjustment for gains included in net income
     8,008       (2,802 )     5,206  
Less:  reclassification of other-than-temporary impairment charges on AFS securities included in net income
     –       –       –  
Net unrealized losses on securities
     (838 )     293       (545 )
Change in pension plans
     313       (109 )     204  
Other comprehensive loss
   $ (525 )   $ 184     $ (341 )


 
Nine Months Ended September 30, 2009
  
 
Before-Tax
  
Tax (Expense)
  
Net-of-Tax
  
 
Amount
  
Benefit
  
Amount
  
Unrealized gains on securities:
            
Unrealized holding gains arising during period
   $ 44,911     $ (15,719 )   $ 29,192  
Non credit portion of other-than-temporary impairment losses on the AFS securities
     (3,197 )     1,119       (2,078 )
Less:  reclassification adjustment for gains included in net income
     26,413       (9,245 )     17,168  
Less:  reclassification of other-than-temporary impairment charges on AFS securities included in net income
     (2,430 )     851       (1,579 )
Net unrealized gains on securities
     17,731       (6,206 )     11,525  
Change in pension plans
     1,024       (358 )     666  
Other comprehensive income
   $ 18,755     $ (6,564 )   $ 12,191  


 
8
 


 
Three Months Ended September 30, 2009
  
 
Before-Tax
  
Tax (Expense)
  
Net-of-Tax
  
 
Amount
  
Benefit
  
Amount
  
Unrealized gains on securities:
            
Unrealized holding gains arising during period
   $ 23,044     $ (8,066 )   $ 14,978  
Less:  reclassification adjustment for gains included in net income
     6,706       (2,348 )     4,358  
Less:  reclassification of other-than-temporary impairment charges on AFS securities included in net income
     (993 )     348       (645 )
Net unrealized gains on securities
     17,331       (6,066 )     11,265  
Change in pension plans
     342       (120 )     222  
Other comprehensive income
   $ 17,673     $ (6,186 )   $ 11,487  


4. Securities

The amortized cost and estimated market value of investment and mortgage-backed securities as of September 30, 2010 and December 31, 2009, are reflected in the tables below (in thousands):

   
September 30, 2010
  
         
Gross
    
Gross Unrealized Losses
        
   
Amortized
    
Unrealized
    
Non-Credit
          
Estimated
  
 AVAILABLE FOR SALE:
  
Cost
    
Gains
    
OTTI
    
Other
    
Market Value
  
Investment Securities:
                              
U.S. Treasury
   $ 4,698     $ –     $ –     $ –     $ 4,698  
State and Political Subdivisions
     221,191       19,251       –       13       240,429  
Other Stocks and Bonds
     3,116       3       2,737       –       382  
Mortgage-backed Securities:
                                        
U.S. Government Agencies
     176,171       3,957       –       1,517       178,611  
Government-Sponsored Enterprises
     843,663       11,579       –       6,984       848,258  
Total
   $ 1,248,839     $ 34,790     $ 2,737     $ 8,514     $ 1,272,378  

   
September 30, 2010
  
         
Gross
    
Gross Unrealized Losses
      
   
Amortized
    
Unrealized
    
Non-Credit
      
Estimated
  
 HELD TO MATURITY:
  
Cost
    
Gains
    
OTTI
  
Other
  
Market Value
  
Investment Securities:
                              
State and Political Subdivisions
   $ 1,012     $ 167     $ –     $ –     $ 1,179  
Other Stocks and Bonds
     483       22       –       –       505  
Mortgage-backed Securities:
                                        
U.S. Government Agencies
     23,943       578       –       473       24,048  
Government-Sponsored Enterprises
     416,190       6,337       –       1,231       421,296  
Total
   $ 441,628     $ 7,104     $ –     $ 1,704     $ 447,028  


   
December 31, 2009
  
         
Gross
    
Gross Unrealized Losses
        
   
Amortized
    
Unrealized
    
Non-Credit
          
Estimated
  
 AVAILABLE FOR SALE:
  
Cost
    
Gains
    
OTTI
    
Other
    
Market Value
  
Investment Securities:
                              
U.S. Treasury
   $ 4,898     $ 1     $ –     $ –     $ 4,899  
State and Political Subdivisions
     250,391       9,431       –       296       259,526  
Other Stocks and Bonds
     3,383       3       2,730       21       635  
Mortgage-backed Securities:
                                        
U.S. Government Agencies
     126,264       3,725       –       407       129,582  
Government-Sponsored Enterprises
     1,092,659       20,787       –       4,846       1,108,600  
Total
   $ 1,477,595     $ 33,947     $ 2,730     $ 5,570     $ 1,503,242  


 
9
 


   
December 31, 2009
  
         
Gross
    
Gross Unrealized Losses
  
 
  
   
Amortized
    
Unrealized
    
Non-Credit
      
Estimated
  
 HELD TO MATURITY:
  
Cost
    
Gains
    
OTTI
  
Other
  
Market Value
  
Investment Securities:
                              
State and Political Subdivisions
   $ 1,013     $ 103     $ –     $ –     $ 1,116  
Other Stocks and Bonds
     480       22       –       –       502  
Mortgage-backed Securities:
                                        
U.S. Government Agencies
     16,677       534       –       36       17,175  
Government-Sponsored Enterprises
     225,988       5,248       –       766       230,470  
Total
   $ 244,158     $ 5,907     $ –     $ 802     $ 249,263  

The following table represents the unrealized loss on securities for the nine months ended September 30, 2010 and year ended December 31, 2009 (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 September 30, 2010:
                        
                         
Available for Sale
                        
State and Political Subdivisions
   $ 562     $ 1     $ 297     $ 12     $ 859     $ 13  
Other Stocks and Bonds
     –       –       188       2,737       188       2,737  
Mortgage-Backed Securities
     574,833       8,488       1,192       13       576,025       8,501  
Total
   $ 575,395     $ 8,489     $ 1,677     $ 2,762     $ 577,072     $ 11,251  
                                                 
Held to Maturity
                                                
Mortgage-Backed Securities
   $ 138,193     $ 1,704     $ 36     $ –     $ 138,229     $ 1,704  
Total
   $ 138,193     $ 1,704     $ 36     $ –     $ 138,229     $ 1,704  

As of December 31, 2009:
                                    
                                     
Available for Sale
                                    
State and Political Subdivisions
   $ 14,520     $ 160     $ 2,953     $ 136     $ 17,473     $ 296  
Other Stocks and Bonds
     –       –       441       2,751       441       2,751  
Mortgage-Backed Securities
     391,889       5,250       1,065       3       392,954       5,253  
Total
   $ 406,409     $ 5,410     $ 4,459     $ 2,890     $ 410,868     $ 8,300  
                                                 
Held to Maturity
                                                
Mortgage-Backed Securities
   $ 19,705     $ 802     $ –     $ –     $ 19,705     $ 802  
Total
   $ 19,705     $ 802     $ –     $ –     $ 19,705     $ 802  
                                                 

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 non credit 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 securities 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 September 30, 2010, 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 September 30, 2010 for the TRUPs is approximately $188,000 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 September 30, 2010 with an other-than-temporary impairment.


 
10
 

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 September 30, 2010.  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 and $3.0 million at September 30, 2010 and December 31, 2009, respectively. The non credit charge to other comprehensive income was estimated at $2.7 million at September 30, 2010 and December 31, 2009.  Therefore, the carrying amount of the TRUPs was written down with $75,000 recognized in earnings for the nine months ended September 30, 2010 and $3.0 million recognized in earnings for the year ended December 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, 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 September 30, 2010.  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 September 30, 2010 (in thousands).

TRUP
    
Par
    
Credit
Loss
    
Amortized Cost
    
Fair Value
    
Tranche
    
Credit Rating
  
                                       
  1     $ 2,000     $ 1,075     $ 925     $ 125       C1    
Ca
  
  2       2,000       550       1,450       37       B1    
Ca
  
  3       2,000       1,450       550       26       B2                      C  
        $ 6,000     $ 3,075     $ 2,925     $ 188                  

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).

 
 
Nine Months Ended September 30, 2010
  
 
Impairment Related to Credit Loss
  
Impairment Related to All Other Factors
  
Total Impairment
  
 
 
                   
Balance, beginning of the period
   $ 3,000     $ 2,730     $ 5,730  
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
     75       (36 )     39  
Balance, end of the period
   $ 3,075     $ 2,694     $ 5,769  

 
Three Months Ended September 30, 2010
  
 
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  

Management has the ability and intent to hold the securities classified as HTM until they mature, at which time we will receive full value for the securities. Furthermore, as of September 30, 2010, management also had the ability and intent to hold the securities classified as AFS for a period of time sufficient for a recovery of cost. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality.


 
11
 

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

   
Nine Months Ended
  
   
September 30, 2010
    
September 30, 2009
  
U.S. Treasury
   $ 7     $ 38  
U.S. Government Agencies
     –       642  
State and Political Subdivisions
     8,239       5,316  
Other Stocks and Bonds
     35       153  
Mortgage-backed Securities
     37,937       47,988  
                 
Total interest income on securities
   $ 46,218     $ 54,137  

   
Three Months Ended
  
   
September 30, 2010
    
September 30, 2009
  
U.S. Treasury
  
$
3
    
$
13
  
U.S. Government Agencies
    
–
      
335
  
State and Political Subdivisions
    
2,375
      
2,282
  
Other Stocks and Bonds
    
8
      
38
  
Mortgage-backed Securities
    
13,378
      
15,509
  
                 
Total interest income on securities
  
$
15,764
    
$
18,177
  

There were no securities transferred from AFS to HTM during the nine months ended September 30, 2010 or 2009.  There were no sales from the HTM portfolio during the nine months ended September 30, 2010 or 2009.  There were $441.6 million of securities classified as HTM for the nine months ended September 30, 2010 compared to $244.2 million of securities classified as HTM for the year ended December 31, 2009.

Of the $23.0 million in net securities gains from the AFS portfolio for the nine months ended September 30, 2010, there were $25.5 million in realized gains and $2.5 million in realized losses.  Of the $26.4 million in net securities gains from the AFS portfolio for the nine months ended September 30, 2009, there were $26.5 million in realized gains and $100,000 in realized losses.

The amortized cost and fair value of securities at September 30, 2010 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.

 
   
September 30, 2010
  
   
Amortized Cost
    
Fair Value
  
   
(in thousands)
  
             
Available for sale securities:
            
             
Investment Securities
            
Due in one year or less
   $ 8,410     $ 8,467  
Due after one year through five years
     6,007       6,216  
Due after five years through ten years
     18,852       20,115  
Due after ten years
     195,736       210,711  
      229,005       245,509  
Mortgage-backed securities
     1,019,834       1,026,869  
Total
   $ 1,248,839     $ 1,272,378  

 

 
12
 


 
   
September 30, 2010
  
   
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
     483       505  
Due after ten years
     1,012       1,179  
      1,495       1,684  
Mortgage-backed securities
     440,133       445,344  
Total
   $ 441,628     $ 447,028  

Investment and mortgage-backed securities with book values of $897.4 million at September 30, 2010 and $1.06 billion at December 31, 2009 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 by category for the periods presented (in thousands):

 
At
    
At
  
 
September 30,
    
December 31,
  
 
2010
    
2009
  
Real Estate Loans:
          
   Construction
   $ 91,170     $ 88,566  
   1-4 Family Residential
     236,923       234,379  
   Other
     202,497       212,731  
Commercial Loans
     156,635       159,529  
Municipal Loans
     173,314       150,111  
Loans to Individuals
     176,669       188,260  
Total Loans
   $ 1,037,208     $ 1,033,576  


 
13
 

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

   
Three Months
    
Nine Months
  
   
Ended September 30,
    
Ended September 30,
  
                         
   
2010
    
2009
    
2010
    
2009
  
Allowance for Loan Losses:
                        
                         
Balance at beginning of period
   $ 19,283     $ 18,804     $ 19,896     $ 16,112  
Provision for loan losses
     3,201       2,973       9,328       9,980  
Loans charged off
     (4,341 )     (3,860 )     (12,816 )     (9,029 )
Recoveries of loans charged off
     588       528       2,323       1,382  
Balance at end of period
   $ 18,731     $ 18,445     $ 18,731     $ 18,445  
                                 
Reserve for Unfunded Loan Commitments:
                                
                                 
Balance at beginning of period
   $ 40     $ 9     $ 5     $ 7  
Provision for losses on unfunded loan
      commitments
     (20 )     (4 )     15       (2 )
Balance at end of period
   $ 20     $ 5     $ 20     $ 5  


6. Long-term Obligations

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

   
September 30,
    
December 31,
  
   
2010
    
2009
  
FHLB Advances (1)
            
   Varying maturities to 2028
   $ 389,499     $ 532,519  
                 
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
   $ 449,810     $ 592,830  

(1)           At September 30, 2010, the weighted average cost of these advances was 3.56%.
 
(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 3.22938% through December 29, 2010 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 2.13906% through November 22, 2010 and thereafter, adjusts quarterly at a rate equal to three-month LIBOR plus 180 basis points.

 
14
 


During the third quarter ending September 30, 2010, we entered into the option to fund two years forward from the advance commitment date $50 million par in advance commitments from the FHLB at the rates on the date the option was purchased.  The fee, included in other assets in our consolidated balance sheet, will be amortized over the term of the advance as long as it is likely we will exercise the advance commitments.  Should we determine the advance commitments will not be exercised, the fee will be expensed in the period determination is made.

Below is a table detailing the optional advance commitment terms (dollars in thousands):
 
 
 
Advance Commitment
  
Option Exercise Date
  
Advance Commitment Term at Exercise Date
  
Advance Commitment Rate
    
Option Fee Paid
$
25,000
  
9/20/12
  
36 months
  
1.325%
  
$
1,105
 
25,000
  
9/20/12
  
48 months
  
1.674%