Southside Bancshares 8K Results of Operations and Financial Condition | SBSI 30 Jul 12

EXHIBIT 99.1

SOUTHSIDE BANCSHARES, INC.

ANNOUNCES NET INCOME FOR THE

THREE AND SIX MONTHS ENDED JUNE 30, 2012

NASDAQ Global Select Market Symbol - "SBSI"

Tyler, Texas, (July 27, 2012) Southside Bancshares, Inc. (“Southside” or the “Company”) (NASDAQ: SBSI) today reported its financial results for the three and six months ended June 30, 2012.

Southside reported net income of $7.7 million for the three months ended June 30, 2012, a decrease of $4.9 million, or 38.8%, when compared to the same period in 2011. Fair value gains-securities decreased $2.5 million as there were no fair value gains or losses for the three months ended June 30, 2012 compared to $2.5 million for the same period in 2011. In addition net interest income decreased $2.0 million and we recorded impairment charges on our Federal Home Loan Bank (“FHLB”) advance option fees of $1.4 million. Net income for the six months ended June 30, 2012 decreased $3.1 million, or 14.9%, to $17.9 million when compared to $21.0 million for the same period in 2011.

Diluted earnings per common share were $0.45 for the three months ended June 30, 2012 when compared to $0.73 for the same period in 2011, a decrease of $0.28, or 38.4%. For the six months ended June 30, 2012, diluted earnings per common share decreased $0.19, or 15.6% to $1.03 when compared to $1.22 for the same period in 2011.

The return on average shareholders’ equity for the six months ended June 30, 2012, was 13.51%, compared to 18.82% for the same period in 2011. The annual return on average assets was 1.09% for the six months ended June 30, 2012 compared to 1.39% for the same period in 2011.

“We are pleased to report our second quarter financial results,” stated Sam Dawson, President and Chief Executive Officer of Southside Bancshares, Inc. “During the second quarter, we continued to experience increased levels of lending activity, resulting in a $42.3 million increase in loans. Given that global economic growth seems to have entered yet another stagnant phase, we are especially grateful to have experienced a meaningful increase in quality loan demand in the areas we serve. In fact, over the first half of 2012, we have reported a 17.6% annualized increase in loans totaling $96.0 million. We are proud to partner with the communities we serve because these communities play an important role in fostering economic growth. Given the current interest rate environment, we believe our loan growth will play an important and positive role in managing our net interest margin.”

“During the first quarter of 2012 we sold all of our securities carried at fair value through income which eliminated potentially significant future fluctuations in either gains or losses through our income statement associated with fair value changes during the period reported. During the second quarter of 2011 we recorded fair value gains-securities of $2.5 million. In addition, we are pleased to report that any future impairment expense related to our FHLB advance option fees will be significantly reduced and limited, as the current remaining balance is $195,000. The decrease in our net interest income was partially the result of an increase in prepayments on our mortgage-backed securities and partially related to the sale of the securities carried at fair value through income during the first quarter. Mortgage refinancing activity has increased this quarter due not only to the historical low interest rate environment, but also due to government programs designed to encourage mortgage refinancing.”

“In our securities portfolio we have increased our allocation to the municipal securities market. We believe that allocating resources to sectors with book yields that are not impacted by prepayments should help mitigate future mortgage-backed securities prepayment volatility. On the funding side, our cost of funds is very likely to continue its decline over the near to medium term as our higher priced FHLB advances mature. Of our approximately $274 million of ‘higher cost FHLB funding’, which we define as 2.0% or higher, approximately 70% with an average cost of 3.80% will roll off over the next 15 months. Over the next two years, approximately 94% of our high cost long term advances with an average cost of 3.60% will mature. This was possible because rather than taking out long term advances, to manage our interest rate risk, nearly two years ago we decided to purchase options on those advances as a hedge against increasing market demands for longer term fixed rate loans and the purchase of longer duration securities. These options gave us the ability to utilize short-term funding at an average cost below 0.18% to fund longer duration assets without increasing our interest rate risk. The purchase of these options also gave us the opportunity to take out long-term funding as a hedge for our long-term assets at a much more opportune time at interest rates well below those available when we purchased the options. In addition to our funding, $36.1 million of our trust preferred long-term debt will transition from the initial average fixed rate of 6.86% to an average floating rate of three month LIBOR plus 1.64%. This positive impact to our earnings will start in the fourth quarter.”

“Given the mixed global outlook, a prudent bank must be prepared for both a prolonged period of sluggish growth and low interest rates as well as a more normal economic and interest rate environment. We view our quality loan growth and additional municipal bond investments as logical substitutes for a portion of our current mortgage-backed securities, and believe these asset allocations, combined with continued careful consideration of funding choices, should positively impact our future net interest margin.”

“At December 31, 2007, we had $132.3 million in shareholders’ equity. At the end of the second quarter, June 30, 2012, we are proud to report $263.4 million in shareholders’ equity. Management of shareholder capital is one the most important responsibilities of a board of directors and senior management. We will utilize that capital to continue our loan growth. We are indeed fortunate to have organically grown capital in an economic environment characterized by recession and nationwide credit concern. We are actively reviewing opportunities to utilize that capital to further expand our franchise. Contrary to what is sometimes reported, profitability is a productive activity. We will use our profits to both assist and expand our service areas. In this scenario, we believe everyone wins. We live in extraordinarily uncertain times and intend to fully participate in the eventual economic recovery. We are proud of our accomplishments, but we are far more excited about our accomplishments yet to come. We fully understand that without the support of our communities, employees and shareholders, our success would not be possible. I thank you for that support.”

Loans and Deposits

For the six months ended June 30, 2012, total loans increased by $96.0 million, or 8.8%, when compared to December 31, 2011. During the six months ended June 30, 2012, real estate 1-4 family increased $78.2 million, real estate other increased $8.4 million, municipal loans increased $8.0 million, loans to individuals increased $4.1 million, commercial loans increased $2.9 million and construction loans decreased $5.7 million.

Nonperforming assets increased during the first six months of 2012 by $590,000, or 4.5%, to $13.8 million, or 0.41% of total assets at June 30, 2012, when compared to 0.40% at December 31, 2011. This increase is primarily a result of an increase in other real estate owned.

During the six months ended June 30, 2012, deposits, net of brokered deposits, increased $176.2 million, or 8.2%, compared to December 31, 2011. During this six month period public fund deposits increased $59.0 million and we had a business account that experienced a temporary increase of approximately $70 million.

Net Interest Income for the Three Months

Net interest income decreased $2.0 million, or 8.2%, to $22.5 million for the three months ended June 30, 2012, when compared to $24.6 million for the same period in 2011. For the three months ended June 30, 2012, our net interest spread decreased to 2.98% when compared to 3.52% for the same period in 2011. The net interest margin decreased to 3.21% for the three months ended June 30, 2012 compared to 3.80% for the same period in 2011. The primary reason for the decrease in the net interest spread and margin was an increase in prepayments on the mortgage-backed securities which resulted in increased amortization expense.

Net Interest Income for the Six Months

Net interest income decreased $285,000, or 0.6%, to $46.5 million for the six months ended June 30, 2012, when compared to $46.8 million for the same period in 2011. For the six months ended June 30, 2012, our net interest spread decreased to 3.11% from 3.39% for the same period in 2011. The net interest margin decreased to 3.36% for the six months ended June 30, 2012 compared to 3.68% for the same period in 2011. Increased prepayments on our mortgage-backed securities were the primary reason for the decrease in the net interest margin and spread.

Net Income for the Three Months

The decrease in net income for the three months ended June 30, 2012, when compared to the same period in 2011, was the result of a decrease in fair value gains-securities of $2.5 million, a decrease in net interest income of $2.0 million and an impairment charge related to our FHLB advance option fees of $1.4 million.

Noninterest expense increased $980,000, or 5.4%, for the three months ended June 30, 2012, compared to the same period in 2011 primarily due to an increase in salaries and employee benefits and an increase in other expense.

Net Income for the Six Months

Net income for the six months ended June 30, 2012 decreased $3.1 million, or 14.9%, to $17.9 million, when compared to $21.0 million for the same period in 2011 due to a $1.2 million increase in provision for loan losses as a result of loan growth, a net $1.1 million decrease in gain on sale of securities and fair value gains-securities, and a $1.8 million increase in the impairment charges on FHLB advance option fees.

Noninterest expense increased $770,000, or 2.1%, primarily as a result of an increase in salaries and employee benefits.

About Southside Bancshares, Inc.

Southside Bancshares, Inc. is a bank holding company with approximately $3.40 billion in assets that owns 100% of Southside Bank. Southside Bank currently has 48 banking centers in Texas and operates a network of 50 ATMs.

To learn more about Southside Bancshares, Inc., please visit our investor relations website at www.southside.com/investor. Our investor relations site provides a detailed overview of our activities, financial information and historical stock price data. To receive e-mail notification of company news, events and stock activity, please register on the E-mail Notification portion of the website. Questions or comments may be directed to Susan Hill at (903) 531-7220, or susan.hill@southside.com.

Forward-Looking Statements

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

Additional information concerning the Company and its business, including additional factors that could materially affect the Company’s financial results, is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 under “Forward-Looking Information” and Item 1A. “Risk Factors,” and in the Company’s other filings with the Securities and Exchange Commission. The Company disclaims any obligation to update any factors or to announce publicly the result of revisions to any of the forward-looking statements included herein to reflect future events or developments.

	At			At			At
	June 30,			December 31,			June 30,
	2012			2011			2011
	(dollars in thousands)
	(unaudited)

Selected Financial Condition Data (at end of period):

Total assets	$	3,400,956		$	3,303,817		$	3,118,468
Loans		1,183,200			1,087,230			1,038,808
Allowance for loan losses		20,194			18,540			19,409
Mortgage-backed and related securities:
Available for sale, at estimated fair value		1,204,759			716,126			783,588
Securities carried at fair value though income		–			647,759			367,140
Held to maturity, at amortized cost		330,138			365,631			385,221
Investment securities:
Available for sale, at estimated fair value		418,215			282,956			302,038
Held to maturity, at amortized cost		1,010			1,496			1,996
Federal Home Loan Bank stock, at cost		34,334			33,869			25,524
Deposits		2,395,872			2,321,671			2,239,537
Long-term obligations		427,300			321,035			338,290
Equity		263,356			258,927			246,594
Nonperforming assets		13,778			13,188			15,703
Nonaccrual loans		10,077			10,299			13,208
Accruing loans past due more than 90 days		1			5			8
Restructured loans		2,352			2,109			1,757
Other real estate owned		960			453			412
Repossessed assets		388			322			318

Asset Quality Ratios:
Nonaccruing loans to total loans		0.85	%		0.95	%		1.27	%
Allowance for loan losses to nonaccruing loans		200.40			180.02			146.95
Allowance for loan losses to nonperforming assets		146.57			140.58			123.60
Allowance for loan losses to total loans		1.71			1.71			1.87
Nonperforming assets to total assets		0.41			0.40			0.50
Net charge-offs to average loans		0.63			0.92			1.01

Capital Ratios:
Shareholders’ equity to total assets		7.74			7.84			7.84
Average shareholders’ equity to average total assets		8.05			7.69			7.40

Loan Portfolio Composition

The following table sets forth loan totals by category for the periods presented:

	At		At		At
	June 30,		December 31,		June 30,
	2012		2011		2011
	(in thousands)
	(unaudited)
Real Estate Loans:
Construction	$	105,675	$	111,361	$	108,851
1-4 Family Residential		325,720		247,479		221,283
Other		214,885		206,519		193,341
Commercial Loans		146,499		143,552		134,197
Municipal Loans		215,256		207,261		200,537
Loans to Individuals		175,165		171,058		180,599
Total Loans	$	1,183,200	$	1,087,230	$	1,038,808

	At or for the						At or for the
	Three Months						Six Months
	Ended June 30,						Ended June 30,
	2012			2011			2012			2011
	(dollars in thousands)						(dollars in thousands)
	(unaudited)						(unaudited)

Selected Operating Data:
Total interest income	$	29,442		$	33,724		$	61,158		$	65,629
Total interest expense		6,897			9,157			14,617			18,803
Net interest income		22,545			24,567			46,541			46,826
Provision for loan losses		2,174			1,860			5,226			3,998
Net interest income after provision for loan losses		20,371			22,707			41,315			42,828
Noninterest income
Deposit services		3,838			4,028			7,586			7,907
Gain on sale of securities available for sale		3,297			3,920			9,269			5,471
(Loss) gain on sale of securities carried at fair value
through income		(13	)		84			(498	)		338

Total other-than-temporary impairment losses		(21	)		–			(21	)		–
Portion of loss recognized in other comprehensive
income (before taxes)		(19	)		–			(160	)		–
Net impairment losses recognized in earnings		(40	)		–			(181	)		–

Fair value gains – securities		–			2,456			–			4,083
FHLB advance option impairment charges		(1,364	)		–			(1,836	)		–
Gain on sale of loans		298			282			429			565
Trust income		669			645			1,346			1,296
Bank owned life insurance income		254			261			520			547
Other		1,123			959			2,234			2,064
Total noninterest income		8,062			12,635			18,869			22,271
Noninterest expense
Salaries and employee benefits		12,142			11,622			23,975			23,313
Occupancy expense		1,851			1,778			3,609			3,499
Equipment expense		554			525			1,064			1,018
Advertising, travel & entertainment		603			550			1,207			1,103
ATM and debit card expense		287			266			566			481
Director fees		273			200			541			391
Supplies		222			161			381			385
Professional fees		390			457			941			1,012
Postage		182			186			357			365
Telephone and communications		445			345			851			682
FDIC Insurance		414			735			884			1,498
Other		1,733			1,291			3,242			3,101
Total noninterest expense		19,096			18,116			37,618			36,848
Income before income tax expense		9,337			17,226			22,566			28,251
Provision for income tax expense		1,608			4,100			4,698			5,886
Net income		7,729			13,126			17,868			22,365
Less: Net income attributable to the noncontrolling interest		–			(493	)		–			(1,358	)
Net income attributable to Southside Bancshares, Inc.	$	7,729		$	12,633		$	17,868		$	21,007

Common share data attributable to Southside Bancshares, Inc:
Weighted-average basic shares outstanding		17,341		17,263		17,334		17,255
Weighted-average diluted shares outstanding		17,353		17,269		17,344		17,260
Net income per common share
Basic	$	0.45	$	0.73	$	1.03	$	1.22
Diluted		0.45		0.73		1.03		1.22
Book value per common share		–		–		15.17		14.16
Cash dividend paid per common share		0.20		0.17		0.38		0.34

	At or for the						At or for the
	Three Months						Six Months
	Ended June 30,						Ended June 30,
	2012			2011			2012			2011
	(unaudited)						(unaudited)
Selected Performance Ratios:
Return on average assets		0.92	%		1.65	%		1.09	%		1.39	%
Return on average shareholders’ equity		11.68			21.73			13.51			18.82
Average yield on interest earning assets		4.10			5.09			4.32			5.01
Average yield on interest bearing liabilities		1.12			1.57			1.21			1.62
Net interest spread		2.98			3.52			3.11			3.39
Net interest margin		3.21			3.80			3.36			3.68
Average interest earnings assets to average interest bearing liabilities		126.12			122.31			125.71			121.54
Noninterest expense to average total assets		2.28			2.37			2.29			2.44
Efficiency ratio		60.89			54.96			59.00			57.21

RESULTS OF OPERATIONS

The analysis below shows average interest earning assets and interest bearing liabilities together with the average yield on the interest earning assets and the average cost of the interest bearing liabilities.

	AVERAGE BALANCES AND YIELDS
	(dollars in thousands)
	(unaudited)
	Six Months Ended
	June 30, 2012								June 30, 2011
	AVG					AVG			AVG					AVG
	BALANCE			INTEREST		YIELD			BALANCE			INTEREST		YIELD
ASSETS
INTEREST EARNING ASSETS:
Loans (1) (2)	$	1,137,397		$	36,132		6.39	%	$	1,059,313		$	36,281		6.91	%
Loans Held For Sale		1,637			31		3.81	%		3,106			68		4.41	%
Securities:
Investment Securities (Taxable)(4)		5,167			51		1.98	%		7,058			38		1.09	%
Investment Securities (Tax-Exempt)(3)(4)		278,435			8,473		6.12	%		302,421			9,564		6.38	%
Mortgage-backed and Related Securities (4)		1,592,499			21,035		2.66	%		1,433,080			24,607		3.46	%
Total Securities		1,876,101			29,559		3.17	%		1,742,559			34,209		3.96	%
FHLB stock and other investments, at cost		34,553			133		0.77	%		30,390			132		0.88	%
Interest Earning Deposits		14,750			15		0.20	%		11,054			13		0.24	%
Total Interest Earning Assets		3,064,438			65,870		4.32	%		2,846,422			70,703		5.01	%
NONINTEREST EARNING ASSETS:
Cash and Due From Banks		42,004								44,511
Bank Premises and Equipment		50,551								50,514
Other Assets		167,295								121,472
Less: Allowance for Loan Loss		(19,501	)							(19,657	)
Total Assets	$	3,304,787							$	3,043,262
LIABILITIES AND SHAREHOLDERS’ EQUITY
INTEREST BEARING LIABILITIES:
Savings Deposits	$	94,647			73		0.16	%	$	83,343			118		0.29	%
Time Deposits		821,752			4,371		1.07	%		856,860			5,744		1.35	%
Interest Bearing Demand Deposits		859,343			1,716		0.40	%		784,228			2,225		0.57	%
Total Interest Bearing Deposits		1,775,742			6,160		0.70	%		1,724,431			8,087		0.95	%
Short-term Interest Bearing Liabilities		311,948			3,326		2.14	%		239,179			3,434		2.90	%
Long-term Interest Bearing Liabilities – FHLB Dallas		289,743			3,476		2.41	%		317,985			5,663		3.59	%
Long-term Debt (5)		60,311			1,655		5.52	%		60,311			1,619		5.41	%
Total Interest Bearing Liabilities		2,437,744			14,617		1.21	%		2,341,906			18,803		1.62	%
NONINTEREST BEARING LIABILITIES:
Demand Deposits		547,150								448,073
Other Liabilities		53,926								26,384
Total Liabilities		3,038,820								2,816,363

SHAREHOLDERS’ EQUITY (6)		265,967								226,899
Total Liabilities and Shareholders’ Equity	$	3,304,787							$	3,043,262
NET INTEREST INCOME				$	51,253							$	51,900
NET INTEREST MARGIN ON AVERAGE EARNING ASSETS							3.36	%							3.68	%
NET INTEREST SPREAD							3.11	%							3.39	%

(1) Interest on loans includes fees on loans that are not material in amount.

(2) Interest income includes taxable-equivalent adjustments of $1,867 and $1,948 for the six months ended June 30, 2012 and June 30, 2011, respectively.

(3) Interest income includes taxable-equivalent adjustments of $2,845 and $3,126 for the six months ended June 30, 2012 and June 30, 2011, respectively.

(4) For the purpose of calculating the average yield, the average balance of securities is presented at historical cost.

(5) Represents junior subordinated debentures issued by us to Southside Statutory Trust III, IV, and V in connection with the issuance by Southside Statutory Trust III of $20 million of trust preferred securities, Southside Statutory Trust IV of $22.5 million of trust preferred securities, Southside Statutory Trust V of $12.5 million of trust preferred securities and junior subordinated debentures issued by Fort Worth Bancshares, Inc. to Magnolia Trust Company I in connection with the issuance by Magnolia Trust Company I of $3.5 million of trust preferred securities.

(6) Includes average equity of noncontrolling interest of $1,788 for the six months ended June 30, 2011.

Note: As of June 30, 2012 and June 30, 2011, loans totaling $10,077 and $13,208, respectively, were on nonaccrual status. The policy is to reverse previously accrued but unpaid interest on nonaccrual loans; thereafter, interest income is recorded to the extent received when appropriate.

	AVERAGE BALANCES AND YIELDS
	(dollars in thousands)
	(unaudited)
	Three Months Ended
	June 30, 2012								June 30, 2011
	AVG					AVG			AVG					AVG
	BALANCE			INTEREST		YIELD			BALANCE			INTEREST		YIELD
ASSETS
INTEREST EARNING ASSETS:
Loans (1) (2)	$	1,165,141		$	18,442		6.37	%	$	1,049,692		$	18,076		6.91	%
Loans Held For Sale		1,568			14		3.59	%		2,491			31		4.99	%
Securities:
Investment Securities (Taxable)(4)		5,660			20		1.42	%		5,082			20		1.58	%
Investment Securities (Tax-Exempt)(3)(4)		307,465			4,483		5.86	%		299,807			4,778		6.39	%
Mortgage-backed and Related Securities (4)		1,606,106			8,872		2.22	%		1,469,138			13,310		3.63	%
Total Securities		1,919,231			13,375		2.80	%		1,774,027			18,108		4.09	%
FHLB stock and other investments, at cost		35,202			54		0.62	%		28,317			52		0.74	%
Interest Earning Deposits		8,226			9		0.44	%		6,101			3		0.20	%
Total Interest Earning Assets		3,129,368			31,894		4.10	%		2,860,628			36,270		5.09	%
NONINTEREST EARNING ASSETS:
Cash and Due From Banks		41,112								43,330
Bank Premises and Equipment		50,509								50,655
Other Assets		167,246								131,926
Less: Allowance for Loan Loss		(19,945	)							(19,266	)
Total Assets	$	3,368,290							$	3,067,273
LIABILITIES AND SHAREHOLDERS’ EQUITY
INTEREST BEARING LIABILITIES:
Savings Deposits	$	96,527			36		0.15	%	$	85,778			58		0.27	%
Time Deposits		782,371			1,894		0.97	%		867,694			2,943		1.36	%
Interest Bearing Demand Deposits		863,308			835		0.39	%		778,084			1,050		0.54	%
Total Interest Bearing Deposits		1,742,206			2,765		0.64	%		1,731,556			4,051		0.94	%
Short-term Interest Bearing Liabilities		367,195			1,734		1.90	%		259,025			1,705		2.64	%
Long-term Interest Bearing Liabilities – FHLB Dallas		311,550			1,573		2.03	%		287,903			2,587		3.60	%
Long-term Debt (5)		60,311			825		5.50	%		60,311			814		5.41	%
Total Interest Bearing Liabilities		2,481,262			6,897		1.12	%		2,338,795			9,157		1.57	%
NONINTEREST BEARING LIABILITIES:
Demand Deposits		565,344								465,578
Other Liabilities		55,593								27,679
Total Liabilities		3,102,199								2,832,052

SHAREHOLDERS’ EQUITY (6)		266,091								235,221
Total Liabilities and Shareholders’ Equity	$	3,368,290							$	3,067,273
NET INTEREST INCOME				$	24,997							$	27,113
NET INTEREST MARGIN ON AVERAGE EARNING ASSETS							3.21	%							3.80	%
NET INTEREST SPREAD							2.98	%							3.52	%

(1) Interest on loans includes fees on loans that are not material in amount.

(2) Interest income includes taxable-equivalent adjustments of $930 and $977 for the three months ended June 30, 2012 and June 30, 2011, respectively.

(3) Interest income includes taxable-equivalent adjustments of $1,522 and $1,569 for the three months ended June 30, 2012 and June 30, 2011, respectively.

(4) For the purpose of calculating the average yield, the average balance of securities is presented at historical cost.

(6) Includes average equity of noncontrolling interest of $2,068 for the three months ended June 30, 2011.

Southside Bancshares (SBSI) 8-KResults of Operations and Financial Condition