Market Overview

Southside Bancshares, Inc. Announces Net Income for the Three and Nine Months Ended September 30, 2012

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TYLER, Texas, Oct. 25, 2012 (GLOBE NEWSWIRE) -- Southside Bancshares, Inc. ("Southside" or the "Company") (Nasdaq: SBSI) today reported its financial results for the three and nine months ended September 30, 2012.

Southside reported net income of $8.6 million for the three months ended September 30, 2012, an increase of $44,000, or 0.5%, when compared to the same period in 2011.  Net income for the nine months ended September 30, 2012 decreased $3.1 million, or 10.5%, to $26.5 million when compared to $29.6 million for the same period in 2011.

Diluted earnings per common share were $0.50 for both the three months ended September 30, 2012 and September 30, 2011.  For the nine months ended September 30, 2012, diluted earnings per common share decreased $0.18, or 10.5% to $1.53 when compared to $1.71 for the same period in 2011.

The return on average shareholders' equity for the nine months ended September 30, 2012, was 13.19%, compared to 16.87% for the same period in 2011.  The return on average assets was 1.06% for the nine months ended September 30, 2012 compared to 1.28% for the same period in 2011.

"We are quite pleased to report on the progress made during the third quarter of 2012," stated Sam Dawson, President and Chief Executive Officer of Southside Bancshares, Inc. "We continue to see tangible signs of demand for capital and housing, which fortunately has translated into $38 million of loan growth during the third quarter. During the first nine months of 2012, loans have increased at an annualized rate of 16%, a $134 million increase. Just as the crash in the housing market led our economy into crisis in 2008, it is difficult to visualize a robust economic recovery without the housing market leading the charge. To that end, we are pleased to report that single family mortgages are leading our loan growth. Municipal lending, an important niche lending area for our franchise, continued to increase during the third quarter. We are proud to continue to partner with Texas communities and play a role in supporting their economic growth. As always, we remain vigilant in regards to credit decisions.

"We are fortunate to serve three strong markets in Texas. East Texas remains our largest market and continues to provide a steady source of excellent loans and deposits. Our two newest markets, the DFW metroplex and Austin, have also become significant contributors. We anticipate these two markets will be catalysts for future franchise growth. Based on internal projections, we believe our growth prospects for Southside in the Austin market look promising enough that we have made application to our regulators to open a second full service branch during the first quarter of 2013. Collectively, our three branches in Fort Worth and Arlington continue to experience impressive growth. All of our markets currently reflect steady growth and an overall healthy economy. As our market areas continue to expand, we will re-evaluate resource allocations as well as branch expansion.

"While we remain focused on our current market areas, we are looking for new market areas that would complement our existing franchise. The current environment favors our community banking model. With increased regulation around every corner, we believe some community banks may begin to look for opportunities to partner with larger community banks like Southside.

"During the third quarter we increased our portfolio allocation to municipal bonds and decreased the overall size of the securities portfolio by selling some of our higher priced mortgage-backed securities. In our municipal portfolio, all but a small percentage of our bonds are high credit quality Texas bonds. Given the uncertain prepayment outlook, combined with the high market prices in the agency mortgage-backed securities market, we have decreased our allocation to that sector. We remain aware that the current portfolio environment is historically unique. Therefore, we believe prudent portfolio management dictates solutions unique to this environment. General market municipals are one example of opportunities available in this environment. While the municipal balances have increased, the average maturity of that sector has decreased. Given the current low interest rate environment, our portfolio decisions reflect our significant focus on interest rate risk.

"As a result of the current level of interest rates, we will continue to manage the balance sheet with the knowledge that at some point we are likely to transition to a higher interest rate environment. Funding decisions are a very important component of earnings, both in the short run, and the longer term. On the funding side, our cost of funds is likely to continue its decline over the next 12 months as many of our higher priced FHLB advances mature. Of our approximately $231 million of higher cost FHLB funding, which we define as 2.00% or higher, approximately 65% with an average cost of 3.76% will mature over the next 12 months. In addition, $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% during the fourth quarter.

"We are committed to a win-win partnership with our shareholders, employees, and customers. Our growth is a result of the hard work of our officers, employees, and our customer focus. Their dedication and diligence, combined with the current opportunities available in our market areas, has made this growth possible. Thank you for your continued support and encouragement."

Loans and Deposits

For the nine months ended September 30, 2012, total loans increased by $134.4 million, or 12.4%, when compared to December 31, 2011.  During the nine months ended September 30, 2012, real estate 1-4 family increased $101.9 million, real estate other increased $19.3 million, municipal loans increased $13.3 million, construction loans increased $4.7 million, commercial loans decreased $3.1 million, and loans to individuals decreased $1.9 million.

Nonperforming assets increased during the nine months of 2012 by $2.6 million, or 19.9%, to $15.8 million, or 0.49% of total assets at September 30, 2012, when compared to 0.40% at December 31, 2011.  This increase is primarily a result of an increase in nonaccrual and restructured loans.

During the nine months ended September 30, 2012, deposits, net of brokered deposits, increased $107.5 million, or 5.0%, compared to December 31, 2011.  During this nine month period public fund deposits increased $67.1 million.

Net Interest Income for the Three Months

Net interest income decreased $2.0 million, or 8.4%, to $22.0 million for the three months ended September 30, 2012, when compared to $24.0 million for the same period in 2011.  For the three months ended September 30, 2012, our net interest spread decreased to 2.99% when compared to 3.34% for the same period in 2011.  The net interest margin decreased to 3.22% for the three months ended September 30, 2012 compared to 3.60% 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 Nine Months

Net interest income decreased $2.3 million, or 3.2%, to $68.5 million for the nine months ended September 30, 2012, when compared to $70.8 million for the same period in 2011.  For the nine months ended September 30, 2012, our net interest spread decreased to 3.08% from 3.37% for the same period in 2011.  The net interest margin decreased to 3.31% for the nine months ended September 30, 2012 compared to 3.65% 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

Net income increased $44,000, or 0.5%, for the three months ended September 30, 2012 to $8.6 million when compared to the same period in 2011. The increase was the result of a decrease in impairment charges related to our FHLB advance option fees of $7.6 million, which was partially offset by a decrease in fair value gains-securities of $3.3 million, a decrease in net interest income of $2.0 million and a $1.8 million increase in provision for loan losses.

Noninterest expense increased $1.4 million, or 7.8%, for the three months ended September 30, 2012, compared to the same period in 2011 primarily due to an increase in salaries and employee benefits, FDIC insurance and other expense.

Net Income for the Nine Months

Net income for the nine months ended September 30, 2012 decreased $3.1 million, or 10.5%, to $26.5 million, when compared to $29.6 million for the same period in 2011. This decrease was due to a $3.0 million increase in provision for loan losses, a net $4.0 million decrease in gain on sale of securities and fair value gains-securities, and a $5.8 million decrease in the impairment charges on FHLB advance option fees.

Noninterest expense increased $2.2 million, or 3.9%, primarily as a result of increases in salaries and employee benefits, telephone and communication expense, and other expense.

About Southside Bancshares, Inc.

Southside Bancshares, Inc. is a bank holding company with approximately $3.22 billion in assets that owns 100% of Southside Bank.  Southside Bank currently has 48 banking centers in Texas and operates a network of 49 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.

The Southside Bancshares, Inc. logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=9555

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," "likely," "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, capital, liquidity, growth and earnings and certain market risk disclosures, including the impact of interest rate and other economic 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
 September 30, 2012
At
 December 31, 2011
At
September 30, 2011
  (dollars in thousands)
    (unaudited)  
Selected Financial Condition Data (at end of period):      
       
Total assets $3,221,085 $3,303,817 $3,211,920
Loans 1,221,595 1,087,230 1,040,471
Allowance for loan losses (20,848) (18,540) (18,189)
Mortgage-backed and related securities:      
Available for sale, at estimated fair value 865,952 716,126 715,192
Securities carried at fair value though income 647,759 567,639
Held to maturity, at amortized cost 293,300 365,631 379,336
Investment securities:      
Available for sale, at estimated fair value 558,634 282,956 304,994
Held to maturity, at amortized cost 1,009 1,496 1,496
Federal Home Loan Bank stock, at cost 33,939 33,869 29,057
Deposits 2,301,817 2,321,671 2,293,760
Long-term obligations 442,179 321,035 335,769
Equity 276,573 258,927 259,210
Nonperforming assets 15,815 13,188 13,160
Nonaccrual loans 11,879 10,299 10,634
Accruing loans past due more than 90 days 9 5 21
Restructured loans 2,897 2,109 1,486
Other real estate owned 708 453 831
Repossessed assets 322 322 188
       
Asset Quality Ratios:      
Nonaccruing loans to total loans 0.97% 0.95% 1.02%
Allowance for loan losses to nonaccruing loans 175.50 180.02 171.05
Allowance for loan losses to nonperforming assets 131.82 140.58 138.21
Allowance for loan losses to total loans 1.71 1.71 1.75
Nonperforming assets to total assets 0.49 0.40 0.41
Net charge-offs to average loans 0.71 0.92 1.02
       
Capital Ratios:      
Shareholders' equity to total assets 8.59 7.84 8.07
Average shareholders' equity to average total assets 8.06 7.69 7.60

Loan Portfolio Composition

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

  At At At
  September 30, December 31, September 30,
  2012 2011 2011
    (in thousands)  
    (unaudited)  
Real Estate Loans:      
Construction $116,079 $111,361 $103,859
1-4 Family Residential 349,419 247,479 228,248
Other 225,854 206,519 202,595
Commercial Loans 140,479 143,552 140,115
Municipal Loans 220,590 207,261 199,122
Loans to Individuals 169,174 171,058 166,532
Total Loans $1,221,595 $1,087,230 $1,040,471
  At or for the Three
Months Ended September 30,
At or for the Nine
Months Ended September 30,
   
  2012 2011 2012 2011
  (dollars in thousands)      
  (unaudited)      
Selected Operating Data:        
Total interest income $28,464 $32,653 $89,622 $98,282
Total interest expense 6,456 8,637 21,073 27,440
Net interest income 22,008 24,016 68,549 70,842
Provision for loan losses 3,265 1,454 8,491 5,452
Net interest income after provision for loan losses 18,743 22,562 60,058 65,390
Noninterest income        
Deposit services 3,907 4,098 11,493 12,005
Gain on sale of securities available for sale 4,302 3,609 13,571 9,080
(Loss) gain on sale of securities carried at fair value        
through income 254 (498) 592
         
Total other-than-temporary impairment losses (21)
Portion of loss recognized in other comprehensive income (before taxes) (160)
Net impairment losses recognized in earnings (181)
         
Fair value gains – securities 3,274 7,357
FHLB advance option impairment charges (195) (7,819) (2,031) (7,819)
Gain on sale of loans 314 402 743 967
Trust income 705 672 2,051 1,968
Bank owned life insurance income 260 288 780 835
Other 1,205 957 3,439 3,021
Total noninterest income 10,498 5,735 29,367 28,006
Noninterest expense        
Salaries and employee benefits 11,919 11,280 35,894 34,593
Occupancy expense 1,980 1,866 5,589 5,365
Equipment expense 506 540 1,570 1,558
Advertising, travel & entertainment 606 591 1,813 1,694
ATM and debit card expense 251 235 817 716
Director fees 261 193 802 584
Supplies 178 186 559 571
Professional fees 606 571 1,547 1,583
Postage 179 178 536 543
Telephone and communications 416 285 1,267 967
FDIC Insurance 429 212 1,313 1,710
Other 1,745 1,559 4,987 4,660
Total noninterest expense 19,076 17,696 56,694 54,544
Income before income tax expense 10,165 10,601 32,731 38,852
Provision for income tax expense 1,558 2,038 6,256 7,924
Net income 8,607 8,563 26,475 30,928
Less: Net income attributable to the noncontrolling interest (1,358)
Net income attributable to Southside Bancshares, Inc. $8,607 $8,563 $26,475 $29,570
Common share data attributable to Southside Bancshares, Inc:        
Weighted-average basic shares outstanding 17,363 17,279 17,342 17,263
Weighted-average diluted shares outstanding 17,377 17,286 17,354 17,270
Net income per common share        
Basic $0.50 $0.50 $1.53 $1.71
Diluted 0.50 0.50 1.53 1.71
Book value per common share 15.92 14.99
Cash dividend paid per common share 0.20 0.18 0.58 0.52
  At or for the Three
Months Ended
September 30,
At or for the Nine Months
Ended September 30,
  2012 2011 2012 2011
  (unaudited) (unaudited)
Selected Performance Ratios:        
Return on average assets 1.02% 1.07% 1.06% 1.28%
Return on average shareholders' equity 12.58 13.45 13.19 16.87
Average yield on interest earning assets 4.04 4.77 4.23 4.93
Average yield on interest bearing liabilities 1.05 1.43 1.15 1.56
Net interest spread 2.99 3.34 3.08 3.37
Net interest margin 3.22 3.60 3.31 3.65
Average interest earnings assets to average interest bearing liabilities 127.11 122.22 126.18 121.77
Noninterest expense to average total assets 2.26 2.22 2.28 2.37
Efficiency ratio 59.85 53.37 59.28 55.91

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)
  Nine Months Ended
  September 30, 2012 September 30, 2011
  AVG   AVG AVG   AVG
  BALANCE INTEREST YIELD BALANCE INTEREST YIELD
ASSETS            
INTEREST EARNING ASSETS:            
Loans (1) (2) $1,159,643 $55,180 6.36% $1,049,918 $53,443 6.81%
Loans Held For Sale 1,717 45 3.50% 3,414 100 3.92%
Securities:            
Investment Securities (Taxable)(4) 5,452 73 1.79% 6,040 49 1.08%
Investment Securities (Tax-Exempt)(3)(4) 341,673 14,352 5.61% 296,752 14,198 6.40%
Mortgage-backed and Related Securities (4) 1,526,375 27,730 2.43% 1,476,950 37,899 3.43%
Total Securities 1,873,500 42,155 3.01
%
1,779,742 52,146 3.92
%
 FHLB stock and other investments, at cost 34,966 190 0.73% 30,146 182 0.81%
Interest Earning Deposits 14,092 19 0.18% 9,164 15 0.22%
Total Interest Earning Assets 3,083,918 97,589 4.23% 2,872,384 105,886 4.93%
NONINTEREST EARNING ASSETS:            
Cash and Due From Banks 41,908     42,069    
Bank Premises and Equipment 50,455     50,570    
Other Assets 168,140     137,582    
Less: Allowance for Loan Loss (19,761)     (19,258)    
Total Assets $3,324,660     $3,083,347    
LIABILITIES AND SHAREHOLDERS' EQUITY            
INTEREST BEARING LIABILITIES:            
Savings Deposits $95,691 $108 0.15% $84,899 $168 0.26%
Time Deposits 794,370 5,945 1.00% 856,059 8,554 1.34%
Interest Bearing Demand Deposits 870,904 2,562 0.39% 790,608 3,244 0.55%
Total Interest Bearing Deposits 1,760,965 8,615 0.65% 1,731,566 11,966 0.92%
Short-term Interest Bearing Liabilities 305,818 4,877 2.13% 266,730 5,077 2.54%
Long-term Interest Bearing Liabilities – FHLB Dallas 316,964 5,094 2.15% 300,184 7,958 3.54%
Long-term Debt (5) 60,311 2,487 5.51% 60,311 2,439 5.41%
Total Interest Bearing Liabilities 2,444,058 21,073 1.15
%
2,358,791 27,440 1.56%
NONINTEREST BEARING LIABILITIES:            
Demand Deposits 560,636     454,454    
Other Liabilities 51,888     34,299    
Total Liabilities 3,056,582     2,847,544    
SHAREHOLDERS' EQUITY (6) 268,078     235,803    
Total Liabilities and Shareholders' Equity $3,324,660     $3,083,347    
NET INTEREST INCOME   $76,516     $78,446  
NET INTEREST MARGIN ON AVERAGE EARNING ASSETS     3.31%     3.65%
NET INTEREST SPREAD     3.08%     3.37%

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

(2)  Interest income includes taxable-equivalent adjustments of $3,082 and $2,913 for the nine months ended September 30, 2012 and September 30, 2011, respectively.

(3)  Interest income includes taxable-equivalent adjustments of $4,885 and $4,691 for the nine months ended September 30, 2012 and September 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 $1,487 for the nine months ended September 30, 2011.

Note: As of September 30, 2012 and September 30, 2011, loans totaling $11,879 and $10,634, 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
  September 30, 2012 September 30, 2011
  AVG   AVG AVG   AVG
  BALANCE INTEREST YIELD BALANCE INTEREST YIELD
ASSETS            
INTEREST EARNING ASSETS:            
Loans (1) (2) $1,203,651 $19,048 6.30% $1,031,435 $17,162 6.60%
Loans Held For Sale 1,877 14 2.97% 4,019 32 3.16%
Securities:            
Investment Securities (Taxable)(4) 6,016 22 1.45% 4,037 11 1.08%
Investment Securities (Tax-Exempt)(3)(4) 466,776 5,879 5.01% 285,598 4,634 6.44%
Mortgage-backed and Related Securities (4) 1,395,563 6,695 1.91% 1,563,263 13,292 3.37%
Total Securities 1,868,355 12,596 2.68% 1,852,898 17,937 3.84%
 FHLB stock and other investments, at cost 35,782 57 0.63% 29,665 50 0.67%
Interest Earning Deposits 12,789 4 0.12% 5,440 2 0.15%
Total Interest Earning Assets 3,122,454 31,719 4.04% 2,923,457 35,183 4.77%
NONINTEREST EARNING ASSETS:            
Cash and Due From Banks 41,718     37,269    
Bank Premises and Equipment 50,265     50,681    
Other Assets 170,885     173,892    
Less: Allowance for Loan Loss (20,276)     (18,474)    
Total Assets $3,365,046     $3,166,825    
LIABILITIES AND SHAREHOLDERS' EQUITY            
INTEREST BEARING LIABILITIES:            
Savings Deposits $97,755 $35 0.14% $87,960 $50 0.23%
Time Deposits 740,203 1,574 0.85% 854,485 2,810 1.30%
Interest Bearing Demand Deposits 893,773 846 0.38% 803,159 1,019 0.50%
Total Interest Bearing Deposits 1,731,731 2,455 0.56% 1,745,604 3,879 0.88%
Short-term Interest Bearing Liabilities 293,692 1,551 2.10% 320,934 1,643 2.03%
Long-term Interest Bearing Liabilities – FHLB Dallas 370,815 1,618 1.74% 265,162 2,295 3.43%
Long-term Debt (5) 60,311 832 5.49% 60,311 820 5.39%
Total Interest Bearing Liabilities 2,456,549 6,456 1.05% 2,392,011 8,637 1.43%
NONINTEREST BEARING LIABILITIES:            
Demand Deposits 587,315     467,008    
Other Liabilities 48,929     54,862    
Total Liabilities 3,092,793     2,913,881    
SHAREHOLDERS' EQUITY (6) 272,253     252,944    
Total Liabilities and Shareholders' Equity $3,365,046     $3,166,825    
NET INTEREST INCOME   $25,263     $26,546  
NET INTEREST MARGIN ON AVERAGE EARNING ASSETS     3.22%     3.60%
NET INTEREST SPREAD     2.99%     3.34
%

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

(2)  Interest income includes taxable-equivalent adjustments of $1,215 and $965 for the three months ended September 30, 2012 and September 30, 2011, respectively.

(3)  Interest income includes taxable-equivalent adjustments of $2,040 and $1,565 for the three months ended September 30, 2012 and September 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 $405 for the three months ended September 30, 2011.

Note: As of September 30, 2012 and September 30, 2011, loans totaling $11,879 and $10,634, 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.

CONTACT: Susan Hill at (903) 531-7220, or susan.hill@southside.com

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