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Southside Bancshares, Inc. Announces Financial Results for the Three Months and Year Ended December 31, 2017

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TYLER, Texas, Feb. 06, 2018 (GLOBE NEWSWIRE) -- Southside Bancshares, Inc. ("Southside" or the "Company") (NASDAQ:SBSI) today reported its financial results for the three months and year ended December 31, 2017.

Southside reported net income of $10.3 million for the three months ended December 31, 2017, a decrease of $1.2 million, or 10.7%, compared to $11.6 million for the same period in 2016.  Southside reported net income of $54.3 million for the year ended December 31, 2017, an increase of $5.0 million, or 10.1%, compared to $49.3 million for the same period in 2016.

Diluted earnings per common share were $0.33 for the three months ended December 31, 2017, a decrease of $0.09, or 21.4%, compared to $0.42 for the three months ended December 31, 2016.  For the year ended December 31, 2017, diluted earnings per common share were $1.81, the same as for the year ended 2016.

The return on average shareholders' equity for the year ended December 31, 2017 was 9.65%, compared to 10.54% for the same period in 2016.  The return on average assets was 0.96% for the year ended December 31, 2017, compared to 0.94% for the same period in 2016.

"Continued solid performance and the closing of our Diboll transaction during the fourth quarter provided a nice finish to 2017," stated Lee R. Gibson, President and Chief Executive Officer of Southside.  "Earnings per share (diluted) for the fourth quarter were negatively impacted $0.08 due to acquisition cost, net of tax, related to the Diboll transaction.  We were also required to recalculate our net deferred tax asset during the fourth quarter to account for the lower corporate tax rates and the reduced future deductions as a result of the Tax Cuts and Jobs Act passed in December 2017.  This recalculation resulted in a non-cash tax charge that negatively impacted earnings $0.08 per diluted common share for the fourth quarter.  The reduction in corporate tax rates is expected to positively impact earnings in 2018 and in future years."

"Many of our customers have become more optimistic about their economic future as a result of the reduced regulatory burden and the anticipated benefits from lower tax rates.  Loans, excluding acquired loans, increased 4.6% during 2017 while maintaining strong asset quality with nonperforming assets at 0.16% of total assets.  The economic conditions in Texas, including our market areas, remain solid with the Austin and DFW markets continuing to perform exceptionally well."

"The completion of the Diboll transaction, healthy, growing markets and tax rate cuts, all provide us a solid foundation on which to build in 2018. I want to thank all of our customers, shareholders, team members and directors for making Southside the success it is today."

Loans and Deposits

For the year ended December 31, 2017, total loans increased by $737.8 million, or 28.9%, compared to December 31, 2016, with approximately $621.3 million the result of the consummation of the Diboll merger in the fourth quarter.  The net increase in our loans was comprised primarily of increases of $319.2 million of commercial real estate loans, $168.1 million of 1-4 family residential loans, $95.7 million of construction loans, $89.2 million of commercial loans, $47.2 million of municipal loans, and $18.5 million of loans to individuals.  Oil and gas industry loans totaled 1.50% of the loan portfolio at December 31, 2017, compared to 1.09% at December 31, 2016.

Nonperforming assets decreased during the year ended December 31, 2017 by $4.6 million, or 30.7%, to $10.5 million, or 0.16% of total assets, compared to $15.1 million, or 0.27% of total assets at December 31, 2016, due to the payoff of several nonaccrual commercial loans during 2017.

During the year ended December 31, 2017, the allowance for loan losses increased by $2.9 million, or 16.0%, to $20.8 million, or 0.63% of total loans, compared to 0.70% of total loans at December 31, 2016.  The decrease in the allowance as a percentage of total loans was due to the fact that there was no allowance for loan losses recorded for the Diboll loans since credit quality was considered in the fair valuing of loans and the timing of the completion of the merger on November 30, 2017, in relation to year end.

For the year ended December 31, 2017, deposits, net of brokered deposits, increased $956.2 million, or 27.3%, compared to December 31, 2016, primarily due to approximately $899.3 million of deposits assumed in the Diboll merger.

Net Interest Income for the Three Months Ended December 31, 2017

Net interest income increased $3.7 million, or 10.6%, to $38.3 million for the three months ended December 31, 2017, compared to $34.6 million for the same period in 2016.  The increase in net interest income was the result of a $6.4 million increase in interest income primarily from our loan portfolio, partially offset by the increase in interest expense of $2.8 million associated with our deposits and other interest bearing liabilities, compared to the same period in 2016.  For the three months ended December 31, 2017, our net interest spread increased slightly to 2.91%, compared to 2.90% for the same period in 2016.  Our net interest margin increased to 3.12% for the three months ended December 31, 2017, compared to 3.03% for the same period in 2016, due to the increase in net interest income and earning assets partially offset by the increase in average rates paid on interest bearing liabilities.  The increase in average rates paid on interest bearing liabilities was primarily due to overall higher interest rates during 2017.  The increase in the average yield on earning assets during the three months ended December 31, 2017 was the result of increases in the average yields on most of the earning asset categories partially offset by the decrease in the average yield on tax-exempt investment securities.  The net interest spread and margin increased on a linked quarter basis from 2.82% and 3.02%, respectively, for the three months ended September 30, 2017, to 2.91% and 3.12%, respectively, for the three months ended December 31, 2017.

Net Interest Income for the Year Ended December 31, 2017

Net interest income increased $4.4 million, or 3.2%, to $144.0 million for the year ended December 31, 2017, compared to $139.6 million for the same period in 2016.  The increase in net interest income was the result of an $18.6 million increase in interest income on loans and the securities portfolio, partially offset by the increase in interest expense of $14.2 million associated with our deposits and other interest bearing liabilities, compared to the same period in 2016.  For the year ended December 31, 2017, our net interest spread decreased to 2.89%, compared to 3.14% for the same period in 2016.  Our net interest margin decreased to 3.07% for the year ended December 31, 2017, compared to 3.26% for the same period in 2016.  Both the decrease in net interest spread and margin was due to higher average rates paid on interest bearing liabilities, partially offset by the increase in the average yield on earning assets.  The increase in average rates paid on interest bearing liabilities was primarily due to overall higher interest rates during 2017 and the non-recurring purchase accretion on the certificate of deposit premium during 2016.  The increase in the average yield on earning assets during the year ended December 31, 2017 was the result of increases in the average yields on most of the earning asset categories partially offset by the decrease in the average yield on tax-exempt investment securities combined with the recognition of $1.3 million of interest income on the payoff of a long-term nonaccrual loan during 2016 that did not recur in 2017.

Net Income for the Three Months Ended December 31, 2017

Net income decreased $1.2 million, or 10.7%, for the three months ended December 31, 2017, to $10.3 million compared to the same period in 2016.  The decrease was primarily the result of a $4.1 million increase in noninterest expense, a $4.0 million increase in income tax expense and a $2.8 million increase in interest expense, partially offset by a $6.4 million increase in interest income, a $2.4 million increase in noninterest income and a $0.8 million decrease in provision for loan losses.

Noninterest income increased $2.4 million, or 35.5%, for the three months ended December 31, 2017, compared to the same period in 2016, due to a decrease in the net loss on sale of securities available for sale and an increase in deposit services income, partially offset by a decrease in other noninterest income.  Other noninterest income decreased primarily due to a decrease in mortgage servicing fee income.

Noninterest expense increased $4.1 million, or 15.7%, for the three months ended December 31, 2017, compared to the same period in 2016, primarily due to acquisition expense of $3.5 million incurred in connection with the Diboll merger.

The increase in income tax expense for the three months ended December 31, 2017 of $4.0 million, or 219.2%, was primarily attributable to $2.4 million associated with the recalculation of our net deferred tax assets as of December 31, 2017 in accordance with the Tax Cuts and Jobs Act and a higher effective tax rate of 21.3%, excluding the effect of the recalculation of our net deferred tax assets, compared to 13.7% for the same three month period in 2016.

Net Income for the Year Ended December 31, 2017

Net income increased $5.0 million, or 10.1%, for the year ended December 31, 2017, to $54.3 million compared to the same period in 2016.  The increase was primarily the result of an $18.6 million increase in interest income, a $5.1 million decrease in provision for loan losses and a $3.2 million decrease in noninterest expense, partially offset by a $14.2 million increase in interest expense, a $5.8 million increase in income tax expense and a $1.9 million decrease in noninterest income.

Noninterest income decreased $1.9 million, or 4.9%, for the year ended December 31, 2017 compared to the same period in 2016, due to a decrease in net gain on sale of securities available for sale and a decrease in gain on sale of loans, partially offset by an increase in deposit services income.

Noninterest expense decreased $3.2 million, or 2.9%, for the year ended December 31, 2017, compared to the same period in 2016.  The decrease is attributable to a reduction in salaries and employee benefits of $3.5 million, occupancy expense of $1.7 million, other noninterest expense of $1.3 million and professional fees of $1.1 million, partially offset by acquisition expense of $4.4 million incurred in connection with the Diboll merger.  The decrease in salaries and employee benefits is primarily due to decreases in direct salary expense and retirement expense which included a one-time expense of $1.7 million related to the acceptance of early retirement packages of 16 employees during the year ended December 31, 2016.  The decrease in occupancy expense is due to the early termination of a lease during the third quarter of 2016.  Other noninterest expense decreased primarily due to reductions in the provision expense for losses on loans sold with recourse and unfunded loan commitments, repossessed assets expense and losses on other real estate owned.  Professional fees decreased due to less consulting fees associated with cost containment and process improvement efforts initiated in January 2016.

The increase in income tax expense for the year ended December 31, 2017 of $5.8 million, or 56.1%, was attributable to $2.4 million associated with the recalculation of our net deferred tax assets as of December 31, 2017 in accordance with the Tax Cuts and Jobs Act and a higher effective tax rate of 19.5%, excluding the effect of the recalculation of our net deferred tax assets, compared to 17.3% for the same period in 2016.

Conference Call

Southside's management team will host a conference call to discuss its fourth quarter and year end December 31, 2017 financial results on Tuesday, February 6, 2018 at 9:00 a.m. CST.  The call can be accessed by dialing 844-775-2540 and by identifying the conference ID number 8799149 or by identifying "Southside Bancshares, Inc., Fourth Quarter and Year End 2017 Earnings Call."  To listen to the call via webcast, register at www.southside.com/about/investor-relations.

For those unable to listen to the conference call live, a recording will be available from approximately 3:00 p.m. CST February 6, 2018 through February 18, 2018 by accessing the company website, www.southside.com/about/investor-relations.

Non-GAAP Financial Measures

Our accounting and reporting policies conform to generally accepted accounting principles ("GAAP") in the United States and prevailing practices in the banking industry.  However, certain non-GAAP measures are used by management to supplement the evaluation of our performance.  These include the following fully-taxable equivalent measures (FTE): (i) tax-equivalent net interest income, (ii) tax-equivalent net interest margin, (iii) tax-equivalent net interest spread, and (iv) tax-equivalent efficiency ratio, which include the effects of taxable-equivalent adjustments using a federal income tax rate of 35% to increase tax-exempt interest income to a tax-equivalent basis.  Whenever we present a non-GAAP financial measure in an SEC filing, we are also required to present the most directly comparable financial measure calculated and presented in accordance with GAAP and reconcile the differences between the non-GAAP financial measure and such comparable GAAP measure.  Tax-equivalent adjustments are reported in notes 2 and 3 to the "Average Balances with Average Yields and Rates" tables below.

Tax-equivalent net interest income, net interest margin and net interest spread.  Net interest income on a tax-equivalent basis is a non-GAAP measure that adjusts for the tax-favored status of net interest income from loans and investments.  We believe this measure to be the preferred industry measurement of net interest income and it enhances comparability of net interest income arising from taxable and tax-exempt sources.  The most directly comparable financial measure calculated in accordance with GAAP is our net interest income.  Net interest margin on a tax-equivalent basis is net interest income on a tax-equivalent basis divided by average interest-earning assets on a tax-equivalent basis.  The most directly comparable financial measure calculated in accordance with GAAP is our net interest margin.  Net interest spread on a tax-equivalent basis is the difference in the average yield on average interest-earning assets on a tax equivalent basis and the average rate paid on average interest-bearing liabilities.   The most directly comparable financial measure calculated in accordance with GAAP is our net interest spread.

Tax-equivalent efficiency ratio.  The efficiency ratio, calculated on a tax-equivalent basis, is a non-GAAP measure that provides a measure of productivity in the banking industry.  This ratio is calculated to measure the cost of generating one dollar of revenue.  The ratio is designed to reflect the percentage of one dollar which must be expended to generate that dollar of revenue.  We calculate this ratio by dividing noninterest expense, excluding amortization of intangibles and certain non-recurring expense by the sum of net interest income on a tax-equivalent basis and noninterest income, excluding gains (losses) on sales of investment securities and certain non-recurring impairments. The most directly comparable financial measure calculated in accordance with GAAP is our efficiency ratio.

These non-GAAP financial measures should not be considered alternatives to GAAP-basis financial statements and other bank holding companies may define or calculate these non-GAAP measures or similar measures differently.

In the following table we present, for the years ended December 31, 2017 and 2016 and for five quarterly periods ended December 31, 2017, the reconciliation of net interest income to net interest income adjusted to a fully taxable-equivalent basis assuming a 35.00% marginal tax rate for interest earned on tax-exempt assets such as municipal loans and investment securities (dollars in thousands), along with the calculation of total revenue, adjusted noninterest expense, efficiency ratio (FTE), net interest margin (FTE) and net interest spread (FTE).

    Three Months Ended   Years Ended
    2017   2016   2017   2016
    Dec. 31,   Sept. 30,   June 30,   Mar. 31,   Dec. 31,   Dec. 31,   Dec. 31,
Net interest income (GAAP)   $ 38,306     $ 34,960     $ 35,424     $ 35,280     $ 34,641     $ 143,970     $ 139,565  
Tax equivalent adjustments:                            
Loans (1)   1,125     1,103     1,050     1,035     1,045     4,313     4,251  
Investment securities (tax-exempt) (2)   3,049     3,544     3,229     3,375     3,657     13,197     13,739  
Net interest income (FTE) (3)   42,480     39,607     39,703     39,690     39,343     161,480     157,555  
Noninterest income   9,099     9,408     9,293     9,673     6,713     37,473     39,411  
Nonrecurring income (4)   483     (627 )   75     (122 )   2,776     (191 )   (2,426 )
Total revenue   $ 52,062     $ 48,388     $ 49,071     $ 49,241     $ 48,832     $
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