13.	EMPLOYEE BENEFITS

Southside Bank has a deferred compensation agreement with 18 of its executive officers, which generally provides for payment of an aggregate amount of $8.3 million over a maximum period of 15 years after retirement or death. Deferred compensation expense was $361,000, $256,000 and $257,000 for the years ended December 31, 2011, 2010 and 2009, respectively. For the years ended December 31, 2011 and 2010, the deferred compensation plan liability totaled $4.3 million and $3.9 million, respectively.

We provide accident and health insurance for substantially all employees through a self-funded insurance program. Our healthcare plan was amended December 2006 to eliminate retiree health insurance for all current employees effective December 31, 2006. Effective July 31, 2007, the healthcare plan no longer provides health insurance coverage for any current retirees. The cost of health care benefits was $3.5 million, $3.7 million and $3.6 million for the years ended December 31, 2011, 2010 and 2009, respectively. In order to be eligible for health insurance coverage as a retiree, the retiree must have 50 years of service with the Company. In addition, the eligible retiree must have Medicare coverage, including part A, part B and part D. Premiums paid will be billed at the Consolidated Omnibus Budget Reconciliation Act (“COBRA”) rates. There were no retirees participating in the health insurance plan as of December 31, 2011 and 2010.

We have an Employee Stock Ownership Plan (the “ESOP”) which covers substantially all employees. Contributions to the ESOP are at the sole discretion of the board of directors. There was $250,000 contributed to the ESOP for each of the years ended December 31, 2011, 2010 and 2009. At December 31, 2011 and 2010, 328,838 and 336,459 shares of common stock were owned by the ESOP, respectively. The number of shares has been adjusted as a result of stock splits and stock dividends. These shares are treated as externally held shares for dividend and earnings per share calculations.

We have an officer's long-term disability income policy which provides coverage in the event they become disabled as defined under its terms. Individuals are automatically covered under the policy if they (a) have been elected as an officer, (b) have been an employee of Southside Bank for three years and (c) receive earnings of $50,000 or more on an annual basis. The policy provides, among other things, that should a covered individual become totally disabled he would receive two-thirds of his current salary, not to exceed $15,000 per month. The benefits paid out of the policy are limited by the benefits paid to the individual under the terms of our other Company-sponsored benefit plans.

We entered into split dollar agreements with eight of our executive officers. The agreements provide we will be the beneficiary of bank owned life insurance (“BOLI”) insuring the executives' lives. The agreements provide the executives the right to designate the beneficiaries of the death benefits guaranteed in each agreement. The agreements originally provided for death benefits of an initial aggregate amount of $4.5 million. The individual amounts are increased annually on the anniversary date of the agreement by inflation adjustment factors ranging from 3% to 5%. As of December 31, 2011, the expected death benefits total $5.9 million. The agreements also state that before and after the executive's retirement dates, we shall also pay an annual gross-up bonus to the executive in an amount sufficient to enable the executive to pay federal income tax on both the economic benefit and on the gross-up bonus. The expense required to record the post retirement liability associated with the split dollar post retirement bonuses was $10,000, $41,000 and $70,000 for the years ended December 31, 2011, 2010 and 2009, respectively. For the years ended December 31, 2011 and 2010, the split dollar liability totaled $1.4 million and 1.3 million, respectively.

We have a defined benefit pension plan (“the Plan”) pursuant to which participants are entitled to benefits based on final average monthly compensation and years of credited service determined in accordance with plan provisions.

Entrance into the Plan by new employees was frozen effective December 31, 2005. Employees hired after December 31, 2005 are not eligible to participate in the plan. All participants in the Plan are fully vested. Benefits are payable monthly commencing on the later of age 65 or the participant's date of retirement. Eligible participants may retire at reduced benefit levels after reaching age 55. We contribute amounts to the pension fund sufficient to satisfy funding requirements of the Employee Retirement Income Security Act.

Plan assets, which consist primarily of marketable equity and debt instruments, are valued using market quotations. Plan obligations and the annual pension expense are determined by independent actuaries and through the use of a number of assumptions. Key assumptions in measuring the plan obligations include the discount rate, the rate of salary increases and the estimated future return on plan assets.

In determining the discount rate, we utilized a cash flow matching analysis to determine a range of appropriate discount rates for the defined benefit pension plan and restoration plans. In developing the cash flow matching analysis, we had our actuaries construct a portfolio of high quality noncallable bonds to match as closely as possible the timing of future benefit payments of the plans at December 31, 2011. We utilized a bond selection-settlement approach based on Towers Watson's Bond:Link. Bond:Link selects a portfolio of bonds from a universe of high quality corporate bonds rated Aa by at least half of the rating agencies available. Based on the results of this cash flow matching analysis, we were able to determine an appropriate discount rate.

Salary increase assumptions are based upon historical experience and anticipated future management actions. The expected long-term rate of return assumption reflects the average return expected based on the investment strategies and asset allocation of the assets invested to provide for the Plan's liabilities. We considered broad equity and bond indices, long-term return projections, and actual long-term historical Plan performance when evaluating the expected long-term rate of return assumption. At December 31, 2011, the weighted-average actuarial assumptions used to determine the benefit obligation of the Plan were: a discount rate of 4.84%; a long-term rate of return on Plan assets of 7.25%; and assumed salary increases of 4.5%. Material changes in pension benefit costs may occur in the future due to changes in these assumptions. Future annual amounts could be impacted by changes in the number of Plan participants, changes in the level of benefits provided, changes in the discount rates, changes in the expected long-term rate of return, changes in the level of contributions to the Plan and other factors.

Plan assets included 183,966 shares of our stock at December 31, 2011 and 2010. Our stock included in Plan assets was purchased at fair value. The number of shares has been adjusted as a result of stock splits and stock dividends. During 2011, our underfunded status increased to $7.8 million at December 31, 2011 from an underfunded status of $19,000 at December 31, 2010, primarily as a result of the decrease in the discount rate to 4.84% at December 31, 2011 from 5.63% at December 31, 2010.

We have a nonfunded supplemental retirement plan (the “Restoration Plan”) for our employees whose benefits under the principal retirement plan are reduced because of compensation deferral elections or limitations under federal tax laws.

We use a measurement date of December 31 for our plans.

	2011						2010						2009
	Defined Benefit Pension Plan			Restoration Plan			Defined Benefit Pension Plan			Restoration Plan			Defined Benefit Pension Plan			Restoration Plan
	(in thousands)
Change in Projected Benefit Obligation:

Benefit obligation at end of prior year	$	53,471		$	7,174		$	45,290		$	4,789		$	42,781		$	3,989
Service cost		1,536			174			1,363			154			1,277			108
Interest cost		2,980			395			2,832			384			2,570			271
Actuarial loss		7,741			646			5,538			1,927			150			501
Benefits paid		(1,554	)		(80	)		(1,469	)		(80	)		(1,386	)		(80	)
Expenses paid		(112	)		–			(83	)		–			(102	)		–
Benefit obligation at end of year		64,062			8,309			53,471			7,174			45,290			4,789

Change in Plan Assets:

Fair value of plan assets at end of prior year		53,452			–			47,669			–			36,894			–
Actual return		2,466			–			4,335			–			6,263			–
Employer contributions		2,000			80			3,000			80			6,000			80
Benefits paid		(1,554	)		(80	)		(1,469	)		(80	)		(1,386	)		(80	)
Expenses paid		(112	)		–			(83	)		–			(102	)		–
Fair value of plan assets at end of year		56,252			–			53,452			–			47,669			–
Funded status at end of year		(7,810	)		(8,309	)		(19	)		(7,174	)		2,379			(4,789	)
Accrued benefit (liability) recognized	$	(7,810	)	$	(8,309	)	$	(19	)	$	(7,174	)	$	2,379		$	(4,789	)

Accumulated benefit obligation at end of year	$	51,071		$	6,088		$	42,043		$	4,586		$	35,954		$	3,202

Amounts related to our defined benefit pension and restoration plans recognized as a component of other comprehensive income (loss) were as follows (in thousands):

	2011						2010						2009
	Defined Benefit Pension Plan			Restoration Plan			Defined Benefit Pension Plan			Restoration Plan			Defined Benefit Pension Plan			Restoration Plan

Recognition of net loss	$	1,163		$	303		$	1,006		$	290		$	1,200		$	209
Recognition of prior service credit		(42	)		(2	)		(42	)		(2	)		(42	)		(2	)
Net gain (loss) occurring during the year		(9,158	)		(646	)		(4,856	)		(1,927	)		3,235			(501	)
		(8,037	)		(345	)		(3,892	)		(1,639	)		4,393			(294	)
Deferred tax benefit		2,813			121			1,362			574			(1,537	)		103
Other comprehensive income (loss), net of tax	$	(5,224	)	$	(224	)	$	(2,530	)	$	(1,065	)	$	2,856		$	(191	)

Net amounts recognized in net periodic benefit cost and other comprehensive loss as of December 31, 2011 and 2010 were as follows (in thousands):

	2011						2010
	Defined Benefit Pension Plan			Restoration Plan			Defined Benefit Pension Plan			Restoration Plan

Net loss	$	1,163		$	303		$	1,006		$	290
Prior service credit		(42	)		(2	)		(42	)		(2	)
		1,121			301			964			288
Deferred tax benefit		(392	)		(105	)		(337	)		(101	)
Accumulated other comprehensive loss, net of tax	$	729		$	196		$	627		$	187

Amounts recognized as a component of accumulated other comprehensive loss as of December 31, 2011 and 2010 were as follows (in thousands):

	2011						2010
	Defined Benefit Pension Plan			Restoration Plan			Defined Benefit Pension Plan			Restoration Plan

Net loss	$	(28,738	)	$	(3,954	)	$	(20,743	)	$	(3,611	)
Prior service credit		422			3			464			5
		(28,316	)		(3,951	)		(20,279	)		(3,606	)
Deferred tax benefit		9,911			1,383			7,098			1,262
Accumulated other comprehensive loss, net of tax	$	(18,405	)	$	(2,568	)	$	(13,181	)	$	(2,344	)

At December 31, 2011 and 2010, the assumptions used to determine the benefit obligation were as follows:

	2011						2010
	Defined Benefit Pension Plan			Restoration Plan			Defined Benefit Pension Plan			Restoration Plan

Discount rate		4.84	%		4.84	%		5.63	%		5.63	%
Compensation increase rate		4.50	%		4.50	%		4.50	%		4.50	%

Net periodic pension cost and postretirement benefit cost for the years ended December 31, 2011, 2010 and 2009 included the following components (in thousands):

	2011			2010			2009
Defined Benefit Pension Plan
Service cost	$	1,536		$	1,363		$	1,277
Interest cost		2,980			2,832			2,570
Expected return on assets		(3,883	)		(3,652	)		(2,878	)
Net loss amortization		1,163			1,006			1,200
Prior service credit amortization		(42	)		(42	)		(42	)
Net periodic benefit cost	$	1,754		$	1,507		$	2,127

Restoration Plan
Service cost	$	174		$	154		$	108
Interest cost		395			384			271
Net loss amortization		303			290			209
Prior service credit amortization		(2	)		(2	)		(2	)
Net periodic benefit cost	$	870		$	826		$	586

For the years ended December 31, 2011, 2010, and 2009, the assumptions used to determine net periodic pension cost and postretirement benefit cost were as follows:

	2011			2010			2009
Defined Benefit Restoration Plan
Discount rate		5.63	%		6.10	%		6.10	%
Expected long-term rate of return on plan assets		7.25	%		7.50	%		7.50	%
Compensation increase rate		4.50	%		4.50	%		4.50	%

Restoration Plan
Discount rate		5.63	%		6.10	%		6.10	%
Compensation increase rate		4.50	%		4.50	%		4.50	%

The amounts in accumulated other comprehensive income (loss) that are expected to be recognized as components of net periodic benefit cost during 2012 are as follows (in thousands):

	Defined Benefit Pension Plan			Restoration Plan

Net loss	$	1,660		$	338
Prior service credit		(42	)		(1	)
		1,618			337
Deferred tax benefit		(566	)		(118	)
Accumulated other comprehensive loss, net of tax	$	1,052		$	219

The major categories of assets in our Plan as of year-end are presented in the following table. Assets are segregated by the level of the valuation inputs within the fair value hierarchy established by ASC Topic 820 “Fair Value Measurements and Disclosures,” utilized to measure fair value (see “Note 14 – Fair Value Measurement”). Our Restoration Plan is unfunded.

	2011		2010
	(in thousands)
Level 1:
Cash	$	2,149	$	3,335
Equity Securities:
U.S. large cap (1)		30,093		25,204
U.S. mid cap (1)		1,914		2,959
U.S. small cap (2)		3,985		4,194
International developed (3)		387		456
International emerging (4)		329		415

Level 2:
Cash equivalents		6,474		4,479
Fixed Income Securities:
Corporate bonds (5)		943		1,493
U.S. government agencies (5)		6,252		8,530
Municipal bonds (5)		2,189		451
U.S. agency mortgage-backed securities (6)		1,537		1,936

Total fair value of plan assets	$	56,252	$	53,452

(1)	This category is comprised of individual securities that are actively managed.

(2)	This category is also comprised solely of Southside Bancshares stock that is owned in the Plan.

(3)	This category is comprised of a broadly ‘passive' mutual fund.

(4)	This category is comprised of a broadly diversified ‘passive' mutual fund.

(5)	This category is comprised of individual investment grade securities that are generally held to maturity.

(6)	This category is comprised of individual securities that are generally not held to maturity.

We did not have any plan assets with Level 3 input fair value measurements at December 31, 2011 or 2010. There were no transfers between Level 1 and Level 2 during the year ended December 31, 2011.

Our overall investment strategy is to realize long-term growth of the plan within acceptable risk parameters, while funding benefit payments from dividend and interest income, to the extent possible. The target allocations for plan assets are 65% equities, 33% fixed income and 2% cash equivalents. Equity securities are diversified among U.S. and international (both developed and emerging), large, mid and small caps, and value and growth securities. The investment objective of equity funds is long-term capital appreciation with current income. Fixed income securities include U.S. Treasuries, agencies, CDs, corporate bonds, and mortgage-backed securities. The investment objective of fixed income funds is to maximize investment return while preserving investment principal. Mutual funds, primarily because of the superior diversification they provide, are used to provide specific international developed and emerging market exposure.

As of December 31, 2011, expected future benefit payments related to our defined benefit pension plan and restoration plan were as follows (in thousands):

	Defined Benefit Pension Plan		Restoration Plan
2012	$	1,921	$	281
2013		2,115		287
2014		2,323		308
2015		2,595		339
2016		2,784		358
2017 through 2021		17,972		3,215
	$	29,710	$	4,788

We expect to contribute $3.0 million to our defined benefit pension plan and $80,000 to our postretirement benefit plan in 2012.

401(k) Plan

We have a 401(k) defined contribution plan (the “401(k) Plan”) covering substantially all employees, who have completed one year of service and are age 21 or older. A participant may elect to defer a percentage of their compensation subject to certain limits based on federal tax laws. For the years ended December 31, 2011, 2010 and 2009, expense attributable to the 401(k) Plan amounted to $194,000, $119,000 and $100,000, respectively.

Share-based Incentive Plans

2009 Incentive Plan (the “2009 Incentive Plan”)

On April 16, 2009, our shareholders approved the Southside Bancshares, Inc. 2009 Incentive Plan (the “2009 Incentive Plan”), which is a stock-based incentive compensation plan. A total of 1,157,625 shares of our common stock were reserved and available for issuance pursuant to awards granted under the 2009 Incentive Plan. Under the 2009 Incentive Plan, we were authorized to grant nonqualified stock options (“NQSOs”), restricted stock units (“RSUs”) or any combination thereof to certain officers. On June 9, 2011, we granted RSUs and NQSOs pursuant to the 2009 Incentive Plan.

As of December 31, 2011, there were 204,202 nonvested awards outstanding. For the year ended December 31, 2011, there was $261,000 share-based compensation expense related to the 2009 Incentive Plan. For the year ended December 31, 2011, there was $91,000 of income tax benefit related to the stock compensation expense. As of December 31, 2010 and 2009, there were no awards granted or nonvested. There was no share-based compensation expense or income tax benefit for the years ended December 31, 2010 or 2009.

As of December 31, 2011, there was $1.4 million of unrecognized compensation cost related to the 2009 Incentive Plan for the nonvested awards granted in June 2011. The cost is expected to be recognized over a weighted-average period of 2.98 years. There was no unrecognized compensation expense related to the 2009 Incentive Plan as of December 31, 2010 or 2009.

The fair value of each NQSO granted is estimated on the date of grant using the Black-Scholes method of option pricing with the following weighted-average assumptions for grants in 2011: dividend yield of 3.54%; risk-free interest rate of 2.30%; expected life of 6.5 and 7.0 years for the three-year and four-year vesting schedule, respectively; and expected volatility of 42.07% and 41.50% for the three-year and four-year vesting schedule, respectively. There were no awards granted during 2010 or 2009.

The NQSOs which have contractual terms of 10 years and vest in equal annual installments over either a three- or four-year period.

The fair value of each RSU is the ending stock price on the date of grant. The RSUs vest in equal annual installments over either a three- or four-year period.

Each award is evidenced by an award agreement that specifies the option price, if applicable, the duration of the award, the number of shares to which the award pertains, and such other provisions as the Board determines.

1993 Incentive Stock Option Plan (“the ISO Plan”)

In April 1993, we adopted the Southside Bancshares, Inc. 1993 Incentive Stock Option Plan ("the ISO Plan"), a stock-based incentive compensation plan. Under the ISO Plan, we were authorized to issue shares of common stock pursuant to "Awards" granted in the form of incentive stock options (intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended). The ISO Plan expired March 31, 2003. Before the ISO Plan expired, awards were granted to selected employees and directors.

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes method of option pricing with the following weighted-average assumptions for grants in 2003: dividend yield of 1.93%; risk-free interest rate of 4.93%; expected life of six years; and expected volatility of 28.90%. No stock options have been available for grant under the ISO Plan since its expiration in March 2003.

As of December 31, 2011 and 2010, there were no nonvested shares for the ISO Plan. For the years ended December 31, 2011, 2010 and 2009, there was no stock-based compensation expense related to the ISO Plan.

As of December 31, 2011, 2010 and 2009, there was no unrecognized compensation cost related to the ISO Plan for nonvested options granted in March 2003.

The ISO Plan provided that the exercise price of any stock option not be less than the fair value of the common stock on the date of grant. The outstanding stock options have contractual terms of 10 years. All options vest on a graded schedule, 20% per year for five years, beginning on the first anniversary date of the grant date.

Shares issued in connection with stock compensation awards are issued from authorized shares and not from treasury shares. During 2011, 838 shares issued in connection with stock compensation awards were issued from available authorized shares. During 2010 and 2009, 102,706 and 254,207 shares, respectively, issued in connection with stock compensation awards were issued from available authorized shares.

A combined summary of activity in our share-based plans as of December 31, 2011 is presented below:

Restricted Stock Units

Outstanding

Stock Options Outstanding

Available for

Grant

Number

of Shares

Weighted-

Average

Grant-Date

Fair Value

Number

of Shares

Weighted-

Average

Exercise

Price

Weighted

-Average

Grant-Date

Fair Value

Balance, January 1, 2011

1,157,625

–

10,825

10.38

–

Granted

(204,202

)

33,392

19.19

170,810

19.19

5.87

Stock options exercised

–

(838

)

10.38

–

Stock awards vested

–

Forfeited

–

Canceled/expired

–

Balance, December 31, 2011

953,423

33,392

19.19

180,797

18.70

5.87

Other information regarding options outstanding and exercisable as of December 31, 2011 is as follows:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of Shares	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life in Years	Number of Shares	Weighted- Average Exercise Price
$ 10.38 – 10.38	9,987	$	10.38	1.25	9,987	$	10.38
19.19 – 19.19	170,810		19.19	9.44	–		–
Total	180,797	$	18.70	8.98	9,987	$	10.38

The total intrinsic value (i.e., the amount by which the fair value of the underlying common stock exceeds the exercise price of a stock option on exercise date) of outstanding stock options and exercisable stock options was $535,000 and $113,000 at December 31, 2011, respectively.

The total intrinsic value of stock options exercised during the years ended December 31, 2011, 2010 and 2009 was $7,000, $1.5 million and $3.0 million, respectively.

Cash received from stock option exercises for the years ended December 31, 2011, 2010 and 2009 was $9,000, $419,000 and $734,000, respectively. The tax benefit realized for the deductions related to the stock option exercises was $2,000, $331,000 and $651,000 for the years ended December 31, 2011, 2010 and 2009, respectively.