SOUTHSIDE BANCSHARES INC (Form: 10-Q, Received: 05/09/2014 11:03:59)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission file number: 0-12247

SOUTHSIDE BANCSHARES, INC.

(Exact name of registrant as specified in its charter)



TEXAS		75-1848732
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1201 S. Beckham, Tyler, Texas		75701
(Address of principal executive offices)		(Zip Code)

903-531-7111

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares of the issuer's common stock, par value $1.25, outstanding as of April 30, 2014 was 18,825,948 shares.

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS	1
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	36
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	54
ITEM 4. CONTROLS AND PROCEDURES	55
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	56
ITEM 1A. RISK FACTORS	56
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	56
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	56
ITEM 4. MINE SAFETY DISCLOSURES	56
ITEM 5. OTHER INFORMATION	56
ITEM 6. EXHIBITS	56
SIGNATURES	57
EXHIBIT INDEX	58
EXHIBIT 31.1 – CERTIFICATION PURSUANT TO SECTION 302
EXHIBIT 31.2 – CERTIFICATION PURSUANT TO SECTION 302
EXHIBIT 32 – CERTIFICATION PURSUANT TO SECTION 906

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except share amounts)

	March 31, 2014			December 31, 2013
ASSETS
Cash and due from banks	$	52,195		$	45,624
Interest earning deposits	5,197			8,807
Total cash and cash equivalents	57,392			54,431
Investment securities:
Available for sale, at estimated fair value	259,662			337,429
Held to maturity, at carrying value (estimated fair value of $387,903 and $377,383, respectively)	390,889			391,552
Mortgage-backed securities:
Available for sale, at estimated fair value	915,061			840,258
Held to maturity, at carrying value (estimated fair value of $266,006 and $271,836, respectively)	265,627			275,569
FHLB stock, at cost	27,331			34,065
Other investments, at cost	2,065			2,065
Loans held for sale	207			151
Loans:
Loans	1,370,393			1,351,273
Less: Allowance for loan losses	(18,787		)	(18,877		)
Net Loans	1,351,606			1,332,396
Premises and equipment, net	52,554			52,060
Goodwill	22,034			22,034
Other intangible assets, net	149			178
Interest receivable	15,453			21,973
Deferred tax asset	15,727			18,415
Unsettled trades to sell securities	—			3,933
Other assets	58,587			59,154
TOTAL ASSETS	$	3,434,344		$	3,445,663
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest bearing	$	554,497		$	529,897
Interest bearing	1,992,346			1,997,911
Total deposits	2,546,843			2,527,808
Short-term obligations:
Federal funds purchased and repurchase agreements	1,914			859
FHLB advances	19,697			73,445
Total short-term obligations	21,611			74,304
Long-term obligations:
FHLB advances	506,560			499,349
Long-term debt	60,311			60,311
Total long-term obligations	566,871			559,660
Unsettled trades to purchase securities	1,032			973
Other liabilities	26,594			23,400
TOTAL LIABILITIES	3,162,951			3,186,145

Off-Balance-Sheet Arrangements, Commitments and Contingencies (Note 11)

Shareholders' equity:
Common stock ($1.25 par, 40,000,000 shares authorized, 21,295,292 shares issued at March 31, 2014 and 20,386,221 shares issued at December 31, 2013)	26,619			25,483
Paid-in capital	239,678			214,091
Retained earnings	56,997			78,673
Treasury stock (2,469,638 shares at cost)	(37,692		)	(37,692		)
Accumulated other comprehensive loss	(14,209		)	(21,037		)
TOTAL SHAREHOLDERS' EQUITY	271,393			259,518
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	3,434,344		$	3,445,663

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

Table of Contents

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands, except per share data)

	Three Months Ended
	March 31,
	2014		2013
Interest income
Loans	$	18,363	$	17,665
Investment securities – taxable	123		364
Investment securities – tax-exempt	5,958		4,488
Mortgage-backed securities	7,682		3,936
FHLB stock and other investments	70		65
Other interest earning assets	43		43
Total interest income	32,239		26,561
Interest expense
Deposits	2,116		2,070
Short-term obligations	71		1,250
Long-term obligations	2,160		1,781
Total interest expense	4,347		5,101
Net interest income	27,892		21,460
Provision for loan losses	4,133		492
Net interest income after provision for loan losses	23,759		20,968
Noninterest income
Deposit services	3,638		3,753
Net gain on sale of securities available for sale	11		4,345
Total other-than-temporary impairment losses	—		(52		)
Portion of loss recognized in other comprehensive income (before taxes)	—		10
Net impairment losses recognized in earnings	—		(42		)

Gain on sale of loans	80		319
Trust income	780		720
Bank owned life insurance income	314		254
Other	983		891
Total noninterest income	5,806		10,240
Noninterest expense
Salaries and employee benefits	13,102		13,209
Occupancy expense	1,754		1,871
Advertising, travel & entertainment	543		641
ATM and debit card expense	317		381
Professional fees	927		640
Software and data processing expense	501		543
Telephone and communications	278		451
FDIC insurance	448		421
Other	2,312		2,162
Total noninterest expense	20,182		20,319

Income before income tax expense	9,383		10,889
Provision for income tax expense	1,159		1,847
Net income	$	8,224	$	9,042
Earnings per common share – basic	$	0.44	$	0.48
Earnings per common share – diluted	$	0.44	$	0.48
Dividends paid per common share	$	0.21	$	0.20

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

Table of Contents

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (in thousands)

	Three Months Ended
	March 31,
	2014			2013
Net income	$	8,224		$	9,042
Other comprehensive income (loss):
Unrealized holding gains (losses) on available for sale securities during the period	10,011			(5,744		)
Change in net unrealized loss on securities transferred to held to maturity	276			—
Noncredit portion of other-than-temporary impairment losses on the AFS securities	—			(10		)
Reclassification adjustment for net gain on sale of available for sale securities, included in net income	(11		)	(4,345		)
Reclassification of other-than-temporary impairment charges on available for sale securities, included in net income	—			42
Amortization of net actuarial loss, included in net periodic benefit cost	232			643
Amortization of prior service credit, included in net periodic benefit cost	(3		)	(11		)
Other comprehensive income (loss), before tax	10,505			(9,425		)
Income tax (expense) benefit related to other items of comprehensive income	(3,677		)	3,299
Other comprehensive income (loss), net of tax	6,828			(6,126		)
Comprehensive income	$	15,052		$	2,916

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

Table of Contents

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) (in thousands, except share and per share data)

	Common Stock		Paid In Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Shareholders' Equity
Balance at December 31, 2012	$	24,308	$	195,602	$	70,708		$	(35,793	)	$	2,938		$	257,763
Net Income					9,042									9,042
Other comprehensive loss											(6,126		)	(6,126		)
Issuance of common stock (14,361 shares)	18		288											306
Purchase of common stock (90,300 shares)								(1,899		)				(1,899		)
Stock compensation expense			207											207
Net issuance of common stock under employee stock plan			62		(62		)							—
Cash dividends paid on common stock ($0.20 per share)					(3,395		)							(3,395		)
Stock dividend declared	1,064		15,992		(17,056		)							—
Balance at March 31, 2013	$	25,390	$	212,151	$	59,237		$	(37,692	)	$	(3,188	)	$	255,898

Balance at December 31, 2013	$	25,483	$	214,091	$	78,673		$	(37,692	)	$	(21,037	)	$	259,518
Net Income					8,224									8,224
Other comprehensive income											6,828			6,828
Issuance of common stock (8,325 shares)	10		247											257
Stock compensation expense			286											286
Tax benefits related to stock awards			1											1
Net issuance of common stock under employee stock plan	3		130		(91		)							42
Cash dividends paid on common stock ($0.21 per share)					(3,763		)							(3,763		)
Stock dividend declared	1,123		24,923		(26,046		)							—
Balance at March 31, 2014	$	26,619	$	239,678	$	56,997		$	(37,692	)	$	(14,209	)	$	271,393

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

Table of Contents

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) (in thousands)

	Three Months Ended
	March 31,
	2014			2013
OPERATING ACTIVITIES:
Net income	$	8,224		$	9,042
Adjustments to reconcile net income to net cash provided by operations:
Depreciation	790			895
Amortization of premium	5,482			8,543
Accretion of discount and loan fees	(887		)	(1,363		)
Provision for loan losses	4,133			492
Stock compensation expense	286			207
Deferred tax (benefit) expense	(989		)	1,031
Excess tax benefits from stock-based compensation	(5		)	—
Net gain on sale of securities available for sale	(11		)	(4,345		)
Net other-than-temporary impairment losses	—			42
Gain on premises and equipment	(7		)	—
Loss (gain) on other real estate owned	55			(21		)
Net change in:
Interest receivable	6,520			5,326
Other assets	(3		)	895
Interest payable	(35		)	(244		)
Other liabilities	3,332			(2,183		)
Loans held for sale	(56		)	463
Net cash provided by operating activities	26,829			18,780

INVESTING ACTIVITIES:
Securities held to maturity:
Purchases	—			(42,898		)
Maturities, calls and principal repayments	9,863			57,275
Securities available for sale:
Purchases	(165,673		)	(448,973		)
Sales	101,830			237,318
Maturities, calls and principal repayments	76,840			87,694
Proceeds from redemption of FHLB stock	6,766			5,242
Purchases of FHLB stock and other investments	(32		)	(2,768		)
Net increase in loans	(24,173		)	(21,524		)
Purchases of premises and equipment	(1,285		)	(805		)
Proceeds from sales of premises and equipment	8			—
Proceeds from sales of other real estate owned	194			266
Proceeds from sales of repossessed assets	1,730			1,778
Net cash provided by (used in) investing activities	6,068			(127,395		)

(continued)

Table of Contents

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) (continued) (in thousands)

	Three Months Ended
	March 31,
	2014			2013
FINANCING ACTIVITIES:
Net increase in demand and savings accounts	59,468			30,071
Net decrease in certificates of deposit	(40,463		)	(44,734		)
Net increase (decrease) in federal funds purchased and repurchase agreements	1,055			(127		)
Proceeds from FHLB advances	5,064,879			942,466
Repayment of FHLB advances	(5,111,416		)	(909,585		)
Excess tax benefits from stock-based awards	5			—
Net issuance of common stock under employee stock plan	42			—
Purchase of common stock	—			(1,899		)
Proceeds from the issuance of common stock	257			306
Cash dividends paid	(3,763		)	(3,395		)
Net cash (used in) provided by financing activities	(29,936		)	13,103

Net increase (decrease) in cash and cash equivalents	2,961			(95,512		)
Cash and cash equivalents at beginning of period	54,431			150,630
Cash and cash equivalents at end of period	$	57,392		$	55,118

SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:

Interest paid	$	4,382		$	5,345
Income taxes paid	$	500		$	—

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:

Loans transferred to other repossessed assets and real estate through foreclosure	$	1,263		$	1,410
Adjustment to pension liability	$	(229	)	$	(632	)
Declaration of 5% stock dividend	$	26,046		$	17,056
Unsettled trades to purchase securities	$	(1,032	)	$	(71,757	)
Unsettled trades to sell securities	$	—		$	1,857

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

Table of Contents

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

In this report, the words “the Company,” “we,” “us,” and “our” refer to the combined entities of Southside Bancshares, Inc. and its subsidiaries. The words “Southside” and “Southside Bancshares” refer to Southside Bancshares, Inc. The words “Southside Bank” and “the Bank” refer to Southside Bank. “SFG” refers to SFG Finance, LLC (formerly Southside Financial Group, LLC), which is a wholly-owned subsidiary of the Bank.

In early 2013, we decided to close Southside Securities, Inc., our introducing broker-dealer. We completed the closure of Southside Securities, Inc. during the second quarter of 2013.

The consolidated balance sheet as of March 31, 2014 , and the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows and notes to the financial statements for the three months period ended March 31, 2014 and 2013 are unaudited; in the opinion of management, all adjustments necessary for a fair statement of such financial statements have been included. Such adjustments consisted only of normal recurring items. All significant intercompany accounts and transactions are eliminated in consolidation. The preparation of these consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires the use of management’s estimates. These estimates are subjective in nature and involve matters of judgment. Actual amounts could differ from these estimates.

Interim results are not necessarily indicative of results for a full year. These financial statements should be read in conjunction with the financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2013 . For a description of our significant accounting and reporting policies, refer to Note 1 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2013 .

On March 20, 2014 , our board of directors declared a 5% stock dividend to common stock shareholders of record as of April 10, 2014 , which was paid on May 1, 2014 . All share data has been adjusted to give retroactive recognition to stock dividends.

Subsequent Event

On April 28, 2014, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with OmniAmerican Bancorp, Inc., a Maryland corporation (“OmniAmerican”) and the holding company for OmniAmerican Bank, a federal savings association based in Fort Worth, Texas. As of March 31, 2014 , OmniAmerican had $1.4 billion in assets. The Merger Agreement provides that, subject to the terms and conditions thereof, OmniAmerican will merge with and into the Company, with the Company as the surviving corporation. The Merger is expected to close during the fourth quarter of 2014, subject to receipt of regulatory approvals and approvals by both our and OmniAmerican's shareholders.

Pursuant to the Merger Agreement, each outstanding share of common stock of OmniAmerican will be converted into (a) 0.4459 of a share of common stock of the Company, subject to adjustment pursuant to the terms of the Merger Agreement and (b) $13.125 in cash.

Accounting Pronouncements

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (ASU) 2014-04 “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure” to clarify when an entity is considered to have obtained physical possession of a residential real estate property collateralizing a consumer mortgage loan. Upon physical possession (from an in-substance possession or foreclosure) of such real property, an entity is required to reclassify the nonperforming mortgage loan to other real estate owned. The ASU is effective for our interim and annual periods beginning after December 15, 2014. Early adoption is permitted. ASU 2014-04 is not expected to have a material impact on our consolidated financial statements.

Table of Contents

2. Earnings Per Share

Earnings per share on a basic and diluted basis have been adjusted to give retroactive recognition to stock dividends and is calculated as follows (in thousands, except per share amounts):



	Three Months Ended March 31,
	2014		2013
Basic and Diluted Earnings:
Net income	$	8,224	$	9,042
Basic weighted-average shares outstanding	18,818		18,752
Add: Stock options	84		21
Diluted weighted-average shares outstanding	18,902		18,773

Basic Earnings Per Share:	$	0.44	$	0.48

Diluted Earnings Per Share:	$	0.44	$	0.48

For the three month periods ended March 31, 2014 and 2013, there were approximately 24,000 and 27,000 anti-dilutive shares, respectively.

Table of Contents

3. Accumulated Other Comprehensive (Loss) Income

The changes in accumulated other comprehensive income by component are as follows (in thousands):



	Three Months Ended March 31, 2014
	Unrealized Gains (Losses) on Securities					Pension Plans
	Other			OTTI		Net Prior Service (Cost) Credit			Net Gain (Loss)			Total
Beginning balance, net of tax	$	(8,656	)	$	—	$	(12	)	$	(12,369	)	$	(21,037	)
Other comprehensive income (loss) before reclassifications	10,287			—		—			—			10,287
Reclassified to income	(11		)	—		(3		)	232			218
Income tax benefit (expense)	(3,597		)	—		1			(81		)	(3,677		)
Net current-period other comprehensive income (loss), net of tax	6,679			—		(2		)	151			6,828
Ending balance, net of tax	$	(1,977	)	$	—	$	(14	)	$	(12,218	)	$	(14,209	)



	Three Months Ended March 31, 2013
	Unrealized Gains (Losses) on Securities						Pension Plans
	Other			OTTI			Net Prior Service (Cost) Credit			Net Gain (Loss)			Total
Beginning balance, net of tax	$	30,500		$	(1,140	)	$	248		$	(26,670	)	$	2,938
Other comprehensive income (loss) before reclassifications	(5,356		)	(398		)	—			—			(5,754		)
Reclassified to income	(4,345		)	42			(11		)	643			(3,671		)
Income tax benefit (expense)	3,395			125			4			(225		)	3,299
Net current-period other comprehensive (loss) income, net of tax	(6,306		)	(231		)	(7		)	418			(6,126		)
Ending balance, net of tax	$	24,194		$	(1,371	)	$	241		$	(26,252	)	$	(3,188	)

Table of Contents

The reclassifications out of accumulated other comprehensive income into net income are presented below (in thousands):



	Three Months Ended March 31,
	2014			2013
Unrealized gains and losses on available for sale securities:
Realized net (loss) gain on sale of securities ⁽¹⁾	$	11		$	4,345
Impairment losses ⁽²⁾	—			(42		)
Total before tax	11			4,303
Tax expense	(4		)	(1,506		)
Net of tax	$	7		$	2,797

Amortization of pension plan items:
Net actuarial loss ⁽³⁾	$	(232	)	$	(643	)
Prior service credit ⁽³⁾	3			11
Total before tax	(229		)	(632		)
Tax benefit	80			221
Net of tax	$	(149	)	$	(411	)
Total reclassifications for the period, net of tax	$	(142	)	$	2,386

(1) Listed as Net gain on sale of securities available for sale on the Statements of Income.

(2) Listed as Net impairment losses recognized in earnings on the Statements of Income.

(3) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost presented in “Note 7 - Employee Benefit Plans.”

Table of Contents

4. Securities

The amortized cost, carrying value, and estimated fair value of investment and mortgage-backed securities as of March 31, 2014 and December 31, 2013 are reflected in the tables below (in thousands):



	March 31, 2014
			Recognized in OCI						Not recognized in OCI
	Amortized		Gross Unrealized		Gross Unrealized		Carrying		Gross Unrealized		Gross Unrealized		Estimated
AVAILABLE FOR SALE	Cost		Gains		Losses		Value		Gains		Losses		Fair Value
Investment Securities:
U.S. Government Agency Debentures	$	11,609	$	—	$	1,080	$	10,529					$	10,529
State and Political Subdivisions	236,428		4,755		5,282		235,901						235,901
Other Stocks and Bonds	13,077		163		8		13,232						13,232
Mortgage-backed Securities: ⁽¹⁾
Residential	785,270		14,788		2,449		797,609						797,609
Commercial	119,419		384		2,351		117,452						117,452
Total	$	1,165,803	$	20,090	$	11,170	$	1,174,723					$	1,174,723

HELD TO MATURITY
Investment Securities:
State and Political Subdivisions	$	395,822	$	5,850	$	10,783	$	390,889	$	4,386	$	7,372	$	387,903
Mortgage-backed Securities: ⁽¹⁾
Residential	64,249		—		91		64,158		3,598		—		67,756
Commercial	208,405		—		6,936		201,469		1,591		4,810		198,250
Total	$	668,476	$	5,850	$	17,810	$	656,516	$	9,575	$	12,182	$	653,909



	December 31, 2013
			Recognized in OCI						Not recognized in OCI
	Amortized		Gross Unrealized		Gross Unrealized		Carrying		Gross Unrealized		Gross Unrealized		Estimated
AVAILABLE FOR SALE	Cost		Gains		Losses		Value		Gains		Losses		Fair Value
Investment Securities:
U.S. Government Agency Debentures	$	11,612	$	—	$	1,483	$	10,129					$	10,129
State and Political Subdivisions	322,412		4,537		12,875		314,074						314,074
Other Stocks and Bonds	13,074		159		7		13,226						13,226
Mortgage-backed Securities: ⁽¹⁾
Residential	760,418		14,940		3,273		772,085						772,085
Commercial	71,262		220		3,309		68,173						68,173
Total	$	1,178,778	$	19,856	$	20,947	$	1,177,687					$	1,177,687

HELD TO MATURITY
Investment Securities:
State and Political Subdivisions	$	396,549	$	5,925	$	10,922	$	391,552	$	1,207	$	15,376	$	377,383
Mortgage-backed Securities: ⁽¹⁾
Residential	74,129		—		99		74,030		3,923		—		77,953
Commercial	208,667		—		7,128		201,539		—		7,656		193,883
Total	$	679,345	$	5,925	$	18,149	$	667,121	$	5,130	$	23,032	$	649,219

(1) All mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.

During 2013, the Company transferred certain commercial mortgage-backed securities and state and political subdivision securities from available for sale (“AFS”) to held to maturity (“HTM”). We transferred these securities due to overall balance sheet strategies, and our management has the current intent and ability to hold these securities until maturity. The net unrealized loss on the transferred securities included in accumulated other comprehensive income at the time of transfer will be amortized over the remaining life of the underlying security as an adjustment of the yield on those securities. There were no securities transferred from AFS to HTM during the three months ended March 31, 2014.

Table of Contents

The following table represents the unrealized loss on securities for the three months ended March 31, 2014 and year ended December 31, 2013 (in thousands):



	As of March 31, 2014
	Less Than 12 Months				More Than 12 Months				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
AVAILABLE FOR SALE
Investment Securities:
U.S. Government Agency Debentures	$	—	$	—	$	10,529	$	1,080	$	10,529	$	1,080
State and Political Subdivisions	119,705		4,635		13,275		647		132,980		5,282
Other Stocks and Bonds	2,992		8		—		—		2,992		8
Mortgage-backed Securities:
Residential	175,901		2,444		1,051		5		176,952		2,449
Commercial	82,527		2,351		—		—		82,527		2,351
Total	$	381,125	$	9,438	$	24,855	$	1,732	$	405,980	$	11,170
HELD TO MATURITY
Investment Securities:
State and Political Subdivisions	$	275,802	$	7,119	$	11,046	$	253	$	286,848	$	7,372
Mortgage-backed Securities:
Commercial	110,240		4,810		—		—		110,240		4,810
Total	$	386,042	$	11,929	$	11,046	$	253	$	397,088	$	12,182

	As of December 31, 2013
	Less Than 12 Months				More Than 12 Months				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
AVAILABLE FOR SALE
Investment Securities:
U.S. Government Agency Debentures	$	—	$	—	$	10,129	$	1,483	$	10,129	$	1,483
State and Political Subdivisions	191,117		11,757		18,408		1,118		209,525		12,875
Other Stocks and Bonds	2,992		7		—		—		2,992		7
Mortgage-backed Securities:
Residential	126,965		3,266		1,351		7		128,316		3,273
Commercial	65,406		3,309		—		—		65,406		3,309
Total	$	386,480	$	18,339	$	29,888	$	2,608	$	416,368	$	20,947
HELD TO MATURITY
Investment Securities:
State and Political Subdivisions	$	283,667	$	15,311	$	1,705	$	65	$	285,372	$	15,376
Mortgage-backed Securities:
Commercial	193,883		7,656		—		—		193,883		7,656
Total	$	477,550	$	22,967	$	1,705	$	65	$	479,255	$	23,032

We review securities in an unrealized loss position to evaluate if a classification of other-than-temporarily impaired is warranted. In estimating other-than-temporary impairment losses, management considers, among other things, the length of time and the extent to which the fair value has been less than cost and the financial condition and near-term prospects of the issuer. The Company considers an other-than-temporary impairment to have occurred when there is an adverse change in expected cash flows. When it is determined that a decline in fair value of HTM and AFS securities is other-

Table of Contents

than-temporary, the carrying value of the security is reduced to its estimated fair value, with a corresponding charge to earnings for the credit portion and to other comprehensive income for the noncredit portion.

The majority of the unrealized loss positions are comprised of highly rated municipal securities and U.S. Agency mortgage- backed securities (“MBS”) where the unrealized loss is a direct result of the change in interest rates and spreads. Based upon the length of time and the extent to which fair value is less than cost, we believe the securities with an unrealized loss in accumulated other comprehensive income (“AOCI”) are not other-than-temporarily impaired at March 31, 2014 .

Prior to December 31, 2013, we held pooled trust preferred securities ("TRUPs"). The turmoil in the capital markets had a significant impact on our estimate of fair value of our TRUPs. These TRUPs were structured products with cash flows dependent upon securities issued by U.S. financial institutions, including banks and insurance companies. Given the facts and circumstances associated with the TRUPs, we reviewed the financial condition of each of the underlying issuing banks within the TRUP collateral pool that had not deferred and defaulted and we performed detailed cash flow modeling for each TRUP using an industry-accepted cash flow model. The cash flow model assumptions represented management’s best estimate and considered a variety of qualitative factors, which include, among others, the credit rating downgrades, the severity and duration of the mark-to-market loss, and the structural nuances of each security. For the three months ended March 31, 2013, the additional write-down recognized in earnings was approximately $42,000 .

The following table presents a roll forward of the credit losses recognized in earnings on the TRUPs (in thousands):



	Three Months Ended March 31,
	2013
Balance, beginning of period	$	3,256
Additions for credit losses recognized on debt securities that had previously incurred impairment losses	42
Balance, end of period	$	3,298

On December 13, 2013, management decided to sell all TRUPs as a result of new guidance effective in 2014 as listed in Section 419 of the Dodd-Frank Act (the “Volcker Rule”). The sale of the TRUPs, with a $2.7 million amortized-cost basis, resulted in a loss of approximately $959,000 . Until the final rules under the Volcker Rule were issued by the agencies on December 10, 2013, management did not intend to sell the securities and it was not more likely than not that we would be required to sell the security before the anticipated recovery of its amortized cost basis.

Interest income recognized on securities for the periods presented (in thousands):



	Three Months Ended March 31,
	2014		2013
U.S. Treasury	$	—	$	17
U.S. Government Agency Debentures	59		212
State and Political Subdivisions	5,970		4,578
Other Stocks and Bonds	52		45
Mortgage-backed Securities	7,682		3,936
Total interest income on securities	$	13,763	$	8,788

Table of Contents

Of the approximately $11,000 in net securities gains from the AFS portfolio for the three months ended March 31, 2014 , there were $2.9 million in realized gains and $2.9 million in realized losses. Of the $4.3 million in net securities gains from the AFS portfolio for the three months ended March 31, 2013 , there were $5.5 million in realized gains and approximately $1.2 million in realized losses. There were no sales from the HTM portfolio during the three months ended March 31, 2014 or 2013 .

The amortized cost, carrying value and fair value of securities at March 31, 2014 , are presented below by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. MBS are presented in total by category due to the fact that MBS typically are issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with varying maturities. The characteristics of the underlying pool of mortgages, such as fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the security holder. The term of a mortgage-backed pass-through security thus approximates the term of the underlying mortgages and can vary significantly due to prepayments.



	March 31, 2014
	Amortized Cost		Fair Value
AVAILABLE FOR SALE	(in thousands)
Investment Securities:
Due in one year or less	$	3,292	$	3,356
Due after one year through five years	18,421		18,915
Due after five years through ten years	25,743		25,228
Due after ten years	213,658		212,163
	261,114		259,662
Mortgage-backed Securities:	904,689		915,061
Total	$	1,165,803	$	1,174,723



	March 31, 2014
	Carrying Value		Fair Value
HELD TO MATURITY	(in thousands)
Investment Securities:
Due in one year or less	$	—	$	—
Due after one year through five years	329		329
Due after five years through ten years	17,591		17,307
Due after ten years	372,969		370,267
	390,889		387,903
Mortgage-backed Securities:	265,627		266,006
Total	$	656,516	$	653,909

Investment and MBS with book values of $1.10 billion and $1.14 billion were pledged as of March 31, 2014 and December 31, 2013 , respectively, to collateralize Federal Home Loan Bank (“FHLB”) advances, repurchase agreements, and public funds or for other purposes as required by law.

Securities with limited marketability, such as FHLB stock and other investments, are carried at cost, which approximates their fair value and are assessed for other-than-temporary impairment. These securities have no maturity date.

Table of Contents

5. Loans and Allowance for Probable Loan Losses

Loans in the accompanying consolidated balance sheets are classified as follows (in thousands):



	March 31, 2014		December 31, 2013
Real Estate Loans:
Construction	$	135,237	$	125,219
1-4 Family Residential	395,809		390,499
Other	272,868		262,536
Commercial Loans	154,524		157,655
Municipal Loans	240,114		245,550
Loans to Individuals	171,841		169,814
Total Loans	1,370,393		1,351,273
Less: Allowance for Loan Losses	18,787		18,877
Net Loans	$	1,351,606	$	1,332,396

Real Estate Construction Loans

Our construction loans are collateralized by property located primarily in the market areas we serve. A majority of our construction loans will be owner-occupied. Construction loans for speculative projects are financed, but these typically have secondary sources of repayment and collateral. Our construction loans have both adjustable and fixed interest rates during the construction period. Construction loans to individuals are typically priced and made with the intention of granting the permanent loan on the property. Speculative and commercial construction loans are subject to underwriting standards similar to that of the commercial portfolio. Owner occupied 1-4 family residential construction loans are subject to the underwriting standards of the permanent loan.

Real Estate 1-4 Family Residential Loans

Residential loan originations are generated by our loan officers, in-house origination staff, marketing efforts, present customers, walk-in customers and referrals from real estate agents and builders. We focus our lending efforts primarily on the origination of loans secured by first mortgages on owner-occupied, 1-4 family residences. Substantially all of our 1-4 family residential loan originations are secured by properties located in or near our market areas.

Our 1-4 family residential loans generally have maturities ranging from five to 30 years. These loans are typically fully amortizing with monthly payments sufficient to repay the total amount of the loan. Our 1-4 family residential loans are made at both fixed and adjustable interest rates.

Underwriting for 1-4 family residential loans includes debt-to-income analysis, credit history analysis, appraised value and down payment considerations. Changes in the market value of real estate can affect the potential losses in the portfolio.

Other Real Estate

Other Real Estate loans primarily include loans collateralized by commercial office buildings, retail, medical facilities and offices, warehouse facilities, hotels and churches. In determining whether to originate commercial real estate loans, we generally consider such factors as the financial condition of the borrower and the debt service coverage of the property. Other real estate loans are made at both fixed and adjustable interest rates for terms generally up to 20 years.

Table of Contents

Commercial Loans

Our commercial loans are diversified loan types including short-term working capital loans for inventory and accounts receivable and short- and medium-term loans for equipment or other business capital expansion. Management does not consider there to be a concentration of risk in any one industry type, other than the medical industry. Loans to borrowers in the medical industry include all loan types listed above for commercial loans. Collateral for these loans varies depending on the type of loan and financial strength of the borrower. The primary source of repayment for loans in the medical community is cash flow from continuing operations.

In our commercial loan underwriting, we assess the creditworthiness, ability to repay, and the value and liquidity of the collateral being offered. Terms of commercial loans are generally commensurate with the useful life of the collateral offered.

Municipal Loans

We have a specific lending department that makes loans to municipalities and school districts throughout the state of Texas. The majority of the loans to municipalities and school districts have tax or revenue pledges and in some cases are additionally supported by collateral. Municipal loans made without a direct pledge of taxes or revenues are usually made based on some type of collateral that represents an essential service.

Loans to Individuals

Substantially all originations of our loans to individuals are made to consumers in our market areas. The majority of loans to individuals are collateralized by titled equipment, which are primarily automobiles. Loan pools purchased through SFG are subjected to a modeling system that takes into consideration credit scores and estimated collateral values to determine expected defaults in each pool. SFG purchased loan pools of approximately $20.8 million and $21.8 million , net of discount, during the three months ended March 31, 2014 and March 31, 2013 , respectively.

Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. The underwriting standards we employ for consumer loans include an application, a determination of the applicant's payment history on other debts, with the greatest weight being given to payment history with us, and an assessment of the borrower's ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, in relation to the proposed loan amount. Most of our loans to individuals are collateralized, which management believes should assist in limiting our exposure.

Allowance for Loan Losses

The allowance for loan losses is based on the most current review of the loan portfolio and is a result of multiple processes. First, the bank utilizes historical data to establish general reserve amounts for each class of loans. The historical charge off figure is further adjusted through qualitative factors that include general trends in past dues, nonaccruals and classified loans to more effectively and promptly react to both positive and negative movements. Second, our lenders have the primary responsibility for identifying problem loans and estimating necessary reserves based on customer financial stress and underlying collateral. These recommendations are reviewed by senior loan administration, the Special Assets department, and the Loan Review department. Third, the Loan Review department independently reviews the portfolio on an annual basis. The Loan Review department follows a board-approved annual loan review scope. The loan review scope encompasses a number of considerations including the size of the loan, the type of credit extended, the seasoning of the loan and the performance of the loan. The Loan Review scope, as it relates to size, focuses more on larger dollar loan relationships, typically, for example, aggregate debt of $500,000 or greater. The Loan Review officer also reviews specific reserves compared to general reserves to determine trends in comparative reserves as well as losses not reserved for prior to charge-off to determine the effectiveness of the specific reserve process.

Table of Contents

a probability that the entire balance of the loan will be uncollectible. If full collection of the loan balance appears unlikely at the time of review, estimates of future expected cash flows or appraisals of the collateral securing the debt are used to determine the necessary allowances. The internal loan review department maintains a list of all loans or loan relationships that are graded as having more than the normal degree of risk associated with them. In addition, a list of specifically reserved loans or loan relationships of $50,000 or more is updated on a quarterly basis in order to properly determine necessary allowances and keep management informed on the status of attempts to correct the deficiencies noted with respect to the loan.

For loans to individuals, the methodology associated with determining the appropriate allowance for losses on loans primarily consists of an evaluation of individual payment histories, remaining term to maturity and underlying collateral support.

SFG loans, included in loans to individuals, experiencing past due status or extension of maturity characteristics are reserved for at higher levels based on the circumstances associated with each specific loan. In general the reserves for SFG are calculated based on the past due status of the loan. For reserve purposes, the portfolio has been segregated by past due status and by the remaining term variance from the original contract. During repayment, loans that pay late will take longer to repay than the original contract. Additionally, some loans may be granted extensions for extenuating payment circumstances and evaluated for troubled debt classification. The remaining term extensions increase the risk of collateral deterioration and, accordingly, reserves are increased to recognize this risk.

Industry and our own experience indicates that a portion of our loans will become delinquent and a portion of the loans will require partial or full charge-off. Regardless of the underwriting criteria utilized, losses may be experienced as a result of various factors beyond our control, including, among other things, changes in market conditions affecting the value of properties used as collateral for loans and problems affecting the credit of the borrower and the ability of the borrower to make payments on the loan. Our determination of the appropriateness of the allowance for loan losses is based on various considerations, including an analysis of the risk characteristics of various classifications of loans, previous loan loss experience, specific loans which would have loan loss potential, delinquency trends, estimated fair value of the underlying collateral, current economic conditions, and geographic and industry loan concentration.

Credit Quality Indicators

We categorize loans into risk categories on an ongoing basis based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We use the following definitions for risk ratings:


•	Pass (Rating 1 – 4) – This rating is assigned to all satisfactory loans. This category, by definition, consists of acceptable credit. Credit and collateral exceptions should not be present, although their presence would not necessarily prohibit a loan from being rated Pass, if deficiencies are in process of correction. These loans are not included in the Watch List.


•	Pass Watch (Rating 5) – Special Treatment Required – These loans require some degree of special treatment, but not due to credit quality. This category does not include loans specially mentioned or adversely classified by Loan Review; however, particular attention must be accorded such credits due to characteristics such as:


•	A lack of, or abnormally extended payment, program;


•	A heavy degree of concentration of collateral without sufficient margin;


•	A vulnerability to competition through lesser or extensive financial leverage; and


•	A dependence on a single, or few customers, or sources of supply and materials without suitable substitutes or alternatives.

Table of Contents

•

Special Mention (Rating 6) – A Special Mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

•

Substandard (Rating 7) – Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.


•	Doubtful (Rating 8) – Loans classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation, in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

Loans that are accruing and not considered troubled debt restructurings ("TDR") are reserved for as a group of similar type credits and included in the general portion of the allowance for loan losses.

The general portion of the loan loss allowance is reflective of historical charge-off levels for similar loans adjusted for changes in current conditions and other relevant factors. These factors are likely to cause estimated losses to differ from historical loss experience and include:


•	Changes in lending policies or procedures, including underwriting, collection, charge-off, and recovery procedures;


•	Changes in local, regional and national economic and business conditions including entry into new markets;


•	Changes in the volume or type of credit extended;


•	Changes in the experience, ability, and depth of lending management;


•	Changes in the volume and severity of past due, nonaccrual, restructured, or classified loans;


•	Changes in charge-off trends;


•	Changes in loan review or Board oversight;


•	Changes in the level of concentrations of credit; and


•	Changes in external factors, such as competition and legal and regulatory requirements.

The following tables detail activity in the allowance for loan losses by portfolio segment for the periods presented (in thousands):



	Three Months Ended March 31, 2014
	Real Estate
	Construction			1-4 Family Residential			Other			Commercial Loans		Municipal Loans		Loans to Individuals			Unallocated		Total
Balance at beginning of period	$	2,142		$	3,277		$	2,572		$	1,970	$	668	$	8,248		$	—	$	18,877
Provision (reversal) for loan losses	(10		)	536			(164		)	3		109		3,659			—		4,133
Loans charged off	(14		)	(22		)	—			—		—		(4,732		)	—		(4,768		)
Recoveries of loans charged off	12			6			3			58		—		466			—		545
Balance at end of period	$	2,130		$	3,797		$	2,411		$	2,031	$	777	$	7,641		$	—	$	18,787

Table of Contents



	Three Months Ended March 31, 2013
	Real Estate
	Construction			1-4 Family Residential			Other			Commercial Loans			Municipal Loans			Loans to Individuals			Unallocated			Total
Balance at beginning of period	$	2,355		$	3,545		$	2,290		$	3,158		$	633		$	7,373		$	1,231		$	20,585
Provision (reversal) for loan losses	(125		)	167			(247		)	(290		)	(12		)	1,344			(345		)	492
Loans charged off	—			(228		)	(46		)	(71		)	—			(2,807		)	—			(3,152		)
Recoveries of loans charged off	17			4			5			50			—			541			—			617
Balance at end of period	$	2,247		$	3,488		$	2,002		$	2,847		$	621		$	6,451		$	886		$	18,542

The following tables present the balance in the allowance for loan losses by portfolio segment based on impairment method (in thousands):



	As of March 31, 2014
	Real Estate
	Construction		1-4 Family Residential		Other		Commercial Loans		Municipal Loans		Loans to Individuals		Unallocated		Total
Ending balance – individually evaluated for impairment	$	61	$	152	$	66	$	421	$	15	$	132	$	—	$	847
Ending balance – collectively evaluated for impairment	2,069		3,645		2,345		1,610		762		7,509		—		17,940
Balance at end of period	$	2,130	$	3,797	$	2,411	$	2,031	$	777	$	7,641	$	—	$	18,787



	As of December 31, 2013
	Real Estate
	Construction		1-4 Family Residential		Other		Commercial Loans		Municipal Loans		Loans to Individuals		Unallocated		Total
Ending balance – individually evaluated for impairment	$	103	$	161	$	73	$	240	$	15	$	173	$	—	$	765
Ending balance – collectively evaluated for impairment	2,039		3,116		2,499		1,730		653		8,075		—		18,112
Balance at end of period	$	2,142	$	3,277	$	2,572	$	1,970	$	668	$	8,248	$	—	$	18,877

Table of Contents

The following tables present the recorded investment in loans by portfolio segment based on impairment method (in thousands):



	March 31, 2014
	Real Estate
	Construction		1-4 Family Residential		Other		Commercial Loans		Municipal Loans		Loans to Individuals		Total
Loans individually evaluated for impairment	$	1,204	$	2,492	$	1,682	$	1,576	$	759	$	445	$	8,158
Loans collectively evaluated for impairment	134,033		393,317		271,186		152,948		239,355		171,396		1,362,235
Total ending loan balance	$	135,237	$	395,809	$	272,868	$	154,524	$	240,114	$	171,841	$	1,370,393



	December 31, 2013
	Real Estate
	Construction		1-4 Family Residential		Other		Commercial Loans		Municipal Loans		Loans to Individuals		Total
Loans individually evaluated for impairment	$	1,472	$	2,624	$	1,778	$	1,369	$	759	$	559	$	8,561
Loans collectively evaluated for impairment	123,747		387,875		260,758		156,286		244,791		169,255		1,342,712
Total ending loan balance	$	125,219	$	390,499	$	262,536	$	157,655	$	245,550	$	169,814	$	1,351,273

The following table sets forth loans by credit quality indicator for the periods presented (in thousands):



	March 31, 2014
	Pass		Pass Watch		Special Mention		Substandard		Doubtful		Total
Real Estate Loans:
Construction	$	129,202	$	1,746	$	2,247	$	2,019	$	23	$	135,237
1-4 Family Residential	385,940		1,487		1,747		6,056		579		395,809
Other	259,133		2,570		2,644		8,509		12		272,868
Commercial Loans	147,585		824		—		5,850		265		154,524
Municipal Loans	239,105		—		—		1,009		—		240,114
Loans to Individuals	170,924		35		—		661		221		171,841
Total	$	1,331,889	$	6,662	$	6,638	$	24,104	$	1,100	$	1,370,393

Table of Contents



	December 31, 2013
	Pass		Pass Watch		Special Mention		Substandard		Doubtful		Total
Real Estate Loans:
Construction	$	121,280	$	—	$	1,419	$	2,454	$	66	$	125,219
1-4 Family Residential	380,741		1,626		3,025		4,901		206		390,499
Other	249,381		2,553		4,698		5,887		17		262,536
Commercial Loans	150,683		836		9		5,826		301		157,655
Municipal Loans	244,505		—		—		1,045		—		245,550
Loans to Individuals	168,764		27		2		719		302		169,814
Total	$	1,315,354	$	5,042	$	9,153	$	20,832	$	892	$	1,351,273

The following table sets forth nonperforming assets for the periods presented (in thousands):



	At March 31, 2014		At December 31, 2013
Nonaccrual loans	$	5,869	$	8,088
Accruing loans past due more than 90 days	—		3
Restructured loans	4,090		3,888
Other real estate owned	476		726
Repossessed assets	454		901
Total Nonperforming Assets	$	10,889	$	13,606

Nonaccrual and Past Due Loans

Nonaccrual loans are loans 90 days or more delinquent and collection in full of both the principal and interest is not expected. Additionally, some loans that are not delinquent may be placed on nonaccrual status due to doubts about full collection of principal or interest. When a loan is categorized as nonaccrual, the accrual of interest is discontinued and any accrued balance is reversed for financial statement purposes. Payments of contractual interest are recognized as income only to the extent that full recovery of the principal balance of the loan is reasonably certain. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Other factors, such as the value of collateral securing the loan and the financial condition of the borrower, are considered in judgments as to potential loan loss.

Loans are considered impaired if, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of the expected future cash flows discounted at the historical effective interest rate stipulated in the loan agreement, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. In measuring the fair value of the collateral, in addition to relying on third party appraisals, we use assumptions, such as discount rates, and methodologies, such as comparison to the recent selling price of similar assets, consistent with those that would be utilized by unrelated third parties performing a valuation. Loans that are evaluated and determined not to meet the definition of an impaired loan are reserved for at the general reserve rate for its appropriate class.

Nonaccrual loans and accruing loans past due more than 90 days include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

Table of Contents

The following table sets forth the recorded investment in nonaccrual and accruing loans past due more than 90 days by class of loans for the periods presented (in thousands):



	March 31, 2014				December 31, 2013
	Nonaccrual		Accruing Loans Past Due More Than 90 Days		Nonaccrual		Accruing Loans Past Due More Than 90 Days
Real Estate Loans:
Construction	$	1,204	$	—	$	1,472	$	—
1-4 Family Residential	1,032		—		1,435		—
Other	518		—		599		—
Commercial Loans	1,028		—		1,062		—
Loans to Individuals	2,087		—		3,520		3
Total	$	5,869	$	—	$	8,088	$	3

The following tables present the aging of the recorded investment in past due loans by class of loans (in thousands):



	March 31, 2014
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total
Real Estate Loans:
Construction	$	2,936	$	—	$	1,204	$	4,140	$	131,097	$	135,237
1-4 Family Residential	3,783		877		1,032		5,692		390,117		395,809
Other	3,901		392		518		4,811		268,057		272,868
Commercial Loans	6,068		90		1,028		7,186		147,338		154,524
Municipal Loans	—		—		—		—		240,114		240,114
Loans to Individuals	6,148		1,281		2,087		9,516		162,325		171,841
Total	$	22,836	$	2,640	$	5,869	$	31,345	$	1,339,048	$	1,370,393



	December 31, 2013
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total
Real Estate Loans:
Construction	$	311	$	—	$	1,472	$	1,783	$	123,436	$	125,219
1-4 Family Residential	4,340		781		1,435		6,556		383,943		390,499
Other	2,652		—		599		3,251		259,285		262,536
Commercial Loans	411		22		1,062		1,495		156,160		157,655
Municipal Loans	—		—		—		—		245,550		245,550
Loans to Individuals	7,241		2,590		3,523		13,354		156,460		169,814
Total	$	14,955	$	3,393	$	8,091	$	26,439	$	1,324,834	$	1,351,273

The following table sets forth interest income recognized on nonaccrual and restructured loans by class of loans for the periods presented. Average recorded investment is reported on a year-to-date basis (in thousands):

Table of Contents



	Three Months Ended
	March 31, 2014						March 31, 2013
	Average Recorded Investment		Interest Income Recognized		Accruing Interest at Original Contracted Rate		Average Recorded Investment		Interest Income Recognized		Accruing Interest at Original Contracted Rate
Real Estate Loans:
Construction	$	1,371	$	—	$	36	$	2,194	$	—	$	40
1-4 Family Residential	2,471		12		37		3,034		8		35
Other	1,717		12		25		2,379		11		36
Commercial Loans	1,480		4		23		2,050		2		30
Municipal Loans	759		—		10		—		—		—
Loans to Individuals	3,099		32		155		3,379		64		179
Total	$	10,897	$	60	$	286	$	13,036	$	85	$	320

The following table sets forth impaired loans by class of loans for the periods presented (in thousands):



	March 31, 2014
	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance for Loan Losses
Real Estate Loans:
Construction	$	2,393	$	—	$	1,204	$	1,204	$	61
1-4 Family Residential	2,639		—		2,492		2,492		152
Other	1,707		—		1,682		1,682		66
Commercial Loans	1,826		—		1,576		1,576		421
Municipal Loans	759		—		759		759		15
Loans to Individuals	2,457		—		2,216		2,216		1,052
Total	$	11,781	$	—	$	9,929	$	9,929	$	1,767



	December 31, 2013
	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance for Loan Losses
Real Estate Loans:
Construction	$	2,629	$	—	$	1,472	$	1,472	$	103
1-4 Family Residential	2,748		—		2,624		2,624		161
Other	1,800		—		1,778		1,778		73
Commercial Loans	1,606		—		1,369		1,369		240
Municipal Loans	759		—		759		759		15
Loans to Individuals	4,280		—		3,943		3,943		1,950
Total	$	13,822	$	—	$	11,945	$	11,945	$	2,542

At the time a loss is probable in the collection of contractual amounts, specific reserves are allocated. Loans are charged off when deemed uncollectible or as soon as collection by liquidation is evident to the liquidation value of the collateral net of liquidation costs, if any, and placed in nonaccrual status.

Table of Contents

Troubled Debt Restructurings

The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses.

The following tables set forth the recorded investment in TDRs for the periods presented (dollars in thousands):



	Three Months Ended March 31, 2014
	Extend Amortization Period		Interest Rate Reductions		Combination ₍₁₎		Total Modifications		Number of Contracts
Real Estate Loans:
1-4 Family Residential	$	—	$	286	$	—	$	286	1
Other	338		—		25		363		2
Commercial Loans	261		—		57		318		3
Loans to Individuals	—		17		47		64		4
Total	$	599	$	303	$	129	$	1,031	10



	Three Months Ended March 31, 2013
	Extend Amortization Period		Interest Rate Reductions		Combination ₍₁₎		Total Modifications		Number of Contracts
Real Estate Loans:
Construction	$	42	$	—	$	—	$	42	1
1-4 Family Residential	365		—		—		365		4
Commercial Loans	295		—		23		318		4
Loans to Individuals	—		—		6		6		9
Total	$	702	$	—	$	29	$	731	18

(1) These modifications include an extension of the amortization period and interest rate reduction.

The majority of loans restructured as TDRs during the three months ended March 31, 2014 and March 31, 2013 were modified to extend the maturity. Interest continues to be charged on principal balances outstanding during the term extended. Therefore, the financial effects of the recorded investment of loans restructured as TDRs during the three months ended March 31, 2014 and March 31, 2013 were insignificant. Generally, the loans identified as TDRs were previously reported as impaired loans prior to restructuring and therefore the modification did not impact our determination of the allowance for loan losses.

On an ongoing basis, the performance of the restructured loans is monitored for subsequent payment default. Payment default for TDRs is recognized when the borrower is 90 days or more past due. For the three months ended March 31, 2014 and 2013 , there were no material defaults. Payment defaults for TDRs did not significantly impact the determination of the allowance for loan loss.

At March 31, 2014 and March 31, 2013 , there were no commitments to lend additional funds to borrowers whose terms had been modified in TDRs.

Table of Contents

6. Long-term Obligations

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



	March 31, 2014		December 31, 2013
FHLB Advances ⁽¹⁾	$	506,560	$	499,349

Long-term Debt ⁽²⁾
Southside Statutory Trust III Due 2033 ⁽³⁾	20,619		20,619
Southside Statutory Trust IV Due 2037 ⁽⁴⁾	23,196		23,196
Southside Statutory Trust V Due 2037 ⁽⁵⁾	12,887		12,887
Magnolia Trust Company I Due 2035 ⁽⁶⁾	3,609		3,609
Total Long-term Debt	60,311		60,311
Total Long-term Obligations	$	566,871	$	559,660


(1)	At March 31, 2014 , the weighted average cost of these advances was 1.45% . Long-term FHLB Advances have maturities ranging from April 2015 through July 2028 .


(2)	This long-term debt consists of trust preferred securities that qualify under the risk-based capital guidelines as Tier 1 capital, subject to certain limitations.


(3)	This debt carries an adjustable rate of 3.1736% through June 29, 2014 and adjusts quarterly at a rate equal to three-month LIBOR plus 294 basis points .


(4)	This debt carries an adjustable rate of 1.5361% through April 29, 2014 and adjusts quarterly at a rate equal to three-month LIBOR plus 130 basis points .


(5)	This debt carries an adjustable rate of 2.48335% through June 15, 2014 and adjusts quarterly at a rate equal to three-month LIBOR plus 225 basis points .


(6)	This debt carries an adjustable rate of 2.0356% through May 22, 2014 and adjusts quarterly at a rate equal to three-month LIBOR plus 180 basis points .

7. Employee Benefit Plans

The components of net periodic benefit cost are as follows (in thousands):



	Three Months Ended March 31,
	Defined Benefit Pension Plan						Restoration Plan
	2014			2013			2014		2013
Service cost	$	448		$	556		$	69	$	51
Interest cost	872			785			136		99
Expected return on assets	(1,412		)	(1,198		)	—		—
Net actuarial loss recognition	131			545			101		98
Prior service (credit) cost amortization	(4		)	(11		)	1		—
Net periodic benefit cost	$	35		$	677		$	307	$	248

Employer Contributions . For the three months ended March 31, 2014 , contributions of $60,000 have been made to our Restoration Plan. We do not anticipate contributing to our Defined Benefit Pension Plan in 2014.

Table of Contents

8. Share-based Incentive Plans

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 1,340,098 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. No grants were made under the 2009 Incentive Plan during the first three months of 2014 or 2013.

As of March 31, 2014 , there were 403,970 unvested awards outstanding. For the three months ended March 31, 2014 , there was share-based compensation expense of $286,000 with an associated income tax benefit for the three months of $100,000 . As of March 31, 2013 , there were 375,461 unvested awards outstanding. Share-based compensation expense for the three months ended March 31, 2013 was $207,000 with an associated income tax benefit for the three months of $72,000 .

As of March 31, 2014 and 2013 , there was $2.8 million and $2.0 million of unrecognized compensation cost, respectively, related to the unvested awards outstanding. The remaining cost at March 31, 2014 is expected to be recognized over a weighted-average period of 2.93 years .

The NQSOs have contractual terms of 10 years and vest in equal annual installments over three- and four-year periods.

The fair value of each RSU is the closing stock price on the date of grant. The RSUs vest in equal annual installments over three- and four-year periods.

Each award is evidenced by an award agreement that specifies the exercise 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.

Shares issued in connection with stock compensation awards are issued from authorized shares and not from treasury shares. For the three months ended March 31, 2014 , there were 2,395 shares issued in connection with stock compensation awards from available authorized shares. No shares were issued during the three months ended March 31, 2013.

The following table presents activity related to our RSUs and NQSOs as of March 31, 2014 .



		Restricted Stock Units Outstanding				Stock Options Outstanding
	Shares 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, 2014	738,764	56,823		$	22.00	501,846		$	20.56	$	6.18
Granted	—	—		—		—		—		—
Stock options exercised	—	—		—		(2,395	)	17.56		5.15
Stock awards vested	—	—		—		—		—		—
Forfeited	12,772	(2,901	)	22.11		(9,871	)	21.89		6.50
Canceled/expired	1,898	—		—		(1,898	)	18.99		5.27
Balance, March 31, 2014	753,434	53,922		$	21.99	487,682		$	20.55	$	6.18

Table of Contents

Other information regarding options outstanding and exercisable as of March 31, 2014 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
$	16.58	-	$25.85	487,682	$	20.55	8.45	137,634	$	17.57
Total				487,682	$	20.55	8.45	137,634	$	17.57

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) of outstanding stock options and exercisable stock options was $4.6 million and $1.7 million at March 31, 2014 , respectively.

The total intrinsic value and cash received from stock options exercised during the three months ended March 31, 2014 was approximately $24,000 and $42,000 , respectively. There were no stock options exercised during the three months ended March 31, 2013.

9. Fair Value Measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

Valuation techniques including the market approach, the income approach and/or the cost approach are utilized to determine fair value. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Valuation policies and procedures are determined by our investment department and reported to our Asset/Liability Committee (“ALCO”) for review. An entity must consider all aspects of nonperforming risk, including the entity’s own credit standing when measuring fair value of a liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. A fair value hierarchy for valuation inputs gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

Table of Contents

Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Securities Available for Sale – U.S. Treasury securities are reported at fair value utilizing Level 1 inputs. Other securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, we obtain fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

We review the prices quarterly supplied by the independent pricing service for reasonableness and to ensure such prices are aligned with traditional pricing matrices. In addition, we obtain an understanding of their underlying pricing methodologies and their Statement on Standards for Attestation Engagements-Reporting on Controls of a Service Organization (“SSAE 16”). We validate prices supplied by the independent pricing service by comparison to prices obtained from, in most cases, three additional third party sources. For securities where prices are outside a reasonable range, we further review those securities to determine what a reasonable price estimate is for that security, given available data.

Certain financial assets are measured at fair value in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of fair value accounting or write-downs of individual assets. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with our monthly and/or quarterly valuation process. There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2014 .

Loans Held for Sale - These loans are reported at the lower of cost or fair value. Fair value is determined based on expected proceeds, which are based on sales contracts and commitments and are considered Level 2 inputs. At March 31, 2014 and December 31, 2013 , based on our estimates of fair value, no valuation allowance was recognized.

Foreclosed Assets – Foreclosed assets are initially recorded at fair value less costs to sell. The fair value of foreclosed assets can include Level 2 measurement inputs such as real estate appraisals and comparable real estate sales information, in conjunction with Level 3 measurement inputs such as cash flow projections, qualitative adjustments, sales cost estimates, etc. As a result, the categorization of foreclosed assets is Level 3 of the fair value hierarchy. In connection with initial recognition of foreclosed assets, we recognize charge-offs through the allowance for loan losses to the extent the fair value of the foreclosed asset, less costs to sell, is less than the loan amount.

Impaired Loans – Certain impaired loans may be reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on customized discounting criteria or appraisals. At March 31, 2014 and December 31, 2013 , the impact of loans with specific reserves based on the fair value of the collateral was reflected in our allowance for loan losses.

Certain nonfinancial assets and nonfinancial liabilities measured at fair value on a recurring basis include reporting units measured at fair value and tested for goodwill impairment.

Table of Contents

The following tables summarize assets measured at fair value on a recurring and nonrecurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):



	At or For the Three Months Ended March 31, 2014
			Fair Value Measurements at the End of the Reporting Period Using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)
Recurring fair value measurements
Investment Securities:
U.S. Government Agency Debentures	$	10,529	$	—	$	10,529	$	—	$	—
State and Political Subdivisions	235,901		—		235,901		—		—
Other Stocks and Bonds	13,232		—		13,232		—		—
Mortgage-backed Securities: ⁽¹⁾
Residential	797,609		—		797,609		—		—
Commercial	117,452		—		117,452		—		—
Total recurring fair value measurements	$	1,174,723	$	—	$	1,174,723	$	—	$	—

Nonrecurring fair value measurements
Foreclosed assets ⁽²⁾	$	930	$	—	$	—	$	930	$	(30	)
Impaired loans ⁽³⁾	8,162		—		—		8,162		(22		)
Total nonrecurring fair value measurements	$	9,092	$	—	$	—	$	9,092	$	(52	)

Table of Contents



	At or For the Year Ended December 31, 2013
			Fair Value Measurements at the End of the Reporting Period Using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)
Recurring fair value measurements
Investment Securities:
U.S. Government Agency Debentures	$	10,129	$	—	$	10,129	$	—	$	—
State and Political Subdivisions	314,074		—		314,074		—		—
Other Stocks and Bonds	13,226		—		13,226		—		—
Mortgage-backed Securities: ⁽¹⁾
Residential	772,085		—		772,085		—		—
Commercial	68,173		—		68,173		—		—
Total recurring fair value measurements	$	1,177,687	$	—	$	1,177,687	$	—	$	—

Nonrecurring fair value measurements
Foreclosed assets ⁽²⁾	$	1,627	$	—	$	—	$	1,627	$	(485	)
Impaired loans ⁽³⁾	9,403		—		—		9,403		(64		)
Total nonrecurring fair value measurements	$	11,030	$	—	$	—	$	11,030	$	(549	)


(1)	All mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.


(2)	Losses represent related losses on foreclosed properties that were written down subsequent to their initial classification as foreclosed properties.


(3)	Loans represent collateral dependent impaired loans with a specific valuation allowance. Losses on these loans represent charge-offs which are netted against the allowance for loan losses.

Table of Contents

For the periods prior to the TRUPs sale in December 2013, the following table presents additional information about the TRUPs measured at fair value on a recurring basis and for which we utilized Level 3 inputs to determine fair value (in thousands):



	Three Months Ended March 31,
	2013
TRUPs
Balance at Beginning of Period	$	990

Total gains or losses (realized/unrealized):
Included in earnings	(42		)
Included in other comprehensive income (loss)	(356		)
Purchases	—
Issuances	—
Settlements	—
Transfers in and/or out of Level 3	—
Balance at End of Period	$	592

The amount of total gains or losses for the periods included in earnings attributable to the change in unrealized gains or losses relating to assets still held at reporting date	$	(42	)

The significant unobservable inputs used in the fair value measurement of our TRUPs included the credit rating downgrades, the severity and duration of the mark-to-market loss, and the structural nuances of each TRUP. Our analysis of the underlying cash flows contemplated various default, deferral and recovery scenarios to arrive at our best estimate of cash flows. Significant increases (decreases) in any of those inputs would result in a significant lower (higher) fair value.

Level 3 assets recorded at fair value on a nonrecurring basis at March 31, 2014 , included loans for which a specific allowance was established based on the fair value of collateral and other real estate for which fair value of the properties was less than the cost basis. For both asset classes, the unobservable inputs were the additional adjustments applied by management to the appraised values to reflect such factors as non-current appraisals and revisions to estimated time to sell. These adjustments are determined based on qualitative judgments made by management on a case-by-case basis and are not quantifiable inputs, although they are used in the determination of fair value.

Disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet is required, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other estimation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Such techniques and assumptions, as they apply to individual categories of our financial instruments, are as follows:

Cash and cash equivalents - The carrying amount for cash and cash equivalents is a reasonable estimate of those assets' fair value.

Investment and mortgage-backed securities - Fair values for these securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices for similar securities or estimates from independent pricing services.

FHLB stock and other investments - The carrying amount of FHLB stock is a reasonable estimate of those assets’ fair value.

Table of Contents

Loans receivable - For adjustable rate loans that reprice frequently and with no significant change in credit risk, the carrying amounts are a reasonable estimate of those assets' fair value. The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Nonperforming loans are estimated using discounted cash flow analyses or the underlying value of the collateral where applicable.

Deposit liabilities - The fair value of demand deposits, savings accounts, and certain money market deposits is the amount on demand at the reporting date, that is, the carrying value. Fair values for fixed rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities.

Federal funds purchased and repurchase agreements - Federal funds purchased generally have original terms to maturity of one day and repurchase agreements, generally less than one year, and therefore both, are considered short-term borrowings. Consequently, their carrying value is a reasonable estimate of fair value.

FHLB advances - The fair value of these advances is estimated by discounting the future cash flows using rates at which advances would be made to borrowers with similar credit ratings and for the same remaining maturities.

Long-term debt - The carrying amount for the long-term debt is estimated by discounting future cash flows using estimated rates at which long-term debt would be made to borrowers with similar credit ratings and for the remaining maturities.

The following tables present our financial assets, financial liabilities, and unrecognized financial instruments measured on a nonrecurring basis at both their respective carrying amounts and fair value (in thousands):



			Estimated Fair Value
March 31, 2014	Carrying Amount		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	57,392	$	57,392	$	57,392	$	—	$	—
Investment securities:
Held to maturity, at carrying value	390,889		387,903		—		387,903		—
Mortgage-backed securities:
Held to maturity, at carrying value	265,627		266,006		—		266,006		—
FHLB stock and other investments, at cost	29,396		29,396		—		29,396		—
Loans, net of allowance for loan losses	1,351,606		1,327,163		—		—		1,327,163
Loans held for sale	207		207		—		207		—
Financial Liabilities:
Retail deposits	$	2,546,843	$	2,545,431	$	—	$	2,545,431	$	—
Federal funds purchased and repurchase agreements	1,914		1,914		—		1,914		—
FHLB advances	526,257		513,836		—		513,836		—
Long-term debt	60,311		43,901		—		43,901		—

Table of Contents



			Estimated Fair Value
December 31, 2013	Carrying Amount		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	54,431	$	54,431	$	54,431	$	—	$	—
Investment securities:
Held to maturity, at carrying value	391,552		377,383		—		377,383		—
Mortgage-backed securities:
Held to maturity, at carrying value	275,569		271,836		—		271,836		—
FHLB stock and other investments, at cost	36,130		36,130		—		36,130		—
Loans, net of allowance for loan losses	1,332,396		1,306,524		—		—		1,306,524
Loans held for sale	151		151		—		151		—
Financial Liabilities:
Retail deposits	$	2,527,808	$	2,526,143	$	—	$	2,526,143	$	—
Federal funds purchased and repurchase agreements	859		859		—		859		—
FHLB advances	572,794		559,648		—		559,648		—
Long-term debt	60,311		43,476		—		43,476		—

As discussed earlier, the fair value estimate of financial instruments for which quoted market prices are unavailable is dependent upon the assumptions used. Consequently, those estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented in the above fair value table do not necessarily represent their underlying value.

10. Income Taxes

The provision for income taxes included in the accompanying statements of income consist of the following (in thousands):



	Three Months Ended March 31,
	2014			2013
Current tax provision	$	2,016		$	816
Deferred tax (benefit) provision	(857		)	1,031
Provision for tax expense charged to operations	$	1,159		$	1,847

Net deferred tax assets totaled $15.7 million at March 31, 2014 and $18.4 million at December 31, 2013 . The decrease in net deferred tax assets resulted primarily from a decrease in unrealized losses on securities available for sale, while offset by an increase in the alternative minimum tax credit. No valuation allowance for deferred tax assets was recorded at March 31, 2014 or December 31, 2013 , as management believes it is more likely than not that all of the deferred tax assets will be realized because they are supported by recoverable taxes paid in prior years. There was approximately $50,000 in unrecognized tax benefits at March 31, 2014 .

Table of Contents

We recognized income tax expense of $1.2 million , for an effective tax rate of 12.4% for the three months ended March 31, 2014 compared to $1.8 million , for an effective tax rate of 17.0% for the three months ended March 31, 2013 . The effective tax rate differed from the U.S. statutory rate of 35% during the comparable periods primarily due to the effect of tax-exempt interest from loans, securities and bank owned life insurance. The lower effective tax rate for the three months ended March 31, 2014 was due to an increase in tax-exempt income as a percentage of taxable income as compared to the same period in 2013 .

We file income tax returns in the U.S. federal jurisdiction and in certain states. We are no longer subject to U.S. federal income tax examinations by tax authorities for years before 2010 .

11. Off-Balance-Sheet Arrangements, Commitments and Contingencies

Financial Instruments with Off-Balance-Sheet Risk . In the normal course of business, we are a party to certain financial instruments, with off-balance-sheet risk, to meet the financing needs of our customers. These off-balance-sheet instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount reflected in the financial statements. The contract or notional amounts of these instruments reflect the extent of involvement and exposure to credit loss that we have in these particular classes of financial instruments.

Commitments to extend credit are agreements to lend to a customer provided that the terms established in the contract are met. Commitments generally have fixed expiration dates and may require payment of fees. Since some commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.

We had outstanding unused commitments to extend credit of $170.1 million and $156.2 million at March 31, 2014 and December 31, 2013 , respectively. Each commitment has a maturity date and the commitment expires on that date with the exception of credit card and ready reserve commitments, which have no stated maturity date. Unused commitments for credit card and ready reserve at both March 31, 2014 and December 31, 2013 were $13.8 million , and are reflected in the due after one year category. We had outstanding standby letters of credit of $6.0 million and $5.9 million at March 31, 2014 and December 31, 2013 , respectively.

The scheduled maturities of unused commitments were as follows (in thousands):



	At March 31, 2014		At December 31, 2013
Unused commitments:
Due in one year or less	$	122,928	$	110,210
Due after one year	47,208		46,032
Total	$	170,136	$	156,242

We apply the same credit policies in making commitments and standby letters of credit as we do for on-balance-sheet instruments. We evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, upon extension of credit is based on management's credit evaluation of the borrower. Collateral held varies but may include cash or cash equivalents, negotiable instruments, real estate, accounts receivable, inventory, oil, gas and mineral interests, property, plant, and equipment.

Lease Commitments . We lease certain branch facilities and office equipment under operating leases. It is expected that certain leases will be renewed, or equipment replaced with new leased equipment, as these leases expire.

Securities . In the normal course of business we buy and sell securities. There were approximately $1.0 million of unsettled trades to purchase securities at both March 31, 2014 and December 31, 2013 . There were no unsettled trades

Table of Contents

to sell securities as of March 31, 2014 . There were $3.9 million unsettled trades to sell securities as of December 31, 2013 .

Deposits . There were no unsettled issuances of brokered CDs at March 31, 2014 or December 31, 2013 .

Litigation . We are involved with various litigation in the normal course of business. Management, after consulting with our legal counsel, believes that any liability resulting from litigation will not have a material effect on our financial position, results of operations or liquidity.

Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of the consolidated financial condition, changes in financial condition, and results of our operations, and should be read and reviewed in conjunction with the financial statements, and the notes thereto, in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2013 .

We reported a decrease in net income for the three months ended March 31, 2014 compared to the same period in 2013 . Net income for the three months ended March 31, 2014 was $8.2 million compared to $9.0 million for the same period in 2013 .

Forward-Looking Statements

Certain statements of other than historical fact that are contained in this document and in written material, press releases and oral statements issued by or on behalf of Southside Bancshares, Inc., 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,” “will,” “would,” “seek,” “intend,” “probability,” “risk,” “goal,” “objective,” “plans,” “potential,” and similar expressions. Forward-looking statements are statements with respect to our 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 our actual results to differ materially from the results discussed in the forward-looking statements. For example, discussions of the effect of our expansion, trends in asset quality and earnings from growth, and certain market risk disclosures 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. Other factors that could cause actual results to differ materially from forward-looking statements include, but are not limited to, the following:

•

general economic conditions, either globally, nationally, in the State of Texas, or in the specific markets in which we operate, including, without limitation, the deterioration of the commercial real estate, residential real estate, construction and development, credit and liquidity markets, which could cause an adverse change in our net interest margin, or a decline in the value of our assets, which could result in realized losses;


•	legislation, regulatory changes or changes in monetary or fiscal policy that adversely affect the businesses in which we are engaged, including the impact of the Dodd-Frank Act, the Federal Reserve’s actions with respect to interest rates and other regulatory responses to current economic conditions;


•	adverse changes in the status or financial condition of the Government-Sponsored Enterprises (the “GSEs”) impacting the GSEs’ guarantees or ability to pay or issue debt;


•	adverse changes in the credit portfolio of other U.S. financial institutions relative to the performance of certain of our investment securities;


•	economic or other disruptions caused by acts of terrorism in the United States, Europe or other areas;


•	changes in the interest rate yield curve such as flat, inverted or steep yield curves, or changes in the interest rate environment that impact interest margins and may impact prepayments on the mortgage-backed securities ("MBS") portfolio;


•	increases in our nonperforming assets;


•	our ability to maintain adequate liquidity to fund operations and growth;


•	the failure of our assumptions underlying allowance for loan losses and other estimates;


•	unexpected outcomes of, and the costs associated with, existing or new litigation involving us;


•	changes impacting our balance sheet and leverage strategy;

Table of Contents


•	risks related to actual U.S. Agency MBS prepayments exceeding projected prepayment levels;


•	risks related to U.S. Agency MBS prepayments increasing due to U.S. Government programs designed to assist homeowners to refinance their mortgage that might not otherwise have qualified;


•	our ability to monitor interest rate risk;


•	significant increases in competition in the banking and financial services industry;


•	changes in consumer spending, borrowing and saving habits;


•	technological changes;


•	our ability to increase market share and control expenses;


•	the effect of changes in federal or state tax laws;


•	the effect of compliance with legislation or regulatory changes;


•	the effect of changes in accounting policies and practices;


•	risks of mergers and acquisitions including the related time and cost of implementing transactions and the potential failure to achieve expected gains, revenue growth or expense savings;


•	credit risks of borrowers, including any increase in those risks due to changing economic conditions;


•	risks related to loans secured by real estate, including the risk that the value and marketability of collateral could decline; and


•	other risks and uncertainties discussed in Part I - "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013.

All written or oral forward-looking statements made by us or attributable to us are expressly qualified by this cautionary notice. We disclaim 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, unless otherwise required by law.

Impact of Dodd-Frank Act

On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act represents a significant overhaul of many aspects of the regulation of the financial services industry, although some of its provisions apply to companies that are significantly larger than us. The Dodd-Frank Act directs applicable regulatory authorities to promulgate regulations implementing many of its provisions. Regulatory agencies are still in the process of issuing regulations, rules and reporting requirements as mandated by the Dodd-Frank Act. The effect of the Dodd-Frank Act on us and the financial services industry as a whole will continue to be clarified as further regulations are issued. Major elements of the Dodd-Frank Act include:


•	A permanent increase in deposit insurance coverage to $250,000 per account, and an increase in the minimum Deposit Insurance Fund reserve requirement from 1.15% to 1.35%, with assessments to be based on assets as opposed to deposits;


•	New disclosure and other requirements relating to executive compensation and corporate governance;


•	New prohibitions and restrictions on the ability of a banking entity and nonbank financial company to engage in proprietary trading and have certain interests in, or relationships with, a hedge fund or private equity fund;


•	Amendments to the Truth in Lending Act aimed at improving consumer protections with respect to mortgage originations, including originator compensation, minimum repayment standards, and prepayment considerations;


•	The establishment of the Financial Stability Oversight Council, which will be responsible for identifying and monitoring systemic risks posed by financial firms, activities, and practices;


•	The development of regulations to limit debit card interchange fees;


•	The elimination of newly issued trust preferred securities as a permitted element of Tier 1 capital;


•	The creation of a special regime to allow for the orderly liquidation of systemically important financial companies, including the establishment of an orderly liquidation fund;


•	The development of regulations to address derivatives markets, including clearing and exchange trading requirements and a framework for regulating derivatives-market participants;

Table of Contents


•	Enhanced supervision of credit rating agencies through the Office of Credit Ratings within the SEC;


•	Increased regulation of asset-backed securities, including a requirement that issuers of asset-backed securities retain at least 5% of the risk of the asset-backed securities; and


•	The establishment of a Bureau of Consumer Financial Protection with centralized authority, including examination and enforcement authority, for consumer protection in the banking industry.

We are continuing to evaluate the potential impact of the Dodd-Frank Act on our business, financial condition and results of operations and expect that some provisions may have adverse effects on us, such as the cost of complying with the numerous new regulations and reporting requirements mandated by the Dodd-Frank Act.

Critical Accounting Estimates

Our accounting and reporting estimates conform with U.S. generally accepted accounting principles (“GAAP”) and general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. We consider our critical accounting policies to include the following:

Allowance for Losses on Loans . The allowance for losses on loans represents our best estimate of probable losses inherent in the existing loan portfolio. The allowance for losses on loans is increased by the provision for losses on loans charged to expense and reduced by loans charged-off, net of recoveries. The provision for losses on loans is determined based on our assessment of several factors: reviews and evaluations of specific loans, changes in the nature and volume of the loan portfolio, current economic conditions and the related impact on specific borrowers and industry groups, historical loan loss experience, the level of classified and nonperforming loans and the results of regulatory examinations.

The loan loss allowance is based on the most current review of the loan portfolio and is validated by multiple processes. The servicing officer has the primary responsibility for updating significant changes in a customer's financial position. Each officer prepares status updates on any credit deemed to be experiencing repayment difficulties which, in the officer's opinion, would place the collection of principal or interest in doubt. Our internal loan review department is responsible for an ongoing review of our loan portfolio with specific goals set for the loans to be reviewed on an annual basis.

At each review, a subjective analysis methodology is used to grade the respective loan. Categories of grading vary in severity from loans that do not appear to have a significant probability of loss at the time of review to loans that indicate a probability that the entire balance of the loan will be uncollectible. If full collection of the loan balance appears unlikely at the time of review, estimates of future expected cash flows or appraisals of the collateral securing the debt are used to determine the necessary allowances. The internal loan review department maintains a list of all loans or loan relationships that are graded as having more than the normal degree of risk associated with them. In addition, a list of specifically reserved loans or loan relationships of $50,000 or more is updated on a quarterly basis in order to properly determine the necessary allowance and keep management informed on the status of attempts to correct the deficiencies noted with respect to the loan.

Loans are considered impaired if, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate stipulated in the loan agreement, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. In measuring the fair value of the collateral, in addition to relying on third party appraisals, we use assumptions such as discount rates, and methodologies, such as comparison to the recent selling price of similar assets, consistent with those that would be utilized by unrelated third parties performing a valuation.

Changes in the financial condition of individual borrowers, economic conditions, historical loss experience and the conditions of the various markets in which collateral may be sold all may affect the required level of the allowance for losses on loans and the associated provision for loan losses.

Table of Contents

As of March 31, 2014 , our review of the loan portfolio indicated that a loan loss allowance of $18.8 million was appropriate to cover probable losses in the portfolio.

Refer to “Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Loan Loss Experience and Allowance for Loan Losses” and “Note 5– Loans and Allowance for Probable Loan Losses” of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2013 for a detailed description of our estimation process and methodology related to the allowance for loan losses.

Estimation of Fair Value . The estimation of fair value is significant to a number of our assets and liabilities. In addition, GAAP requires disclosure of the fair value of financial instruments as a part of the notes to the consolidated financial statements. Fair values for securities are volatile and may be influenced by a number of factors, including market interest rates, prepayment speeds, discount rates and the shape of yield curves. Fair values for most investment and MBS are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on the quoted prices of similar instruments or estimates from independent pricing services. Where there are price variances outside certain ranges from different pricing services for specific securities, those pricing variances are reviewed with other market data to determine which of the price estimates is appropriate for that period.

Impairment of Investment Securities and Mortgage-backed Securities . Investment and MBS classified as available for sale (“AFS”) are carried at fair value and the impact of changes in fair value are recorded on our consolidated balance sheet as an unrealized gain or loss in “Accumulated other comprehensive (loss) income,” a separate component of shareholders’ equity. Securities classified as AFS or held to maturity ("HTM") are subject to our review to identify when a decline in value is other-than-temporary. When it is determined that a decline in value is other-than-temporary, the carrying value of the security is reduced to its estimated fair value, with a corresponding charge to earnings for the credit portion and to other comprehensive income for the noncredit portion. Factors considered in determining whether a decline in value is other-than-temporary include: (1) whether the decline is substantial; the duration of the decline; the reasons for the decline in value; (2) whether the decline is related to a credit event, a change in interest rate or a change in the market discount rate; (3) the financial condition and near-term prospects of the issuer; and (4) whether we have a current intent to sell the security and whether it is not more likely than not that we will be required to sell the security before the anticipated recovery of its amortized cost basis. For certain assets we consider expected cash flows of the investment in determining if impairment exists.

Defined Benefit Pension Plan . The plan obligations and related assets of our defined benefit pension plan (the “Plan”) are presented in “Note 11 – Employee Benefits” of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2013 . Entry into the Plan by new employees was frozen effective December 31, 2005. Plan assets, which consist primarily of marketable equity and debt instruments, are valued using observable market quotations. Plan obligations and the annual pension expense are determined by independent actuaries and through the use of a number of assumptions that are reviewed by management. 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 our defined benefit pension and restoration plans. In developing the cash flow matching analysis, we constructed a portfolio of high quality noncallable bonds (rated AA- or better) to match as close as possible the timing of future benefit payments of the plans at December 31, 2013 . Based on this cash flow matching analysis, we were able to determine an appropriate discount rate.

Salary increase assumptions are based upon historical experience and our anticipated future actions. The expected long-term rate of return assumption reflects the average return expected based on the investment strategies and asset allocation on 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 March 31, 2014 , the weighted-average actuarial assumptions of the Plan were: a discount rate of 5.06% ; a long-term rate of return on Plan assets of 7.25% ; and assumed salary increases of 4.50% . 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.

Table of Contents

Off-Balance-Sheet Arrangements, Commitments and Contingencies

Details of our off-balance-sheet arrangements, commitments and contingencies as of March 31, 2014 and December 31, 2013 are included in “Note 11 – Off-Balance-Sheet Arrangements, Commitments and Contingencies” in the accompanying Notes to Consolidated Financial Statements included in this report.

Balance Sheet Strategy

We utilize wholesale funding and securities to enhance our profitability and balance sheet composition by determining acceptable levels of credit, interest rate and liquidity risk consistent with prudent capital management. This balance sheet strategy consists of borrowing a combination of long and short-term funds from the FHLB, and when determined appropriate, issuing brokered CDs. These funds are invested primarily in U.S. Agency MBS, and to a lesser extent, long-term municipal securities. Although U.S. Agency MBS often carry lower yields than traditional mortgage loans and other types of loans we make, these securities generally (i) increase the overall quality of our assets because of either the implicit or explicit guarantees of the U.S. Government, (ii) are more liquid than individual loans and (iii) may be used to collateralize our borrowings or other obligations. While the strategy of investing a substantial portion of our assets in U.S. Agency MBS and municipal securities has historically resulted in lower interest rate spreads and margins, we believe that the lower operating expenses and reduced credit risk combined with the managed interest rate risk of this strategy have enhanced our overall profitability over the last several years. At this time, we utilize this balance sheet strategy with the goal of enhancing overall profitability by maximizing the use of our capital.

Risks associated with the asset structure we maintain include a lower net interest rate spread and margin when compared to our peers, changes in the slope of the yield curve, which can reduce our net interest rate spread and margin, increased interest rate risk, the length of interest rate cycles, changes in volatility spreads associated with the MBS and municipal securities, the unpredictable nature of MBS prepayments and credit risks associated with the municipal securities. See “Part I - Item 1A. Risk Factors – Risks Related to Our Business” in our Annual Report on Form 10-K for the year ended December 31, 2013 , for a discussion of risks related to interest rates. Our asset structure, net interest spread and net interest margin require us to closely monitor our interest rate risk. An additional risk is the change in fair value of the AFS securities portfolio as a result of changes in interest rates. Significant increases in interest rates, especially long-term interest rates, could adversely impact the fair value of the AFS securities portfolio, which could also significantly impact our equity capital. Due to the unpredictable nature of MBS prepayments, the length of interest rate cycles, and the slope of the interest rate yield curve, net interest income could fluctuate more than simulated under the scenarios modeled by our ALCO and described under “Item 3. Quantitative and Qualitative Disclosures about Market Risk” in this report.

Determining the appropriate size of the balance sheet is one of the critical decisions any bank makes. Our balance sheet is not merely the result of a series of micro-decisions, but rather the size is controlled based on the economics of assets compared to the economics of funding. The current low interest rate environment and investment and economic landscape make it unlikely that we will experience asset growth driven by an increase in the securities portfolio until one or more of these conditions change.

The management of our securities portfolio as a percentage of earning assets is guided by the current economics associated with increasing the securities portfolio, changes in our overall loan and deposit levels, and changes in our wholesale funding levels. If adequate quality loan growth is not available to achieve our goal of enhancing profitability by maximizing the use of capital, as described above, then we could purchase additional securities, if appropriate, which could cause securities as a percentage of earning assets to increase. Should we determine that increasing the securities portfolio or replacing the current securities maturities and principal payments is not an efficient use of capital, we could decrease the level of securities through proceeds from maturities, principal payments on MBS or sales. Our balance sheet strategy is designed such that our securities portfolio should help mitigate financial performance associated with slower loan growth and higher credit costs.

During the three months ended March 31, 2014 , we sold long duration municipal securities and U.S. Agency MBS that resulted in a slight overall gain on the sale of AFS securities of $11,000 . The purpose of the municipal securities sales were two fold. As long-term interest rates decreased and municipal spreads tightened we sold municipal securities to reduce the overall duration in the securities portfolio and to reduce tax free income due to the additional tax free

Table of Contents

income from yield to maturity amortization compared to yield to call amortization. During the quarter we purchased U.S. Agency commercial MBS with maturities ten years or less and premium U.S. Agency MBS at prices that create a favorable risk reward scenario with limited extension. Our total investment securities and U.S. Agency MBS decrease d slightly from $1.84 billion at December 31, 2013 to $1.83 billion at March 31, 2014 . At March 31, 2014 , total unamortized premium for our MBS increased to $27.4 million from $26.8 million at December 31, 2013 , as a result of a net increase in the MBS portfolio of $64.9 million at March 31, 2014 , to $1.18 billion, from $1.12 billion at December 31, 2013 . Total unamortized premium for our MBS was $41.0 million at March 31, 2013 .

The average coupon of the MBS portfolio decrease d to 4.18% at March 31, 2014 from 4.31% at December 31, 2013 . The average coupon of the municipal securities portfolio increase d to 4.92% at March 31, 2014 when compared to 4.91% at December 31, 2013 . At March 31, 2014 , securities as a percentage of assets decreased to 53.3% as compared to 53.5% at December 31, 2013 . Our balance sheet management strategy is dynamic and will be continually reevaluated as market conditions warrant. As interest rates, yield curves, MBS prepayments, funding costs, security spreads and loan and deposit portfolios change, our determination of the proper types and maturities of securities to own, proper amount of securities to own and funding needs and funding sources will continue to be reevaluated. Should the economics of purchasing securities remain the same or decrease, we will likely allow this part of the balance sheet to shrink through run-off or security sales. However, should the economics become more attractive, we might strategically increase the securities portfolio and the balance sheet.

With respect to liabilities, we continue to utilize a combination of FHLB advances and deposits to achieve our strategy of minimizing cost while achieving overall interest rate risk objectives as well as the liability management objectives of the ALCO. FHLB funding is the primary wholesale funding source we are currently utilizing. Our FHLB borrowings decrease d 8.1% , or $46.5 million , to $526.3 million at March 31, 2014 from $572.8 million at December 31, 2013 , due to the increase in deposits and the decrease in the securities portfolio. During the three months ended March 31, 2014 , our long-term FHLB advances increase d $7.2 million , to $506.6 million , from $499.3 million at December 31, 2013 . We will continue to purchase long-term FHLB advances as a hedge against future potential high interest rates. Our long-term brokered CDs decrease d from $54.4 million at December 31, 2013 to $35.4 million at March 31, 2014 . All of the long-term brokered CDs, except for one $5.0 million CD, have short-term calls that we control. We utilized long-term callable brokered CDs because the brokered CDs at the time of issuance better matched overall ALCO objectives by protecting us with fixed rates should interest rates increase, while providing us options to call the funding should interest rates decrease. We are actively evaluating the callable brokered CDs and may exercise the call option if there is an economic benefit. Our wholesale funding policy currently allows maximum brokered CDs of $180 million; however, this amount could be increased to match changes in ALCO objectives. The potential higher interest expense and lack of customer loyalty are risks associated with the use of brokered CDs. When looking at deposits without brokered CDs, the overall growth in deposits resulted in a decrease in our total wholesale funding as a percentage of deposits, to 22.4% at March 31, 2014 from 24.7% at March 31, 2013 and 25.4% at December 31, 2013 .

Net Interest Income

Net interest income is one of the principal sources of a financial institution's earnings stream and represents the difference or spread between interest and fee income generated from interest earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates or interest rate yield curves, as well as repricing characteristics and volume, and changes in the mix of interest earning assets and interest bearing liabilities, materially impact net interest income.

Net interest income for the three months ended March 31, 2014 was $27.9 million , an increase of $6.4 million , or 30.0% , compared to the same period in 2013 as a result of an increase in interest income, along with a decrease in interest expense.

During the three months ended March 31, 2014 , total interest income increase d $5.7 million , or 21.4% , to $32.2 million compared to $26.6 million , for the same period in 2013 . The increase in total interest income was the result of an increase in the average yield on earning assets from 4.01% for the three months ended March 31, 2013 to 4.46% for the three months ended March 31, 2014 , and the increase in average interest earning assets of $277.8 million , or 9.2% , from $3.01 billion for the three months ended March 31, 2013 to $3.28 billion for the same period in 2014 . Total interest expense decrease d $754,000 , or 14.8% , to $4.3 million , during the three months ended March 31, 2014 , as

Table of Contents

compared to $5.1 million during the same period in 2013 . The decrease was attributable to a decrease in the average yield on interest bearing liabilities for the three months ended March 31, 2014 , to 0.66% from 0.87% for the same period in 2013 , which more than offset the increase in average interest bearing liabilities of $285.3 million , or 12.0% , from $2.37 billion for the three months ended March 31, 2013 , to $2.66 billion for the same period in 2014 .

Our average yield on interest bearing liabilities decrease d 21 basis points as a result of a continued low interest rate environment, the repricing of deposits into this low interest rate environment and the repricing of higher priced FHLB advances that matured or were prepaid. For the three months ended March 31, 2014 , our net interest spread and net interest margin increase d to 3.80% and 3.93% , respectively, from 3.14% and 3.32% , respectively, for the same period in 2013 .

For the three months ended March 31, 2014 , average loans increase d $97.2 million , or 7.7% , to $1.36 billion , when compared to $1.27 billion for the same period in 2013 . Real estate loans represent a large part of this increase. The average yield on loans decrease d from 5.96% for the three months ended March 31, 2013 , to 5.76% for the three months ended March 31, 2014 , due to overall lower interest rates. Interest income on loans increase d $698,000 , or 4.0% , to $18.4 million for the three months ended March 31, 2014 , when compared to $17.7 million for the same period in 2013 as a result of an increase in the average balance which more than offset the decrease in the average yield. Due to the competitive loan pricing environment, we anticipate that we may be required to continue to offer lower interest rate loans that compete with those offered by other financial institutions in order to retain quality loan relationships. Offering lower interest rate loans could impact the overall yield on loans and, therefore, profitability.

Average investment and MBS increase d $174.8 million , or 10.6% , to $1.82 billion for the three months ended March 31, 2014 , when compared to $1.64 billion for the same period in 2013 . The overall yield on average investment and MBS increase d to 3.71% during the three months ended March 31, 2014 , from 2.71% during the same period in 2013 primarily as a result of an increase in MBS. Interest income from investment and MBS increase d $5.0 million , or 56.6% , to $13.8 million for the three months ended March 31, 2014 , compared to $8.8 million for the same period in 2013 . This increase in interest income was due to an increase in the average yield and average balance.

Average FHLB stock and other investments increase d $4.7 million , or 17.5% , to $31.6 million for the three months ended March 31, 2014 , when compared to $26.9 million for the same period in 2013 due to an increase in average FHLB advances during 2014 and the corresponding requirement to hold stock associated with those advances. Interest income from our FHLB stock and other investments increase d $5,000 , or 7.7% , during the three months ended March 31, 2014 , when compared to the same period in 2013 due to an increase in the average balance which more than offset the decrease in average yield from 0.98% for the three months ended March 31, 2013 , to 0.90% for the same period in 2014 . The FHLB stock is a variable instrument with the rate typically tied to the federal funds rate. We are required as a member of the FHLB to own a specific amount of stock that changes as the level of our FHLB advances and asset size change.

Average interest earning deposits increase d $2.9 million , or 4.4% , to $69.4 million for the three months ended March 31, 2014 , when compared to $66.5 million for the same period in 2013 . Interest income from interest earning deposits was $43,000 , for both the three months ended March 31, 2014 and 2013 . The slight increase in the average balance was offset by the decrease in the average yield from 0.26% for the three months ended March 31, 2013 to 0.25% for the same period in 2014 .

During the three months ended March 31, 2014 , our average securities increase d more than our average loans increase d compared to the same period in 2013 . The mix of our average interest earning assets reflected an increase in average total securities as a percentage of total average interest earning assets as average securities increase d to 56.3% during the three months ended March 31, 2014 , compared to 55.6% during the same period in 2013 . Average loans increase d to 41.6% of average total interest earning assets and other interest earning asset categories averaged 2.1% for the three months ended March 31, 2014 . During the same period in 2013 , the comparable mix was 42.2% in loans and 2.2% in the other interest earning asset categories.

Total interest expense decrease d $754,000 , or 14.8% , to $4.3 million during the three months ended March 31, 2014 , as compared to $5.1 million during the same period in 2013 . The decrease was primarily attributable to decreased funding costs as the average yield on interest bearing liabilities decrease d from 0.87% for the three months ended March 31, 2013 , to 0.66% for the three months ended March 31, 2014 , which more than offset the increase in average interest bearing liabilities of $285.3 million , or 12.0% , for the three months ended March 31, 2014 compared to the

Table of Contents

same period in 2013. This increase in average interest bearing liabilities included an increase in interest bearing deposits of $217.1 million , or 12.1% , and an increase in long-term FHLB advances of $133.1 million , or 36.2% , which was partially offset by a decrease in short-term interest bearing liabilities of $64.9 million , or 42.0% .

Our average total deposits increase d $213.7 million, or 9.2%, from $2.33 billion for the three months ended March 31, 2013 to $2.54 billion for the three months ended March 31, 2014 . The increase in our average total deposits is primarily the result of an increase in public fund deposits and deposit growth due to market penetration. Average interest bearing deposits increase d $217.1 million , or 12.1% , from $1.79 billion for the three months ended March 31, 2013 to $2.00 billion for the same period in 2014, while the average rate paid decrease d from 0.47% for the three months ended March 31, 2013 , to 0.43% for the three months ended March 31, 2014 . Average time deposits increase d $15.3 million , or 2.5% , from $622.2 million for the three months ended March 31, 2013 to $637.5 million for the same period in 2014, while the average rate paid decrease d to 0.74% for the three months ended March 31, 2014 , as compared to 0.76% for the same period in 2013 . Average interest bearing demand deposits increase d $194.5 million , or 18.3% , while the average rate paid decrease d to 0.30% for the three months ended March 31, 2014 , as compared to 0.33% for the same period in 2013 . Average savings deposits increase d $7.3 million , or 7.0% , while the average rate paid decrease d slightly to 0.13% for the three months ended March 31, 2014 , as compared to 0.14% for the same period in 2013 . Interest expense for interest bearing deposits for the three months ended March 31, 2014 , increase d $46,000 , or 2.2% , when compared to the same period in 2013 , due to the increase in the average balance which was slightly offset by a decrease in the average yield. Average noninterest bearing demand deposits decrease d $3.3 million , or 0.6% , during the three months ended March 31, 2014 compared to the same period in 2013 . The latter three categories, interest bearing demand deposits, savings deposits and noninterest bearing demand deposits, are considered the lowest cost deposits and comprised 74.9% of total average deposits during the three months ended March 31, 2014 compared to 73.3% during the same period in 2013 .

At March 31, 2014 , we had $35.4 million in brokered CDs that represented 1.4% of deposits, all with maturities of less than seven years. At December 31, 2013 , we had $54.4 million in brokered CDs that represented 2.2% of deposits, all with maturities of less than five years.

For the three months ended March 31, 2014 , average short-term interest bearing liabilities, consisting primarily of FHLB advances, federal funds purchased and repurchase agreements, were $89.4 million , a decrease of $64.9 million , or 42.0% , when compared to the same period in 2013 . Interest expense associated with short-term interest bearing liabilities decrease d $1.2 million , or 94.3% , for the three months ended March 31, 2014 compared to the same period in 2013 and the average rate paid decrease d to 0.32% for the three months ended March 31, 2014 , compared to 3.29% for the same period in 2013 .

Average long-term interest bearing liabilities consisting of FHLB advances increase d $133.1 million , or 36.2% , during the three months ended March 31, 2014 to $501.1 million , as compared to $368.0 million for the three months ended March 31, 2013 . Interest expense associated with long-term FHLB advances increase d $389,000 , or 27.4% , while the average rate paid decrease d 10 basis points for the three months ended March 31, 2014 , when compared to the same period in 2013 . The increase in the average long-term FHLB advances was due primarily to the increase in the purchase of long-term advances during the three months ended March 31, 2014 , when compared to the same period in 2013 .

Average long-term debt, consisting of our junior subordinated debentures was $60.3 million for the three months ended March 31, 2014 and 2013 . Interest expense associated with long-term debt decrease d $10,000 , or 2.8% , to $352,000 for the three months ended March 31, 2014 , when compared to $362,000 for the same period in 2013 , as a result of a slight decrease in the average yield of six basis points during the three months ended March 31, 2014 , when compared to the same period in 2013 . The interest rate on the $20.6 million of long-term debentures issued to Southside Statutory Trust III adjusts quarterly at a rate equal to three-month LIBOR plus 294 basis points . The interest rate on the $23.2 million of long-term debentures issued to Southside Statutory Trust IV adjusts quarterly at a rate equal to three-month LIBOR plus 130 basis points . The interest rate on the $12.9 million of long-term debentures issued to Southside Statutory Trust V adjusts quarterly at a rate equal to three-month LIBOR plus 225 basis points . The interest rate on the $3.6 million of long-term debentures issued to Magnolia Trust Company I, adjusts quarterly at a rate equal to three-month LIBOR plus 180 basis points .

Table of Contents

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)
						Three Months Ended
	March 31, 2014							March 31, 2013
	AVG					AVG		AVG					AVG
	BALANCE			INTEREST		YIELD		BALANCE			INTEREST		YIELD
ASSETS
INTEREST EARNING ASSETS:
Loans ^{(1) (2)}	$	1,364,571		$	19,375	5.76	%	$	1,267,371		$	18,628	5.96	%
Loans Held For Sale	425			5		4.77	%	2,266			16		2.86	%
Securities:
Investment Securities (Taxable) ⁽⁴⁾	26,436			123		1.89	%	90,231			364		1.64	%
Investment Securities (Tax-Exempt) ⁽³⁾⁽⁴⁾	643,343			8,842		5.57	%	513,349			6,672		5.27	%
Mortgage-backed Securities ⁽⁴⁾	1,148,259			7,682		2.71	%	1,039,671			3,936		1.54	%
Total Securities	1,818,038			16,647		3.71	%	1,643,251			10,972		2.71	%
FHLB stock and other investments, at cost	31,619			70		0.90	%	26,912			65		0.98	%
Interest Earning Deposits	69,392			43		0.25	%	66,487			43		0.26	%
Total Interest Earning Assets	3,284,045			36,140		4.46	%	3,006,287			29,724		4.01	%
NONINTEREST EARNING ASSETS:
Cash and Due From Banks	45,991							48,660
Bank Premises and Equipment	52,286							50,128
Other Assets	121,102							129,565
Less: Allowance for Loan Loss	(18,648		)					(20,003		)
Total Assets	$	3,484,776						$	3,214,637
LIABILITIES AND SHAREHOLDERS’ EQUITY
INTEREST BEARING LIABILITIES:
Savings Deposits	$	111,687		35		0.13	%	$	104,420		36		0.14	%
Time Deposits	637,546			1,163		0.74	%	622,244			1,162		0.76	%
Interest Bearing Demand Deposits	1,255,678			918		0.30	%	1,061,190			872		0.33	%
Total Interest Bearing Deposits	2,004,911			2,116		0.43	%	1,787,854			2,070		0.47	%
Short-term Interest Bearing Liabilities	89,440			71		0.32	%	154,291			1,250		3.29	%
Long-term Interest Bearing Liabilities – FHLB Dallas	501,066			1,808		1.46	%	368,003			1,419		1.56	%
Long-term Debt ⁽⁵⁾	60,311			352		2.37	%	60,311			362		2.43	%
Total Interest Bearing Liabilities	2,655,728			4,347		0.66	%	2,370,459			5,101		0.87	%
NONINTEREST BEARING LIABILITIES:
Demand Deposits	535,349							538,697
Other Liabilities	25,540							46,999
Total Liabilities	3,216,617							2,956,155
SHAREHOLDERS’ EQUITY	268,159							258,482
Total Liabilities and Shareholders’ Equity	$	3,484,776						$	3,214,637
NET INTEREST INCOME				$	31,793						$	24,623
NET INTEREST MARGIN ON AVERAGE EARNING ASSETS						3.93	%						3.32	%
NET INTEREST SPREAD						3.80	%						3.14	%


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


(2)	Interest income includes taxable-equivalent adjustments of $1,017 and $979 for the three months ended March 31, 2014 and 2013 , respectively.


(3)	Interest income includes taxable-equivalent adjustments of $2,884 and $2,184 for the three months ended March 31, 2014 and 2013 , respectively.


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


(5)	Represents issuance of junior subordinated debentures.

Note: As of March 31, 2014 and 2013 , loans totaling $5,869 and $8,570 , respectively, were on nonaccrual status. Our policy is to reverse previously accrued but unpaid interest on nonaccrual loans; thereafter, interest income is recorded to the extent received when appropriate.

Table of Contents

Liquidity and Interest Rate Sensitivity

Liquidity management involves our ability to convert assets to cash with a minimum of loss to enable us to meet our obligations to our customers at any time. This means addressing (1) the immediate cash withdrawal requirements of depositors and other funds providers; (2) the funding requirements of all lines and letters of credit; and (3) the short-term credit needs of customers. Liquidity is provided by short-term investments that can be readily liquidated with a minimum risk of loss. Cash, interest earning deposits, federal funds sold and short-term investments with maturities or repricing characteristics of one year or less continue to be a substantial percentage of total assets. At March 31, 2014 , these investments were 15.1% of total assets as compared with 14.1% for December 31, 2013 and 14.8% for March 31, 2013 . The increase to 15.1% at March 31, 2014 is primarily reflective of changes in the investment portfolio. Liquidity is further provided through the matching, by time period, of rate sensitive interest earning assets with rate sensitive interest bearing liabilities. Southside Bank has three lines of credit for the purchase of overnight federal funds at prevailing rates. One $25.0 million and two $15.0 million unsecured lines of credit have been established with Frost Bank, Comerica Bank and TIB - The Independent Bankers Bank, respectively. There were no federal funds purchased at March 31, 2014 . Southside Bank has a $5.0 million line of credit with Frost Bank to be used to issue letters of credit. At March 31, 2014 , the amount of additional funding Southside Bank could obtain from FHLB using unpledged securities at FHLB was approximately $518.7 million, net of FHLB stock purchases required. Southside Bank obtained no letters of credit from FHLB as collateral for a portion of its public fund deposits.

Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of new interest income through periods of changing interest rates. The ALCO closely monitors various liquidity ratios, interest rate spreads and margins. The ALCO performs interest rate simulation tests that apply various interest rate scenarios including immediate shocks and market value of portfolio equity (“MVPE”) with interest rates immediately shocked plus and minus 200 basis points to assist in determining our overall interest rate risk and adequacy of the liquidity position. In addition, the ALCO utilizes a simulation model to determine the impact on net interest income of several different interest rate scenarios. By utilizing this technology, we can determine changes that need to be made to the asset and liability mixes to minimize the change in net interest income under these various interest rate scenarios. See “Item 3. Quantitative and Qualitative Disclosures about Market Risk” in this Quarterly Report on Form 10-Q.

Noninterest Income

Noninterest income consists of revenue generated from a broad range of financial services and activities including deposit related fee based services such as ATM, overdraft, and check processing fees. In addition, we earn income from the sale of loans and securities, trust services, bank owned life insurance (“BOLI”), brokerage services, and other fee generating programs that we either provide or in which we participate.

Noninterest income was $5.8 million for the three months ended March 31, 2014 , compared to $10.2 million for the same period in 2013 , a decrease of $4.4 million , or 43.3% . The primary reason for the decrease in noninterest income for the three months ended March 31, 2014 , was due to the decrease in net gain on sale of securities AFS.

During the three months ended March 31, 2014 , we had net gain on sale of AFS securities of $11,000 , compared to $4.3 million for the same period in 2013 . During the quarter ended March 31, 2014 , we sold long duration, lower coupon municipal securities, U.S. Agency MBS and to a lesser extent, U.S. Agency debentures. The fair value of the AFS securities portfolio at March 31, 2014 was $1.17 billion with a net unrealized gain on that date of $8.9 million . The net unrealized gain is comprised of $20.1 million in unrealized gains and $11.2 million in unrealized losses. The fair value of the HTM securities portfolio at March 31, 2014 was $653.9 million with a net unrealized loss on that date of $14.6 million . The net unrealized loss is comprised of $15.4 million in unrealized gains and $30.0 million in unrealized losses. During the three months ended March 31, 2014 , we pro-actively managed the investment portfolio which included maintaining the blend of our investment portfolio.

Table of Contents

Gain on sale of loans decrease d $239,000 , or 74.9% , for the three months ended March 31, 2014 , when compared to the same period in 2013 . The decrease for the three months ended March 31, 2014 was due primarily to a decrease in the dollar amount of loans sold and the related servicing release and secondary market fees.

Bank owned life insurance increased $60,000, or 23.6%, for the three months ended March 31, 2014 , due to an increase in average BOLI assets when compared to the same period in 2013 .

Other income increase d $92,000 , or 10.3% , for the three months ended March 31, 2014 , when compared to the same period in 2013 , primarily due to increases in brokerage service fees, merchant services income, and credit card fees which were slightly offset by a decrease in the Southside Select fee income.

Noninterest Expense

We incur numerous types of noninterest expenses associated with the operation of our various business activities, the largest of which are salaries and employee benefits.

Noninterest expense was $20.2 million for the three months ended March 31, 2014 , compared to $20.3 million for the same period in 2013 , representing a decrease of $137,000 , or 0.7% , for the three months ended March 31, 2014 .

Salaries and employee benefits expense decrease d $107,000 , or 0.8% , during the three months ended March 31, 2014 , when compared to the same period in 2013 . The decrease for the three months ended March 31, 2014 was primarily the result of the decrease in retirement expense which was partially offset by the increase in direct salary expense.

Direct salary expense and payroll taxes increase d $551,000 , or 5.0% , during the three months ended March 31, 2014 when compared to the same period in 2013 due to increases in personnel and normal salary increases effective in the first quarter of 2014.

Retirement expense, included in salary and benefits, decrease d $679,000 , or 55.1% , for the three months ended March 31, 2014 , when compared to the same period in 2013 . The decrease was primarily related to the decrease in the defined benefit plan expense due to the funded status of the plan and the increase in the discount rate to 5.06% from 4.08% for the same period in 2013.

ATM and debit card expense decrease d $64,000 , or 16.8% , for the three months ended March 31, 2014 , when compared to the same period in 2013 . This was attributable to a nonrecurring transaction expense of $80,000 that occurred during the first three months of 2013 which was slightly offset by higher transaction cost in the first three months of 2014.

Professional fees increase d $287,000 , or 44.8% , for the three months ended March 31, 2014 , when compared to the same period in 2013, due to increases in accounting and audit fees.

Telephone and communication expenses decrease d $173,000 , or 38.4% , for the three months ended March 31, 2014 , when compared to the same period in 2013 . The decrease was due to the continued effects of moving to a consolidated system and vendor changes in 2013.

Table of Contents

Income Taxes

Pre-tax income for the three months ended March 31, 2014 was $9.4 million , compared to $10.9 million for the same period in 2013 . Income tax expense was $1.2 million for the three months ended March 31, 2014 compared to $1.8 million for the three months ended March 31, 2013 . The effective tax rate as a percentage of pre-tax income was 12.4% for the three months ended March 31, 2014 compared to 17.0% , for the same period in 2013 . The decrease in the effective tax rate for the three months ended March 31, 2014 was due to an increase in tax-exempt income as a percentage of taxable income, as compared to the same period in 2013 . The increase in tax-exempt income as a percentage of taxable income was primarily due to the significant increase in our average tax-exempt securities portfolio for the three months ended March 31, 2014 compared to the same period in 2013 . Net deferred assets totaled $15.7 million at March 31, 2014 , as compared to $18.4 million at December 31, 2013.

Capital Resources

Our total shareholders' equity at March 31, 2014 , was $271.4 million , representing an increase of 4.6% , or $11.9 million from December 31, 2013 and represented 7.9% of total assets at March 31, 2014 , compared to 7.5% of total assets at December 31, 2013 .

Increases to our shareholders’ equity consisted primarily of net income of $8.2 million , an increase in accumulated other comprehensive income of $6.8 million , the issuance of $257,000 in common stock ( 8,325 shares) through our dividend reinvestment plan, and $286,000 of stock compensation expense. These increases were slightly offset by $3.8 million in cash dividends paid.

On March 20, 2014 our board of directors declared a 5% stock dividend to common stock shareholders of record as of April 10, 2014 , which was paid on May 1, 2014 .

Under the Federal Reserve Board's risk-based capital guidelines for bank holding companies, the minimum ratio of total capital to risk-adjusted assets (including certain off-balance sheet items, such as standby letters of credit) is currently 8%. The minimum Tier 1 capital to risk-adjusted assets is 4%. Our trust preferred securities issued by our subsidiaries, Southside Statutory Trust III, IV, V and Magnolia Trust Company I, respectively, are considered Tier 1 capital by the Federal Reserve Board. The Federal Reserve Board also requires bank holding companies to comply with the minimum leverage ratio guidelines. The leverage ratio is the ratio of bank holding company's Tier 1 capital to its total consolidated quarterly average assets, less goodwill and certain other intangible assets. The guidelines require a minimum leverage ratio of 4% for bank holding companies that meet certain specified criteria. Failure to meet minimum capital requirements could result in certain mandatory and possibly additional discretionary actions by our regulators that, if undertaken, could have a direct material effect on our financial statements. Management believes that, as of March 31, 2014 , we met all capital adequacy requirements to which we were subject.

The Federal Deposit Insurance Act requires bank regulatory agencies to take "prompt corrective action" with respect to FDIC-insured depository institutions that do not meet minimum capital requirements. A depository institution's treatment for purposes of the prompt corrective action provisions will depend on how its capital levels compare to various capital measures and certain other factors, as established by regulation. Prompt corrective action and other discretionary actions could have a direct material effect on our financial statements.

It is management's intention to maintain our capital at a level acceptable to all regulatory authorities and future dividend payments will be determined accordingly. Regulatory authorities require that any dividend payments made by either us or the Bank, not exceed earnings for that year. Shareholders should not anticipate a continuation of the cash dividend simply because of the existence of a dividend reinvestment program. The payment of dividends will depend upon future earnings, our financial condition, and other related factors including the discretion of the board of directors.

Table of Contents

To be categorized as well capitalized we must maintain minimum Total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table:



	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Actions Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of March 31, 2014:	(dollars in thousands)
Total Capital (to Risk Weighted Assets)
Consolidated	$	340,919	22.12	%	$	123,315	8.00	%	N/A		N/A
Bank Only	$	338,181	21.94	%	$	123,312	8.00	%	$	154,140	10.00	%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated	$	321,831	20.88	%	$	61,657	4.00	%	N/A		N/A
Bank Only	$	319,093	20.70	%	$	61,656	4.00	%	$	92,484	6.00	%
Tier 1 Capital (to Average Assets) ⁽¹⁾
Consolidated	$	321,831	9.34	%	$	137,894	4.00	%	N/A		N/A
Bank Only	$	319,093	9.26	%	$	137,820	4.00	%	$	172,275	5.00	%
As of December 31, 2013:
Total Capital (to Risk Weighted Assets)
Consolidated	$	335,944	21.71	%	$	123,776	8.00	%	N/A		N/A
Bank Only	$	332,069	21.46	%	$	123,775	8.00	%	$	154,719	10.00	%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated	$	316,754	20.47	%	$	61,888	4.00	%	N/A		N/A
Bank Only	$	312,879	20.22	%	$	61,888	4.00	%	$	92,831	6.00	%
Tier 1 Capital (to Average Assets) ⁽¹⁾
Consolidated	$	316,754	9.07	%	$	139,665	4.00	%	N/A		N/A
Bank Only	$	312,879	8.97	%	$	139,559	4.00	%	$	174,449	5.00	%


(1)	Refers to quarterly average assets as calculated by bank regulatory agencies.

The capital requirements applicable to the Company and Southside Bank are subject to change because, over the coming years, the regulatory capital framework will change as a result of the Dodd-Frank Act and as a result of a separate international regulatory capital initiative known as “Basel III.” See the section captioned “Supervision and Regulation” in Item 1. Business of our 2013 Annual Report on Form 10-K for more information on these topics.

Management believes that, as of March 31, 2014 , Southside Bancshares and Southside Bank would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if such requirements were currently in effect.

Table of Contents

The table below summarizes our key equity ratios for the three months ended March 31, 2014 and 2013 :



	Three Months Ended March 31,
	2014		2013
Return on Average Assets	0.96	%	1.14	%
Return on Average Shareholders' Equity	12.44		14.19
Dividend Payout Ratio – Basic	47.73		41.67
Dividend Payout Ratio – Diluted	47.73		41.67
Average Shareholders' Equity to Average Total Assets	7.70		8.04

Composition of Loans

One of our main objectives is to seek attractive lending opportunities in Texas, primarily in the counties in which we operate. Refer to “Part I - Item 1. Business - Market Area” in our Annual Report on Form 10-K for the year ended December 31, 2013 for a discussion of our primary market area and the geographic concentration of our loan portfolio as of December 31, 2013 . There were no substantial changes in these concentrations during the three months ended March 31, 2014 . Substantially all of our loan originations are made to borrowers who live in and conduct business in our primary market area, with the exception of municipal loans, which are made almost entirely in Texas, and purchases of automobile loan portfolios throughout the United States. Municipal loans are made to municipalities, counties, school districts and colleges primarily throughout the state of Texas. Through SFG, we purchase portfolios of automobile loans from a variety of lenders throughout the United States. These high yield loans represent existing subprime automobile loans with payment histories that are collateralized by new and used automobiles. At March 31, 2014 , the SFG loans totaled approximately $93.6 million . Our loan growth may accelerate in the future when the economy in the markets we serve improves and as we work to identify and develop additional markets and strategies that will allow us to expand our lending territory. Total loans increase d $19.1 million , or 1.4% , to $1.37 billion for the three months ended March 31, 2014 from $1.35 billion at December 31, 2013 , and increase d $88.7 million , or 6.9% , from $1.28 billion at March 31, 2013 . Average loans increase d $97.2 million , or 7.7% , during the three months ended March 31, 2014 when compared to the same period in 2013 .

Our market areas to date have not experienced the level of downturn in the economy and real estate prices that some of the harder hit areas of the country have experienced. However, we did experience a slight slowdown as a result of the real estate led downturn across the country during 2008 and continuing into 2011. During 2012 and 2013, our markets stabilized and in some cases strengthened. A more severe decline in credit markets generally could adversely affect our financial condition and results of operation if we are unable to extend credit or sell loans into the secondary market. Our real estate loan portfolio does not have Alt-A or subprime mortgage exposure.

Table of Contents

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



	At March 31, 2014		At December 31, 2013		At March 31, 2013
	(in thousands)
Real Estate Loans:
Construction	$	135,237	$	125,219	$	119,326
1-4 Family Residential	395,809		390,499		376,421
Other	272,868		262,536		242,571
Commercial Loans	154,524		157,655		160,831
Municipal Loans	240,114		245,550		215,869
Loans to Individuals	171,841		169,814		166,629
Total Loans	$	1,370,393	$	1,351,273	$	1,281,647

Construction loans increase d $10.0 million , or 8.0% , to $135.2 million at March 31, 2014 from $125.2 million at December 31, 2013 , and $15.9 million , or 13.3% , from $119.3 million at March 31, 2013 , due to increased activity in the Austin and Dallas-Fort Worth markets.

Our 1-4 family residential mortgage loans increase d $5.3 million , or 1.4% , to $395.8 million at March 31, 2014 , from $390.5 million at December 31, 2013 , and $19.4 million , or 5.2% , from $376.4 million at March 31, 2013 , due primarily to the low interest rate environment and increased activity in the Dallas-Fort Worth market.

Other real estate loans, which are comprised primarily of commercial real estate loans, increase d $10.3 million , or 3.9% , to $272.9 million at March 31, 2014 , from $262.5 million at December 31, 2013 , and increased $30.3 million , or 12.5% , from $242.6 million at March 31, 2013 .

Commercial loans decrease d $3.1 million , or 2.0% , to $154.5 million at March 31, 2014 , from $157.7 million at December 31, 2013 , and decrease d $6.3 million , or 3.9% , from $160.8 million at March 31, 2013 .

Municipal loans decrease d $5.4 million , or 2.2% , to $240.1 million at March 31, 2014 , from $245.6 million at December 31, 2013 , and increase d $24.2 million , or 11.2% , from $215.9 million at March 31, 2013 .

Loans to individuals, which includes SFG loans, increase d $2.0 million , or 1.2% , to $171.8 million at March 31, 2014 , from $169.8 million at December 31, 2013 , and increase d $5.2 million , or 3.1% , from $166.6 million at March 31, 2013 . The increase for the three months ended March 31, 2014 is due to an increase in SFG loans purchased.

Loan Loss Experience and Allowance for Loan Losses

The allowance for loan losses is based on the most current review of the loan portfolio and is a result of multiple processes. First, the bank utilizes historical data to establish general reserve amounts for each class of loans. The historical charge-off figure is further adjusted through qualitative factors that include general trends in past dues, nonaccruals and classified loans to more effectively and promptly react to both positive and negative movements. Second, our lenders have the primary responsibility for identifying problem loans and estimating necessary reserves based on customer financial stress and underlying collateral. These recommendations are reviewed by senior loan administration, the Special Assets department, and the Loan Review department. Third, the Loan Review department independently reviews the portfolio on an annual basis. The Loan Review department follows a board-approved annual loan review scope. The loan review scope encompasses a number of considerations including the size of the loan, the type of credit extended, the seasoning of the loan and the performance of the loan. The Loan Review scope, as it relates to size, focuses more on larger dollar loan relationships, typically, for example, aggregate debt of $500,000 or

Table of Contents

greater. The Loan Review officer also reviews specific reserves compared to general reserves to determine trends in comparative reserves as well as losses not reserved for prior to charge-off to determine the effectiveness of the specific reserve process.

At each review, a subjective analysis methodology is used to grade the respective loan. Categories of grading vary in severity from loans that do not appear to have a significant probability of loss at the time of review to loans that indicate a probability that the entire balance of the loan will be uncollectible. If full collection of the loan balance appears unlikely at the time of review, estimates of future expected cash flows or appraisals of the collateral securing the debt are used to determine the necessary allowances. The internal loan review department maintains a list of all loans or loan relationships that are graded as having more than the normal degree of risk associated with them. In addition, a list of specifically reserved loans or loan relationships of $50,000 or more is updated on a quarterly basis in order to properly determine necessary allowances and keep management informed on the status of attempts to correct the deficiencies noted with respect to the loan.

After all of the data in the loan portfolio is accumulated the reserve allocations are separated into various loan classes.

As of March 31, 2014 , our review of the loan portfolio indicated that a loan loss allowance of $18.8 million was appropriate to cover probable losses in the portfolio. Changes in economic and other conditions may require future adjustments to the allowance for loan losses.

For the three months ended March 31, 2014 , loan charge-offs were $4.8 million and recoveries were $545,000 , resulting in net charge-offs of $4.2 million . For the three months ended March 31, 2013 , loan charge-offs were $3.2 million , and recoveries were $617,000 , resulting in net charge-offs of $2.5 million . The increase in net charge-offs for the three months ended March 31, 2014 , was primarily related to an increase in the level of charge-offs in the consumer portfolio. The necessary provision expense was estimated at $4.1 million for the three months ended March 31, 2014 , compared to $492,000 for the comparable period in 2013 . The increase in provision expense for the three months ended March 31, 2014 , compared to the same period in 2013 was due in part to low provision expense during the first quarter of 2013 and the increase in the level of charge-offs in the consumer portfolio during the first quarter of 2014.

Table of Contents

Nonperforming Assets

Nonperforming assets consist of delinquent loans 90 days or more past due, nonaccrual loans, other real estate owned ("OREO"), repossessed assets and restructured loans. Nonaccrual loans are loans 90 days or more delinquent and collection in full of both the principal and interest is not expected. Additionally, some loans that are not delinquent may be placed on nonaccrual status due to doubts about full collection of principal or interest. When a loan is categorized as nonaccrual, the accrual of interest is discontinued and any accrued balance is reversed for financial statement purposes. Restructured loans represent loans that have been renegotiated to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrowers. The restructuring of a loan is considered a “troubled debt restructuring” if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. Categorization of a loan as nonperforming is not in itself a reliable indicator of potential loan loss. Other factors, such as the value of collateral securing the loan and the financial condition of the borrower must be considered in judgments as to potential loan loss. OREO represents real estate taken in full or partial satisfaction of debts previously contracted. The dollar amount of OREO is based on a current evaluation of the OREO at the time it is recorded on our books, net of estimated selling costs. Updated valuations are obtained as needed and any additional impairments are recognized.

The following tables set forth nonperforming assets for the periods presented (in thousands):



	At March 31, 2014		At December 31, 2013		At March 31, 2013
Nonaccrual loans	$	5,869	$	8,088	$	8,570
Accruing loans past due more than 90 days	—		3		2
Restructured loans	4,090		3,888		3,317
Other real estate owned	476		726		584
Repossessed assets	454		901		108
Total Nonperforming Assets	$	10,889	$	13,606	$	12,581



	At March 31, 2014		At December 31, 2013		At March 31, 2013
Asset Quality Ratios:
Nonaccruing loans to total loans	0.43	%	0.60	%	0.67	%
Allowance for loan losses to nonaccruing loans	320.11		233.40		216.36
Allowance for loan losses to nonperforming assets	172.53		138.74		147.38
Allowance for loan losses to total loans	1.37		1.40		1.45
Nonperforming assets to total assets	0.32		0.39		0.38
Net charge-offs to average loans	1.26		0.82		0.81

Total nonperforming assets at March 31, 2014 were $10.9 million , a decrease of $2.7 million , or 20.0% , from $13.6 million at December 31, 2013 and a decrease of $1.7 million , or 13.4% , from $12.6 million at March 31, 2013 . The decrease in nonperforming assets for the three months ended March 31, 2014 is primarily a result of a decrease in nonaccrual loans.

Table of Contents

From December 31, 2013 to March 31, 2014 , nonaccrual loans decrease d $2.2 million , or 27.4% , to $5.9 million , and from March 31, 2013 , decrease d $2.7 million , or 31.5% . Of the total nonaccrual loans at March 31, 2014 , 17.6% are residential real estate loans, 8.8% are commercial real estate loans, 17.5% are commercial loans, 35.6% are loans to individuals, primarily SFG automobile loans, and 20.5% are construction loans. Restructured loans increase d $202,000 , or 5.2% , to $4.1 million at March 31, 2014 , from $3.9 million at December 31, 2013 and $773,000 , or 23.3% , from $3.3 million at March 31, 2013 . OREO decrease d $250,000 , or 34.4% , to $476,000 at March 31, 2014 from $726,000 at December 31, 2013 and $108,000 , or 18.5% , from $584,000 at March 31, 2013 . The OREO at March 31, 2014 , consisted primarily of commercial real estate property. We are actively marketing all properties and none are being held for investment purposes. Repossessed assets decrease d $447,000 , or 49.6% , to $454,000 at March 31, 2014 , from $901,000 at December 31, 2013 and increased $346,000 , or 320.4% , from $108,000 at March 31, 2013 .

Pending Acquisition

Recent Accounting Pronouncements

See “Note 1 – Basis of Presentation” in our consolidated financial statements included in this report.

Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The disclosures set forth in this item are qualified by the section captioned “Forward-Looking Statements” included in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report and other cautionary statements set forth elsewhere in this report.

Refer to the discussion of market risks included in “Item 7A. Quantitative and Qualitative Disclosures About Market Risks” in our Annual Report on Form 10-K for the year ended December 31, 2013 . There have been no significant changes in the types of market risks we face since December 31, 2013 .

In the banking industry, a major risk exposure is changing interest rates. The primary objective of monitoring our interest rate sensitivity, or risk, is to provide management the tools necessary to manage the balance sheet to minimize adverse changes in net interest income as a result of changes in the direction and level of interest rates. Federal Reserve Board monetary control efforts, the effects of deregulation, the current economic downturn and legislative changes have been significant factors affecting the task of managing interest rate sensitivity positions in recent years.

In an attempt to manage our exposure to changes in interest rates, management closely monitors our exposure to interest rate risk through our ALCO. Our ALCO meets regularly and reviews our interest rate risk position and makes recommendations to our board for adjusting this position. In addition, our board reviews our asset/liability position on a monthly basis. We primarily use two methods for measuring and analyzing interest rate risk: net income simulation analysis and MVPE modeling. We utilize the net income simulation model as the primary quantitative tool in measuring the amount of interest rate risk associated with changing market rates. This model quantifies the effects of various interest rate scenarios on projected net interest income and net income over the next 12 months. The model was used to measure the impact on net interest income relative to a base case scenario of rates immediately increasing 100 and 200 basis points or decreasing 100 and 200 basis points over the next 12 months. These simulations incorporate assumptions regarding balance sheet growth and mix, pricing and the repricing and maturity characteristics of the existing and projected balance sheet. The impact of interest rate-related risks such as prepayment, basis and option risk are also considered. As of March 31, 2014 , the model simulations projected that 100 and 200 basis point immediate increases in interest rates would result in negative variances on net interest income of 2.74% and 5.35%, respectively, relative to the base case over the next 12 months, while an immediate decrease in interest rates of 100 and 200 basis points would result in a negative variance in net interest income of 3.05% and 3.00%, respectively, relative to the base case over the next 12 months. As of December 31, 2013, the model simulations projected that 100 and 200 basis point immediate increases in interest rates would result in negative variances on net interest income of 5.86% and 8.42%, respectively, relative to the base case over the next 12 months, while an immediate decrease in interest rates of 100 and 200 basis points would result in a negative variance in net interest income of 2.69% and 4.15%, respectively, relative to the base case over the next 12 months. As of March 31, 2013 , the model simulations projected that 100 and 200 basis point immediate increases in interest rates would result in negative variances on net interest income of 4.17% and 6.44%, respectively, relative to the base case over the next 12 months, while an immediate decrease in interest rates of 100 and 200 basis points would result in a negative variance in net interest income of 0.98% and 1.07%, respectively, relative to the base case over the next 12 months. As part of the overall assumptions, certain assets and liabilities have been given reasonable floors. This type of simulation analysis requires numerous assumptions including but not limited to changes in balance sheet mix, prepayment rates on mortgage-related assets and fixed rate loans, cash flows and repricing of all financial instruments, changes in volumes and pricing, future shapes of the yield curve, relationship of market interest rates to each other (basis risk), credit spread and deposit sensitivity. Assumptions are based on management’s best estimates but may not accurately reflect actual results under certain changes in interest rates.

The ALCO monitors various liquidity ratios to ensure a satisfactory liquidity position for us. Management continually evaluates the condition of the economy, the pattern of market interest rates and other economic data to determine the types of investments that should be made and at what maturities. Using this analysis, management from time to time assumes calculated interest sensitivity gap positions to maximize net interest income based upon anticipated movements

Table of Contents

in the general level of interest rates. Regulatory authorities also monitor our gap position along with other liquidity ratios. In addition, as described above, we utilize a simulation model to determine the impact of net interest income under several different interest rate scenarios. By utilizing this technology, we can determine changes that need to be made to the asset and liability mixes to mitigate the change in net interest income under these various interest rate scenarios.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision of and with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of March 31, 2014. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective as of March 31, 2014 due to the fact that there was a material weakness in our internal control over financial reporting as discussed in more detail below. Based on a number of factors, including remediation actions taken to address the material weakness, we believe the consolidated financial statements in this Quarterly Report fairly present, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods, presented.

As disclosed in Part II, Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2013, management identified a control deficiency that was determined to be a material weakness related to our interest income recognition on callable municipal securities purchased at a premium. As a result of the control deficiency, we did not properly amortize the premium to the maturity of the security, but instead we amortized the premium to the earliest call date. The control deficiency resulted in an interest income recognition error for individual callable municipal securities purchased at a premium that required specific accounting in accordance with generally accepted accounting principles.

As of March 31, 2014, management believes it has placed in operation controls to address the material weakness. Specifically, we enhanced our interest income recognition controls for callable municipal securities purchased at a premium. We are amortizing all of our municipal securities purchased at a premium to the maturity date of the security. However, given the timing of these remediation activities there was not sufficient evidence to make a determination as to their sustained effectiveness. As a result, management is evaluating the operating effectiveness of the controls implemented to ensure sustainability and will take further remediation actions should any evidence of ineffectiveness be found.

Our Audit Committee has directed management to monitor and test the controls implemented and develop additional controls should any of the new controls require additional enhancement. In addition, under the direction of our Audit Committee, management will continue to review and make necessary changes to the overall design of our internal control environment, as well as policies and procedures to improve the overall effectiveness of internal control over financial reporting.

Management believes the measures described above and others that will be implemented as necessary will remediate the control deficiency we identified and strengthen our internal control over financial reporting. Management is committed to continuous improvement of our internal control processes and will continue to diligently review our financial reporting controls and procedures. As management continues to evaluate and work to improve internal control over financial reporting, we may determine to take additional measures to address control deficiencies or determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures described above.

Changes in Internal Control Over Financial Reporting

Except as described above, there have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are party to legal proceedings arising in the normal conduct of business. Management believes that at March 31, 2014 such litigation is not material to our financial position, results of operations or cash flows.

ITEM 1A. RISK FACTORS

Additional information regarding risk factors appears in “Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Forward Looking Statements” of this Form 10-Q and in Part I - “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013. The risks and uncertainties described in our Annual Report on Form 10-K for the year ended December 31, 2013 are not the only ones we face. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not Applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

Not Applicable.

ITEM 6. EXHIBITS

A list of exhibits to this Form 10-Q is set forth on the Exhibit Index and is incorporated herein by reference.

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		SOUTHSIDE BANCSHARES, INC.

DATE:	May 9, 2014	BY:	/s/ SAM DAWSON
			Sam Dawson
			President and Chief Executive Officer
			(Principal Executive Officer)


DATE:	May 9, 2014	BY:	/s/ LEE R. GIBSON
			Lee R. Gibson, CPA
			Senior Executive Vice President and Chief Financial Officer
			(Principal Financial Officer)

Table of Contents

Exhibit Index



Exhibit Number		Description
*2		Agreement and Plan of Merger, dated April 28, 2014, by and among Southside Bancshares, Inc., Omega Merger Sub, Inc. and OmniAmerican Bancorp, Inc.

*3 (a)		Restated Certificate of Formation of Southside Bancshares, Inc. effective May 2, 2014.

3 (b)		Amended and Restated Bylaws of Southside Bancshares, Inc. effective August 9, 2012 (filed as Exhibit 3(b) to the Registrant’s Form 8-K, filed August 10, 2012, and incorporated herein by reference).

*31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

*31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

†*32		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*101.INS		XBRL Instance Document.

*101.SCH		XBRL Taxonomy Extension Schema Document.

*101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.

*101.LAB		XBRL Taxonomy Extension Label Linkbase Document.

*101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.

*101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.

*Filed herewith.

† The certification attached as Exhibit 32 accompanies this Quarterly Report on Form 10-Q and is “furnished” to the Commission pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by us for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

EXHIBIT 2

Execution Copy

AGREEMENT AND PLAN OF MERGER

by and among

SOUTHSIDE BANCSHARES, INC.,

OMEGA MERGER SUB, INC.

and

OMNIAMERICAN BANCORP, INC.

___________________________

Dated as of April 28, 2014

___________________________

TABLE OF CONTENTS



ARTICLE I	THE MERGERS
1.1	The Mergers	1
1.2	Effective Time	1
1.3	Closing	2
1.4	Governing Documents	2
1.5	Directors and Officers of Surviving Corporation	2
1.6	Tax Consequences	3
1.7	Effects of the Mergers	3
1.8	Bank Merger	3

ARTICLE II	MERGER CONSIDERATION
2.1	Conversion of Shares in the First Merger	4
2.2	Conversion of Shares in the Second Merger	4
2.3	Deposit of Merger Consideration and Option Consideration	5
2.4	Delivery of Merger Consideration	5
2.5	Company Options	7

ARTICLE III	REPRESENTATIONS AND WARRANTIES OF COMPANY
3.1	Corporate Organization	8
3.2	Capitalization	9
3.3	Authority; No Violation	9
3.4	Consents and Approvals	10
3.5	Reports	11
3.6	Financial Statements	11
3.7	Undisclosed Liabilities	13
3.8	Absence of Certain Changes or Events	13
3.9	Legal Proceedings	13
3.10	Taxes and Tax Returns	14
3.11	Employee Benefit Plans	15
3.12	Labor Matters	19
3.13	Compliance with Applicable Law	19
3.14	Material Contracts	20
3.15	Agreements with Regulatory Agencies	22
3.16	Investment Securities	22
3.17	Derivative Instruments	22
3.18	Environmental Liability	22
3.19	Insurance	24
3.20	Title to Property	24
3.21	Intellectual Property	25
3.22	Loans	26
3.23	Related Party Transactions	27
3.24	Takeover Laws	28
3.25	Approvals	28
3.26	Company Information	28
3.27	Broker’s Fees	28
3.28	Transaction Expenses	28
3.29	No Other Representations or Warranties	28



ARTICLE IV	REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
4.1	Corporate Organization	29
4.2	Capitalization	30
4.3	Authority; No Violation	30
4.4	Consents and Approvals	31
4.5	Legal Proceedings	31
4.6	Absence of Certain Changes	32
4.7	Reports	32
4.8	Financial Statements	32
4.9	Investment Securities	34
4.10	Taxes and Tax Returns	34
4.11	Approvals	34
4.12	Compliance with Applicable Laws	34
4.13	Parent Information	35
4.14	Employee Benefit Plans	35
4.15	Labor Matters	37
4.16	Intellectual Property	37
4.17	Loans	38
4.18	Environmental Laws	38
4.19	Derivative Instruments	39
4.20	Related Party Transactions	39
4.21	Available Funds	39
4.22	Broker’s Fees	39
4.23	Ownership of Shares	39
4.24	Access to Information, Disclaimer	39

ARTICLE V	COVENANTS RELATING TO CONDUCT OF BUSINESS
5.1	Conduct of Business of Company Prior to the Effective Time	40
5.2	Forbearances of Company	40
5.3	Forbearances of Parent	44

ARTICLE VI	ADDITIONAL AGREEMENTS
6.1	Regulatory Matters	44
6.2	Access to Information	46
6.3	SEC Filings and Stockholder Approval	46
6.4	Public Disclosure	47
6.5	Employee Benefit Matters	50
6.6	Additional Agreements	50
6.7	Indemnification; Directors’ and Officers’ Insurance	50
6.8	Exchange Listing	51
6.9	No Solicitation	51
6.10	Notification of Certain Actions	54
6.11	Takeover Provisions	54
6.12	Stockholder Litigation	54
6.13	Merger Sub; Parent Subsidiaries; Company Subsidiaries	54
6.14	Tax Representation Letters	54

ARTICLE VII	CONDITIONS PRECEDENT
7.1	Conditions to Each Party’s Obligation to Effect the Closing	55
7.2	Conditions to Obligations of Parent	55
7.3	Conditions to Obligations of Company	56



ARTICLE VIII	TERMINATION AND AMENDMENT
8.1	Termination	57
8.2	Notice of Termination; Effect of Termination	58
8.3	Termination Fee	59
8.4	Amendment	59
8.5	Extension; Waiver	60

ARTICLE IX	GENERAL PROVISIONS
9.1	No Survival of Representations and Warranties and Agreements	60
9.2	Expenses	60
9.3	Notices	60
9.4	Interpretation	61
9.5	Counterparts	61
9.6	Entire Agreement	62
9.7	Governing Law; Venue; WAIVER OF JURY TRIAL	62
9.8	Specific Performance	62
9.9	Additional Definitions	62
9.10	Severability	66
9.11	Authorship	66
9.12	Assignment; Third-Party Beneficiaries	66


Schedule A:	Stockholders Executing Voting and Support Agreements
Schedule B:	Individuals Executing Employment Agreements
Exhibit A:	Form of Voting and Support Agreement
Exhibit B:	Form of Subsidiary Bank Plan of Merger

iii

INDEX OF DEFINED TERMS



	Section		Section
Acquisition Proposal	6.9(c)	Delaware Courts	9.7(b)
AD&D	6.5(a) 9.9 Preamble	Derivative Transactions	9.9
Affiliate	9.9	Disclosure Schedule	Article III
Agreement	Preamble	Effective Time	1.2
Articles of Merger	1.2	Employment Agreements	Recitals
Balance Sheet	3.7	End Date	9.9
Balance Sheet Date	3.7	Enforceability Exceptions	3.3(a)
Bank Merger	1.8	Environmental Law	9.9
Bank Merger Certificates	1.8	ERISA	3.11(a)
Business Day	9.9	ERISA Affiliate	9.9
Cancelled Shares	2.1(c)	Exchange and Paying Agent	2.3
Cash Consideration	2.1(b)	Exchange and Paying Agent
Certificate of Merger	1.2	Agreement	2.3
Certificates	2.4(a)	Exchange and Payment Fund	2.3
Claim	6.7(a)	Exchange Ratio	2.1(b)
Closing	1.3	FDIC	3.1(a)
Closing Date	1.3	Federal Reserve	3.4
Code	9.9	First Merger	Recitals
Company	Preamble	Form S-4	6.3(c)
Company Acquisition Agreement	6.9(a)	GAAP	3.6(a)
Company Adverse Recommendation		Governmental Entity	3.4
Change	6.9(b)	HIPAA	3.11(c)
Company Bank Subsidiary	1.8	Holders	2.4(a)
Company Benefit Plans	3.11(a)	Intellectual Property	9.9
Company Board Recommendation	6.3(a)	IRS	3.10(k)
Company Bylaws	3.1(a)	Joint Proxy Statement	6.3(c)
Company Charter	3.1(a)	Key Employees	Recitals
Company Common Stock	2.1(b)	Knowledge	9.9
Company Designees	1.5(b)	Law	9.9
Company Financial Statements	3.6(a)	Laws	9.9
Company Indemnified Party	6.7(a)	Leased Premises	3.20(b)
Company Intellectual Property	3.21(a)	Letter of Transmittal	2.4(a)
Company Policies	3.19	Liability	9.9
Company Regulatory Agreement	3.15	Lien	3.1(b)
Company SEC Documents	3.5(b)	Loan Documentation	9.9
Company Stock Plan	9.9	Loan Sale Agreement	3.22(g)
Company Stockholders Meeting	6.3(a)	Loan Tape	3.22(b)
Company Subsidiaries	3.1(b)	Loans	3.22(a)
Company Subsidiary	3.1(b)	Material Adverse Effect	9.9
Confidentiality Agreement	9.9	Material Contract	3.14(a)
Continuation Period	6.5(a)	Materially Burdensome Regulatory
Controlled Group Liability	9.9	Condition	6.1(a)
Corporate Entity	9.9	Maximum Amount	6.7(c)
Covered Employees	6.5(a)	Merger Consideration	2.1(b)
CRA	3.13(a)	Merger Sub	Preamble



	Section		Section
Mergers	Recitals	Qualified Plans	3.11(f)
MGCL	1.1	Real Property Leases	3.20(a)
Multiemployer Plan	3.11(h)	Regulatory Agencies	3.5(a)
Multiple Employer Plan	3.11(h)	Regulatory Approvals	6.1(a)
NASDAQ	3.4	Reports	3.5(a)
Notice Period	6.9(g)	Representative	6.9(a)
Obligor	3.22(a)	Required Regulatory Approval	9.9
Option Consideration	2.5(a)	Requisite Stockholder Approval	3.3(a)
Owned Real Property	3.20(a)	Sarbanes-Oxley Act	3.6(d)
Parent	Preamble	SDAT	1.2
Parent Bank	1.8	SEC	Article III Preamble
Parent Benefit Plan	9.9	Second Effective Time	1.2
Parent Board	1.5(b)	Second Merger	Recitals
Parent Board Recommendation	6.3(b)	Securities Act	3.2
Parent Capitalization Date	4.2	Stock Consideration	2.1(b)
Parent Common Stock	2.1(b)	Subsidiary	9.9
Parent Disclosure Schedule	Article IV	Subsidiary Plan of Merger	1.8
Parent Financial Statements	4.8(a)	Superior Proposal	6.9(c)
Parent Intellectual Property	4.16(a)	Surviving Corporation	Recitals
Parent Options	4.2	Surviving Parent Company	Recitals
Parent Pension Plan	4.14(d)	Takeover Provisions	3.24
Parent Qualified Plans	4.14(d)	Tax	9.9
Parent SEC Reports	4.7(b)	Tax Return	9.9
Parent Share Value	9.9	Taxes	9.9
Parent Stockholder Approval	4.3(a)	TBOC	1.1
Parent Stockholders Meeting	6.3(b)	Tenant Leases	3.20(a)
parties	9.9	Termination Fee	8.3(a)
party	9.9	Trading Day	9.9
Pension Plan	3.11(g)	Voting and Support Agreement	Recitals
Permitted Encumbrances	3.20(b)	Voting and Support Agreements	Recitals
Person	9.9	Voting Debt	3.2
Personal Property	3.20(f)

AGREEMENT AND PLAN OF MERGER

THIS AGREEMENT AND PLAN OF MERGER (this “ Agreement ”) is made and entered into as of April 28, 2014, by and among SOUTHSIDE BANCSHARES, INC. , a Texas corporation (“ Parent ”), OMEGA MERGER SUB, INC. , a Maryland corporation and a wholly owned subsidiary of Parent (“ Merger Sub ”), and OMNIAMERICAN BANCORP, INC. , a Maryland corporation (“ Company ”). Certain capitalized terms have the meanings given to such terms in Article IX.

RECITALS

WHEREAS, the boards of directors of Company and Parent have determined that it is in the best interests of their respective companies to consummate a strategic business combination transaction pursuant to which Merger Sub will, on the terms and subject to the conditions set forth in this Agreement, merge with and into Company (the “ First Merger ”), with Company as the surviving corporation (the “ Surviving Corporation ”), and then immediately after the First Merger and as a part of an integrated plan, the Surviving Corporation will merge with and into Parent (the “ Second Merger ,” and together with the First Merger, the “ Mergers ”), with Parent as the surviving corporation (sometimes referred to in such capacity as the “ Surviving Parent Company ”);

WHEREAS, the board of directors of Company has (a) determined that this Agreement, the Mergers and the transactions contemplated by this Agreement are advisable and in the best interests of Company, (b) approved this Agreement, the Mergers and the transactions contemplated by this Agreement, (c) directed that the First Merger be submitted for consideration at a meeting of Company stockholders and (d) recommended the approval of the First Merger by Company stockholders at the Company Stockholders Meeting;

WHEREAS, the board of directors of Parent has (a) determined that this Agreement, the Mergers and the other transactions contemplated by this Agreement, including the issuance of Parent Common Stock in the First Merger, are advisable and in the best interests of Parent and its stockholders, (b) approved this Agreement, the Mergers and the other transactions contemplated by this Agreement, including the issuance of Parent Common Stock in the First Merger as contemplated by this Agreement, (c) directed that the issuance of Parent Common Stock in the First Merger as contemplated by this Agreement be submitted for approval at a meeting of Parent’s stockholders, and (d) recommended the approval of the issuance of Parent Common Stock in the First Merger as contemplated by this Agreement;

WHEREAS, the board of directors of Merger Sub has (a) determined that this Agreement, the First Merger and the other transactions contemplated by this Agreement are advisable and in the best interests of Merger Sub, (b) approved this Agreement, the First Merger and the other transactions contemplated by this Agreement, (c) directed that the First Merger be submitted for approval by Merger Sub’s sole stockholder and (d) recommended the approval of the First Merger by Merger Sub’s sole stockholder;

WHEREAS , Parent (i) in its capacity as the sole stockholder of Merger Sub, has taken all actions required for the execution of this Agreement by Merger Sub, has approved this Agreement and approved the First Merger and (ii) upon consummation of the First Merger, shall take all actions required for the consummation of the Second Merger and the other transactions contemplated by this Agreement;

WHEREAS, the parties intend that the Mergers will constitute a “reorganization” within the meaning of Section 368(a)(1)(A) of the Code, that Company and Parent are parties to such reorganization within the meaning of Section 368(b) of the Code, and that this Agreement constitutes a plan of reorganization;

WHEREAS, concurrently with the execution and delivery of this Agreement, as a condition and inducement to Parent’s willingness to enter into this Agreement, each of the directors of Company, as listed on Schedule A hereto, has simultaneously herewith entered into a Voting and Support Agreement substantially in the form attached hereto as Exhibit A (each, a “ Voting and Support Agreement " and, collectively, the “ Voting and Support Agreements ”) in connection with the First Merger; and

WHEREAS, concurrently with the execution and delivery of this Agreement, as a condition and inducement to Parent’s willingness to enter into this Agreement, each of the individuals listed on Schedule B hereto (the “ Key Employees ”) is entering into a new employment agreement with Parent and Parent Bank (the “ Employment Agreements ”), dated as of the date hereof, to be effective as of (and subject to the occurrence of) the Effective Time.

NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows:

ARTICLE I

THE MERGERS

1.1 The Mergers . Upon the terms and subject to the satisfaction or waiver of the conditions set forth in this Agreement, and in accordance with the Maryland General Corporation Law (the “ MGCL ”), at the Effective Time, (i) Merger Sub shall merge with and into Company, (ii) the separate corporate existence of Merger Sub shall cease and (iii) Company shall be the Surviving Corporation of the First Merger and shall continue its corporate existence under the MGCL. Immediately following the Effective Time, upon the terms and subject to the satisfaction or waiver of conditions set forth in this Agreement, and in accordance with the Texas Business Organizations Code, as amended (the “ TBOC ”) and the MGCL, as part of an integrated plan, (i) the Surviving Corporation shall be merged with and into Parent, (ii) the separate corporate existence of the Surviving Corporation shall cease and (iii) Parent shall be the Surviving Parent Company of the Second Merger and shall continue its legal existence under the TBOC.

1.2 Effective Time.

(a) Prior to the Closing, Parent and Company shall prepare and, on the Closing Date, Parent, Merger Sub and Company shall (i) cause articles of merger with respect to the First Merger (the “ First Articles of Merger ”) to be duly executed and filed with the State Department of Assessments and Taxation of Maryland (the “ SDAT ”) in accordance with the MGCL and (ii) make any other filings, recordings or publications required to be made by Company or Merger Sub under the MGCL in connection with the First Merger. The First Merger shall become effective upon the date and at the time set forth in the First Articles of Merger (such date and time, the “ Effective Time ”).

Immediately following the Effective Time, Parent and Surviving Corporation shall (i) cause a certificate of merger with respect to the Second Merger (as set forth in Section 10.006 of the

TBOC, the “ Certificate of Merger ”) with the Secretary of State of the State of Texas and articles of merger (the “ Second Articles of Merger ” and, together with the First Articles of Merger, the “ Articles of Merger ”) with respect to the Second Merger to be duly executed and filed with the SDAT in accordance with the MGCL and (ii) make any other filings, recordings or publications required to be made by Parent or the Surviving Corporation under the TBOC and the MGCL in connection with the Second Merger. The Second Merger shall become effective upon the date and at the time set forth in the Certificate of Merger and the Second Articles of Merger (such date and time, the “ Second Effective Time ”).

1.3 Closing . On the terms and subject to the conditions set forth in this Agreement, the closing of the First Merger (the “ Closing ”) shall take place at 10:00 a.m., Atlanta time, at the offices of Alston & Bird LLP, 1201 West Peachtree Street, Atlanta, Georgia on a date no later than three (3) Business Days after the satisfaction or waiver (subject to applicable Law) of the latest to occur of the conditions set forth in Article VII (other than those conditions that by their nature are to be satisfied or waived at the Closing, but subject to the satisfaction of such conditions and the continued satisfaction or waiver of all other conditions set forth in Article VII), or such other date, time or place as mutually agreed to by the parties (including Closing by facsimile or “PDF” electronic mail transmission exchange of executed documents or signature pages followed by the exchange of originals as soon thereafter as practicable) (the “ Closing Date ”).

1.4 Governing Documents . At the Effective Time, the charter and bylaws of Company in effect immediately prior to the Effective Time shall be the charter and bylaws of the Surviving Corporation until thereafter amended in accordance with applicable Law. At the Second Effective Time, the articles of incorporation and bylaws of Parent in effect immediately prior to the Second Effective Time shall be the articles of incorporation and bylaws of the Surviving Parent Company until thereafter amended in accordance with applicable Law.

1.5 Directors and Officers .

(a) The First Articles of Merger will provide that, at the Effective Time, the directors of Merger Sub immediately prior to the Effective Time shall serve as the directors of the Surviving Corporation from and after the Effective Time in accordance with the bylaws of the Surviving Corporation. The First Articles of Merger will provide that, at the Effective Time, the officers of Merger Sub immediately prior to the Effective Time shall be the officers of the Surviving Corporation from and after the Effective Time, until the earlier of their resignation or removal, or otherwise ceasing to be an officer or until their respective successors are duly elected and qualified, as the case may be.

At the Second Effective Time, the directors of Parent immediately prior to the Second Effective Time shall continue to serve as the directors of the Surviving Parent Company from and after the Second Effective Time in accordance with the articles of incorporation and bylaws of the Surviving Parent Company; provided that prior to, but subject to the occurrence of, the Effective Time, the board of directors of Parent (the “ Parent Board ”) shall take all action necessary to increase the size of the Parent Board by two and to appoint to such newly created vacancies individuals selected by Parent from among the then-current directors of Company (the “ Company Designees ”), which individuals shall serve as directors of the Surviving Parent Company until their successors are duly elected and qualified in accordance with the articles of incorporation and bylaws of Parent; provided further , that one of the Company Designees must: (i) meet the definition of “independent director” set forth in the rules and regulations of the NASDAQ for companies

listed on the NASDAQ and applicable regulations promulgated by the SEC and (ii) meet the independence standards previously published by Parent, and neither of the Company Designees shall have been party to or involved in an event that would be required to be disclosed pursuant to Item 401(f) of Regulation S-K under the Securities Act and the Exchange Act; provided further , that each of the Company Designees shall be placed in the class of directors whose terms of office shall expire at the annual meeting of Parent shareholders to be held in 2015 and the Nominating Committee of the Parent Board shall consider in good faith the nomination for reelection of each of the Company Designees for a full three-year term at the 2015 annual meeting of Parent’s shareholders. The officers of Parent immediately prior to the Second Effective Time shall be the officers of the Surviving Parent Company from and after the Second Effective Time, until the earlier of their resignation or removal, or otherwise ceasing to be an officer or until their respective successors are duly elected and qualified, as the case may be.

1.6 Tax Consequences . It is intended that the Mergers shall qualify as a “reorganization” within the meaning of Section 368(a) of the Code, and that this Agreement shall constitute, and is hereby adopted as, a “plan of reorganization” for purposes of Sections 354 and 361 of the Code. From and after the date of this Agreement and until the Closing Date, each party hereto shall use its reasonable best efforts to cause the Mergers to qualify, and will not knowingly take any action, cause any action to be taken, fail to take any action or cause any action not to be taken, which action or failure to act could reasonably be expected to prevent the Mergers from qualifying as a “reorganization” within the meaning of Section 368(a) of the Code.

1.7 Effects of the Mergers . At and after the Effective Time, the First Merger shall have the effects set forth in this Agreement and in the relevant provisions of the MGCL. At and after the Second Effective Time, the Second Merger shall have the effects set forth in this Agreement and in the relevant provisions of the TBOC and the MGCL.

1.8 Bank Merger . Immediately following the Second Effective Time, OmniAmerican Bank, a federal savings association and, prior to the Second Effective Time, wholly owned subsidiary of Company (the “ Company Bank Subsidiary ”), will merge (the “ Bank Merger ”) with and into Southside Bank, a Texas banking corporation and wholly owned subsidiary of Parent (“ Parent Bank ”). Parent Bank shall be the surviving entity in the Bank Merger and shall continue its corporate existence under the name “Southside Bank”, and, following the Bank Merger, the separate corporate existence of the Company Bank Subsidiary shall cease. The liquidation account established by Company Bank Subsidiary pursuant to 12 C.F.R. part 192 shall be assumed by Parent Bank following the Bank Merger. The parties agree that the Bank Merger shall become effective immediately after the Second Effective Time. The Bank Merger shall be implemented pursuant to a subsidiary plan of merger, in substantially the form set forth in Exhibit B hereto (the “ Subsidiary Plan of Merger ”). In order to obtain the necessary Regulatory Approvals for the Bank Merger, the parties hereto shall cause the following to be accomplished prior to the filing of applications for such Regulatory Approvals: (a) Company shall cause the Company Bank Subsidiary to approve the Subsidiary Plan of Merger; Company, as the sole stockholder of the Company Bank Subsidiary, shall approve the Subsidiary Plan of Merger; and Company shall cause the Subsidiary Plan of Merger to be duly executed by the Company Bank Subsidiary and delivered to Parent and (b) Parent shall cause Parent Bank to approve the Subsidiary Plan of Merger; Parent, as the sole stockholder of Parent Bank, shall approve the Subsidiary Plan of Merger; and Parent shall cause Parent Bank to duly execute and deliver the Subsidiary Plan of Merger to Company. Prior to the Second Effective Time, the Surviving Parent Company shall cause the Company Bank Subsidiary and Parent Bank to execute such certificates of merger and articles of combination and such other documents and certificates as are necessary to make the Bank Merger effective (“ Bank Merger Certificates ”) immediately after the Second Effective Time.

ARTICLE II

MERGER CONSIDERATION

2.1 Conversion of Shares in the First Merger. At the Effective Time, by virtue of the First Merger and without any action on the part of Parent, Merger Sub, Company or the holder of any of the following securities:

(a) Conversion of Shares of Merger Sub Stock . Each share of common stock of Merger Sub issued and outstanding immediately prior to the Effective Time shall automatically be converted into one validly issued, fully paid and nonassessable share of common stock, par value $0.01 per share, of Company (“ Company Common Stock ”).

(b) Conversion of Company Common Stock . Each share of Company Common Stock issued and outstanding immediately prior to the Effective Time (other than any Cancelled Shares) shall be converted into the right to receive: (i) 0.4459 shares (the “ Exchange Ratio ”), subject to adjustment in accordance with Section 2.1(d), of validly issued, fully paid and nonassessable shares of common stock, par value $1.25 per share, of Parent (“ Parent Common Stock ”) (together with any cash in lieu of fractional shares of Parent Common Stock to be paid pursuant to Section 2.4(f), the “ Stock Consideration ”); and (ii) $13.125 per share of Company Common Stock in cash (the “ Cash Consideration ” and, together with the Stock Consideration, the “ Merger Consideration ”).

(c) Cancellation of Certain Shares of Company Common Stock . All shares of Company Common Stock issued and outstanding immediately prior to the Effective Time that are owned directly by Parent or Company or a Subsidiary of Company (other than (i) shares held in trust accounts, managed accounts and the like, or otherwise held in a fiduciary or agency capacity, that are beneficially owned by third parties and (ii) shares held, directly or indirectly, by Parent or Company in respect of a debt previously contracted) shall be cancelled and shall cease to exist and no Merger Consideration or other consideration shall be delivered in exchange therefor (such cancelled shares, the “ Cancelled Shares ”).

(d) Adjustments to Prevent Dilution . If at any time during the period between the date of this Agreement and the Effective Time, any change in the outstanding shares of capital stock of Parent or Company, respectively, shall occur (or for which the relevant record date will occur) as a result of any reclassification, recapitalization, stock split (including a reverse stock split) or subdivision or combination or readjustment of shares, or any stock dividend or stock distribution with a record date during such period, an appropriate and proportionate adjustment shall be made to the Stock Consideration, the Exchange Ratio and other dependent items, as applicable.

(e) No Dissenter’s or Appraisal Rights. No holder of Company Common Stock is entitled, with respect to the First Merger, to exercise any rights of an objecting stockholder provided for under Title 3 Subtitle 2 of the MGCL or any successor statute, or any similar dissenter’s or appraisal rights.

(f) No Effect on Parent Common Stock . Each share of Parent Common Stock issued and outstanding immediately prior to the Effective Time shall remain issued and outstanding immediately after the Effective Time.

2.2 Conversion of Shares in the Second Merger . At the Second Effective Time, by virtue of the Second Merger and without any action on the part of Parent, the Surviving Corporation or the holder of any of the following securities:

(a) Cancellation of Shares of Surviving Corporation Stock . Each share of common stock of the Surviving Corporation issued and outstanding immediately prior to the Second Effective Time shall automatically be retired and shall cease to exist, and no consideration shall be paid, nor shall any other payment be made or right inure with respect thereto in connection with or as a consequence of the Second Merger.

(b) No Effect on Parent Common Stock . Each share of Parent Common Stock issued and outstanding immediately prior to the Second Effective Time shall remain issued and outstanding and shall not be affected by the Second Merger.

2.3 Deposit of Merger Consideration and Option Consideration . Promptly after the Effective Time, Parent shall deposit (or cause to be deposited) to Computershare Trust Company or another bank or trust company selected by Parent and reasonably acceptable to Company (the “ Exchange and Paying Agent ”) pursuant to an agreement, the terms of which shall be reasonably acceptable to Company, entered into prior to the Closing (the “ Exchange and Paying Agent Agreement ”), for exchange in accordance with this Article II: (a) the number of shares of Parent Common Stock sufficient to deliver the aggregate Stock Consideration; (b) to the extent then determinable, any cash payable in lieu of fractional shares pursuant to Section 2.4(f); (c) cash in an amount equal to the Cash Consideration; and (d) cash in the amount equal to the Option Consideration (with such deposits collectively referred to herein as the “ Exchange and Payment Fund ”), and Parent shall instruct the Exchange and Paying Agent to timely deliver the Merger Consideration and the Option Consideration in accordance with this Agreement.

2.4 Delivery of Merger Consideration .

(a) As soon as reasonably practicable after the Effective Time, the Exchange and Paying Agent shall mail to each holder of record immediately prior to the Effective Time (collectively, the “ Holders ”) of certificates representing shares of Company Common Stock (“ Certificates ”) that were converted into the right to receive the Merger Consideration pursuant to Section 2.1 (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to Certificate(s) shall pass, only upon delivery of Certificate(s) (or affidavits of loss in lieu of such Certificate(s))) to the Exchange and Paying Agent and shall be substantially in such form and have such other provisions as shall be prescribed by the Exchange and Paying Agent and Parent), the terms of which shall be reasonably acceptable to Company, (the “ Letter of Transmittal ”) and (ii) instructions for use in surrendering Certificate(s) in exchange for the Merger Consideration upon surrender of such Certificate(s) and any dividends or other distributions to which such Holder is entitled pursuant to Section 2.4(c).

(b) Upon surrender to the Exchange and Paying Agent of its Certificate(s), accompanied by a properly completed Letter of Transmittal, a Holder of Company Common Stock shall receive, promptly after the Effective Time, the Merger Consideration in respect of the shares of Company Common Stock represented by its Certificate(s). Until so surrendered, each such Certificate shall represent after the Effective Time, for all purposes, only the right to receive, without interest, the Merger Consideration upon surrender of such Certificate in accordance with, and any dividends or other distributions to which such Holder is entitled pursuant to, this Article II.

No dividends or other distributions with respect to Parent Common Stock shall be paid to the Holder of any unsurrendered Certificate with respect to the shares of Parent Common Stock represented thereby, in each case unless and until the surrender of such Certificate in accordance with this Article II. Subject to the effect of applicable abandoned property, escheat or similar Laws, following surrender of any such Certificate in accordance with this Article II, the Holder thereof shall be entitled to receive, without interest, (i) the amount

of dividends or other distributions with a record date after the Effective Time theretofore payable with respect to the whole shares of Parent Common Stock represented by such Certificate and not paid and/or (ii) at the appropriate payment date, the amount of dividends or other distributions payable with respect to whole shares of Parent Common Stock represented by such Certificate with a record date after the Effective Time (but before such surrender date) and with a payment date subsequent to the issuance of the Parent Common Stock issuable with respect to such Certificate.

(a) After the Effective Time, there shall be no transfers on the stock transfer books of Company of any shares of Company Common Stock that were issued and outstanding immediately prior to the Effective Time other than to settle transfers of Company Common Stock that occurred prior to the Effective Time. If, after the Effective Time, Certificates representing such shares are presented for transfer to the Exchange and Paying Agent, they shall be cancelled and exchanged for the Merger Consideration in accordance with Section 2.1 and the procedures set forth in this Article II.

(b) In the event of a transfer of ownership of a Certificate representing Company Common Stock that is not registered in the stock transfer records of Company, the Merger Consideration shall be delivered in exchange therefor to a Person other than the Person in whose name the Certificate so surrendered is registered if the Certificate formerly representing such Company Common Stock shall be properly endorsed or otherwise be in proper form for transfer and the Person requesting such payment or issuance shall pay any transfer or other similar Taxes required by reason of the payment or issuance to a Person other than the registered Holder of the Certificate or establish to the satisfaction of Parent that the Tax has been paid or is not applicable.

(c) Notwithstanding anything to the contrary contained in this Agreement, no certificates or scrip representing fractional shares of Parent Common Stock shall be issued upon the surrender of Certificates for exchange, no dividend or other distribution with respect to Parent Common Stock shall be payable on or with respect to any fractional share, and such fractional share interests shall not entitle the owner thereof to vote or to any other rights of a stockholder of Parent. In lieu of the issuance of any such fractional share, Parent shall pay to each former stockholder of Company who otherwise would be entitled to receive such fractional share, an amount in cash (rounded to the nearest whole cent) determined by multiplying (i) the Parent Share Value by (ii) the fraction of a share (after taking into account all shares of Company Common Stock held by such Holder at the Effective Time and rounded to the nearest one ten-thousandth when expressed in decimal form) of Parent Common Stock to which such Holder would otherwise be entitled to receive pursuant to Section 2.1. The parties acknowledge that payment of the cash consideration in lieu of issuing fractional shares was not separately bargained-for consideration but merely represents a mechanical rounding off for purposes of avoiding the expense and inconvenience that would otherwise be caused by the issuance of fractional shares.

(d) The Exchange and Paying Agent (or, subsequent to the first anniversary of the Effective Time, Parent) shall be entitled to deduct and withhold from any portion of the Merger Consideration such amounts as the Exchange and Paying Agent or Parent, as the case may be, is required to deduct and withhold under the Code, or any provision of state, local or foreign Tax Law, with respect to the making of such payment. To the extent that the amounts are so withheld by the Exchange and Paying Agent or Parent, as the case may be, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the Holder of shares of Company Common Stock in respect of whom such deduction and withholding was made by the Exchange and Paying Agent or Parent, as the case may be.

(e) Any portion of the Exchange and Payment Fund that remains unclaimed by the stockholders of Company as of the first anniversary of the Effective Time shall be paid to Parent. Any former

stockholders of Company who have not theretofore complied with this Article II shall thereafter look only to Parent with respect to the Merger Consideration and any unpaid dividends and other distributions on the Parent Common Stock deliverable in respect of each share of Company Common Stock such stockholder holds as determined pursuant to this Agreement, in each case, without any interest thereon, subject to the requirements of abandoned property, escheat or similar Laws. Notwithstanding the foregoing, none of Parent, Company, the Exchange and Paying Agent or any other Person shall be liable to any former holder of shares of Company Common Stock for any amount delivered in good faith to a public official pursuant to applicable abandoned property, escheat or similar Laws.

(f) The Exchange and Paying Agent shall invest any cash included in the Exchange and Payment Fund as directed by Parent, on a daily basis; provided that no such investment or loss thereon shall affect the amounts payable to holders of Certificates pursuant to this Article II. Any interest or other income resulting from such investments shall be paid to Parent, upon demand.

(g) In the event that any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such Certificate to be lost, stolen or destroyed and, if reasonably required by Parent or the Exchange and Paying Agent, the posting by such Person of a bond in such amount as Parent may determine is reasonably necessary as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange and Paying Agent shall issue in exchange for such lost, stolen or destroyed Certificate the Merger Consideration deliverable in respect thereof pursuant to this Agreement.

(h) Subject to the terms of the Exchange and Paying Agent Agreement, Parent, in the exercise of its reasonable discretion, shall have the right to make all determinations, not inconsistent with the terms of this Agreement, governing (i) the validity of any Letter of Transmittal and compliance by any Company stockholder with the procedures and instructions set forth herein and therein, (ii) the issuance and delivery of the whole number of shares of Parent Common Stock into which shares of Company Common Stock are converted in the First Merger and (iii) the method of payment of the cash in lieu of fractional shares of Parent Common Stock.

(i) In the case of outstanding shares of Company Common Stock that are not represented by Certificates, the parties shall make such adjustments to this Article II as are necessary or appropriate to implement the same purpose and effect that this Article II has with respect to shares of Company Common Stock that are represented by Certificates.

2.5 Company Options .

(a) Notwithstanding anything to the contrary in the Company Stock Plan or in any individual award agreement, no more than fifteen (15) days prior to the Effective Time, the board of directors of Company (or, if appropriate, any committee administering the Company Stock Plan) shall (i) take all necessary actions to cause the conditional vesting of any unvested shares of Company Common Stock (conditioned on the consummation of the First Merger) granted pursuant to the Company Stock Plan and (ii) take all necessary actions, including the conditional vesting of unvested outstanding stock options (conditioned on the consummation of the First Merger) granted pursuant to the Company Stock Plan (the “ Company Options ”), to direct that all, but not less than all, outstanding Company Options be canceled as of the Effective Time in exchange for the right to receive a cash payment per share of Company Common Stock subject to such Company Option equal to the excess (if any) of (a) the sum of (i) the Cash Consideration payable with respect to one share of Company Common Stock and (ii) the value of the Stock Consideration payable with respect to one share of Company Common Stock (with such value determined based on the

closing price of the Parent Common Stock on the last Trading Day immediately preceding the Effective Time) over (b) the exercise price per share of the Company Option being canceled (the “ Option Consideration ”). Parent shall cause the Exchange and Paying Agent to deliver the Option Consideration to the holders of Company Options entitled to receive such payments promptly after the Effective Time.

(b) Prior to the Effective Time, the board of directors of Company (or, if appropriate, any committee administering the Company Stock Plans) shall adopt such resolutions or take such other actions as may be required to effect the transactions described in this Section 2.5.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF COMPANY

Except as (a) disclosed in writing in the correspondingly enumerated section or subsection of the disclosure schedule of Company delivered herewith (the “ Disclosure Schedule ”) (provided that each exception set forth in the Disclosure Schedule shall be deemed to qualify any other representation and warranty to the extent that the relevance of such exception to such other representation and warranty is reasonably apparent on the face of the disclosure (without the need to examine underlying documentation referenced in, but not attached to, the Disclosure Schedule)) or (b) disclosed in any report, schedule, form or other document filed with the Securities and Exchange Commission (the “ SEC ”) by Company prior to the date hereof and on or after the date on which Company filed with the SEC its Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (but excluding any risk factor disclosures contained under the heading “Risk Factors,” any disclosure of risks included in any “forward-looking statements” disclaimer or any other statements that are similarly non-specific or predictive or forward-looking in nature), Company hereby represents and warrants to Parent and Merger Sub as follows:

3.1 Corporate Organization .

(a) Company and each of its Subsidiaries is an entity duly organized, validly existing and in good standing (with respect to jurisdictions that recognize such concept) under the Laws of the jurisdiction of its organization. The deposit accounts of the Company Bank Subsidiary are insured by the Federal Deposit Insurance Corporation (the “ FDIC ”) through the Bank Insurance Fund to the fullest extent permitted by Law, and all premiums and assessments required in connection therewith have been paid by Company Bank Subsidiary when due. The Company Bank Subsidiary is a member in good standing of the Federal Home Loan Bank of Dallas and owns the requisite amount of stock therein. Company and each of its Subsidiaries has the requisite corporate power and authority to own or lease and operate all of its properties and assets and to carry on its business as it is now being conducted. Company and each of its Subsidiaries is duly licensed or qualified to do business in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing or qualification necessary, except where the failure to be so licensed or qualified has not had and is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on Company. True and complete copies of Company’s charter (the “ Company Charter ”), and bylaws (the “ Company Bylaws ”), and the articles or certificate of incorporation and bylaws (or comparable organizational documents) of each Company Subsidiary, in each case as in effect as of the date of this Agreement, have previously been furnished or made available to Parent. Neither Company nor any of its Subsidiaries is in violation of any of the provisions of the Company Charter or Company Bylaws or such articles or certificate of incorporation and bylaws (or comparable organizational documents) of such Company Subsidiary, as applicable.

(b) Section 3.1(b) of the Disclosure Schedule sets forth a complete and correct list of all the

Subsidiaries of Company (each a “ Company Subsidiary ” and collectively the “ Company Subsidiaries ”). Section 3.1(b) of the Disclosure Schedule also sets forth the number and owner of all outstanding capital stock or other equity securities of each such Subsidiary, options, warrants, stock appreciation rights, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, shares of any capital stock or other equity securities of such Subsidiary, or contracts, commitments, understandings or arrangements by which such Subsidiary may become bound to issue additional shares of its capital stock or other equity securities, or options, warrants, scrip, rights to subscribe to, calls or commitments for any shares of its capital stock or other equity securities and the identity of the parties to any such agreements or arrangements. All of the outstanding shares of capital stock or other securities evidencing ownership of Company Subsidiaries are validly issued, fully paid and nonassessable and such shares or other securities are owned by Company or another of its Subsidiaries free and clear of any lien, claim, charge, option, encumbrance, mortgage, pledge or security interest or other restriction of any kind (“Lien”) with respect thereto. Except for its interests in Company Subsidiaries, its ownership of marketable securities and as set forth on Section 3.1(b) of the Disclosure Schedule, Company does not as of the date of this Agreement own, directly or indirectly, any capital stock, membership interest, partnership interest or other equity interest in any Person.

3.2 Capitalization . The authorized capital stock of Company consists of 100,000,000 shares of Company Common Stock and 50,000,000 shares of preferred stock, par value $0.01 per share. As of the date of this Agreement, there are (a) 11,551,732 shares of Company Common Stock issued and outstanding, (b) 812,796 shares of Company Common Stock reserved for issuance upon the exercise of Company Options and (c) no other shares of capital stock or other voting securities of Company issued, reserved for issuance or outstanding. All of the issued and outstanding shares of Company Common Stock have been duly authorized and validly issued, are fully paid, nonassessable and free of preemptive rights. As of the date of this Agreement, there are no outstanding bonds, debentures, notes or other indebtedness having the right to vote on any matters on which stockholders may vote (“ Voting Debt ”) of Company. No trust preferred or subordinated debt securities of Company are issued or outstanding. Except as set forth on Section 3.2 of the Disclosure Schedule, there are no outstanding subscriptions, options, warrants, puts, calls, rights, exchangeable or convertible securities or other commitments or agreements of any character relating to the issued or unissued capital stock or other securities of Company, or otherwise obligating Company to issue, transfer, sell, purchase, redeem or otherwise acquire, or to register under the Securities Act of 1933, as amended, and the rules and regulations of the SEC thereunder (the “ Securities Act ”), any such securities. Company is not a party to any voting trusts, stockholder agreements, proxies or other agreements in effect with respect to the voting or transfer of the Company Common Stock or other equity interests of Company, and, to the Knowledge of Company, except for the Voting and Support Agreements, the ESOP and proxies for Company’s 2014 annual meeting of stockholders, there are no such agreements to which any director, executive officer or holder of more than 5% of Company Common Stock is a party. Section 3.2 of the Disclosure Schedule sets forth a true, correct and complete list of the aggregate number of shares of Company Common Stock issuable upon the exercise of each Company Option outstanding as of the date of this Agreement and the holder and exercise price for each such Company Option. Other than the Company Options and the outstanding restricted shares of Company Common Stock, no equity-based awards (including any cash awards where the amount of payment is determined in whole or in part based on the price of any capital stock of Company or any of its Subsidiaries) are outstanding.

3.3 Authority; No Violation .

(a) Company has full corporate power and authority and is duly authorized to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and

delivery of this Agreement and the consummation of the transactions contemplated hereby, including the First Merger, have been duly, validly and unanimously authorized by the board of directors of Company, the board of directors of Company has resolved to recommend to Company’s stockholders the approval of the First Merger and all necessary corporate action in respect thereof on the part of Company has been taken, subject to the approval by the affirmative vote of the holders of a majority of the outstanding shares of Company Common Stock (the “ Requisite Stockholder Approval ”) and the filing of the Articles of Merger with and acceptance for record of the Articles of Merger by the SDAT. The Requisite Stockholder Approval is the only vote of the holders of securities of Company required to approve the First Merger. This Agreement has been duly and validly executed and delivered by Company. Assuming due authorization, execution and delivery by Parent and Merger Sub, this Agreement constitutes a valid and binding obligation of Company, enforceable against Company in accordance with its terms, except as such enforcement may be limited by (i) the effect of bankruptcy, insolvency, reorganization, receivership, conservatorship, arrangement, moratorium or other Laws affecting or relating to the rights of creditors generally or (ii) the rules governing the availability of specific performance, injunctive relief or other equitable remedies and general principles of equity, regardless of whether considered in a proceeding in equity or at law (the “ Enforceability Exceptions ”).

(b) Neither the execution and delivery of this Agreement by Company nor the consummation by Company of the transactions contemplated hereby, nor compliance by Company with any of the terms or provisions hereof, will, subject to obtaining the Requisite Stockholder Approval, (i) violate any provision of the Company Charter or Company Bylaws or the articles or certificate of incorporation or bylaws (or similar organizational documents) of any Company Subsidiary or (ii) assuming that the consents and approvals referred to in Section 3.4 are duly obtained and/or made, (A) violate any Law, judgment, order, writ, decree or injunction applicable to Company or any of its Subsidiaries or any of their respective properties or assets or (B) except as set forth on Section 3.3(b) of the Disclosure Schedule, violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under or in any payment conditioned, in whole or in part, on a change of control of Company or approval or consummation of transactions contemplated hereby, accelerate the performance required by or rights or obligations under, or result in the creation of any Lien upon any of the respective properties or assets of Company or any of its Subsidiaries under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement, contract or other instrument or obligation to which Company or any of its Subsidiaries is a party, or by which they or any of their respective properties, assets or business activities may be bound or affected, except, in the case of clause (ii) above, for such violations, conflicts, breaches, defaults or the loss of benefits which, have not had and are not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on Company.

3.4 Consents and Approvals . Except for (a) the filing of any required applications, filings or notices with the Board of Governors of the Federal Reserve System (the “ Federal Reserve ”), the FDIC, the Texas Department of Banking, the Office of the Comptroller of the Currency (the “ OCC ”) and approval of or non-objection to such applications, filings and notices, (b) compliance with any applicable requirements of the Exchange Act and the Securities Act, including, the Joint Proxy Statement and Form S-4 in which the Joint Proxy Statement will be included as a prospectus, and declaration of effectiveness of the Form S-4, (c) the filing of the Articles of Merger with the SDAT and the Certificate of Merger with the Secretary of State of the State of Texas pursuant to the MGCL and TBOC, respectively, (d) the filing of the Bank Merger Certificates, (e) such filings and approvals as are required to be made or obtained under the securities or “Blue Sky” laws of various states in connection with the issuance of the shares of Parent Common Stock pursuant to this Agreement, (f) approval of listing of such Parent Common Stock on the NASDAQ Global Select Market (the “ NASDAQ ”), (g) the filing of any required applications, filings or notices with the Federal

Home Loan Bank and (h) such other notices, consents, approvals, non-objections, waivers, authorizations, applications, filings or registrations the failure of which to be obtained or made would not be reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on Company, no notices to, consents or approvals or non-objections of, waivers or authorizations by, or applications, filings or registrations with any foreign, federal, state or local court, administrative agency, arbitrator or commission or other governmental, prosecutorial, regulatory, self-regulatory authority or instrumentality (each, a “ Governmental Entity ”) are required to be made or obtained by Company or any of its Subsidiaries in connection with (i) the execution and delivery by Company of this Agreement or (ii) the consummation of the transactions contemplated hereby.

3.5 Reports .

(a) Company and each of its Subsidiaries have filed (or furnished, as applicable) all material reports, forms, correspondence, registrations and statements, together with any amendments required to be made with respect thereto (“ Reports ”), that they were required to file (or furnish, as applicable) since January 1, 2012 with (a) the Federal Reserve, the FDIC and the OCC and any other federal, state or foreign governmental or regulatory agency or authority having jurisdiction over Company and its Subsidiaries (together with such agencies having jurisdiction over Parent, collectively, the “ Regulatory Agencies ”) and have paid all fees and assessments due and payable in connection therewith, except where the failure to file (or furnish, as applicable) such Report or to pay such fees and assessments, individually or in the aggregate, that would not reasonably be expected to be material to Company and its Subsidiaries, taken as a whole. Any such Report regarding Company or any of its Subsidiaries filed with or otherwise submitted to any Regulatory Agency complied in all material respects with relevant legal requirements, including as to content. Except for normal examinations conducted by a Regulatory Agency in the ordinary course of the business of Company and its Subsidiaries, there is no pending proceeding before, or, to the Knowledge of Company, examination or investigation by, any Regulatory Agency into the business or operations of Company or any of its Subsidiaries. There are no unresolved violations, criticisms or exceptions by any Regulatory Agency with respect to any Report relating to any examinations of Company or any of its Subsidiaries, except for any such violations, criticisms or exceptions that would not reasonably be expected to, individually or in the aggregate, be material to Company and its Subsidiaries, taken as a whole.

(a) Company has timely filed with or furnished to, as applicable, the SEC all registration statements, prospectuses, reports, schedules, forms, statements and other documents (including exhibits and all other information incorporated by reference) required to be filed or furnished by it with the SEC since January 1, 2012 (the “ Company SEC Documents ”). As of their respective filing dates (or, if amended or superseded by a subsequent filing, as of the date of the last such amendment or superseding filing prior to the date hereof), each of the Company SEC Documents complied as to form in all material respects with the applicable requirements of the Securities Act and Exchange Act applicable to such Company SEC Documents. None of the Company SEC Documents, including any financial statements, schedules or exhibits included or incorporated by reference therein at the time they were filed (or, if amended or superseded by a subsequent filing, as of the date of the last such amendment or superseding filing prior to the date hereof), contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. None of Company’s Subsidiaries is required to file or furnish any forms, reports or other documents with the SEC.

3.6 Financial Statements .

(a) Each of the consolidated financial statements (including, in each case, any related notes thereto) contained in the Company SEC Documents (the “ Company Financial Statements ”): (i) complied as to form in all material respects with the published rules and regulations of the SEC with respect thereto as of their respective dates; (ii) was prepared in accordance with United States generally accepted accounting principles (“ GAAP ”) applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto and, in the case of unaudited interim financial statements, as may be permitted by the SEC and GAAP for Quarterly Reports on Form 10-Q); and (iii) fairly presented in all material respects the consolidated financial position of Company and its consolidated Subsidiaries as of the respective dates thereof and the consolidated results of Company’s operations and cash flows for the periods indicated therein, subject, in the case of unaudited interim financial statements, to normal and year-end audit adjustments and the absence of footnotes as permitted by GAAP and the applicable rules and regulations of the SEC.

(b) Company and each of its Subsidiaries has established and maintains a system of “internal controls over financial reporting” (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that is sufficient to provide reasonable assurance (i) regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, (ii) that receipts and expenditures of Company and its Subsidiaries are being made only in accordance with authorizations of management and the board of directors of Company, and (iii) regarding prevention or timely detection of the unauthorized acquisition, use or disposition of Company’s and its Subsidiaries’ assets that could have a material effect on Company’s financial statements.

(c) Company’s “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) are designed to ensure that all information (both financial and non-financial) required to be disclosed by Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that all such information is accumulated and communicated to Company’s management as appropriate to allow timely decisions regarding required disclosure and to make the certifications of the chief executive officer and chief financial officer of Company required under the Exchange Act with respect to such reports. Company has disclosed, based on its most recent evaluation of its disclosure controls and procedures prior to the date of this Agreement, to Company’s auditors and the audit committee of the board of directors of Company (i) any significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting that could adversely affect in any material respect Company’s ability to record, process, summarize and report financial information and (ii) any fraud, whether or not material, that involves management or other employees who have a significant role in Company’s internal controls over financial reporting. For purposes of this Agreement, the terms “significant deficiency” and “material weakness” shall have the meaning assigned to them in Public Company Accounting Oversight Board Auditing Standard 2, as in effect on the date of this Agreement.

(d) Each of the principal executive officer and the principal financial officer of Company (or each former principal executive officer and each former principal financial officer of Company, as applicable) has made all certifications required by Rule 13a-14 or 15d-14 under the Exchange Act and Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 (including the rules and regulations promulgated thereunder, the “ Sarbanes-Oxley Act ”) with respect to the Company SEC Documents, and the statements contained in such certifications are true and accurate in all material respects. For purposes of this Agreement, “principal executive officer” and “principal financial officer” shall have the meanings given to such terms in the Sarbanes-Oxley Act. Neither Company nor any of its Subsidiaries has outstanding (nor has arranged or modified since the enactment of the Sarbanes-Oxley Act) any “extensions of credit” (within the meaning of

Section 402 of the Sarbanes-Oxley Act) to directors or executive officers (as defined in Rule 3b-7 under the Exchange Act) of Company or any of its Subsidiaries. Company is otherwise in compliance with all applicable provisions of the Sarbanes-Oxley Act, except for any non-compliance that has not had and is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on Company.

(e) The books and records kept by Company and its Subsidiaries are in all material respects complete and accurate and have been maintained in accordance with applicable Laws and accounting requirements. The Company Financial Statements have been prepared from, and are in accordance with, the books and records of Company and its Subsidiaries.

(f) Neither Company nor any of its Subsidiaries is a party to, or has any commitment to become a party to, any joint venture, off-balance sheet partnership or any similar contract or arrangement (including any contract or arrangement relating to any transaction or relationship between or among Company and any of its Subsidiaries, on the one hand, and any unconsolidated Affiliate, including any structured finance, special purpose or limited purpose entity or Person, on the other hand, or any “off-balance sheet arrangement”), where the result, purpose or intended effect of such contract or arrangement is to avoid disclosure of any material transaction involving, or material liabilities of, Company or any of its Subsidiaries in Company’s or such Subsidiary’s financial statements.

3.7 Undisclosed Liabilities . The consolidated balance sheet of Company dated as of December 31, 2013 (the “ Balance Sheet Date ”), contained in the Company SEC Documents filed prior to the date hereof is hereinafter referred to as the “ Balance Sheet. ” Neither Company nor any of its Subsidiaries has any liabilities of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether due or to become due) other than liabilities that (i) are reflected or reserved against on the Balance Sheet (including in the notes thereto), (ii) were incurred since the Balance Sheet Date in the ordinary course of business consistent with past practice or in connection with the transactions contemplated by this Agreement or (iii) have not had, and are not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on Company.

3.8 Absence of Certain Changes or Events. Except as set forth on Section 3.8 of the Disclosure Schedule, from the Balance Sheet Date to the date of this Agreement, (a) Company and its Subsidiaries have, in all material respects, carried on their respective businesses in the ordinary course consistent with their past practice, (b) Company has not taken any of the actions that Company has agreed not to take or permit its Subsidiaries to take from the date hereof through the Effective Time pursuant to Section 5.2(b), (f), (h), (i), (j), (n) or (t), and (c) there has not been any Material Adverse Effect on Company.

3.9 Legal Proceedings . Except as set forth on Section 3.9 of the Disclosure Schedule, neither Company nor any of its Subsidiaries is a party to or the subject of any, and there are no outstanding or pending or, to the Knowledge of Company, threatened, material legal, administrative, arbitral or other proceedings, claims, actions or governmental or regulatory investigations of any nature against Company or any of its Subsidiaries. There is no material outstanding injunction, order, judgment, decree or regulatory restriction (other than regulatory restrictions of general application that apply to similarly situated companies) imposed upon Company, any of its Subsidiaries or the assets of Company or any of its Subsidiaries.

3.10 Taxes and Tax Returns .

(a) Except as set forth on Section 3.10 of the Disclosure Schedule, Company and each of its Subsidiaries has duly and timely filed or caused to be filed (including all applicable extensions) all federal, state, foreign and local Tax Returns required to be filed by it or with respect to it (all such Tax Returns being accurate and complete in all material respects) and has duly and timely paid or caused to be paid on its behalf all material Taxes due and required to be paid by it prior to the date hereof (whether or not shown to be due on such Tax Returns). Through the Balance Sheet Date, Company and its Subsidiaries do not have any material liability for Taxes in excess of the amount reserved or provided for on the Company Financial Statements. The unpaid Taxes of Company and its Subsidiaries did not, as of the Balance Sheet Date, exceed the reserve for Tax Liability set forth on the face of the Balance Sheet (rather than in any notes thereto), and do not exceed that reserve as adjusted for the passage of time through the Closing Date in accordance with the past custom and practice of Company and its Subsidiaries.

(b) No jurisdiction where Company and its Subsidiaries do not file a Tax Return has ever made a claim in writing that any of Company and its Subsidiaries is required to file a Tax Return in such jurisdiction.

(c) No material Tax Liens are currently in effect with respect to any of the assets of Company and its Subsidiaries, other than Permitted Encumbrances.

(d) There are no audits, examinations, disputes or proceedings pending or threatened in writing, or, to the Knowledge of Company and all of its Subsidiaries, otherwise notified, with respect to, or claims or assessments for any Taxes of Company or any of its Subsidiaries.

(e) All material Taxes required to be withheld, collected or deposited by or with respect to Company and each of its Subsidiaries, with respect to any employee, independent contractor, creditor, stockholder, or other party, have been timely withheld, collected or deposited, as the case may be, and to the extent required by applicable Law, have been paid to the relevant Governmental Entity. Company and each of its Subsidiaries have complied in all material respects with all information reporting and backup withholding provisions of applicable Law, including the collection, review and retention of any required withholding certificates or comparable documents (including with respect to deposits) and any notice received pursuant to Section 3406(a)(1)(B) or (C) of the Code.

(f) Neither Company nor any of its Subsidiaries has participated in any reportable transaction, as defined in Treasury Regulation Section 1.6011-4(b)(1).

(g) Except as set forth on Section 3.10 of the Disclosure Schedule, neither Company nor any of its Subsidiaries is a party to, is bound by, or has any obligation under, any Tax sharing, allocation, indemnity or similar agreements or arrangement that obligates it to make any payment computed by reference to the Taxes, taxable income or taxable losses of any other Person.

(h) Neither Company nor any of its Subsidiaries (i) has been a member of an affiliated group filing a consolidated federal income Tax Return (other than a group the common parent of which was Company) or (ii) has any liability for the Taxes of any Person (other than Company or any of its Subsidiaries) under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local or foreign Law), as a transferee or successor, by contract or otherwise.

(i) Neither Company nor any of its Subsidiaries has been, within the past two (2) years, part of a “plan (or series of related transactions)” within the meaning of Section 355(e) of the Code of which the transactions contemplated in this Agreement are also a part, a “distributing corporation” or a “controlled corporation” (within the meaning of Section 355(a)(1)(A) of the Code) in a distribution of stock intending to qualify for Tax-free treatment under Section 355 of the Code.

(j) Since January 1, 2011, neither Company nor any of its Subsidiaries has been required (or has applied) to include in income any material adjustment pursuant to Section 481 of the Code by reason of a voluntary change in accounting method initiated by Company or any of its Subsidiaries, and the Internal Revenue Service (“ IRS ”) has not initiated or proposed any such material adjustment or change in accounting method (including any method for determining reserves for bad debts maintained by Company or any Subsidiary).

(k) Neither Company nor any of its Subsidiaries has any application pending with any Governmental Entity requesting permission for any changes in accounting method.

(l) Neither Company nor any of its Subsidiaries will be required to include any material item of income or gain in, or exclude any item of deduction or loss from, taxable income as a result of any (i) adjustment required by a change in method of accounting, (ii) closing agreement, (iii) intercompany transaction, (iv) installment sale or open transaction disposition made on or prior to the Effective Time, or (v) prepaid amount received, on or prior to the Effective Time.

(m) No rulings, requests for rulings or closing agreements have been entered into with or issued by, or are pending with, any Governmental Entity with respect to Company or any of its Subsidiaries.

(n) Neither Company nor any of its Subsidiaries has taken or agreed to take any action or is aware of any fact or circumstance that would prevent or impede, or could reasonably be expected to prevent or impede, the Mergers from qualifying as a “reorganization” within the meaning of Section 368(a) of the Code.

(o) Neither Company nor any of its Subsidiaries has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code.

(p) Except as set forth on Section 3.10(p) of the Disclosure Schedule, neither Company nor any of its Subsidiaries has made any payments, is obligated to make any payments, or is a party to any contract that could obligate it to make any payments that could be disallowed as a deduction under Section 280G or 162(m) of the Code or any comparable provision of state Tax Law.

3.11 Employee Benefit Plans .

(a) Section 3.11(a) of the Disclosure Schedule sets forth a true and complete list of all employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ ERISA ”)), whether or not subject to ERISA, and all bonus, stock option, stock purchase, restricted stock, incentive, deferred compensation, retiree medical or life insurance, welfare, retirement, severance, change-in-control or other compensatory or benefit plans, programs, policies or arrangements and all retention, bonus, employment, termination, severance or other contracts or agreements to which Company or any of its Subsidiaries or any of their respective ERISA Affiliates (as hereinafter defined) is a

party, with respect to which Company or any of its Subsidiaries or any of their respective ERISA Affiliates has any current or future obligation, contingent or otherwise, or that are maintained, contributed to or sponsored by Company or any of its Subsidiaries or any of their respective ERISA Affiliates for the benefit of any current or former employee, officer, director or independent contractor of Company or any of its Subsidiaries or any of their respective ERISA Affiliates (all such plans, programs, policies, arrangements, contracts or agreements, whether or not listed in Section 3.11(a) of the Disclosure Schedule, collectively, the “ Company Benefit Plans ”).

(b) Company has delivered or made available to Parent true, correct and complete copies of the following (as applicable): (i) the written document evidencing each Company Benefit Plan or, with respect to any such plan that is not in writing, a written description of the material terms thereof, (ii) the annual report (Form 5500), if any, filed with the IRS for the last three (3) plan years, (iii) the most recently received IRS determination letter, if any, relating to a Company Benefit Plan, (iv) the most recently prepared actuarial report or financial statement, if any, relating to a Company Benefit Plan, (v) the most recent summary plan description, if any, for such Company Benefit Plan (or other descriptions of such Company Benefit Plan provided to employees) and all modifications thereto, (vi) all material correspondence with the U.S. Department of Labor or the IRS, (vii) all amendments, modifications or material supplements to any Company Benefit Plan, and (viii) any related trust agreements, insurance contracts or documents of any other funding arrangements that are currently in effect (or for which there is any Liability) relating to a Company Benefit Plan. Except as specifically provided in the foregoing documents delivered or made available to Parent, there are no amendments to any Company Benefit Plans that have been adopted or approved nor has Company or any of its Subsidiaries undertaken to make any such amendments or to adopt or approve any new Company Benefit Plans.

(c) Each Company Benefit Plan has been established, operated and administered in all material respects in accordance with its terms and the requirements of all applicable Laws, including ERISA and the Code (including all applicable aspects of the Patient Protection and Affordable Care Act, as amended) as well as the Health Insurance Portability and Accountability Act of 1996, as amended (“ HIPAA ”). Each Company Benefit Plan that constitutes a group health plan subject to Code § 4980H is, or will be, prepared to determine and offer coverage to full-time employees as required to avoid the excise taxes under Code § 4980H. Except as set forth on Section 3.11(c) of the Disclosure Schedule, neither Company nor any of its Subsidiaries has taken any action to take corrective action or make a filing under any voluntary correction program of the IRS, the U.S. Department of Labor or any other Governmental Entity with respect to any Company Benefit Plan, and to the Knowledge of Company and its Subsidiaries, there are no material plan defects that would qualify for correction under any such program.

(d) All contributions required to be made to any Company Benefit Plan by applicable Law or by any plan document or other contractual undertaking, and all premiums due or payable with respect to insurance policies funding any Company Benefit Plan, for any period through the date hereof, have been timely made or paid in full or, to the extent not required to be made or paid on or before the date hereof, have been fully reflected on the books and records of Company.

(e) Each Company Benefit Plan that is in any part a “nonqualified deferred compensation plan” subject to Section 409A of the Code (A) complies and, at all times after December 31, 2008 has complied, both in form and operation, in all material respects with the requirements of Section 409A of the Code and the final regulations and other applicable guidance thereunder and (B) between January 1, 2005 and December 31, 2008 was operated in good faith compliance with Section 409A of the Code, as determined under applicable guidance of the U.S. Department of the Treasury and the IRS. No compensation payable by Company or any of its Subsidiaries has been reportable as nonqualified deferred compensation in the

gross income of any individual or entity, and subject to an additional tax, as a result of the operation of Section 409A of the Code. No assets set aside for the payment of benefits under any “nonqualified deferred compensation plan” are held outside of the United States, except to the extent that substantially all of the services to which such benefits are attributable have been performed in the jurisdiction in which such assets are held.

(f) Section 3.11(f) of the Disclosure Schedule identifies each Company Benefit Plan that is intended to be qualified under Section 401(a) of the Code (the “ Qualified Plans ”). The IRS has issued a favorable determination letter with respect to each Qualified Plan and the related trust that has not been revoked, and, to the Knowledge of Company, there are no existing circumstances and no events have occurred that could adversely affect the qualified status of any Qualified Plan or the related trust. Each trust created under any Qualified Plan has been determined to be exempt from Tax under Section 501(a) of the Code and neither Company nor any of its Subsidiaries is aware of any circumstances that could result in the revocation of the exemption. No trust funding any Company Benefit Plan is intended to meet the requirements of Section 501(c)(9) of the Code.

(g) Each Company Benefit Plan that is subject to Title IV or Section 302 of ERISA or Section 412 or 4971 of the Code (a “ Pension Plan ”) had, as of the date of its most recent actuarial valuation, assets measured at fair market value at least equal to its “funding target” as that term is defined in Section 430 of the Code. Since the date of the most recent actuarial valuation, no event has occurred that would be reasonably expected to adversely change any such funded status in a material way. Any Company Benefit Plan that is a Pension Plan has satisfied its “minimum funding standard” within the meaning of Section 412 of the Code or Section 302 or ERISA. All required contributions with respect to any Pension Plan have been timely made and there is no Lien, nor is there expected to be a Lien, under Section 430(k) of the Code or ERISA Section 303(k) or Tax under Section 4971 of the Code. Neither Company nor any of its Subsidiaries has provided, or is required to provide, security to any of its Pension Plans pursuant to Section 412 of the Code. All premiums required to be paid under ERISA Section 4007 have been timely paid by Company and its Subsidiaries. No Liability under Title IV of ERISA has been or is expected to be incurred by Company or any of its Subsidiaries with respect to any Pension Plan currently or formerly maintained by any of them or by any of their ERISA Affiliates that has not been satisfied in full (other than Liability for Pension Benefit Guaranty Corporation premiums, which have been paid when due).

(h) (i) No Company Benefit Plan is a “multiemployer plan” within the meaning of Section 4001(a)(3) of ERISA (a “ Multiemployer Plan ”) or a plan that has two or more contributing sponsors at least two of whom are not under common control, within the meaning of Section 4063 of ERISA (a “ Multiple Employer Plan ”); (ii) none of Company and its Subsidiaries nor any of their respective ERISA Affiliates has, at any time during the last six (6) years, contributed to or been obligated to contribute to any Multiemployer Plan or Multiple Employer Plan; and (iii) none of Company and its Subsidiaries nor any of their respective ERISA Affiliates has incurred any liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as those terms are defined in Part I of Subtitle E of Title IV of ERISA.

(i) Except as set forth on Section 3.11(i) of the Disclosure Schedule, neither Company nor any of its Subsidiaries sponsors, has sponsored or has any obligation with respect to any employee benefit plan that provides for any post-employment or post-retirement health or medical or life insurance benefits for retired, former or current employees or beneficiaries or dependents thereof, except as required by Section 4980B of the Code. Company and each of its Subsidiaries have reserved the right to amend, terminate or modify at any time all plans or arrangements providing for health (including retiree health) or life insurance

coverage, and no representations or commitments, whether or not written, have been made that would limit Company’s or such Subsidiary’s right to amend, terminate or modify any such benefits.

(j) Except as set forth on Section 3.11(j) of the Disclosure Schedule, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (either alone or in conjunction with any other event) result in, cause the vesting, exercisability or delivery of, or increase in the amount or value of, any payment, right or other benefit to any employee, officer, director or other service provider (including early termination rights or penalties) of Company or any of its Subsidiaries, or result in any limitation on the right of Company or any of its Subsidiaries to amend, merge, terminate or receive a reversion of assets from any Company Benefit Plan or related trust. Without limiting the generality of the foregoing, no amount paid or payable (whether in cash, in property, or in the form of benefits) by Company or any of its Subsidiaries in connection with the transactions contemplated hereby (either solely as a result thereof or as a result of such transactions in conjunction with any other event) will be an “excess parachute payment” within the meaning of Section 280G of the Code. No Company Benefit Plan provides for the gross-up or reimbursement of Taxes under Section 4999 or 409A of the Code.

(k) Except as otherwise identified on Section 3.11(k) of the Disclosure Schedule, there does not now exist, nor do any circumstances exist that could result in, any Controlled Group Liability that would be a liability of Company, its Subsidiaries or any of their ERISA Affiliates following the Closing. Without limiting the generality of the foregoing, neither Company nor any of its ERISA Affiliates has engaged in any transaction described in Section 4069, 4204 or 4212 of ERISA.

(l) Except as set forth on Section 3.11(l) of the Disclosure Schedule, there are no pending claims (other than claims for benefits in the ordinary course), lawsuits or arbitrations that have been asserted or instituted, and, to the Knowledge of Company, no threatened claims (other than claims for benefits in the ordinary course), lawsuits or arbitrations and no set of circumstances exists that may reasonably give rise to a claim or lawsuit, against the Company Benefit Plans, any fiduciaries thereof with respect to their duties to the Company Benefits Plans or the assets of any of the trusts under any of the Company Benefit Plans that could reasonably be expected to result in any material Liability of Company or any of its Subsidiaries to the Pension Benefit Guaranty Corporation, the U.S. Department of the Treasury, the U.S. Department of Labor, any Multiemployer Plan, any Multiple Employer Plan, any participant in a Company Benefit Plan, or any other party. No Company Benefit Plan is under audit or the subject of an investigation by the IRS, the U.S. Department of Labor, the Pension Benefit Guaranty Corporation, the SEC or any other Governmental Entity, nor is any such audit or investigation pending or, to the Knowledge of the Company, threatened.

(m) Neither Company nor any of its Subsidiaries has engaged in a transaction with respect to any Company Benefit Plan that would subject Company or any of its Subsidiaries to a Tax or penalty imposed by either Section 4975 of the Code or Section 502(i) of ERISA. Neither Company nor, to the Knowledge of Company, any administrator or fiduciary of a Company Benefit Plan (or any agent of any of the foregoing) has engaged in any transaction, or acted or failed to act in any manner with respect to such Company Benefit Plan that could subject Company or any of its Subsidiaries to any direct or indirect Liability (by indemnity or otherwise) for breach of any fiduciary, co-fiduciary or any other duty under ERISA.

(n) Except as otherwise identified on section 3.11(n) of the Disclosure Schedule, the consummation of the transactions contemplated by this Agreement will not (or will not upon termination of employment within a fixed period of time following such consummation) (A) entitle any employee, director or consultant to severance pay, unemployment compensation or any other payment, or (B) accelerate the time of payment or vesting or increase the amount of payment with respect to any compensation due to any employee director or consultant.

(o) No written, nor to the Knowledge of Company, oral representation or communication with respect to any aspect of a Company Benefit Plan has been made to any employee that is not in accordance with the written or otherwise pre-existing terms and provisions of such plans.

(p) Any Company Benefit Plan can be terminated without resulting in any liability to the Company or any Subsidiary of the Company for any additional contributions, penalties, premiums, fees, fines, excise taxes, or any other charges or liabilities.

3.12 Labor Matters . There are no agreements with, or pending petitions for recognition of, a labor union or association as the exclusive bargaining agent for any of the employees of Company or any of its Subsidiaries and there are no representation or certification proceedings or petitions seeking a representation proceeding presently pending or, to the Knowledge of Company, threatened to be brought or filed with the National Labor Relations Board or any other comparable foreign, state or local labor relations tribunal or authority. There are no labor strikes, work stoppages, slowdowns, lockouts, material arbitrations or material grievances or other material labor disputes, other than routine grievance matters, now pending or, to the Knowledge of Company, threatened against or involving Company or any of its Subsidiaries; to the Knowledge of Company, there are no organizing activities pending or threatened against or involving Company or any of its Subsidiaries; and, since January 1, 2009, there have not been any such labor strikes, work stoppages or other labor troubles with respect to Company or any of its Subsidiaries. Company is not a party to, or otherwise bound by, any consent decree with, or citation by, any Governmental Entity relating to employees or employment practices; and, to the Knowledge of Company, there are no complaints or charges of discrimination, which have been asserted against Company or that are now pending before any Governmental Entity, including but not limited to the U.S. Equal Employment Opportunity Commission and U.S. Department of Labor, relating to employees or employment practices that would result in liability to Company or any of its Subsidiaries. Company and each of its Subsidiaries is in compliance with all applicable Laws in respect of employment and employment practices, including terms and conditions of employment, wages and hours, employment discrimination, employee classification, workers’ compensation, unemployment compensation, family and medical leave, the Immigration Reform and Control Act, and occupational safety and health requirements. Each individual who renders services to Company or any of its Subsidiaries who is classified by Company or such Subsidiary, as applicable, as having the status of an independent contractor, consultant or other non-employee status for any purpose (including for purposes of taxation and tax reporting and under Company Benefit Plans) is properly so characterized.

3.13 Compliance with Applicable Law.

(a) Company and each of its Subsidiaries and each of their employees, in their capacities as such (i) hold all licenses, registrations, franchises, certificates, variances, permits and authorizations necessary for the lawful conduct of their respective businesses and properties and (ii) are and have been in compliance with all, and are not and have not been in violation of any, applicable Law and neither Company nor any of its Subsidiaries has Knowledge of, or to the Knowledge of Company, has since January 1, 2012, received notice of, any violations of any of the above, except in each case where the failure to hold such license, registration, franchise, certificate, variance, permit or authorization or such noncompliance or violation has not had and is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on Company.

(b) Except as has not had and is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on Company, Company and each of its Subsidiaries have properly

administered all accounts for which Company or any of its Subsidiaries acts as a fiduciary, including accounts for which Company or any of its Subsidiaries serves as a trustee, agent, custodian, personal representative, guardian, conservator or investment adviser, in accordance with the terms of the governing documents and applicable Law in all material respects. None of Company or any of its Subsidiaries, or, to the Knowledge of Company, any director, officer or employee of Company or any of its Subsidiaries, has committed any breach of trust with respect to any such fiduciary account that has had or is reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on Company, and the accountings for each such fiduciary account are true and correct in all material respects and accurately reflect in all material respects the assets of such fiduciary account.

(c) Company and the Company Bank Subsidiary are “well-capitalized” (as such term is defined at 12 C.F.R. 225.2(r) or the relevant regulation of Company’s or such Subsidiary’s primary federal bank regulator), and “well managed” (as that term is defined at 12 C.F.R. 225.2(s) or the relevant regulation of Company’s or such Subsidiary’s primary federal bank regulator), and the rating of the Company Bank Subsidiary under the Community Reinvestment Act of 1997 (“ CRA ”) is no less than “satisfactory.” Neither Company nor the Company Bank Subsidiary has been informed that its status as “well-capitalized,” “well managed” or, in the case of the Company Bank Subsidiary, for CRA purposes, “satisfactory,” will change within one (1) year.

3.14 Material Contracts .

(a) Neither Company nor any of its Subsidiaries is a party to or bound by, as of the date hereof, any of the following (each contract, arrangement, commitment or understanding of the type described in this Section 3.14(a), whether written or oral (and, for the avoidance of doubt, whether or not set forth in the Disclosure Schedule), is referred to as a “ Material Contract ,” which does not necessarily mean that such contract, arrangement, commitment or understanding is a material contract required to be filed with the SEC under Item 601(b)(10) of Regulation S-K):

i. any contract or agreement entered into since January 1, 2012 (and any contract or agreement entered into at any time to the extent that material obligations remain as of the date hereof) for the acquisition of the securities of, or any material portion of the assets of, any other Person or entity, other than (x) marketable securities and (y) such contracts or agreements entered into in the ordinary course of business consistent with past practice;

ii. any trust indenture, mortgage, promissory note, loan agreement or other contract, agreement or instrument for the borrowing of money and any currency exchange, commodities or other hedging arrangement or any leasing transaction of the type required to be capitalized in accordance with GAAP, in each case (x) with an outstanding principal balance or notional amount in excess of $500,000 and (y) where Company or any of its Subsidiaries is a borrower or guarantor in each case other than (A) agreements evidencing deposit liabilities, trade payables, federal funds purchased, advances and loans from the Federal Home Loan Bank, (B) securities sold under repurchase agreements and (C) Loans and other contracts or agreements relating to borrowings entered into in the ordinary course of business;

iii. any contract or agreement limiting in any material respect the freedom of Company or any of its Subsidiaries or other Affiliates (x) to engage in any line of business or to compete with any other Person or (y) prohibiting Company or any of its Subsidiaries or other Affiliates

from soliciting customers, clients or employees, in each case whether in any specified geographic region or business or generally;

iv. any material contract or agreement with any Affiliate of Company or any of its Subsidiaries (except with respect to loans to, or deposits from, directors, officers and employees entered into in the ordinary course of business and in accordance with all applicable regulatory requirements with respect to it);

v. any agreement providing a guarantee, credit enhancement or assumption of indebtedness of any material amount by Company or any of its Subsidiaries, or any similar commitment by Company or any of its Subsidiaries with respect to the obligations, liabilities (whether accrued, absolute, contingent or otherwise) or indebtedness of any other Person other than those entered into in the ordinary course of business and issuances of letters of credit in the ordinary course of business;

vi. any agreement that by its terms calls for payments by or to the Company and its Subsidiaries in excess of $25,000 per annum and would give rise to a right of, or result in, the termination, cancellation, modification or acceleration of any obligation of Company or any of its Subsidiaries, in each case as a result of the announcement or the consummation of the transactions contemplated by this Agreement (with or without notice or lapse of time, or both);

vii. any joint venture, stockholders’ partnership or similar agreement involving a sharing of profits or losses of a third party relating to Company or any of its Subsidiaries;

viii. any employment agreement with any employee or officer of Company or any of its Subsidiaries providing for annual compensation in excess of $100,000;

ix. any contract or agreement that by its terms calls for payments by or to the Company and its Subsidiaries in excess of $25,000 per annum and contains any (A) exclusive dealing obligation, (B) “clawback” or similar undertaking requiring the reimbursement or refund of any fees, (C) “most favored nation” or similar provision granted by Company or any of its Subsidiaries or (D) provision that grants any right of first refusal or right of first offer or similar right or that limits the ability of Company or any of its Subsidiaries to own, operate, sell, transfer, pledge or otherwise dispose of any assets or business;

x. any agreement, option or commitment or right with, or held by, any third party to acquire, use or have access to any assets or properties, or any interest therein, of Company or any of its Subsidiaries, other than in connection with the sale of Loans, Loan participations or investment securities in the ordinary course of business consistent with past practice to third parties who are not Affiliates of Company;

xi. any material lease or other contract related to owned or leased property, whether real, personal or mixed, tangible or intangible, that by its terms calls for payments in excess of $100,000 per annum;

xii. any other contract or agreement for the use or purchase of materials, supplies, goods, services, equipment or other assets not of the type described in clauses (i) - (x) above which involved the payments by Company or any of its Subsidiaries in the fiscal year ended December 31, 2013, or which could reasonably be expected to involve such payments during the fiscal year ending December 31, 2014, of more than $500,000 (other than pursuant to Loans originated or purchased

by Company or any of its Subsidiaries or in the ordinary course of business consistent with past practice).

(b) Company and each of its Subsidiaries have performed all of the obligations required to be performed by them and are entitled to all accrued benefits under, and, to the Knowledge of Company, are not alleged to be in default in respect of, each Material Contract to which Company or any of its Subsidiaries is a party or by which Company or any of its Subsidiaries is bound, except as has not had and is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on Company. Each of the Material Contracts is valid and binding on Company or its applicable Subsidiary and in full force and effect, without amendment, and there exists no default or event of default or event, occurrence, condition or act, with respect to Company or any of its Subsidiaries or, to the Knowledge of Company, with respect to any other contracting party, which, with the giving of notice, the lapse of time or the happening of any other event or condition, would become a default or event of default under any Material Contract, except as has not had and is not reasonably likely to have, individually or in the aggregate, Material Adverse Effect on Company. True, correct and complete copies of all Material Contracts have been furnished or made available to Parent.

3.15 Agreements with Regulatory Agencies . Except as set forth on Section 3.15 of the Disclosure Schedule, neither Company nor any of its Subsidiaries is subject to any cease-and-desist or other order or enforcement action issued by, or is a party to any written agreement, consent agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is subject to any order or directive by, or has been ordered to pay any civil penalty by, or, to the Knowledge of Company, is a recipient of any supervisory letter from, or was required by any Regulatory Agency or other Governmental Entity to adopt any board resolutions that requires Company or its Subsidiaries to maintain capital adequacy, or restricts its ability to pay dividends, its credit or risk management policies, its management or its business (any such agreement, memorandum of understanding, letter, undertaking, order, directive or resolutions, whether or not set forth in the Disclosure Schedule, a “ Company Regulatory Agreement ”), nor to the Knowledge of Company, are there any pending or threatened regulatory investigation or other action by any Regulatory Agency or other Governmental Entity that could reasonably be expected to lead to the issuance of any such Company Regulatory Agreement.

3.16 Investment Securities .

(a) Each of Company and its Subsidiaries has good and marketable title to all securities held by it (except securities sold under repurchase agreements or held in any fiduciary or agency capacity) free and clear of any Lien, except to the extent that such securities are pledged in the ordinary course of business consistent with past practices to secure obligations of Company or any of its Subsidiaries and except for such defects in title or Liens that would not be material to Company and its Subsidiaries, taken as a whole. Such securities are valued on the books of Company and each of its Subsidiaries in accordance with GAAP.

(b) Company and each of its Subsidiaries employs investment, securities risk management and other policies, practices and procedures that Company and each such Subsidiary believes are prudent and reasonable in the context of such businesses.

3.17 Derivative Instruments . Section 3.17 of the Disclosure Schedule lists all Derivative Transactions, whether entered into for the account of Company or any if its Subsidiaries or for the account of a customer of the Company Bank Subsidiary with a notional amount in excess of $1,000,000. All Derivative Transactions: (i) were entered into in the ordinary course of business and in accordance with prudent banking practice and applicable Law and with counterparties believed to be financially responsible at the time; (ii) are legal, valid and binding obligations of Company or its Subsidiaries and, to the Knowledge

of Company, each of the counterparties thereto; and (iii) are in full force and effect and enforceable in accordance with their terms (except as enforcement may be limited by the Enforceability Exceptions). Neither Company and its Subsidiaries nor, to the Knowledge of Company, the counterparties to all such Derivative Transactions, is in material breach, violation or default of any of its obligations under any Derivative Transaction. The financial position of Company and its Subsidiaries on a consolidated basis under or with respect to each such Derivative Transaction has been reflected in its books and records and the books and records of such Subsidiaries in accordance with GAAP consistently applied.

3.18 Environmental Liability .

(a) Each of Company and its Subsidiaries and, to the Knowledge of Company (except as set forth in the relevant Loan Documentation regarding real property securing a Loan made in the ordinary course of business to a third party that is not an Affiliate of Company), any property in which Company or any of its Subsidiaries holds a security interest, is in material compliance with all Environmental Laws.

(b) There are no legal, administrative, arbitral or other proceedings, claims or actions pending, or, to the Knowledge of Company, threatened against Company or any of its Subsidiaries, nor to the Knowledge of Company are there governmental or third-party environmental investigations or remediation activities or governmental investigations pending or threatened against Company or any of its Subsidiaries, in each case that seek to impose or that could reasonably be expected to result in the imposition, on Company or any of its Subsidiaries, of any liability or obligation arising under any Environmental Law which liability or obligation would reasonably be expected to, individually or in the aggregate, be material to Company and its Subsidiaries, taken as a whole. To the Knowledge of Company, there is no reasonable basis for any such proceeding, claim, action or governmental investigation that would impose any liability or obligation that would be or would reasonably be expected to be, individually or in the aggregate, material to Company and its Subsidiaries, taken as a whole.

(c) To the Knowledge of Company, there has been no release or threatened release of any hazardous, toxic, radioactive or dangerous materials or other materials regulated under Environmental Laws in, on, under or affecting any property currently owned, managed, or operated by Company or any of its Subsidiaries or, during the time of ownership, management, or operation, any property formerly owned, managed, or operated by Company or its Subsidiaries.

(d) Company and each of its Subsidiaries are not subject to any, order, judgment or decree by or with any Governmental Entity, Regulatory Authority or third party imposing any liability or obligation with respect to Environmental Law that would reasonably be expected to be, individually or in the aggregate, material to the Company and its Subsidiaries. There has been no written third-party environmental site assessment conducted since January 1, 2011 assessing the presence of hazardous materials located on any property owned or leased by Company or any of its Subsidiaries that is within the possession or control of Company and its Subsidiaries as of the date of this Agreement that has not been made available to Parent prior to the date of this Agreement.

(e) The representations and warranties made pursuant to this Section 3.18 are the exclusive representations and warranties by Company regarding any environmental matter, including any matter related to Environmental Law.

3.19 Insurance . Company and each of its Subsidiaries are insured with reputable insurers against such risks and in such amounts as constitute reasonably adequate coverage against all risks customarily insured against by banking institutions and their subsidiaries of comparable size and operations to Company and its Subsidiaries. Company has previously delivered to Parent a true and complete list of all insurance policies applicable and available to Company and each of its Subsidiaries with respect to its business or that are otherwise maintained by or for Company or any of its Subsidiaries (the “ Company Policies ”) and has provided true and complete copies of all such Company Policies to Parent. There is no claim for coverage by Company or any of its Subsidiaries pending under any of such Company Policies as to which coverage has been questioned, denied or disputed by the underwriters of such Company Policies or in respect of which such underwriters have reserved their rights. Each Company Policy is in full force and effect and all premiums payable by Company or any of its Subsidiaries have been timely paid, by Company or its Subsidiaries, as applicable. Neither Company nor any of its Subsidiaries has received written notice of any threatened termination of, material premium increase with respect to, or material alteration of coverage under, any of such Company Policies.

3.20 Title to Property .

(a) Section 3.20(a) of the Disclosure Schedule lists (i) all real property owned by Company or any Company Subsidiary and the owner and location of the property (the “ Owned Real Property ”); (ii) all leases, subleases, licenses or other contracts pursuant to which Company or any of its Subsidiaries lease land and/or buildings, together with the real property rights (including security deposits), benefits and appurtenances pertaining thereto and rights in respect thereof, including ground leases (the “ Real Property Leases ”) (and such Schedule identifies which entity is the party to each such agreement, and the location of the applicable property) and (iii) all leases, subleases, licenses or other use agreements between Company or any of its Affiliates, as landlord, sublandlord or licensor, and third parties with respect to Owned Real Property or Leased Premises, as tenant, subtenant or licensee (“ Tenant Leases ”) (and such Schedule identifies which entity is the party to each such agreement and the location of the applicable property). All such documentation (including all material amendments, modifications, and supplements thereto) has been made available to Parent on or prior to the date hereof.

(b) Either Company or one of its Subsidiaries (in each instance identified on Schedule 3.20(a) of the Disclosure Schedule) (i) has good and indefeasible title to all Owned Real Properties, free and clear of all Liens of any nature whatsoever, except (A) statutory Liens securing payments not yet due (or being contested in good faith and for which adequate reserves have been established), (B) Liens for real property Taxes not yet due and payable, (C) easements, restrictions, rights of way, and other similar encumbrances that do not materially affect the value or use of the properties or assets subject thereto or affected thereby or otherwise materially impair business operations at such properties and that are filed of record in the county where the Owned Real Properties are located, (D) such imperfections or irregularities of title or Liens as do not materially affect the value or use of the properties or assets subject thereto or affected thereby or otherwise materially impair business operations at such properties and (E) zoning, entitlement and other land use and environmental regulations by any Governmental Entity that do not materially affect the value or use of the properties or assets subject thereto or affected thereby or otherwise materially impair business operations at such properties and that are of public record ((A) through (E) collectively, “ Permitted Encumbrances ”), and (ii) has a valid and binding leasehold interest in all parcels of real property leased to Company pursuant to the Real Property Leases (the “ Leased Premises ”), free and clear of all Liens on the leasehold estate of any nature whatsoever, except for Permitted Encumbrances, and is in sole possession of the properties purported to be leased thereunder, subject and pursuant to the terms of the Real Property Leases. Since December 31, 2013, none of the Leased Premises or Owned Real Property

has been taken by eminent domain (or, to the Knowledge of Company, is the subject of a pending or contemplated taking which has not been consummated). The Owned Real Properties and Leased Premises constitute all interests in real property currently used, occupied or held for use in connection with the business of Company and the Subsidiaries, as the business is currently conducted.

(c) Subject to the Permitted Encumbrances and Tenant Leases, no Person other than Company and its Subsidiaries has (or will have, at Closing) (i) any right in any of the Owned Real Property or any right to use or occupy any portion of the Owned Real Property or (ii) any right to use or occupy any portion of the Leased Premises. To the Knowledge of Company, all buildings, structures, fixtures and appurtenances comprising part of the Owned Real Property are in material compliance with all zoning and other governmental requirements and are in good operating condition and not in current or imminent need of capital repairs in excess of $25,000 and are sufficient for the purposes to which they are used in the conduct of Company’s and its Subsidiaries’ business. Company and its Subsidiaries do not use in their businesses any real property other than the Owned Real Property and the Leased Premises.

(d) Each of the Real Property Leases and each of the Tenant Leases is in full force and effect, without amendment and, to the Knowledge of Company, there exists no default or event of default or event, occurrence, condition or act, with respect to Company or any of its Subsidiaries or with respect to the other parties thereto, which, with the giving of notice, the lapse of time or the happening of any other event or condition, would become a default or event of default thereunder, except as specifically described on Section 3.20(a) of the Disclosure Schedule.

(e) To the Knowledge of Company, Company and its Subsidiaries have operated the Owned Real Property and the Leased Premises, and the continued operation of the Owned Real Property and the Leased Premises in the manner it is used in Company’s and its Subsidiaries’ business will be, in accordance in all material respects with all applicable Laws. Prior to the date hereof, Company has provided to Parent a true, correct and complete copy of each Real Property Lease, Tenant Lease, title policy, survey, environmental report, and any other property condition report related to the Owned Real Property or Leased Premises, in each instance to the extent in the possession of Company or any Subsidiary.

(f) Except as would not be material to Company, (i) subject to any applicable lease under which Company and its Subsidiaries lease Personal Property, Company and its Subsidiaries have good, valid and marketable title to all of the personal property of Company and its Subsidiaries consisting of the trade fixtures, shelving, furniture, on-premises ATMs, equipment, security systems, safe deposit boxes (exclusive of contents), vaults, sign structures and supplies excluding any items consumed or disposed of, but including new items acquired, used or obtained in the ordinary course of the operation of the business of Company and its Subsidiaries (“ Personal Property ”) and (ii) each of the leases under which Company or any of its Subsidiaries lease Personal Property is valid, and in full force and effect, without default thereunder by the lessee or, to the Knowledge of Company, the lessor.

3.21 Intellectual Property.

(a) To the Knowledge of Company, Company and each of its Subsidiaries own, or are licensed or otherwise possess rights to use free and clear of all Liens all material Intellectual Property used or held for use by Company and any of its Subsidiaries as of the date hereof (collectively, the “ Company Intellectual Property ”) in the manner that it is currently used by Company and any of its Subsidiaries.

(b) Neither Company nor any of its Subsidiaries has received written notice from any third party alleging any material interference, infringement, misappropriation or violation of any Intellectual

Property rights of any third party and, to the Knowledge of Company, neither Company nor any of its Subsidiaries has interfered in any material respect with, infringed upon, misappropriated or violated any Intellectual Property rights of any third party. To the Knowledge of Company, no third party has interfered with, infringed upon, misappropriated or violated any Intellectual Property owned by Company. Neither Company nor any of its Subsidiaries has entered into any agreements with third parties relating to any Intellectual Property owned by Company, except in the ordinary course of business.

(c) Neither Company nor any of its Subsidiaries is a party to any agreement to indemnify any Person against a claim of infringement of or misappropriation by any Company Intellectual Property.

3.22 Loans .

(a) Each loan agreement, note or borrowing arrangement (including leases, credit enhancements, commitments, guarantees and interest-bearing assets) (collectively, “ Loans ”) payable to Company or any of its Subsidiaries (i) is evidenced by Loan Documentation that is true, genuine and what it purports to be and (ii) represents the valid and legally binding obligation of the obligor, maker, co-maker, guarantor, endorser or debtor (such person referred to as an “ Obligor ”) thereunder, and is enforceable against the Obligor in accordance with its terms, subject to the Enforceability Exceptions.

(b) The information with respect to each Loan set forth in the data storage disk produced by Company from its management information systems regarding the Loans and delivered to Parent prior to the date hereof (the “ Loan Tape ”), and, to the Knowledge of Company, any third-party information set forth in the Loan Tape is true, correct and accurate in all material respects as of the dates specified therein, or, if no such date is indicated therein, as of the date the information was entered into electronic media.

(c) (i) Section 3.22(c) of the Disclosure Schedule sets forth a list of all Loans as of the date hereof by Company and its Subsidiaries to any directors, executive officers and principal stockholders (as such terms are defined in Regulation O of the Federal Reserve (12 C.F.R. Part 215)) of Company or any of its Subsidiaries, (ii) there are no employee, officer, director or other affiliate Loans on which the borrower is paying a rate other than that reflected in the note or other relevant credit or security agreement or on which the borrower is paying a rate that was below market at the time the Loan was originated and (iii) all such Loans are and were originated in compliance in all material respects with all applicable Laws.

(d) Each Loan payable to Company or any of its Subsidiaries (i) was originated or purchased by Company or its Subsidiaries and its principal balance as shown on Company’s books and records is true and correct as of the date indicated therein, (ii) contains customary and enforceable provisions such that the rights and remedies of the holder thereof shall be adequate for the practical realization against any collateral therefor and (iii) complies, and at the time the Loan was originated or purchased by Company or its Subsidiaries complied, including as to the Loan Documentation related thereto, in all material respects, with all applicable requirements of federal, state and local Laws.

(e) Each outstanding Loan (including Loans held for resale to investors) payable to Company or any of its Subsidiaries has been solicited and originated and is administered and serviced (to the extent administered and serviced by Company or a Company Subsidiary) and the relevant Loan Documentation are being maintained, in all material respects in accordance with Company’s or its Subsidiary’s underwriting and servicing standards and with applicable Law.

(f) With respect to each Loan payable to Company or any of its Subsidiaries that is secured, Company or its Subsidiary has a valid and enforceable Lien on the collateral described in the Loan

Documentation, and each such Lien is assignable and has the priority described in the Loan Documentation (except as may be limited by bankruptcy, insolvency, moratorium, reorganization or similar Laws affecting the rights of creditors generally and except as the availability of equitable remedies may be limited by general principles of equity).

(g) Except as set forth on Section 3.22 of the Disclosure Schedule, none of the agreements pursuant to which Company or any of its Subsidiaries has sold Loans or pools of Loans or participations in Loans or pools of Loans (each a “ Loan Sale Agreement ”) contains any obligation to repurchase such Loans or interests therein solely on account of a payment default by the obligor on any such Loan. There is no pending or, to the Knowledge of Company, threatened, cancellation or termination of any Loan Sale Agreement to which Company or any of its Subsidiaries is a party. There is no breach by Company or any of its Subsidiaries under any Loan Sale Agreement, and no third party has exercised or, to the Knowledge of Company, is threatening to exercise its contractual right to require Company or any of its Subsidiaries to repurchase any loan from such third party due to a breach of representation, warranty or covenant by Company or any of its Subsidiaries under a Loan Sale Agreement.

(h) Company’s allowance for loan losses is, and has been since January 1, 2011, in compliance with Company’s methodology for determining the adequacy of its allowance for loan losses as well as the standards established by applicable Governmental Entities and the Financial Accounting Standards Board in all material respects.

(i) Section 3.22(i) of the Disclosure Schedule identifies each Loan payable to Company or any of its Subsidiaries that (i) as of December 31, 2013 (A) was on non-accrual status, (B) the interest rate terms of which had been reduced and/or the maturity dates of which had been extended subsequent to the agreement under which the Loan was originally created due to concerns regarding the borrower’s ability to pay in accordance with such initial terms, (C) a specific reserve allocation existed in connection therewith, (D) was required to be accounted for as a troubled debt restructuring in accordance with Statement of Financial Accounting Standards No. 15 or (E) was contractually past due ninety (90) days or more in the payment of principal and/or interest, or (ii) as of the date of this Agreement is classified as “Other Loans Specially Mentioned,” “Special Mention,” “Substandard,” “Doubtful,” “Loss,” “Classified,” “Criticized,” “Watch List” or words of similar import. For each Loan identified in response to clause (i) or (ii) above, Section 3.22(i) of the Disclosure Schedule sets forth the outstanding balance, including accrued and unpaid interest, on each such Loan and the identity of the borrower thereunder as of December 31, 2013.

3.23 Related Party Transactions .

(a) There are no agreements, contracts, plans, arrangements or other transactions between Company or any of its Subsidiaries, on the one hand, and any (i) officer or director of Company or any of its Subsidiaries, (ii) record or beneficial owner of five percent (5%) or more of the voting securities of Company, (iii) Affiliate or family member of any such officer, director or record or beneficial owner or (iv) any other affiliate of Company, on the other hand, except those of a type available to non-Affiliates of Company generally and compensation or benefit arrangements with officers and directors.

(b) No stockholder or Affiliate of Company (other than Company and its Subsidiaries) owns any material property or asset used in the conduct of the business of Company and its Subsidiaries.

3.24 Takeover Laws . No anti-takeover, control share, “fair price”, moratorium, interested stockholder or similar Law (collectively, the “ Takeover Provisions ”) is applicable to this Agreement, either of the Mergers or any of the transactions contemplated hereby (which includes voting thereon by holders of Company Common Stock) under Maryland or federal Law.

3.25 Approvals . As of the date of this Agreement, Company knows of no reason why all regulatory approvals from any Governmental Entity required for the consummation of the transactions contemplated by this Agreement should not be obtained on a timely basis.

3.26 Company Information . None of the information supplied or to be supplied by Company for inclusion or incorporation by reference in the Joint Proxy Statement and/or in the Form S-4, as applicable, or in any amendment or supplement thereto, will, at the time the Joint Proxy Statement or any such amendment or supplement thereto is first mailed to Company’s or Parent’s stockholders or at the time Company’s or Parent’s stockholders vote on the matters constituting the Requisite Stockholder Approval or the Parent Stockholder Approval, respectively, or at the time the Form S-4 or any such amendment or supplement thereto becomes effective under the Securities Act or at the Effective Time, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. No representation or warranty is made by Company in this Section 3.26 with respect to statements made or incorporated by reference in the Joint Proxy Statement or the Form S-4 based on information supplied by Parent. All documents that Company is required to file in connection with the Joint Proxy Statement will comply as to form in all material respects with the requirements of the Exchange Act. If at any time prior to the Effective Time any event is discovered by Company or any of its Subsidiaries which is required to be set forth in an amendment or supplement to the Form S-4 or the Joint Proxy Statement, Company shall promptly so inform Parent.

3.27 Broker’s Fees . Other than Sandler O’Neill & Partners, L.P., no broker or finder is entitled to any broker’s fees, commissions or finder’s fees in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Company or its Subsidiaries. The agreement between Sandler O’Neill & Partners, L.P. and Company regarding such fees or commissions has been provided to Parent.

3.28 Transaction Expenses . The expenses incurred or to be incurred by Company and its Subsidiaries prior to Closing in connection with the transactions contemplated by this Agreement are not, as of the date of this Agreement, expected to exceed the amount set forth on Section 3.28 of the Disclosure Schedule.

3.29 No Other Representations or Warranties . Company acknowledges and agrees that it (a) has had an opportunity to discuss the business of Parent and its Subsidiaries with the management of Parent, (b) has had reasonable access to the books and records of Parent and its Subsidiaries, (c) has been afforded the opportunity to ask questions of and receive answers from officers of Parent and (d) has conducted its own independent investigation of Parent and its Subsidiaries, their respective businesses and the transactions contemplated hereby, and has not relied on any representation, warranty or other statement by any person on behalf of Parent, Merger Sub or any of their Subsidiaries, other than the representations and warranties of Parent and Merger Sub expressly contained in Article IV of this Agreement. Company acknowledges that neither Parent nor Merger Sub makes any express or implied representations or warranties as to any matter whatsoever except as expressly set forth in Article IV, including with respect to any information furnished, disclosed or made available to Company or its representatives in the course of their due diligence investigation

of Parent and the negotiation of this Agreement, or otherwise in connection with the transactions contemplated hereby. The representations and warranties set forth in Article IV are made solely by Parent and Merger Sub, and no representative of Parent or Merger Sub shall have any responsibility or liability related thereto. Except for the representations and warranties in this Article III, neither Company nor any other Person makes any express or implied representation or warranty with respect to Company and its Subsidiaries, or their respective businesses, operations, assets, liabilities, conditions (financial or otherwise) or prospects, and Company hereby disclaims any such other representations or warranties, including with respect to any financial projection, forecast, estimate, budget or prospective information relating to Company, any of its Subsidiaries or their respective businesses or any oral or written information presented to Parent or any of Parent’s Affiliates or representatives in the course of their due diligence investigation of Company, the negotiation of this Agreement or in the course of the transactions contemplated hereby.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF PARENT AND

MERGER SUB

Except as (a) disclosed in writing in the correspondingly enumerated section or subsection of the disclosure schedule of Parent delivered herewith (the “ Parent Disclosure Schedule ”) ( provided that each exception set forth in the Parent Disclosure Schedule shall be deemed to qualify any other representation and warranty to the extent that the relevance of such exception to such other representation and warranty is reasonably apparent on the face of the disclosure (without the need to examine underlying documentation referenced in, but not attached to, the Disclosure Schedule)) or (b) disclosed in any report, schedule, form or other document filed with the SEC by Parent prior to the date hereof and on or after the date on which Parent filed with the SEC its Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (but excluding any risk factor disclosures contained under the heading “Risk Factors,” any disclosure of risks included in any “forward-looking statements” disclaimer or any other statements that are similarly non-specific or predictive or forward-looking in nature), Parent and Merger Sub, jointly and severally, hereby represent and warrant to Company as follows:

4.1 Corporate Organization . Each of Parent, Merger Sub and Parent Bank is an entity duly organized, validly existing and in good standing under the Laws of its jurisdiction of organization. The deposit accounts of Parent Bank are insured by the FDIC through the Bank Insurance Fund to the fullest extent permitted by Law, and all premiums and assessments required in connection therewith have been paid by Parent Bank when due. Each of Parent, Merger Sub, Parent Bank and their respective Subsidiaries has the requisite corporate power and authority to own or lease all of its properties and assets and to carry on its business as it is now being conducted. Each of Parent, Merger Sub, Parent Bank and their respective Subsidiaries is duly licensed or qualified to do business in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing or qualification necessary, except where the failure to be so licensed or qualified has not had and is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on Parent. True and complete copies of the articles of incorporation and bylaws of Parent, Merger Sub, Parent Bank and their respective Subsidiaries, as in effect as of the date of this Agreement, have previously been furnished or made available to Company. Neither Parent, Merger Sub, Parent Bank nor any of their respective Subsidiaries are in violation of any of the provisions of their respective articles of incorporation or bylaws, each as amended.

4.2 Capitalization .

(a) The authorized capital stock of Parent consists of 40,000,000 shares of Parent Common Stock, of which, as of March 31, 2014 (the “ Parent Capitalization Date ”), 17,927,187 shares were issued and outstanding and 2,469,638 shares were held in treasury. On March 20, 2014, the Parent Board declared a stock dividend pursuant to which 898,467 shares of Parent Common Stock will be issued on May 1, 2014 to shareholders of record on April 10, 2014. All of the issued and outstanding shares of Parent Common Stock have been duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights. As of the Parent Capitalization Date, there were 1,340,098 shares of Parent Common Stock reserved for issuance upon exercise of options granted as employment inducement awards and under Parent’s equity compensation plans (the “ Parent Options ”). As of the date of this Agreement, except pursuant to (i) this Agreement; (ii) the Parent Options and (iii) Parent's equity compensation plans, there were no outstanding subscriptions, options, warrants, puts, calls, rights, exchangeable or convertible securities or other commitments or agreements of any character relating to the issued or unissued capital stock or other securities of Parent, or otherwise obligating Parent to issue, transfer, sell, purchase, redeem or otherwise acquire any such securities. As of the Parent Capitalization Date, no Voting Debt of Parent is issued or outstanding. The shares of Parent Common Stock to be issued pursuant to the First Merger will be duly authorized and validly issued and, at the Effective Time, all such shares will be fully paid, nonassessable and free of preemptive rights. Neither Parent, Merger Sub, Parent Bank nor any of their respective Subsidiaries is currently deferring interest payments with respect to any trust preferred securities or related debentures issued by it or any of its affiliates, all such securities have been paid and will continue to be paid on a current basis as they accrue, there is no default or event of default under, or other breach or violation of, the terms of such securities or any instrument, indenture or other agreement entered into in connection therewith.

(b) The authorized capital stock of Merger Sub consists of 1,000 shares of common stock, par value $0.01 per share (“ Merger Sub Common Stock ”), of which, as of the date of this Agreement, 1,000 shares were issued and outstanding. All of the issued and outstanding shares of Merger Sub Common Stock (x) have been duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights and (y) are owned, beneficially and of record, by Parent, free and clear of all Liens. There are no outstanding subscriptions, options, warrants, puts, calls, rights, exchangeable or convertible securities or other commitments or agreements of any character relating to the issued or unissued capital stock or other securities of Merger Sub, or otherwise obligating Merger Sub to issue, transfer, sell, purchase, redeem or otherwise acquire any such securities.

4.3 Authority; No Violation .

(a) Each of Parent and Merger Sub has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly approved by all necessary corporate action on the part of Parent and Merger Sub, subject to receipt of the affirmative vote of the holders of a majority of the votes cast by the holders of Parent Common Shares at the Parent Stockholder Meeting to approve the issuance of the Parent Common Shares in the First Merger (the “ Parent Stockholder Approval ”). The Parent Stockholder Approval is the only vote of the holders of Parent’s capital stock necessary in connection with the consummation of the Mergers and the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Parent and Merger Sub. Assuming due authorization, execution and delivery by Company, this Agreement constitutes a valid and binding obligation of each of Parent and Merger Sub, enforceable against Parent and Merger Sub in accordance with its terms, except as such enforcement may be limited by the Enforceability Exceptions.

(b) Neither the execution and delivery of this Agreement by Parent and Merger Sub, nor the consummation by Parent and Merger Sub of the transactions contemplated hereby, nor compliance by Parent and Merger Sub with any of the terms or provisions hereof, will (i) violate any provision of the articles of incorporation or bylaws of Parent or Merger Sub, or (ii) assuming that the consents and approvals referred to in Section 4.4 are duly obtained and/or made, (A) violate any Law, judgment, order, writ, decree or injunction applicable to Parent or any of its Subsidiaries or any of their respective properties or assets or (B) violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required by or rights or obligations under, or result in the creation of any Lien upon any of the respective properties or assets of Parent or any of its Subsidiaries under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, trust preferred or other subordinated debt security, license, lease, agreement, contract, or other instrument or obligation to which Parent or any of its Subsidiaries is a party, or by which they or any of their respective properties, assets or business activities may be bound or affected, except (in the case of clause (ii) above) for such violations, conflicts, breaches, defaults or the loss of benefits that have not had and are not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on Parent.

4.4 Consents and Approvals . Except for (a) the regulatory approvals and non-objections described in Section 3.4(a), (b) compliance with any applicable requirements of the Exchange Act and the Securities Act, including, the Joint Proxy Statement and Form S-4 in which the Joint Proxy Statement will be included as a prospectus, and declaration of effectiveness of the Form S-4, (c) the filing of the Articles of Merger with the SDAT and the Certificate of Merger with the Secretary of State of the State of Texas pursuant to the MGCL and the TBOC, respectively, (d) the filing of the Bank Merger Certificates, (e) such filings and approvals as are required to be made or obtained under the securities or “Blue Sky” laws of various states in connection with the issuance of the shares of Parent Common Stock pursuant to this Agreement, (f) the filing of any required applications, filings or notices with the Federal Home Loan Bank, (g) approval of listing of such Parent Common Stock on the NASDAQ, and (h) such other notices, consents, approvals, non-objections, waivers, authorizations, applications, filings or registrations the failure of which to be obtained or made would not be reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on Parent, no consents, approvals or authorizations of or filings or registrations with any Governmental Entity, or of or with any third party, are required to be made or obtained by Parent or any of its Subsidiaries in connection with (i) the execution and delivery by Parent and Merger Sub of this Agreement or (ii) the consummation by Parent and Merger Sub of the transactions contemplated hereby.

4.5 Legal Proceedings .

(a) Neither Parent, Merger Sub, nor any of their respective Subsidiaries is a party to or the subject of any, and there are no outstanding or pending or, to the Knowledge of Parent, threatened, material legal, administrative, arbitral or other proceedings, claims, actions or governmental or regulatory investigations of any nature against Parent, Merger Sub or any of their respective Subsidiaries. There is no material outstanding injunction, order, judgment, decree or regulatory restriction (other than regulatory restrictions of general application that apply to similarly situated companies) imposed upon Parent, Merger Sub or any of their respective Subsidiaries or the assets of Parent, Merger Sub or any of their respective Subsidiaries that would reasonably be reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on Parent.

4.6 Absence of Certain Changes . From December 31, 2013 to the date of this Agreement, there has not been a Material Adverse Effect on Parent.

4.7 Reports .

(a) Parent, Merger Sub and their respective Subsidiaries have filed (or furnished, as applicable) all material Reports that they were required to file (or furnish, as applicable) since January 1, 2012 with the Regulatory Agencies, and have paid all fees and assessments due and payable in connection therewith, except where the failure to file (or furnish) such Report or to pay such fees and assessments, individually or in the aggregate, that would not reasonably be expected to be material to Parent and its Subsidiaries, taken as a whole.

(b) Parent has timely filed with or furnished to, as applicable, the SEC all registration statements, prospectuses, reports, schedules, forms, statements and other documents (including exhibits and all other information incorporated by reference) required to be filed or furnished by it with the SEC since January 1, 2012 (the “ Parent SEC Reports ”). As of their respective filing dates (or, if amended or superseded by a subsequent filing, as of the date of the last such amendment or superseding filing prior to the date hereof), each of the Parent SEC Reports complied as to form in all material respects with the applicable requirements of the Securities Act and Exchange Act applicable to such Parent SEC Reports. None of the Parent SEC Reports, including any financial statements, schedules or exhibits included or incorporated by reference therein at the time they were filed (or, if amended or superseded by a subsequent filing, as of the date of the last such amendment or superseding filing prior to the date hereof), contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. None of Parent’s Subsidiaries is required to file with or furnish to the SEC any forms, reports or other documents. As of the date of this Agreement, no executive officer of Parent has failed in any respect to make the certifications required of him or her under Section 302 or 906 of the Sarbanes-Oxley Act.

4.8 Financial Statements .

(a) Each of the consolidated financial statements (including, in each case, any related notes thereto) contained in the Parent SEC Documents (the “ Parent Financial Statements ”): (i) complied as to form in all material respects with the published rules and regulations of the SEC with respect thereto as of their respective dates; (ii) was prepared in accordance with GAAP applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto and, in the case of unaudited interim financial statements, as may be permitted by the SEC and GAAP for Quarterly Reports on Form 10-Q); and (iii) fairly presented in all material respects the consolidated financial position of Parent and its consolidated Subsidiaries as of the respective dates thereof and the consolidated results of Parent’s operations and cash flows for the periods indicated therein, subject, in the case of unaudited interim financial statements, to normal and year-end audit adjustments and the absence of footnotes as permitted by GAAP and the applicable rules and regulations of the SEC.

(b) Parent and each of its Subsidiaries has established and maintains a system of “internal controls over financial reporting” (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that is sufficient to provide reasonable assurance (i) regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, (ii) that receipts and expenditures of Parent and its Subsidiaries are being made only in accordance with authorizations of management and the board of directors of Parent, and (iii) regarding prevention or timely detection of the unauthorized acquisition,

use or disposition of Parent’s and its Subsidiaries’ assets that could have a material effect on Parent’s financial statements.

(c) Parent’s “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) are reasonably designed to ensure that all information (both financial and non-financial) required to be disclosed by Parent in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that all such information is accumulated and communicated to Parent’s management as appropriate to allow timely decisions regarding required disclosure and to make the certifications of the chief executive officer and chief financial officer of Parent required under the Exchange Act with respect to such reports. Parent has disclosed, based on its most recent evaluation of its disclosure controls and procedures prior to the date of this Agreement, to Parent’s auditors and the audit committee of the board of directors of Parent (i) any significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting that could adversely affect in any material respect Parent’s ability to record, process, summarize and report financial information and (ii) any fraud, whether or not material, that involves management or other employees who have a significant role in Parent’s internal controls over financial reporting. For purposes of this Agreement, the terms “significant deficiency” and “material weakness” shall have the meaning assigned to them in Public Company Accounting Oversight Board Auditing Standard 2, as in effect on the date of this Agreement.

(d) Each of the principal executive officer and the principal financial officer of Parent (or each former principal executive officer and each former principal financial officer of Company, as applicable) has made all certifications required by Rule 13a-14 or 15d-14 under the Exchange Act and Sections 302 and 906 of the Sarbanes-Oxley Act with respect to the Parent SEC Documents, and the statements contained in such certifications are true and accurate in all material respects. For purposes of this Agreement, “principal executive officer” and “principal financial officer” shall have the meanings given to such terms in the Sarbanes-Oxley Act. Neither Parent nor any of its Subsidiaries has outstanding (nor has arranged or modified since the enactment of the Sarbanes-Oxley Act) any “extensions of credit” (within the meaning of Section 402 of the Sarbanes-Oxley Act) to directors or executive officers (as defined in Rule 3b-7 under the Exchange Act) of Parent or any of its Subsidiaries. Parent is otherwise in compliance with all applicable provisions of the Sarbanes-Oxley Act, except for any non-compliance that has not had and is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on Parent.

(e) The books and records kept by Parent and its Subsidiaries are in all material respects complete and accurate and have been maintained in accordance with applicable Laws and accounting requirements. The Parent Financial Statements have been prepared from, and are in accordance with, the books and records of Parent and its Subsidiaries.

(f) Neither Parent nor any of its Subsidiaries is a party to, or has any commitment to become a party to, any joint venture, off-balance sheet partnership or any similar contract or arrangement (including any contract or arrangement relating to any transaction or relationship between or among Parent and any of its Subsidiaries, on the one hand, and any unconsolidated Affiliate, including any structured finance, special purpose or limited purpose entity or Person, on the other hand, or any “off-balance sheet arrangement”), where the result, purpose or intended effect of such contract or arrangement is to avoid disclosure of any material transaction involving, or material liabilities of, Parent or any of its Subsidiaries in Parent’s or such Subsidiary’s financial statements.

4.9 Investment Securities. Each of Parent, Merger Sub and their respective Subsidiaries has good and marketable title to all securities held by it (except securities sold under repurchase agreements or held in any fiduciary or agency capacity) free and clear of any Lien, except to the extent that such securities are pledged in the ordinary course of business consistent with past practices to secure obligations of Parent, Merger Sub or any of their respective Subsidiaries and except for such defects in title or Liens that would not be material to Parent, Merger Sub or any of their respective Subsidiaries, taken as a whole. Such securities are valued on the books of Parent, Merger Sub or their respective Subsidiaries in accordance with GAAP. Parent and each of its Subsidiaries employs investment, securities risk management and other policies, practices and procedures that Parent, Merger Sub and their respective Subsidiaries believes are prudent and reasonable in the context of such businesses.

4.10 Taxes and Tax Returns .

(a) Each of Parent, Merger Sub and each of their respective Subsidiaries has duly and timely filed or caused to be filed (including all applicable extensions) all federal, state, foreign and local Tax Returns required to be filed by it or with respect to it (all such Tax Returns being accurate and complete in all material respects) and has duly and timely paid or caused to be paid on its behalf all material Taxes due and required to be paid by it prior to the date hereof. Through December 31, 2013, Parent, Merger Sub and each of their respective Subsidiaries do not have any material liability for Taxes in excess of the amount reserved or provided for on the Parent Financial Statements.

(b) There are no audits, examinations, disputes or proceedings pending or threatened in writing, or, to the Knowledge of Parent, Merger Sub and each of their respective Subsidiaries, otherwise notified, with respect to, or claims or assessments for any Taxes of Parent, Merger Sub or any of their respective Subsidiaries.

(c) None of Parent, Merger Sub or any of their respective Subsidiaries has participated in any reportable transaction, as defined in Treasury Regulation Section 1.6011-4(b)(1).

(d) Neither Parent, Merger Sub nor any of their respective Subsidiaries has taken or agreed to take any action or is aware of any fact or circumstance that would prevent or impede, or could reasonably be expected to prevent or impede, the Mergers from qualifying as a “reorganization” within the meaning of Section 368(a) of the Code.

4.11 Approvals . As of the date of this Agreement, neither Parent nor Merger Sub knows of any reason why all regulatory approvals from any Governmental Entity required for the consummation of the transactions contemplated by this Agreement should not be obtained on a timely basis.

4.12 Compliance with Applicable Laws.

(a) Parent, Merger Sub and each of their respective Subsidiaries and each of their employees, in their capacities as such, (i) hold all licenses, registrations, franchises, certificates, variances, permits and authorizations necessary for the lawful conduct of their respective businesses and properties and (ii) are and have been in compliance with all, and are not and have not been in violation of any, applicable Law and neither Parent, Merger Sub nor any of their respective Subsidiaries has Knowledge of, or to the Knowledge of Parent, has since January 1, 2012, received notice of, any violations of any of the above, except in each case where the failure to hold such license, registration, franchise, certificate, variance, permit or

authorization or such noncompliance or violation has not had and is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on Parent.

(b) Except as has not had and is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on Parent, Parent, Merger Sub and each of their respective Subsidiaries have properly administered all accounts for which Parent, Merger Sub or any of their Subsidiaries acts as a fiduciary, including accounts for which Parent, Merger Sub or any of their Subsidiaries serves as a trustee, agent, custodian, personal representative, guardian, conservator or investment adviser, in accordance with the terms of the governing documents and applicable Law in all material respects. None of Parent, Merger Sub or any of their Subsidiaries, or, to the Knowledge of Parent, any director, officer or employee of Parent, Merger Sub or any of their Subsidiaries, has committed any breach of trust with respect to any such fiduciary account that has had or is reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on Parent, and the accountings for each such fiduciary account are true and correct in all material respects and accurately reflect in all material respects the assets of such fiduciary account.

(c) Parent and Parent Bank are “well-capitalized” (as such term is defined at 12 C.F.R. 225.2(r) or the relevant regulation of Parent’s or such Subsidiary’s primary federal bank regulator), and “well managed” (as that term is defined at 12 C.F.R. 225.2(s) or the relevant regulation of Parent’s or such Subsidiary’s primary federal bank regulator), and the rating of the Parent Bank under the CRA is no less than “satisfactory.” Neither Parent nor the Parent Bank has been informed that its status as “well-capitalized,” “well managed” or, in the case of the Parent Bank, for CRA purposes, “satisfactory,” will change within one (1) year.

4.13 Parent Information . None of the information supplied or to be supplied by Parent and Merger Sub for inclusion or incorporation by reference in the Joint Proxy Statement and/or in the Form S-4, as applicable, or in any amendment or supplement thereto, will, at the time the Joint Proxy Statement or any such amendment or supplement thereto is first mailed to Company’s or Parent’s stockholders or at the time Company’s or Parent’s stockholders vote on the matters constituting the Requisite Stockholder Approval or the Parent Stockholder Approval, respectively, or at the time the Form S-4 or any such amendment or supplement thereto becomes effective under the Securities Act or at the Effective Time, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. No representation or warranty is made by Parent or Merger Sub in this Section 4.13 with respect to statements made or incorporated by reference therein based on information supplied by Company in writing expressly for inclusion or incorporation by reference in the Joint Proxy Statement, the Form S-4. All documents Parent is required to file in connection with the Joint Proxy Statement and Form S-4 will comply as to form in all material respects with the applicable requirements of the Exchange Act and the Securities Act. If at any time prior to the Effective Time any event is discovered by Parent or Merger Sub which is required to be set forth in an amendment or supplement to the Form S-4 or the Joint Proxy Statement, Parent and Merger Sub shall promptly so inform Company.

4.14 Employee Benefit Plans .

(a) Each Parent Benefit Plan has been established, operated and administered in all material respects in accordance with its terms and the requirements of all applicable Laws, including ERISA and the Code (including all applicable aspects of the Patient Protection and Affordable Care Act, as amended) as well as HIPAA. Neither Parent, Merger Sub nor any of their respective Subsidiaries has taken any action to take corrective action or make a filing under any voluntary correction program of the IRS, the U.S. Department of Labor or any other Governmental Entity with respect to any Parent Benefit Plan, and to the

Knowledge of Parent and its Subsidiaries, there are no material plan defect that would qualify for correction under any such program.

(b) All contributions required to be made to any Parent Benefit Plan by applicable Law or by any plan document or other contractual undertaking, and all premiums due or payable with respect to insurance policies funding any Parent Benefit Plan, for any period through the date hereof, have been timely made or paid in full or, to the extent not required to be made or paid on or before the date hereof, have been fully reflected on the books and records of Parent.

(c) The IRS has issued a favorable determination letter with respect to each Parent Company Benefit Plan that is intended to be qualified under Section 401(a) of the Code (the “ Parent Qualified Plans ”) and the related trust that has not been revoked, and, to the Knowledge of Parent, there are no existing circumstances and no events have occurred that could adversely affect the qualified status of any Parent Qualified Plan or the related trust. Each trust created under any Parent Qualified Plan has been determined to be exempt from Tax under Section 501(a) of the Code and neither Parent nor any of its Subsidiaries is aware of any circumstances that could result in the revocation of the exemption. No trust funding any Parent Benefit Plan is intended to meet the requirements of Section 501(c)(9) of the Code.

(d) Each Parent Benefit Plan that is subject to Title IV or Section 302 of ERISA or Section 412 or 4971 of the Code (a “ Parent Pension Plan ”) had, as of the date of its most recent actuarial valuation, assets measured at fair market value at least equal to its “funding target” as that term is defined in Section 430 of the Code. Since the date of the most recent actuarial valuation, no event has occurred that would be reasonably expected to adversely change any such funded status in a material way. Any Parent Benefit Plan that is a Parent Pension Plan has satisfied its “minimum funding standard” within the meaning of Section 412 of the Code or Section 302 or ERISA. All required contributions with respect to any Parent Pension Plan have been timely made and there is no Lien, nor is there expected to be a Lien, under Section 430(k) of the Code or ERISA Section 303(k) or Tax under Section 4971 of the Code. Neither Parent nor any of its Subsidiaries has provided, or is required to provide, security to any of its Parent Pension Plans pursuant to Section 412 of the Code. All premiums required to be paid under ERISA Section 4007 have been timely paid by Parent and its Subsidiaries. No Liability under Title IV of ERISA has been or is expected to be incurred by Parent, Merger Sub or any of their respective Subsidiaries with respect to any Parent Pension Plan currently or formerly maintained by any of them or by any of their ERISA Affiliates that has not been satisfied in full (other than Liability for Pension Benefit Guaranty Corporation premiums, which have been paid when due).

(e) There are no pending claims (other than claims for benefits in the ordinary course), lawsuits or arbitrations that have been asserted or instituted, and, to the Knowledge of Parent, no threatened claims (other than claims for benefits in the ordinary course), lawsuits or arbitrations and no set of circumstances exists that may reasonably give rise to a claim or lawsuit, against the Parent Benefit Plans, any fiduciaries thereof with respect to their duties to the Parent Benefits Plans or the assets of any of the trusts under any of the Parent Benefit Plans that could reasonably be expected to result in any material Liability of Parent, Merger Sub or any of their respective Subsidiaries to the Pension Benefit Guaranty Corporation, the U.S. Department of the Treasury, the U.S. Department of Labor, any Multiemployer Plan, any Multiple Employer Plan, any participant in a Parent Benefit Plan, or any other party. No Parent Benefit Plan is under audit or the subject of an investigation by the IRS, the U.S. Department of Labor, the Pension Benefit Guaranty Corporation, the SEC or any other Governmental Entity, nor is any such audit or investigation pending or, to the Knowledge of Parent and Merger Sub, threatened.

(f) Neither Parent, Merger Sub nor any of their respective Subsidiaries has engaged in a transaction with respect to any Parent Benefit Plan that would subject Parent or any of its Subsidiaries to a Tax or penalty imposed by either Section 4975 of the Code or Section 502(i) of ERISA. Neither Parent nor Merger Sub, to the Knowledge of Parent or Merger Sub, any administrator or fiduciary of a Parent Benefit Plan (or any agent of any of the foregoing) has engaged in any transaction, or acted or failed to act in any manner with respect to such Parent Benefit Plan that could subject Parent or any of its Subsidiaries to any direct or indirect Liability (by indemnity or otherwise) for breach of any fiduciary, co-fiduciary or any other duty under ERISA.

4.15 Labor Matters . There are no agreements with, or pending petitions for recognition of, a labor union or association as the exclusive bargaining agent for any of the employees of Parent, Merger Sub or any of their respective Subsidiaries and there are no representation or certification proceedings or petitions seeking a representation proceeding presently pending or, to the Knowledge of Parent and Merger Sub, threatened to be brought or filed with the National Labor Relations Board or any other comparable foreign, state or local labor relations tribunal or authority. There are no labor strikes, work stoppages, slowdowns, lockouts, material arbitrations or material grievances or other material labor disputes, other than routine grievance matters, now pending or, to the Knowledge of Parent and Merger Sub, threatened against or involving Parent, Merger Sub or any of their respective Subsidiaries; to the Knowledge of Parent and Merger Sub, there are no organizing activities pending or threatened against or involving the Parent, Merger Sub or any of their respective Subsidiaries; and there have not been any such labor strikes, work stoppages or other labor troubles with respect to Parent or any of its Subsidiaries at any time within the five (5) years prior to the date of this Agreement. Parent and Merger Sub are not a party to, or otherwise bound by, any consent decree with, or citation by, any Governmental Entity relating to employees or employment practices; and there is no charge of discrimination in employment or employment practices for any reason, including age, gender, race, religion or other legally protected category, to the Knowledge of Parent and Merger Sub, which has been asserted against Parent or that is now pending before the U.S. Equal Employment Opportunity Commission or any other Governmental Entity that would result in liability to Parent or any of its Subsidiaries. Parent, Merger Sub and each of their respective Subsidiaries is in compliance with all applicable Laws in respect of employment, employment practices, including terms and conditions of employment and wages and hours, employment discrimination, employee classification, workers’ compensation, family and medical leave, the Immigration Reform and Control Act and occupational safety and health requirements. Each individual who renders services to Parent, Merger Sub or any of their respective Subsidiaries who is classified by Parent, Merger Sub or of such Subsidiary, as applicable, as having the status of an independent contractor, consultant or other non-employee status for any purpose (including for purposes of taxation and tax reporting and under Parent Benefit Plans) is properly so characterized.

4.16 Intellectual Property.

(a) To the Knowledge of Parent and Merger Sub, Parent, Merger Sub and their respective Subsidiaries each own, or are licensed or otherwise possess rights to use free and clear of all Liens all material Intellectual Property used or held for use by Parent, Merger Sub and their respective Subsidiaries as of the date hereof (collectively, the “ Parent Intellectual Property ”) in the manner that it is currently used by Parent, Merger Sub and their respective Subsidiaries.

(b) Neither Parent, Merger Sub nor any of their respective Subsidiaries has received written notice from any third party alleging any material interference, infringement, misappropriation or violation of any Intellectual Property rights of any third party and, to the Knowledge of Parent and Merger Sub, neither Parent, Merger Sub nor any of their respective Subsidiaries has interfered in any material respect with, infringed upon, misappropriated or violated any Intellectual Property rights of any third party. To the

Knowledge of Parent and Merger Sub, no third party has interfered with, infringed upon, misappropriated or violated any Intellectual Property owned by Parent or Merger Sub. Neither Parent, Merger Sub nor any of their respective Subsidiaries has entered into any agreements with third parties relating to any Intellectual Property owned by Parent or Merger Sub, except in the ordinary course of business.

(c) Neither Parent nor Merger Sub is a party to any agreement to indemnify any Person against a claim of infringement of or misappropriation by any Parent Intellectual Property.

4.17 Loans .

(a) Each Loan payable to Parent, Merger Sub or their respective Subsidiaries (i) is evidenced by Loan Documentation that is true, genuine and what it purports to be and (ii) represents the valid and legally binding obligation of the Obligor thereunder, and is enforceable against the Obligor in accordance with its terms, subject to the Enforceability Exceptions.

(b) All Loans as of the date hereof by Parent, Merger Sub and their respective Subsidiaries, including any Loan by Parent, Merger Sub and their respective Subsidiaries to any directors, executive officers and principal shareholders (as such terms are defined in Regulation O of the Federal Reserve Board (12 C.F.R. Part 215)) of Parent, Merger Sub and their respective Subsidiaries, are and were originated in compliance in all material respects with all applicable Laws.

(c) Each Loan payable to Parent, Merger Sub and their respective Subsidiaries (i) was originated or purchased by Parent, Merger Sub and their respective Subsidiaries and its principal balance as shown on Parent’s or Merger Sub’s books and records is true and correct as of the date indicated therein, (ii) contains customary and enforceable provisions such that the rights and remedies of the holder thereof shall be adequate for the practical realization against any collateral therefor and (iii) complies, and at the time the Loan was originated or purchased by Parent, Merger Sub and their respective Subsidiaries complied, including as to the Loan Documentation related thereto, in all material respects, with all applicable requirements of federal, state and local Laws.

(d) With respect to each Loan payable to Parent, Merger Sub and their respective Subsidiaries that is secured, Parent, Merger Sub and their respective Subsidiaries has a valid and enforceable Lien on the collateral described in the Loan Documentation, and each such Lien is assignable and has the priority described in the Loan Documentation (except as may be limited by bankruptcy, insolvency, moratorium, reorganization or similar Laws affecting the rights of creditors generally and except as the availability of equitable remedies may be limited by general principles of equity).

(e) Parent’s allowance for loan losses is, and has been since January 1, 2011, in compliance with Parent’s methodology for determining the adequacy of its allowance for loan losses as well as the standards established by applicable Governmental Entities and the Financial Accounting Standards Board in all material respects.

4.18 Environmental Laws . Parent, Merger Sub and their respective Subsidiaries are in material compliance with all Environmental Laws. To the Knowledge of Parent, Merger Sub and their respective Subsidiaries, there has been no release or threatened release of any hazardous, toxic, radioactive or dangerous materials or other materials regulated under Environmental Laws in, on, under or affecting any property owned or operated by Parent, Merger Sub or any of their respective Subsidiaries or during the time of ownership or operation, any property formerly owned or operated by Parent, Merger Sub or any of their respective Subsidiaries.

4.19 Derivative Instruments. All Derivative Transactions: (i) were entered into in the ordinary course of business and in accordance with prudent banking practice and applicable Law and with counterparties believed to be financially responsible at the time; (ii) are legal, valid and binding obligations of Parent, Merger Sub, Parent Bank or their respective Subsidiaries and, to the Knowledge of Parent, each of the counterparties thereto; and (iii) are in full force and effect and enforceable in accordance with their terms (except as enforcement may be limited by the Enforceability Exceptions). Neither Parent, Merger Sub, Parent Bank nor their respective Subsidiaries nor, to the Knowledge of Parent, the counterparties to all such Derivative Transactions, is in material breach, violation or default of any of its obligations under any Derivative Transaction. The financial position of Parent, Merger Sub, Parent Bank or their respective Subsidiaries on a consolidated basis under or with respect to each such Derivative Transaction has been reflected in its books and records and the books and records of such Subsidiaries in accordance with GAAP consistently applied.

4.20 Related Party Transactions . There are no agreements, contracts, plans, arrangements or other transactions between Parent or any of its Subsidiaries, on the one hand, and any (i) officer or director of Parent or any of its Subsidiaries, (ii) record or beneficial owner of five percent (5%) or more of the voting securities of Parent, (iii) Affiliate or family member of any such officer, director or record or beneficial owner or (iv) any other affiliate of Parent, on the other hand, except those of a type available to non-Affiliates of Parent generally and compensation or benefit arrangements with officers and directors.

4.21 Available Funds . Parent and Merger Sub have and will have access prior to and at the Closing, sufficient funds to consummate the Merger and the other transactions contemplated hereby on the terms and subject to the conditions contemplated hereby.

4.22 Broker’s Fees . Except for Keefe, Bruyette & Woods, Inc., neither Parent, Merger Sub, Parent Bank nor any of their respective Subsidiaries has employed any broker or finder or incurred any liability for any broker’s fees, commissions or finder’s fees in connection with the transactions contemplated by this Agreement.

4.23 Ownership of Shares. Except for the Voting and Support Agreements and transactions contemplated therein, Parent, Merger Sub and their respective Subsidiaries do not beneficially own (within the meaning of Section 13 of the Exchange Act and the rules and regulations promulgated thereunder) any shares of Company Common Stock, and Parent and Merger Sub are not a party to, and prior to the Effective Time, Parent and Merger Sub will not become a party to, any contract, arrangement or understanding (other than this Agreement) for the purpose of acquiring, holding, voting or disposing of any shares of Company Common Stock.

4.24 Access to Information, Disclaimer . Each of Parent and Merger Sub acknowledges and agrees that it (a) has had an opportunity to discuss the business of Company and its Subsidiaries with the management of Company, (b) has had reasonable access to (i) the books and records of Company and its Subsidiaries and (ii) the electronic dataroom maintained by Company for purposes of the transactions contemplated by this Agreement, (c) has been afforded the opportunity to ask questions of and receive answers from officers of Company and (d) has conducted its own independent investigation of Company and its Subsidiaries, their respective businesses and the transactions contemplated hereby, and has not relied on any representation, warranty or other statement by any person on behalf of Company or any of its Subsidiaries, other than the representations and warranties of Company expressly contained in Article III of this Agreement. Each of Parent and Merger Sub acknowledges that Company makes no representations or warranties as to any matter whatsoever except as expressly set forth in Article III, including with respect to any information furnished,

disclosed or made available to Parent, Merger Sub, or their respective representatives in the course of their due diligence investigation of Company and the negotiation of this Agreement, or otherwise in connection with the transactions contemplated hereby. The representations and warranties set forth in Article III are made solely by Company, and no representative of Company shall have any responsibility or liability related thereto. Except for the representations and warranties in this Article IV, none of Parent, Merger Sub or any other Person makes any express or implied representation or warranty with respect to Parent, Merger, or their respective businesses, operations, assets, liabilities, conditions (financial or otherwise) or prospects, and Parent and Merger Sub hereby disclaim any such other representations or warranties, including with respect to any financial projection, forecast, estimate, budget or prospective information relating to Parent, any of its Subsidiaries or their respective businesses or any oral or written information presented to Company or any of Company’s Affiliates or representatives in the course of their due diligence investigation of Parent, the negotiation of this Agreement or in the course of the transactions contemplated hereby.

ARTICLE V

COVENANTS RELATING TO CONDUCT OF BUSINESS

5.1 Conduct of Business of Company Prior to the Effective Time. During the period from the date of this Agreement to the earlier of the Effective Time or the termination of this Agreement in accordance with Article VIII, except as expressly contemplated or permitted by this Agreement, (a) Company shall, and shall cause each of its Subsidiaries to, (i) conduct its business in the usual, regular and ordinary course consistent with past practice, and (ii) use commercially reasonable efforts to maintain and preserve intact its business organization, rights, franchises and other authorizations issued by Governmental Entities and its current relationships with its customers, regulators, employees and other Persons with which it has business or other relationships and (b) each of Company and Parent shall, and shall cause each of its respective Subsidiaries to, take no action that is intended to or would reasonably be expected to adversely affect or materially delay the ability of either Company or Parent to obtain any necessary approvals of any Regulatory Agency or other Governmental Entity required for the transactions contemplated hereby or to perform its covenants and agreements under this Agreement or to consummate the transactions contemplated hereby.

5.2 Forbearances of Company . During the period from the date of this Agreement to the Effective Time, except as set forth in Section 5.2 of the Disclosure Schedule or as expressly required by this Agreement, Company shall not, and shall not permit any of its Subsidiaries to, do any of the following, without the prior written consent of Parent:

(a) (i) create or incur any indebtedness for borrowed money (other than (1) acceptance of deposits, (2) purchases of Federal funds, (3) Federal Home Loan Bank borrowings of no more than $25,000,000 in the aggregate and with maturity dates of no more than five (5) years, which are used solely to fund new loans, (4) sales of certificates of deposit, (5) issuances of commercial paper, (6) entering into repurchase agreements, and (7) indebtedness with maturities of less than three (3) months to replace expiring indebtedness, each in the ordinary course of business consistent with past practice) or (ii) assume, guarantee, endorse or otherwise as an accommodation become responsible for the obligations of any other individual, corporation or other entity, except, in the case of this clause (ii), in connection with (x) issuances of letters of credit or similar facilities in the ordinary course of business and (y) presentation of items for collection (e.g., personal or business checks) in the ordinary course of business consistent with past practice or in connection with indebtedness incurred pursuant to clause (i) above; provided that Company shall consult with Parent in good faith with respect to any sales of brokered or internet certificates of deposit with a term that exceeds six (6) months;

(b) (i) adjust, split, combine or reclassify any capital stock or other equity interest, (ii) set any record or payment dates for the payment of any dividends or other distributions on its capital stock or other equity interest or make, declare or pay any dividend or other distribution (except for dividends paid in the ordinary course of business by any direct or indirect wholly owned Company Subsidiary to Company or any other direct or indirect wholly owned Company Subsidiary) or make any other distribution on any shares of its capital stock or other equity interest or redeem, purchase or otherwise acquire any securities or obligations convertible into or exchangeable for any shares of its capital stock or other equity interest, provided that Company may (to the extent legally and contractually permitted to do so), but shall not be obligated to, declare and pay regular cash dividends on the shares of Company Common Stock in an amount not in excess of $.05 per share per quarter; provided further , that the parties shall cooperate in selecting the Effective Time to ensure that, with respect to the period in which the Effective Time occurs, the holders of Company Common Stock do not become entitled to receive both a dividend in respect of their Company Common Stock and a dividend in respect of Parent Common Stock or fail to be entitled to receive any dividend, (iii) grant any stock appreciation rights, options, restricted stock, restricted stock units, awards based on the value of Company’s capital stock or other equity-based compensation or grant to any individual, corporation or other entity any right to acquire any shares of its capital stock, (iv) issue or commit to issue any additional shares of capital stock of Company or sell, lease, transfer, mortgage, encumber or otherwise dispose of any capital stock in any Company Subsidiary, other than in connection with the issuance of shares of Company Common Stock upon the exercise of Company Options outstanding as of the date hereof, or (v) enter into any agreement, understanding or arrangement with respect to the sale or voting of its capital stock, except with respect to the Mergers or the other transactions contemplated by this Agreement;

(c) sell, lease, transfer, mortgage, encumber or otherwise dispose of any of its properties or assets to any Person other than a direct or indirect wholly owned Company Subsidiary, except (i) subject to Section 5.2(k), sales of Loans, Loan participations and sales of investment securities in the ordinary course of business consistent with past practice to third parties who are not Affiliates of Company, (ii) as expressly required by contracts or agreements in force at the date of this Agreement that are set forth in Section 5.2(c) of the Disclosure Schedule and (iii) the sales of other real estate owned up to $500,000 for any single property in the ordinary course of business;

(e) except as required under applicable Law or the terms of any Company Benefit Plan existing as of the date hereof, (i) (A) hire, transfer or promote any employee of Company or any of its Subsidiaries (or with respect to hiring, who will become an employee of Company or any of its Subsidiaries), who has (or with respect to hiring, will have) target annual compensation of $100,000 or more, except for merit-based promotions of employees or (B) terminate the employment of any employee who has target annual compensation of $100,000 or more other than a termination of employment for cause in the ordinary course of business consistent with past practice, (ii) enter into, adopt, amend or terminate any employment, bonus, severance, change-of-control or retirement contract or plan, (iii) enter into, adopt, amend or terminate, commence participation in, or agree to enter into, adopt or terminate or commence participation in, any employee benefit plan, program or policy for the benefit or welfare of any current or former employee, officer, director or consultant of Company or any of its Subsidiaries, (iv) amend any employee benefit plan, program or policy for the benefit or welfare of any current or former employee, officer, director or consultant of

Company or any of its Subsidiaries in a manner that would result in any increase in cost to Parent, Company or any of their respective Subsidiaries, other than amendments required to comply with applicable Law and de minimis amendments in the ordinary course of business consistent with past practice, (v) increase or agree to increase the compensation or benefits payable to any such individual (including the payment of any amounts to any such individual not otherwise due), (vi) enter into any new, amend or commence participation in any existing collective bargaining agreement or similar agreement with respect to Company or any of its Subsidiaries, (vii) cause the funding of any rabbi trust or similar arrangement or take any action to fund or in any other way secure the payment of compensation or benefits under any Company Benefit Plan or (viii) grant any awards or, except as contemplated by this Agreement, accelerate the vesting of or lapsing of restrictions with respect to any stock-based compensation or other long-term incentive compensation under any Company Benefit Plans, except for such actions with respect to any Company Benefit Plans in the ordinary course of business consistent with past practice;

(f) (i) settle any claim, action or proceeding other than claims, actions or proceedings in the ordinary course of business consistent with past practice involving solely money damages not in excess of $100,000 individually or $200,000 in the aggregate, or waive, compromise, assign, cancel or release any material rights or claims or (ii) agree or consent to the issuance of any injunction, decree, order or judgment restricting or otherwise affecting its business or operations;

(g) pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than, subject to Section 5.2(f), in the ordinary course of business consistent with past practice;

(h)

(i) (i) make any change in accounting methods or systems of internal accounting controls (or the manner in which it accrues for liabilities), except as required by Regulatory Agencies or by changes in GAAP as concurred in by KPMG LLP, its independent auditors, or (ii) except as may be required by GAAP and in the ordinary course of business consistent with past practice, revalue in any material respect any of its assets, including writing-off notes or accounts receivable;

(j) make, change or revoke any Tax election, change an annual Tax accounting period, adopt or change any Tax accounting method, file any amended Tax Return, enter into any closing agreement with respect to Taxes, or settle any Tax claim, audit, assessment or dispute or surrender any right to claim a refund of Taxes, in each case except in the ordinary course of business or consistent with past practice;

(k) adopt or implement any amendment to its charter or any changes to its bylaws or comparable organizational documents or take any board action under Title 3, Subtitle 8 of the MGCL;

(l) (i) materially restructure or materially change its investment securities portfolio or its gap position, through purchases, sales or otherwise, or the manner in which the portfolio is classified or reported, (ii) invest in any mortgage-backed or mortgage related securities which would be considered “high-risk” securities under applicable regulatory pronouncements or (iii) without previously notifying and consulting with Parent (through Parent’s Treasurer or such other representative as may be designated by Parent), purchase or otherwise acquire any debt security with a remaining term as of the date of such purchase or acquisition of greater than fifteen (15) years for Company’s own account or any Company Subsidiary’s own account;

(m) enter into, modify, amend or terminate any contract of the sort required to be disclosed pursuant to Section 3.14, other than in the ordinary course of business consistent with past practice; provided

that in no event shall Company or any Company Subsidiary enter into, modify, amend or terminate any contract of the sort required to be disclosed pursuant to Section 3.14(a);

(n) other than as determined to be necessary or advisable by Company in the good faith exercise of its discretion based on changes in market conditions, change in any material respect its credit policies and collateral eligibility requirements and standards;

(o) fail to use commercially reasonable efforts to take any action that is required by a Company Regulatory Agreement, or take any action that violates a Company Regulatory Agreement;

(p) except as required by applicable Law, regulation or policies imposed by any Governmental Entity, enter into any new line of business or change in any material respect its lending, investment, underwriting, risk and asset liability management, interest rate or fee pricing with respect to depository accounts, hedging and other material banking and operating policies or practices, including policies and practices with respect to underwriting, pricing, originating, acquiring, selling, servicing, or buying or selling rights to service, Loans;

(q) permit the commencement of any construction of new structures or facilities upon, or purchase or lease any real property in respect of any branch or other facility, or file any application, or otherwise take any action, to establish, relocate or terminate the operation of any banking office of Company or any Company Subsidiary;

(r) make, or commit to make, any material capital expenditures other than as disclosed in Company’s capital expenditure budget set forth in Section 5.2(q) of the Disclosure Schedule;

(s) without previously notifying and consulting with Parent (through Parent’s Chief Credit Officer, Chief Executive Officer or such other representative as may be designated by Parent), (i) renew or extend an existing commitment, except to the extent approved by Company and committed to, in each case prior to the date hereof and set forth in Section 5.2(r) of the Disclosure Schedule, for any Loan relationship having total credit exposure to the applicable borrower, as calculated for applicable loan-to-one borrower regulatory limitations, in excess of $2,000,000, or (ii) make or acquire any Loan or issue a commitment (or amend, renew, restructure or modify in any material respect any existing Loan relationship), that would result in total credit exposure to the applicable borrower (and its Affiliates), as calculated for applicable loan-to-one borrower regulatory limitations, in excess of $1,000,000;

(t) take any action that is intended to, would or would be reasonably likely to result in any of the conditions set forth in Article VII not being satisfied or prevent or materially delay the consummation of the transactions contemplated hereby, except, in every case, as may be required by applicable Law;

(u) knowingly take any action, or fail to take any action, which action or failure to act prevents or impedes, or could reasonably be expected to prevent or impede, the Mergers from qualifying as a “reorganization” within the meaning of Section 368(a) of the Code; or

(v) agree to, or make any commitment to, take, or adopt any resolutions of the board of directors of Company in support of, any of the actions prohibited by this Section 5.2.

5.3 Forbearances of Parent . During the period from the date of this Agreement to the Effective Time, except as set forth in Section 5.3 of the Parent Disclosure Schedule, as expressly required by this Agreement or as required by Law, Parent shall not, and shall not permit any of its Subsidiaries to, do any of the following, without the prior written consent of Company:

(a) amend its articles of incorporation or bylaws or similar governing documents of any of Parent Bank or Merger Sub in a manner that would materially and adversely affect the economic benefits of the First Merger to the holders of Company Common Stock;

(b) take any action that is intended to, would or would be reasonably likely to result in any of the conditions set forth in Article VII not being satisfied or prevent or materially delay the consummation of the transactions contemplated hereby, except, in every case, as may be required by applicable Law;

(c) knowingly take any action, or fail to take any action, which action or failure to act prevents or impedes, or could reasonably be expected to prevent or impede, the Mergers from qualifying as a “reorganization” within the meaning of Section 368(a) of the Code;

(d) (i) acquire direct or indirect control over any business or Corporate Entity, whether by stock purchase, merger, consolidation or otherwise, or (ii) make any other investment either by purchase of stock or securities, contributions to capital, property transfers or purchase of any property or assets of any other Person, except, in either instance, (x) in connection with a foreclosure of collateral or conveyance of such collateral in lieu of foreclosure taken in connection with collection of a Loan in the ordinary course of business consistent with past practice and with respect to Loans made to third parties who are not Affiliates of Parent, or (y) if such transaction, together with all other such transactions, is not material to it and its Subsidiaries, taken as a whole, and would not reasonably be expected to present a material risk that the Closing Date will be materially delayed or that the Regulatory Approvals will be more difficult to obtain;

(e) with respect to it, Parent Bank or Merger Sub, adopt or enter into a plan of liquidation or dissolution; or

(f) agree to or make any commitment to, take, or adopt any resolutions of the board of directors of Parent in support of, any of the actions prohibited by this Section 5.3.

ARTICLE VI

ADDITIONAL AGREEMENTS

6.1 Regulatory Matters .

(a) Each of Parent and Company shall, and shall cause its Subsidiaries to, use their respective reasonable best efforts to:

i. take, or cause to be taken, and assist and cooperate with the other party in taking, all actions necessary, proper or advisable to comply promptly with all legal requirements with respect to the transactions contemplated hereby, including obtaining any third-party consent or waiver that may be required to be obtained in connection with the transactions contemplated hereby, and, subject to the conditions set forth in Article VII, to consummate the transactions contemplated hereby (including actions required in order to effect the Bank Merger immediately after the Effective Time and to continue any contract or agreement of Company or its Subsidiaries following the Closing or

to avoid any penalty or other fee under such contracts and agreements, in each case arising in connection with the transactions contemplated hereby); and

ii. obtain (and assist and cooperate with the other party in obtaining) any action, nonaction, permit, consent, authorization, order, clearance, waiver or approval of, or any exemption by, any Regulatory Agency or other Governmental Entity that is required or advisable in connection with the transactions contemplated by this Agreement, including the Mergers and the Bank Merger (collectively, the “ Regulatory Approvals ”).

The parties hereto shall cooperate with each other and prepare and file, as promptly as possible after the date hereof, all necessary documentation, and effect all applications, notices, petitions and filings, to obtain as promptly as practicable all actions, nonactions, permits, consents, authorizations, orders, clearances, waivers or approvals of all third parties and Regulatory Agencies or other Governmental Entities that are necessary or advisable to consummate the transactions contemplated by this Agreement, including the Regulatory Approvals. Each of Parent and Company shall use their commercially reasonable efforts to resolve any objections that may be asserted by any Governmental Entity with respect to this Agreement or the transactions contemplated by this Agreement. Notwithstanding anything set forth in this Agreement, under no circumstances shall Parent be required, and Company and its Subsidiaries shall not be permitted (without Parent’s written consent in its sole discretion), to take any action, or commit to take any action, or agree to any condition or restriction, involving Parent, Company or any of their respective Subsidiaries pursuant to this Section 6.1 or otherwise in connection with obtaining the foregoing actions, nonactions, permits, consents, authorizations, orders, clearances, waivers or approvals, that would have, or would be reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on Parent and its Subsidiaries, taken as a whole, or Company and its Subsidiaries, taken as a whole, in each case measured on a scale relative to Company and its Subsidiaries taken as a whole (including, for the avoidance of doubt, any determination by a Regulatory Agency or other Governmental Entity that the Bank Merger may not be consummated as contemplated herein (and without material on-going conditions or restrictions) as of and following the consummation of the Bank Merger, a “ Materially Burdensome Regulatory Condition ”); provided that , if requested by Parent, then Company and its Subsidiaries will take or commit to take any such action, or agree to any such condition or restriction, so long as such action, commitment, agreement, condition or restriction is binding on Company and its Subsidiaries only subsequent and subject to the Closing.

(b) Subject to applicable Law relating to the exchange of information, Parent and Company shall, upon request, furnish each other with all information concerning Parent, Company and their respective Subsidiaries, directors, officers and stockholders and such other matters as may be reasonably necessary in connection with any statement, filing, notice or application made by or on behalf of Parent, Company or any of their respective Subsidiaries to any Governmental Entity in connection with the transactions contemplated by this Agreement. In exercising the foregoing right, each of the parties hereto shall act reasonably and as promptly as practicable.

(c) Subject to applicable Law (including applicable Law relating to the exchange of information), Company and Parent shall consult with and keep each other apprised of the status of matters relating to the completion of the transactions contemplated by this Agreement. Without limiting the generality of the foregoing, subject to applicable Law (i) Company and Parent shall promptly furnish each other with copies of nonconfidential notices or other communications received by Company, Parent or any of their respective Subsidiaries (or written summaries of communications received orally) from any third party or Governmental Entity with respect to the transactions contemplated by this Agreement, which communications may be redacted to address reasonable privilege or confidentiality concerns, (ii) Parent shall provide Company a reasonable opportunity to review in advance any proposed nonconfidential communication to, including

any filings with or other nonconfidential written materials submitted to, any Governmental Entity and (iii) Parent shall consider in good faith Company’s views with respect to, and confer in good faith with Company to resolve, any disagreement as to strategy with respect to any nonconfidential communication by Company or any of its Subsidiaries with any Governmental Entity or third party relating to the transactions contemplated by this Agreement. Company and Parent shall use their respective reasonable best efforts to promptly notify the other party of any meeting or substantive discussion, either in person or by telephone, with any Governmental Entity in connection with the proposed transactions. Any such disclosures may be made on an outside counsel-only basis to the extent required under applicable Law.

6.2 Access to Information.

(a) Subject to the Confidentiality Agreement and applicable Law, Company agrees to provide Parent and its Representatives and Parent agrees to provide Company and its Representatives, from time to time prior to the Effective Time, such information as one party shall reasonably request with respect to other party and its Subsidiaries and their respective businesses, financial conditions and operations and such access to the properties, books and records and personnel of the other party and its Subsidiaries as the requesting party shall reasonably request, which access shall occur during normal business hours and shall be conducted in such manner as not to interfere unreasonably with the conduct of the business of the other party or its Subsidiaries. Without limiting the foregoing, as soon as reasonably practicable after they become available, but in no event more than 15 days after the end of each calendar month ending after the date hereof, Company shall furnish to Parent (i) consolidated financial statements (including balance sheets, statements of operations and stockholders’ equity) of Company or (if requested by Parent prior to the end of such calendar month) any of its Subsidiaries as of and for such month then ended, (ii) internal management reports showing actual financial performance against plan and previous period and (iii) to the extent permitted by applicable Law, any reports provided to the board of directors of Company or any committee thereof relating to the financial performance and risk management of Company or any of its Subsidiaries. To the extent permitted by applicable Law, each party shall be entitled to have at least one observer present at each meeting of the boards of directors and their respective committees of the other party and its Subsidiaries, except to the extent the discussions of such boards and committees relate to this Agreement and the transactions contemplated hereby.

(b) Parent and Company shall comply with, and shall cause their respective Representatives, directors, officers and employees to comply with, all of their respective obligations under the Confidentiality Agreement, which shall survive the termination of this Agreement in accordance with the terms set forth therein.

6.3 SEC Filings and Stockholder Approval .

(a) Subject to the terms of this Agreement, Company shall take all action necessary in accordance with the MGCL, the Company Charter and the Company Bylaws, and the rules and regulations of the NASDAQ and applicable Law, to duly call, give notice of, convene and hold a meeting of stockholders of Company entitled to notice of and vote at the meeting as promptly as practicable for the purpose of obtaining the Requisite Stockholder Approval (such meeting or any adjournment or postponement thereof, the “ Company Stockholders Meeting ”). Except to the extent that the board of directors of Company shall have effected a Company Adverse Recommendation Change in compliance with Section 6.9 of this Agreement, or if this Agreement has been terminated, the board of directors of Company shall (i) recommend to Company’s stockholders the approval of the First Merger (the “ Company Board Recommendation ”) and (ii) include the Company Board Recommendation in the Joint Proxy Statement. Notwithstanding any Company Adverse Recommendation Change, Company shall solicit and use its reasonable best efforts to

obtain the Requisite Stockholder Approval. Notwithstanding anything contained herein to the contrary, Company shall not be required to hold the Company Stockholders Meeting if this Agreement is terminated before the Company Stockholders Meeting is held.

(b) Parent shall take all action necessary in accordance with the TBOC, its articles of incorporation and bylaws, and the rules and regulations of the NASDAQ and applicable Law, to duly call, give notice of, convene and hold a meeting of stockholders of the Parent entitled to vote at the meeting as promptly as practicable for the purpose of obtaining the Parent Stockholder Approval (such meeting or any adjournment or postponement thereof, the “ Parent Stockholders Meeting ”). The board of directors of Parent shall (i) recommend to Parent’s stockholders the approval of the issuance of the number of shares of Parent Common Stock sufficient to deliver the aggregate Merger Consideration (the “ Parent Board Recommendation ”), (ii) include the Parent Board Recommendation in the Joint Proxy Statement and (iii) solicit and use its reasonable best efforts to obtain the Parent Stockholder Approval. Notwithstanding anything contained herein to the contrary, Parent shall not be required to hold the Parent Stockholders Meeting if this Agreement is terminated before the Parent Stockholders Meeting is held.

(c) Merger Sub and Parent, as the sole stockholder of Merger Sub, shall take all action necessary in accordance with the MGCL and its articles of incorporation and bylaws to approve and effect the consummation of the Mergers.

(d) Company and Parent shall as promptly as practicable prepare and file with the SEC a joint proxy statement relating to the Company Stockholders Meeting and the Parent Stockholders Meeting (the “ Joint Proxy Statement ”). Company and Parent shall as promptly as practicable prepare and Parent shall file with the SEC a registration statement on Form S-4 (the “ Form S-4 ”) in which the Joint Proxy Statement will be included as a prospectus, and Parent and Company shall use their respective reasonable best efforts to cause the Form S-4 to be declared effective by the SEC as promptly as practicable after filing. The parties shall notify each other promptly of the receipt of any comments from the SEC or its staff and of any request by the SEC or its staff for amendments or supplements to the Joint Proxy Statement or the Form S-4 or for additional information and shall supply each other with copies of all written correspondence between such party or any of its Representatives, on the one hand, and the SEC or its staff, on the other hand, with respect to the Joint Proxy Statement, the Form S-4 or the Mergers. If, at any time prior to the receipt of the Requisite Stockholder Approval and the Parent Stockholder Approval, any event occurs with respect to Company, Parent or any of their respective Subsidiaries, or any change occurs with respect to other information supplied by a party for inclusion in the Joint Proxy Statement or the Form S-4, which is required to be described in an amendment or supplement to the Joint Proxy Statement or the Form S-4, such party shall promptly notify the other party of such event, and Company and Parent shall cooperate in the prompt filing with the SEC of any necessary amendment or supplement to the Joint Proxy Statement and the Form S-4 and, to the extent required by applicable Law, in disseminating the information contained in such amendment or supplement to Company’s and Parent’s stockholders.

6.4 Public Disclosure . Parent and Company agree that the press release announcing the execution and delivery of this Agreement shall be a joint release of Parent and Company. Thereafter, Parent and Company shall consult with and provide each other the reasonable notice of any press release or other public (or non-confidential) statement or comment prior to the issuance of such press release or such other statement or comment relating to this Agreement or the transactions contemplated herein and shall not issue any such press release or such other statement or comment prior to such notice except as may be required by applicable Law or rules of, or listing obligations under, an applicable stock exchange.

6.5 Employee Benefit Matters .

(a) (i) If the Closing Date occurs on or before October 15, 2014, from the Closing Date through December 31, 2014 (the “ Continuation Period ”), Parent shall maintain or cause to be maintained life insurance, accidental death and dismemberment (“ AD&D ”), short and long term disability, long-term care, medical, vision and dental benefit plans for the benefit of employees (as a group) who are actively employed by Company and its Subsidiaries on the Closing Date and continue to be actively employed after the Effective Time, for so long as they continue to be so actively employed (“ Covered Employees ”) that provide life insurance, AD&D, short and long term disability, medical, vision and dental benefits (while a Covered Employee is employed during the Continuation Period) that, in the aggregate, provide benefits that are no less favorable than the short and long term disability, long-term care, life insurance, AD&D, medical, vision and dental benefits that are generally made available to similarly situated employees of Company and its Subsidiaries immediately prior to the Closing Date.

(ii) If the Closing Date occurs after October 15, 2014, Parent shall maintain benefits during the Continuation Period, as set forth in (i) above and, in addition, for the period from January 1, 2015 through December 31, 2015, Parent shall maintain or cause to be maintained medical and dental benefit plans for the benefit of Covered Employees during this subsequent period that are substantially similar to the medical and dental plans generally made available to similarly situated employees of Company and its Subsidiaries immediately prior to the Closing Date. Parent shall provide all other benefits, at its discretion, under plans offered to employees of Parent and its Subsidiaries (other than Company). With respect to any health care plan of Parent or any of its Subsidiaries (other than Company and its Subsidiaries) in which any Covered Employee is eligible to participate for the plan year in which such Covered Employee is first eligible to participate, Parent shall use commercially reasonable efforts to cause any preexisting condition limitations or eligibility waiting periods (applicable prior to January 1, 2016) under such Parent or Subsidiary plan to be waived with respect to such Covered Employee to the extent that such limitation would have been waived or satisfied under the Company Benefit Plan in which such Covered Employee participated immediately prior to the Effective Time.

(b) During the period beginning on the Closing Date and ending on December 31, 2015, each Covered Employee shall, subject to meeting the applicable eligibility requirements, be eligible to receive benefits upon qualifying terminations of employment that are consistent with the terms of the OmniAmerican Bank Severance Pay Plan and Summary Plan Description (the “ Severance Plan ”), as in effect immediately prior to the Closing Date; provided , however , that any Covered Employees who are eligible to receive severance benefits, change in control benefits or any enhanced payments pursuant to an individual employment arrangement, change in control arrangement or deferred compensation plan shall not be eligible to receive severance benefits under Severance Plan.

(c) Company shall take all actions necessary to terminate, effective immediately prior to the Effective Time, the OmniAmerican Employee Stock Ownership Plan (the “ ESOP ”). Following receipt of a favorable determination letter from the IRS confirming that the termination of the ESOP did not adversely affect the ESOP’s qualification for federal tax purposes, the Covered Employees shall be permitted to roll any eligible rollover distributions from the ESOP into another cash or deferred arrangement within the meaning of Section 401(k) sponsored by Parent or its Subsidiaries and in which the Covered Employees are eligible (the “ Parent 401(k) Plan ”), provided that shares of Parent Common Stock shall only be permitted to be rolled over in kind into the Parent 401(k) Plan if such plan maintains a Parent Common Stock fund.

(d) Company shall take all actions necessary to terminate, effective immediately prior to the Effective Time, the OmniAmerican 401(k) Profit Sharing Plan (the “OmniAmerican 401(k) Plan”). As soon as administratively feasible after the Closing Date, the Covered Employees shall be eligible to participate in the Parent 401(k) Plan on the same terms and conditions applicable to employees of Parent or any of its Subsidiaries. Following receipt of a favorable determination letter from the IRS confirming that the termination of the OmniAmerican 401(k) Plan did not adversely affect such plan’s qualification for federal tax purposes, Covered Employees shall be permitted to roll any eligible rollover distributions from the OmniAmerican 401(k) Plan into the Parent 401(k) Plan. In addition, Parent shall take any and all necessary action, to the extent allowable by Law to permit a Covered Employee with an outstanding loan under the OmniAmerican 401(k)Plan, to rollover such outstanding loan balance to the Parent 401(k) Plan, provided , however , that the Covered Employee may transfer such loan only if such loan is acceptable to the Parent 401(k) Plan and such Covered Employee elects to rollover his or her entire account balance under the OmniAmerican 401(k) Plan to the Parent 401(k) Plan.

(e) In the event that the Closing Date occurs prior to the payment of the Covered Employees’ bonuses in respect of the 2014 year, Parent agrees that the Covered Employees shall be eligible to be awarded bonuses with respect to the 2014 year, taking into account Company’s performance for the 2014 performance year, the terms of Company’s applicable bonus plan, and Company’s bonus allocation practice in the ordinary course of business; provided that the Company shall have accrued for any bonuses earned prior to the Effective Time. During the period beginning on the Closing Date and ending on December 31, 2015, Parent agrees to maintain or cause to be maintained the incentive plans identified on Section 6.5(e) of the Disclosure Schedule for the benefit of the Covered Employees participating in such plans as of the Closing Date.

(f) Prior to the Closing Date, Company shall (i) amend its Absences from Work Policy to provide that time accumulated in an employee’s medical reserve account shall be frozen as of the Closing Date and no additional time may be banked after the Closing Date (“ Banked MRA Time ”); provided, however, that if the Closing Date is expected to occur after December 31, 2014, the Company will take all such actions prior to December 31, 2014 such that no additional time is banked after such date, and (ii) notify its employees that (A) Parent will permit Covered Employees to use Banked MRA Time, pursuant to the terms of the Absences from Work Policy, for the period that begins on the Closing Date and ends six (6) months after the Closing Date and (B) any Banked MRA Time will be forfeited six months after the Closing Date. For the calendar year in which the Closing Date occurs, Parent shall continue to maintain or cause to be maintained Company’s Absences from Work Policy (as amended in the manner described in the preceding sentence) that was in effect on the Closing Date. During the Continuation Period, pursuant to the terms of the Absences from Work Policy, Parent shall permit the Covered Employees to continue to accrue paid time off and to use any unused paid-time off granted during the calendar year. Following the Continuation Period, any accrued and unused paid time off will be forfeited.

(g) Parent shall cause any employee benefit plans of Parent and its Subsidiaries in which any Covered Employee is eligible to participate for the plan year in which such Covered Employee is first eligible to participate to recognize the service of such Covered Employee with Company or its Subsidiaries for purposes of eligibility, participation and vesting under such employee benefit plan of Parent or any of its Subsidiaries, to the same extent that such service was recognized immediately prior to the Effective Time under a corresponding Company Benefit Plan in which such Covered Employee was eligible to participate immediately prior to the Effective Time; provided that such recognition of service shall not (i) operate to duplicate any benefits of a Covered Employee with respect to the same period of service, (ii) apply for purposes of any retiree medical plans (iii) apply for purposes of any plan, program or arrangement (A) under

which similarly situated employees of Parent and its Subsidiaries do not receive credit for prior service or (B) that is grandfathered or frozen, either with respect to level of benefits or participation.

(h) With respect to the OmniAmerican Defined Benefit Plan (the “ DB Plan ”), Parent reserves the right to terminate the DB Plan at a time determined by Parent, in it its sole discretion, following the Closing Date.

(i) Without limiting the generality of Section 6.5, the provisions of this Section 6.5 are solely for the benefit of the parties to this Agreement, and no current or former employee or any other individual associated therewith shall be regarded for any purpose as a third-party beneficiary of this Agreement. In no event shall the terms of this Agreement be deemed to (i) establish, amend or modify any Company Benefit Plan or any “employee benefit plan” as defined in Section 3(3) of ERISA, or any other benefit plan, program, agreement or arrangement maintained or sponsored by Parent, Company or any of their respective Affiliates; (ii) alter or limit the ability of Parent or any of its Subsidiaries (including, after the Closing Date, Company and its Subsidiaries) to amend, modify or terminate any Company Benefit Plan, employment agreement or any other benefit or employment plan, program, agreement or arrangement after the Closing Date; or (iii) confer upon any current or former employee, officer, director or consultant any right to employment or continued employment or continued service with the Parent or any of its Subsidiaries (including, following the Closing Date, Company and its Subsidiaries), or constitute or create an employment agreement with any employee.

6.6 Additional Agreements . Subject to the terms and conditions of this Agreement, each of Company and Parent shall cooperate fully with each other and to use reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective, at the time and in the manner contemplated by this Agreement, the Merger. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement (including any merger between a Subsidiary of Parent, on the one hand, and a Subsidiary of Company, on the other) or to vest the Surviving Corporation with full title to all properties, assets, rights, approvals, immunities and franchises of either party to the Merger, the proper officers and directors of each party and their respective Subsidiaries shall, at Parent’s sole expense, take all such necessary action as may be reasonably requested by Parent.

6.7 Indemnification; Directors’ and Officers’ Insurance .

(a) From and after the Effective Time, Parent shall indemnify and hold harmless each person who is now, or who has been at any time before the date of this Agreement, or who becomes at or before the Effective Time, a director or officer of Company, or any persons who are or were serving at the request of Company or any of its Subsidiaries as a director, officer, trustee, fiduciary, employee or agent of another entity (including any Company Employee Benefit Plan) (each, a “ Company Indemnified Party ”) against all judgments, penalties, fines, settlements (which settlement shall require the prior written consent of Parent, which consent shall not be unreasonably withheld) , and reasonable expenses actually incurred (including attorneys’ fees), in connection with any claim, action, suit, proceeding, investigation or other legal proceeding, whether civil, criminal, administrative or investigative (each, a “ Claim ”) arising out of actions or omissions occurring at or prior to the Effective Time which were committed by such Company Indemnified Party (including the Mergers and the other transactions contemplated hereby) or in connection with any appearance as a witness, regardless of whether such Claim is asserted or claimed before, or after, the Effective Time, to the fullest extent permitted under the Company Charter, Company Bylaws, and any agreement between the Company and such Company Indemnified Party, each as in effect on the date hereof. Any

Company Indemnified Party wishing to claim indemnification under Section 6.7(a), upon learning of any Claim, shall promptly after the Effective Time notify Parent thereof.

(b) Parent shall maintain in effect for a period of six (6) years after the Effective Time directors’ and officers’ liability insurance and fiduciary insurance policy ( provided that Parent may substitute therefor (i) policies of at least the same coverage and amounts containing terms and conditions which are substantially no less advantageous or (ii) with the consent of Company given prior to the Effective Time, any other policy) with respect to claims arising from facts, events or actions which occurred prior to the Effective Time and covering persons who are currently covered by such insurance; provided that Parent shall not be obligated to make aggregate annual premium payments for such six (6)-year period in respect of such policy (or coverage replacing such policy) which exceed 250% of the annual premium payments on Company’s current policy in effect as of the date of this Agreement (the “ Maximum Amount ”). If the amount of the premiums necessary to maintain or procure such insurance coverage exceeds the Maximum Amount, Parent shall use its reasonable best efforts to maintain the most advantageous policies of directors’ and officers’ liability insurance obtainable for a premium equal to the Maximum Amount. In lieu of the foregoing, Parent may obtain on or prior to the Effective Time, a six (6)-year “tail” prepaid policy providing equivalent coverage to that described in this Section 6.7(b).

(c) The provisions of this Section 6.7 are intended to be for the benefit of, and shall be enforceable by, each Company Indemnified Party and their respective heirs and representatives.

6.8 Exchange Listing. Parent shall use its reasonable best efforts to list, prior to the Effective Time, on the NASDAQ, subject to official notice of issuance, the shares of Parent Common Stock to be issued pursuant to the First Merger, and Parent shall give all notices and make all filings with the NASDAQ required in connection with the transactions contemplated herein.

6.9 No Solicitation.

(a) Except as specifically permitted in this Section 6.9, Company shall not, and shall cause each of its Subsidiaries and its and their respective officers, directors, employees, agents, investment bankers, financial advisors, attorneys, accountants and other retained representatives (each, a “ Representative ”) not to, directly or indirectly (i) solicit, initiate, assist or knowingly take any other action to facilitate or encourage (including by way of furnishing non-public information), the submission of any Acquisition Proposal or the making of any proposal that could reasonably be expected to lead to any Acquisition Proposal, (ii) enter into, continue or otherwise participate in any discussions or negotiations regarding any Acquisition Proposal, or (iii) approve, recommend, declare advisable or enter into any acquisition agreement, merger agreement, option agreement, joint venture agreement, partnership agreement, letter of intent, term sheet or other similar agreement regarding any Acquisition Proposal or requiring Company to abandon, terminate or breach its obligations hereunder or fail to consummate the Mergers (a “ Company Acquisition Agreement ”).

(b) Subject to Section 6.9(f), the board of directors of Company shall not fail to make at any time required by this Agreement, withdraw, amend, modify or materially qualify, in a manner adverse to Parent or Merger Sub, the Company Board Recommendation, or adopt, approve or publicly recommend an Acquisition Proposal, or make any public statement inconsistent with the Company Board Recommendation, or resolve or agree to take any of the foregoing actions (any of the foregoing, a “ Company Adverse Recommendation Change ”).

(c) As used in this Agreement, “ Acquisition Proposal ” means a proposal or offer from, or indication of interest in making a proposal or offer by, any Person (or group of Persons) other than Parent

or its Subsidiaries, including Merger Sub, relating to, or that is reasonably likely to lead to, any (i) direct or indirect acquisition of assets of Company or its Subsidiaries (including any voting equity interests of Subsidiaries, but excluding sales of assets in the ordinary course of business) equal to twenty percent (20%) or more of the fair market value of Company's consolidated assets or to which twenty percent (20%) or more of Company's net revenues or net income on a consolidated basis are attributable, (ii) direct or indirect acquisition of twenty percent (20%) or more of the voting equity interests of Company, (iii) tender offer or exchange offer that if consummated would result in any Person beneficially owning (within the meaning of Section 13(d) of the Exchange Act) twenty percent (20%) or more of the voting equity interests of Company, (iv) merger, consolidation, other business combination or similar transaction involving Company or any of its Subsidiaries, pursuant to which such Person would own twenty percent (20%) or more of the consolidated assets, net revenues or net income of Company, taken as a whole, or (v) liquidation or dissolution (or the adoption of a plan of liquidation or dissolution) of Company or the declaration or payment of an extraordinary dividend (whether in cash or other property) by Company. As used in this Agreement, “ Superior Proposal ” shall mean a bona fide written Acquisition Proposal that the board of directors of Company reasonably determines in good faith (after consultation with outside legal counsel and Company financial advisor), taking into account all legal, financial, regulatory and other aspects of the proposal and the Person or Persons making the proposal, (x) is more favorable from a financial point of view to the holders of Company Common Stock than the transactions contemplated by this Agreement (taking into account any adjustment to the terms and conditions thereof proposed in writing by Parent in response to any such Acquisition Proposal), and (y) is reasonably likely to be completed on the terms proposed on a timely basis; provided that for purposes of the definition of “Superior Proposal,” references in the term “Acquisition Proposal” to “20%” shall be deemed to be references to “a majority.”

(d) Notwithstanding Section 6.9(a), prior to the receipt of the Requisite Stockholder Approval, the board of directors of Company, directly or indirectly through any Representative, may participate in negotiations or discussions with any third party that has made (and not withdrawn) a bona fide, unsolicited Acquisition Proposal in writing and furnish to such third party information relating to Company or any of its Subsidiaries pursuant to an executed confidentiality agreement on terms no more favorable than those in the Confidentiality Agreement (which confidentiality agreement shall not constitute a Company Acquisition Agreement and a copy of which confidentiality agreement shall be promptly provided for informational purposes only to Parent) if (i) the board of directors of Company determines in good faith, after consultation with outside legal counsel and Company’s financial advisor, that the Acquisition Proposal is reasonably likely to result in a Superior Proposal, (ii) the board of directors of Company determines in good faith, after consultation with outside legal counsel, that the failure to take such action would reasonably be expected to cause the board of directors of Company to be in breach of its fiduciary duties under applicable Law, and (iii) the Company has notified Parent of the receipt of such Acquisition Proposal as provided in Section 6.9(e).

(e) Company shall notify Parent promptly (but in no event later than forty-eight (48) hours) after receipt of any Acquisition Proposal or any material modification of or material amendment to any Acquisition Proposal, or any request for nonpublic information relating to Company or any of its Subsidiaries or for access to the properties, books or records of Company or any of its Subsidiaries by any Person that has made, or to the Knowledge of Company, may be considering making, an Acquisition Proposal (including any request from a third party to release or to waive the confidentiality or the standstill provisions of any agreement to which the Company or any of its Subsidiaries is a party). Such notice to Parent shall be made orally and in writing, and shall indicate the identity of the Person making the Acquisition Proposal or intending to make or considering making an Acquisition Proposal or requesting non-public information or access to the books and records of Company or any of its Subsidiaries, and the material terms of any such Acquisition Proposal or modification or amendment to an Acquisition Proposal; provided that any non-public

information provided to any Person given such access shall have previously been provided to Parent or shall be provided to Parent prior to or concurrently with the time it is provided to such Person. Company shall keep Parent reasonably informed, on a current basis, of any material changes in the status and any material changes or modifications in the terms of any such Acquisition Proposal, indication or request.

(f) Except as set forth in this Section 6.9(f), and subject to Company’s compliance in all material respects with the provisions of this Section 6.9, the board of directors of Company shall not make any Company Adverse Recommendation Change or enter into (or permit any Subsidiary to enter into) any Company Acquisition Agreement. Notwithstanding the foregoing, at any time prior to the receipt of the Requisite Stockholder Approval, if (i) the board of directors of Company determines in good faith (after consultation with outside legal and financial advisors) that an Acquisition Proposal constitutes a Superior Proposal and (ii) the board of directors of Company determines in good faith (after consultation with outside legal counsel) that the failure to take such action would be inconsistent with its fiduciary duties under applicable Law, the board of directors of Company may (x) effect a Company Adverse Recommendation Change in response to the Superior Proposal and/or (y) terminate this Agreement in accordance with Section 8.1(h)(iii) in order to enter into a definitive Company Acquisition Agreement with respect to such Superior Proposal.

(g) Prior to effecting any Company Adverse Recommendation Change or entering into a Company Acquisition Agreement with respect to a Superior Proposal, (i) Company shall notify Parent in writing, at least three Business Days prior to effecting such Company Adverse Recommendation Change or entering into a Company Acquisition Agreement (the “ Notice Period ”), of its intention to effect such Company Adverse Recommendation Change or enter into a Company Acquisition Agreement with respect to a Superior Proposal, which notice shall include the material terms and conditions of any Superior Proposal and the identity of the Person making such proposal (it being understood and agreed that any material amendment to the terms of such Superior Proposal shall require a new Notice Period of at least two Business Days), (ii) during the applicable Notice Period, Company shall negotiate with Parent in good faith (to the extent Parent wishes to negotiate) to make such adjustments to the terms and conditions of this Agreement such that the Superior Proposal ceases to be a Superior Proposal, and (iii) at the end of the Notice Period, Company’s board of directors shall determine in good faith (after consultation with outside legal counsel and financial advisors) that such Superior Proposal has not been withdrawn and continues to constitute a Superior Proposal (taking into account any changes to the terms of this Agreement proposed by Parent).

(h) Company and its Subsidiaries shall immediately cease and cause to be terminated any existing discussions or negotiations with any Persons (other than Parent and its Representatives) conducted heretofore with respect to any of the foregoing, and shall direct all Persons (other than Parent and its Representatives) who have been furnished confidential information regarding Company in connection with the solicitation of or discussions regarding an Acquisition Proposal within the twelve (12) months prior to the date hereof promptly to return or destroy such information. Company agrees not to, and to cause its Subsidiaries not to, release any third party from, and agrees to enforce, the confidentiality and standstill provisions of any agreement to which Company or its Subsidiaries is a party that remains in effect as of the date hereof, and shall immediately take all steps necessary to terminate any approval that may have been heretofore given under any such provisions authorizing any Person to make an Acquisition Proposal; provided that the Company shall not be required to take, or be prohibited from taking, any action otherwise prohibited by this sentence if the board of directors of Company determines in good faith, after consultation with outside legal counsel, that taking such action or failing to take such action, as the case may be, would reasonably be expected to cause the board of directors of Company to be in breach of its fiduciary duties under applicable Law.

(i) Nothing contained herein shall prevent the board of directors of Company from disclosing to Company's stockholders a position contemplated by Rule 14d-9 and Rule 14e-2(a) promulgated under the Exchange Act with regard to an Acquisition Proposal, if Company determines, after consultation with outside legal counsel, that failure to disclose such position would constitute a violation of applicable Law. Any such disclosure (other than solely a “stop, look and listen” communication of the type contemplated by Rule 14d-9(f) under the Exchange Act) shall be deemed to be a Company Adverse Recommendation Change unless the board of directors of Company expressly and concurrently reaffirms the Company Board Recommendation.

6.10 Notification of Certain Actions . Company and Parent shall give prompt notice to the other of any fact, change, event or circumstance known to it that (a) is reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on Company or Parent, respectively, or (b) would cause or constitute a breach of any of its representations, warranties, covenants or agreements contained herein.

6.11 Takeover Provisions . No party shall take any action that would cause the transactions contemplated by this Agreement to be subject to requirements imposed by any Takeover Provision, and each party shall take all necessary steps within its control to exempt (or ensure the continued exemption of) those transactions from, or if necessary challenge the validity or applicability of, any applicable Takeover Provision, as now or hereafter in effect.

6.12 Stockholder Litigation. Company shall control, and Company shall give Parent prompt notice of and the opportunity to participate in the defense of, any litigation brought by stockholders of Company against Company and/or its officers or directors relating to the transactions contemplated by this Agreement; provided that Company shall not settle or offer to settle any claim, action, suit, charge, investigation or proceeding against Company, any of its Subsidiaries or any of their respective directors or officers by any stockholder of Company arising out of or relating to this Agreement or the transactions contemplated by this Agreement without the prior written consent of Parent (not to be unreasonably withheld, conditioned or delayed).

6.13 Merger Sub; Parent Subsidiaries; Company Subsidiaries . Parent shall cause each of Merger Sub and any other applicable Parent Subsidiary to comply with and perform all of its obligations under or relating to this Agreement, including in the case of Merger Sub to consummate the First Merger on the terms and conditions set forth in this Agreement. Company shall cause each of the Company Subsidiaries to comply with and perform all of its obligations under or relating to this Agreement.

6.14 Tax Representation Letters .

(a) Parent shall (i) use its reasonable best efforts to obtain the opinion of counsel referred to in Section 7.2(d) , and (ii) deliver to Alston & Bird LLP, counsel to Parent, and Haynes and Boone, LLP, counsel to Company, tax representation letters, dated as of the effective date of the Form S-4 and the Closing Date, respectively, and signed by an officer of Parent, in form and substance reasonably acceptable to such counsel, containing representations of Parent as shall be reasonably necessary or appropriate to enable Alston & Bird LLP to render an opinion on the effective date of the Form S-4 and on the Closing Date, as described in Section 7.2(d) , respectively, and Haynes and Boone, LLP to render an opinion on the effective date of the Form S-4 and on the Closing Date, as described in Section 7.3(d) , respectively.

(b) Company shall (i) use its reasonable best efforts to obtain the opinion of counsel referred to in Section 7.3(d) , and (ii) deliver to Haynes and Boone, LLP, counsel to Company, and Alston

& Bird LLP, counsel to Parent, tax representation letters, dated as of the effective date of the Form S-4 and the Closing Date, respectively, and signed by an officer of Company, in form and substance reasonably acceptable to such counsel, containing representations of Company as shall be reasonably necessary or appropriate to enable Alston & Bird LLP to render an opinion on the effective date of the Form S-4 and on the Closing Date, as described in Section 7.2(d) , respectively, and Haynes and Boone, LLP to render an opinion on the effective date of the Form S-4 and on the Closing Date, as described in Section 7.3(d) , respectively.

ARTICLE VII

CONDITIONS PRECEDENT

7.1 Conditions to Each Party’s Obligation to Effect the Closing . The respective obligation of each party to effect the Closing shall be subject to the satisfaction or waiver at or prior to the Effective Time of the following conditions:

(a) Stockholder Approvals . The Requisite Stockholder Approval and the Parent Stockholder Approval shall have been obtained.

(b) Regulatory Approvals . All Required Regulatory Approvals shall have been obtained and shall remain in full force and effect or, in the case of waiting periods, shall have expired or been terminated (and in the case of the obligation of Parent to effect the Closing, no such Regulatory Approval shall contain or shall have resulted in, or would reasonably be expected to result in, the imposition of any Materially Burdensome Regulatory Condition).

(c) No Injunctions or Restraints; Illegality . No order, injunction, decree or judgment issued by any court or governmental body or agency of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Mergers or the other transactions contemplated by this Agreement shall be in effect. No Law shall have been enacted, entered, promulgated or enforced by any Governmental Entity which prohibits or makes illegal consummation of the Mergers.

(d) Exchange Listing . The shares of Parent Common Stock to be issued as part of the Merger Consideration upon consummation of the First Merger shall have been authorized for listing on the NASDAQ, subject to official notice of issuance.

(e) Form S-4 . The Form S-4 shall have become effective under the Securities Act and shall not be the subject of any stop order suspending the effectiveness of the Form S-4 nor shall proceedings for that purpose have been threatened.

7.2 Conditions to Obligations of Parent . The obligation of Parent to effect the Closing is also subject to the satisfaction or waiver by Parent at or prior to the Effective Time of the following conditions:

(a) Representations and Warranties . After giving effect to the lead-in to Article III, (i) each of the representations and warranties of Company set forth in Section 3.1, Section 3.2, Section 3.3(a), Section 3.3(b)(i), 3.8(c) and Section 3.26 of the Agreement shall be true and correct in all respects, except for such failures to be true and correct as are de minimis, at and as of the date of this Agreement and at and as of the Closing Date as though made at and as of the Closing Date (unless any such representation or warranty is made only as of a specific date, in which case as of such specific date) and (ii) each of the other representations and warranties of Company set forth in this Agreement shall be true and correct in all respects

(without giving effect to any limitation as to “materiality” or “Material Adverse Effect” set forth therein) at and as of the date of this Agreement and at and as of the Closing Date as though made at and as of the Closing Date (unless any such representation or warranty is made only as of a specific date, in which case as of such specific date), except in the case of the foregoing clause (ii), where the failure to be so true and correct (without giving effect to any limitation as to “materiality” or “Material Adverse Effect” set forth therein), has not had and is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on Company.

(b) Performance of Obligations of Company . Company shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Effective Time.

(c) Officer’s Certificate . Parent shall have received a certificate signed on behalf of Company by its Chief Executive Officer or Chief Financial Officer stating that the conditions specified in Section 7.2(a) and Section 7.2(b) have been satisfied.

(d) Opinion of Tax Counsel . Parent shall have received an opinion from Alston & Bird LLP, counsel to Parent, dated as of the effective date of the Form S-4, satisfying the requirements of item 601 of Regulation S-K under the Securities Act, and as of the Closing Date, to the effect that, on the basis of the facts, representations and assumptions set forth or referred to in such opinion, the Mergers will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. In rendering its opinion, Alston & Bird LLP may require and rely upon representations contained in letters described in Section 6.14.

(e) Material Adverse Effect. No Material Adverse Effect on Company shall have occurred.

(f) FIRPTA Certificate . Company shall deliver to Parent a certificate, under penalties of perjury, stating that Company is not and has not been a United States real property holding corporation, dated as of the Closing Date and in form and substance required under Treasury Regulation Section 1.897-2(h) so that Parent is exempt from withholding any portion of the Merger Consideration thereunder.

7.3 Conditions to Obligations of Company . The obligation of Company to effect the Closing is also subject to the satisfaction or waiver by Company at or prior to the Effective Time of the following conditions:

(a) Representations and Warranties . Each of the representations and warranties of Parent set forth in this Agreement shall be true and correct in all respects (without giving effect to any limitation as to “materiality” or “Material Adverse Effect” set forth therein) at and as of the date of this Agreement and at and as of the Closing Date as though made at and as of the Closing Date (unless any such representation or warranty is made only as of a specific date, in which case as of such specific date), except where the failure to be so true and correct (without giving effect to any limitation as to “materiality” or “Material Adverse Effect” set forth therein), has not had and is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on Parent.

(b) Performance of Obligations of Parent . Parent shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Effective Time.

(c) Officer’s Certificate. Company shall have received a certificate from Parent signed by an authorized officer of Parent stating that the conditions specified in Section 7.3(a) and Section 7.3(b) have been satisfied.

(d) Opinion of Tax Counsel . Company shall have received an opinion from Haynes and Boone, LLP, counsel to Company, dated as of the effective date of the Form S-4, satisfying the requirements of item 601 of Regulation S-K under the Securities Act, and as of the Closing Date, to the effect that, on the basis of the facts, representations and assumptions set forth or referred to in such opinion, the Mergers will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. In rendering its opinion, Haynes and Boone, LLP may require and rely upon representations contained in letters described in Section 6.14. The condition set forth in this Section 7.3(d) shall not be waivable after receipt of the Requisite Stockholder Approval, unless further stockholder approval is obtained with appropriate disclosure.

(e) Material Adverse Effect. No Material Adverse Effect on Parent shall have occurred.

ARTICLE VIII

TERMINATION AND AMENDMENT

8.1 Termination . This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of the matters presented in connection with the First Merger by the stockholders of Company:

(a) by mutual written consent of Company and Parent;

(b) by either Company or Parent, if the Closing shall not have occurred on or before End Date ( provided that the right to terminate this Agreement under this Section 8.1(b) shall not be available to any party if the failure of such party to perform or comply in all material respects with the covenants and agreements of such party set forth in this Agreement shall have been the direct cause of, or resulted directly in, or materially contributed to, the failure of the First Merger to be consummated by the End Date);

(c) by either Company or Parent, (i) if any court of competent jurisdiction or other Governmental Entity shall have issued a judgment, order, injunction, rule or decree, or taken any other action restraining, enjoining or otherwise prohibiting any of the transactions contemplated by this Agreement and such judgment, order, injunction, rule, decree or other action shall have become final and nonappealable or (ii) if either party receives written notice from or is otherwise advised by a Governmental Entity that it will not grant (or intends to rescind or revoke if previously approved) any Regulatory Approval required to consummate the transactions contemplated under this Agreement without imposing a Materially Burdensome Regulatory Condition on Company or Parent (unless in either case the failure of the party seeking to terminate this Agreement to perform or comply in all material respects with the covenants and agreements of such party set forth in this Agreement shall have been the direct cause of, or resulted directly in, or materially contributed to, the issuance of the injunction, prohibition or the failure to obtain such Regulatory Approval or the imposition of the Materially Burdensome Regulatory Condition);

(d) by Company, if Parent or Merger Sub has breached or is in breach of any representation, warranty, covenant or agreement on the part of Parent or Merger Sub contained in this Agreement in any respect, which breach would, individually or together with all such other then uncured breaches by Parent and Merger Sub, constitute grounds for the conditions set forth in Section 7.3(a) or 7.3(b) not to be satisfied on the Closing Date and such breach is not cured prior to the earlier of (i) the End Date and (ii) the thirtieth (30th) Business Day after written notice thereof to Parent or by its nature or timing cannot be cured within such time period; provided that Company shall not have the right to terminate this Agreement pursuant to

this clause (d) if Company is then in material breach of any of its representations, warranties, covenants or agreements set forth in this Agreement;

(e) by Parent, if Company has breached or is in breach of any representation, warranty, covenant or agreement on the part of Company contained in this Agreement in any respect, which breach would, individually or together with all such other than uncured breaches by Company, constitute grounds for the conditions set forth in Section 7.2(a) or 7.2(b) not to be satisfied on the Closing Date and such breach is not cured prior to the earlier of (i) the End Date and (ii) the thirtieth (30th) Business Day after written notice thereof to Company or by its nature or timing cannot be cured within such time period; provided that Parent shall not have the right to terminate this Agreement pursuant to this clause (e) if either Parent or Merger Sub is then in material breach of any of its representations, warranties, covenants or agreements set forth in this Agreement;

(f) by either party, if (i) the Requisite Stockholder Approval shall not have been obtained at the Company Stockholders Meeting or at any adjournment or postponement thereof at which a vote on the approval of the First Merger was taken or (ii) the Parent Stockholder Approval shall not have been obtained at the Parent Stockholders Meeting or at any adjournment or postponement thereof at which a vote on the matters required by this Agreement was taken;

(g) by Parent, if Company has (i) failed to make the Company Board Recommendation at any time required by this Agreement or has made a Company Adverse Recommendation Change, (ii) failed to comply in all material respects with its obligations under Sections 6.3(a) and 6.9, or (iii) approved, recommended or endorsed (or in the case of a tender or exchange offer, failed to recommend rejection thereof within ten Business Days after commencement), or proposed or resolved to recommend or endorse (or in the case of a tender or exchange offer, failed to recommend rejection thereof within ten Business Days after commencement), an Acquisition Proposal involving Company;

(h) by Company, (i) if Parent has failed to make the Parent Board Recommendation or has withdrawn, modified or qualified, or proposed or resolved to withdraw, modify or qualify, such recommendation in a manner adverse to Company, (ii) if Parent has failed to comply in all material respects with its obligations under Section 6.3(b) or (iii) if Company’s board of directors determines to enter into a definitive Company Acquisition Agreement with respect to a Superior Proposal in accordance with Section 6.9(f) ( provided that this Agreement may not be terminated pursuant to this Section 8.1(h)(iii) unless substantially concurrently with the occurrence of such termination the payment required by Section 8.3(b) is made in full to Parent and such definitive Company Acquisition Agreement is entered into with respect to such Superior Proposal); or

8.2 Notice of Termination; Effect of Termination . The party desiring to terminate this Agreement pursuant to this Article VIII (other than pursuant to Section 8.1(a)) shall deliver written notice of such termination to each other party hereto specifying with particularity the reason for such termination, and any such termination in accordance with Article VIII shall be effective immediately upon delivery of such written notice to the other party. In the event of termination of this Agreement pursuant to this Article VIII, no party to this Agreement shall have any liability or further obligation hereunder to the other party hereto, except that (a) Section 6.2(b) (Access to Information (Confidentiality)), Section 8.1 (Termination), Section 8.2 (Effect of Termination), Section 8.3 (Termination Fee), and Article IX (General Provisions) shall survive any termination of this Agreement and (b) notwithstanding anything to the contrary in this Agreement, termination will not relieve a breaching party from liability for fraud or any willful and material breach of any provision of this Agreement.

8.3 Termination Fee .

(a) In the event that this Agreement is terminated

i. by Parent or Company pursuant to Section 8.1(b) or by Parent pursuant to Section 8.1(e) and, after the date hereof but prior to termination of this Agreement pursuant to Section 8.1(b) or, in the case of termination pursuant to Section 8.1(e), prior to the breach giving rise to such right of termination, an Acquisition Proposal has been announced, disclosed, or otherwise communicated or made known (whether or not publicly) to Company’s board of directors or made known generally to Company's stockholders, or any Person shall have announced an intention (whether or not conditional) to make such an Acquisition Proposal, or

ii. by Company or Parent pursuant to Section 8.1(f)(i), and prior to the Company Stockholder Meeting, an Acquisition Proposal has been publicly announced, publicly disclosed or otherwise made known generally to Company’s stockholders, or any Person shall have publicly announced an intention (whether or not conditional) to make such an Acquisition Proposal, and prior to the date that is twelve (12) months after the date of such termination Company consummates an Acquisition Proposal or enters into a Company Acquisition Agreement, then Company shall on the earlier of the date an Acquisition is consummated or any such Company Acquisition Agreement is executed or agreement entered into, as applicable, pay Parent a fee equal to $10,000,000 (the “ Termination Fee ”) by wire transfer of immediately available funds; provided that for purposes of this Section 8.3, each reference to 20% in the definition of “Acquisition Proposal” shall be deemed to be a reference to “a majority.”

(b) In the event this Agreement is terminated by Parent pursuant to Section 8.1(g) or by Company pursuant to Section 8.1(h)(iii), Company shall pay Parent the Termination Fee by wire transfer of immediately available funds to accounts designated by Parent within two (2) Business Days after notice of the termination of this Agreement.

(c) Notwithstanding anything to the contrary in this Agreement, the parties hereby acknowledge that in the event that the Termination Fee becomes payable and is paid by Company pursuant to this Section 8.3, the Termination Fee shall be Parent's and Merger Sub's sole and exclusive remedy for monetary damages under this Agreement, and under no circumstances shall Company be obligated to pay the Termination Fee on more than one occasion.

(d) Company acknowledges that the agreements contained in this Section 8.3 are an integral part of the transactions contemplated by this Agreement, and that, without these agreements, Parent would not enter into this Agreement; accordingly, if Company fails promptly to pay the amount due pursuant to this Section 8.3, and, in order to obtain such payment, Parent commences a suit which results in a judgment against Company for the fee set forth in this Section 8.3 Company shall pay to Parent its fees and expenses (including attorneys’ fees and expenses) in connection with such suit, together with interest on the amount of the fee at a rate per annum equal to the prime rate published in The Wall Street Journal on the date such payment was required to be made.

8.4 Amendmen t. Subject to compliance with applicable Law, this Agreement may be amended by Parent and Company; provided however , after any approval of the transactions contemplated by this Agreement by the stockholders of Company, there may not be, without further approval of such stockholders,

any amendment of this Agreement that requires such further approval under applicable Law; provided further , that this Agreement may not be amended except by an instrument in writing signed on behalf of Parent and Company.

8.5 Extension ; Waiver. At any time prior to the Effective Time, the parties hereto may, to the extent legally allowed, (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (c) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party, but such extension or waiver or failure to exercise any right or to insist on strict compliance with an obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other matter.

ARTICLE IX

GENERAL PROVISIONS

9.1 No Survival of Representations and Warranties and Agreements . None of the representations and warranties set forth in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time. This Section 9.1 shall not limit the survival of any covenant or agreement contained in this Agreement that by its terms applies or is to be performed in whole or in part after the Effective Time.

9.2 Expenses . Except as otherwise expressly provided in this Agreement, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expense.

9.3 Notices . All notices and other communications required or permitted to be given hereunder shall be sent to the party to whom it is to be given and be either delivered personally against receipt, by facsimile, email or other wire transmission, by registered or certified mail (postage prepaid, return receipt requested) or deposited with an express courier (with confirmation) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):

(a) if to Company, to:

OmniAmerican Bancorp, Inc.

1320 South University Drive, Suite 900

Fort Worth, Texas 76107

Attention: Tim Carter

Fax: (817) 367-5271

Email: tim.carter@omniamerican.com

with a copy to:

Haynes and Boone, LLP

201 Main Street, Suite 2200

Fort Worth, Texas 76102

Attention: Brian D. Barnard

Fax: (817) 348-2303

Email: brian.barnard@haynesboone.com

(b) if to Parent or Merger Sub, to:

Southside Bancshares, Inc.

P.O. Box 8444

Tyler, Texas 75711

Attention: Sam Dawson

Fax: (903) 535-4508

Email: sam.dawson@southside.com

with a copy to:

Alston & Bird LLP

1201 West Peachtree Street

Atlanta, Georgia 30309

Attention: Lesley H. Solomon

and David E. Brown, Jr.

Fax: (404) 881-7777

Email: lesley.solomon@alston.com and david.brown@alston.com

All notices and other communications shall be deemed to have been given (i) when received if given in person, (ii) on the date of electronic confirmation of receipt if sent by facsimile, email or other wire transmission, (iii) three (3) Business Days after being deposited in the U.S. mail, certified or registered mail, postage prepaid, or (iv) one (1) Business Day after being deposited with a reputable overnight courier.

9.4 Interpretation . For the purposes of this Agreement, (a) words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other gender as the context requires, (b) the terms “hereof,” “herein,” and “herewith” and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole (including all of the Schedules and Exhibits to this Agreement) and not to any particular provision of this Agreement, and Article, Section, paragraph, Schedule and Exhibit references are to the Articles, Sections, paragraphs, Schedules and Exhibits to this Agreement unless otherwise specified, (c) whenever the words “include,” “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation,” (d) the word “or” shall not be exclusive and (e) all references to any period of days shall be deemed to be to the relevant number of calendar days unless otherwise specified. It is understood and agreed that the specification of any dollar amount in the representations and warranties contained in this Agreement or the inclusion of any specific item in the Disclosure Schedule or the Parent Disclosure Schedule is not intended to imply that such amounts or higher or lower amounts, or the items so included or other items, are or are not material, and neither party shall use the fact of the setting of such amounts or the fact of the inclusion of any such item in the Disclosure Schedule or the Parent Disclosure Schedule in any dispute or controversy between the parties as to whether any obligation, item or matter not described in this Agreement or included in the Disclosure Schedule or the Parent Disclosure Schedule is or is not material for purposes of this Agreement. This Agreement shall not be interpreted or construed to require any Person to take any action, or fail to take any action, if to do so would violate applicable Law.

9.5 Counterparts . This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which together shall be deemed one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the Parties and delivered (by telecopy, electronic

delivery or otherwise) to the other Parties. Signatures to this Agreement transmitted by facsimile transmission, by electronic mail in “portable document form” (“ pdf ”), or by any other electronic means intended to preserve the original graphic and pictorial appearance of a document, will have the same effect as physical delivery of the paper document bearing the original signature.

9.6 Entire Agreement . This Agreement (including the Disclosure Schedule and the Parent Disclosure Schedule, the other Schedules and Exhibits and the other documents and the instruments referred to herein), the Voting and Support Agreements and the Confidentiality Agreement constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof.

9.7 Governing Law; Venue; WAIVER OF JURY TRIAL .

(a) This Agreement shall be governed and construed in accordance with the Laws of the State of Delaware, without regard to any applicable conflicts of law principles thereof that would result in the application of the laws of any other jurisdiction, except to the extent that the laws of the state of Maryland or the state of Texas mandatorily apply to the Mergers or other actions related thereto.

(b) Each party agrees that it will bring any action or proceeding in respect of any claim or dispute arising out of or related to this Agreement or the transactions contemplated hereby exclusively in any federal or state court sitting in the State of Delaware (the “ Delaware Courts ”), and, solely in connection with claims or disputes arising under or relating to this Agreement or the Mergers that are the subject of this Agreement, (i) irrevocably submits to the exclusive jurisdiction of the Delaware Courts, (ii) waives any objection or defense to laying venue in any such action or proceeding in the Delaware Courts, (iii) waives any objection that the Delaware Courts are an inconvenient forum or do not have jurisdiction over any party and (iv) agrees that service of process upon such party in any such action or proceeding will be effective if notice is given in accordance with Section 9.3.

(c) WAIVER OF JURY TRIAL . EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE EXTENT PERMITTED BY LAW AT THE TIME OF INSTITUTION OF THE APPLICABLE LITIGATION, ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT: (I) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER; (II) EACH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER; (III) EACH PARTY MAKES THIS WAIVER VOLUNTARILY; AND (IV) EACH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.7.

9.8 Specific Performance . The parties agree that substantial irreparable damage would occur and would not be adequately remedied by monetary damages in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached or threatened to be breached. Accordingly, each of the parties shall be entitled to an injunction or injunctions to prevent breaches or threatened breaches of this Agreement and to enforce specifically the terms and

provisions of this Agreement without proof of actual damages or otherwise, this being in addition to any other remedy to which such party is entitled at law or in equity. Each of the parties hereby further waives any requirement under any law to post bond or other security as a prerequisite to obtaining or enforcing equitable relief.

9.9 Additional Definitions . In addition to any other definitions contained in this Agreement, the following words, terms and phrases shall have the following meanings when used in this Agreement.

“ Affiliate ” shall mean (unless otherwise specified), with respect to any Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with, such specified Person and “control,” with respect to the relationship between or among two or more Persons, means the possession, directly or indirectly, of the power to direct or cause the direction of the affairs or management of a Person, whether through the ownership of voting securities, as trustee or executor, by contract or by any other means.

“ Business Day ” shall mean any day other than a Saturday, Sunday or day on which banking institutions in New York, New York or Tyler, Texas are authorized or obligated pursuant to legal requirements or executive order to be closed.

“ Code ” shall mean the Internal Revenue Code of 1986, as amended.

“ Company Stock Plan ” shall mean the OmniAmerican Bancorp, Inc. 2011 Equity Incentive Plan.

“ Confidentiality Agreement ” shall mean that certain letter agreement dated as of February 6, 2014, by and between Company and Parent (as it may be amended from time to time).

“ Controlled Group Liability ” shall mean any and all liabilities (a) under Title IV of ERISA, (b) under Section 302 of ERISA, (c) under Sections 412, 430 and 4971 of the Code, (d) as a result of a failure to comply with the continuation coverage requirements of Section 601 et seq. of ERISA and Section 4980B of the Code and (e) under corresponding or similar provisions of foreign Laws, other than such liabilities that arise solely out of, or relate solely to, the Company Benefit Plans listed in Section 3.11(a) of the Disclosure Schedule.

“ Corporate Entity ” shall mean a bank, corporation, partnership, limited liability company, association, joint venture or other organization, whether an incorporated or unincorporated organization.

“ Derivative Transactions ” shall mean any swap transaction, option, warrant, forward purchase or sale transaction, futures transaction, cap transaction, floor transaction or collar transaction relating to one or more currencies, commodities, bonds, equity securities, loans, interest rates, prices, values, or other financial or non-financial assets, credit-related events or conditions or any indexes, or any other similar transaction or combination of any of these transactions, including any collateralized debt or equity instruments evidencing or embedding any such types of transactions, and any related credit support, collateral or other similar arrangements related to such transactions.

“ End Date ” shall mean the date that is the nine (9) month anniversary of the date hereof .

“ Environmental Law ” shall mean all Laws (including common law), related to pollution, protection of the environment, protection of public health and safety as relating to exposure to pollutants, or natural resources, including, without limitation the Comprehensive Environmental Response, Compensation

and Liability Act, as amended, 42 U.S.C. §§9601 et seq. (“ CERCLA ”), and the Resource Conservation and Recovery Act, 42 U.S.C. §§6901 et seq. (“ RCRA ”).

“ ERISA Affiliate ” shall mean, with respect to any entity, trade or business, any other entity, trade or business that is, or was at the relevant time, a member of a group described in Section 414(b), (c), (m) or (o) of the Code or Section 4001(b)(1) of ERISA that includes or included the first entity, trade or business, or that is, or was at the relevant time, a member of the same “controlled group” as the first entity, trade or business pursuant to Section 4001(a)(14) of ERISA.

“ Intellectual Property ” shall mean any or all of the following and all rights in, arising out of or associated with: all patents, trademarks, trade names, service marks, domain names, database rights, copyrights and, in each case, any applications therefore, mask works, websites, know how, trade secrets, computer software programs or applications (in both source code and object code form), and tangible or intangible proprietary information or material of a Person.

“ Knowledge ” with respect to Company, shall mean the actual knowledge, after due inquiry, of those individuals set forth in Section 9.9 of the Disclosure Schedule and with respect to Parent and Merger Sub, shall mean the actual knowledge, after due inquiry, of those individuals set forth in Section 9.9 of the Parent Disclosure Schedule.

“ Law ” or “ Laws ” shall mean any federal, state, local or foreign or provincial law, statute, ordinance, rule, regulation, order, legally binding policy, legally binding guideline or legally binding agency requirement of any Governmental Entity, including common law.

“ Liability ” shall mean any direct or indirect, primary or secondary, liability, indebtedness, obligation, penalty, cost or expense (including costs of investigation, collection and defense), claim, deficiency or guaranty of any type, whether accrued, absolute or contingent, liquidated or unliquidated, matured or unmatured, or otherwise.

“ Loan Documentation ” shall mean all Loan files and all documents included in (i) a Company or its Subsidiaries on the one hand or (ii) Parent and its Subsidiaries on the other hand, as applicable, or file or imaging system with respect to a Loan, including loan applications, notes, security agreements, deeds of trust, collectors notes, appraisals, credit reports, disclosures, titles to collateral, verifications (including employment verification, deposit verification, etc.), mortgages, loan agreements (including building and loan agreements), guarantees, pledge agreements, financing statements, intercreditor agreements, participation agreements, sureties and insurance policies (including title insurance policies) and all modifications, waivers and consents relating to any of the foregoing.

“ Material Adverse Effect ” shall mean, with respect to any party any event, circumstance, development, change or effect that, individually or in the aggregate is, or is reasonably likely to be, material and adverse to (i) the business, results of operations, financial condition, assets, liabilities or results of operations of Company and its Subsidiaries taken as a whole or (ii) the ability of such party to timely consummate the transactions contemplated hereby; provided that in the case of clause (i) only, a “Material Adverse Effect” shall not be deemed to include any event, circumstance, development, change or effect to the extent resulting from (A) changes after the date of this Agreement in the application of GAAP or regulatory accounting requirements, (B) changes after the date of this Agreement in Laws of general applicability to companies in the financial services industry, (C) changes after the date of this Agreement in global or national (or any state or territory thereof) political, general economic or market conditions, in each case affecting other companies in the financial services industry, including changes in the credit markets, any downgrades in the credit markets, or adverse credit events or changes in prevailing interest rates, currency exchange rates,

or price levels or trading volumes in the United States and including changes to any previously correctly applied asset marks resulting therefrom, (D) any outbreak or escalation of hostilities, declared or undeclared acts of war or terrorism, (E) actions or omissions taken with the prior written consent of the other party, (F) any failure, in and of itself, by such party to meet internal or other estimates, projections or forecasts (it being understood that the facts or circumstances giving rise or contributing to the failure to meet estimates, projections or forecasts may be taken into account in determining whether there has been a Material Adverse Effect, except to the extent such facts or circumstances are themselves excepted from the definition of Material Adverse Effect pursuant to any other clause of this definition) or (G) the execution or public disclosure of this Agreement or the transactions contemplated hereby or the consummation thereof, including the impacts thereof on relationships with customers and employees; except, with respect to clauses (A), (B), (C) and (D), if the effects of such change disproportionately affect such party and its Subsidiaries, taken as a whole, as compared to other companies in the industry in which such party and its Subsidiaries operate.

“ Parent Benefit Plan ” shall mean all employee benefit plans (as defined in Section 3(3) of ERISA), whether or not subject to ERISA, and all bonus, stock option, stock purchase, restricted stock, incentive, deferred compensation, retiree medical or life insurance, welfare, retirement, severance, change-in-control or other compensatory or benefit plans, programs, policies or arrangements, and all retention, bonus, employment, termination, severance or other contracts or agreements to which Parent or any of its Subsidiaries or any of their respective ERISA Affiliates (as hereinafter defined) is a party, with respect to which Parent or any of its Subsidiaries or any of their respective ERISA Affiliates has any current or future obligation, contingent or otherwise, or that are maintained, contributed to or sponsored by Parent or any of its Subsidiaries or any of their respective ERISA Affiliates for the benefit of any current or former employee, officer, director or independent contractor of Parent or any of its Subsidiaries or any of their respective ERISA Affiliates.

“ Parent Share Value ” shall mean the volume weighted average price per share (calculated to the nearest one-hundredth of one cent) of Parent Common Stock on the NASDAQ (based on “regular way” trading on the NASDAQ only), for the consecutive period of five (5) trading days immediately preceding (but not including) the Closing Date, as calculated by Bloomberg Financial LP under the function “VWAP.”

“ party ” or “ parties ” shall mean Company and Parent.

“ Person ” shall mean any individual, Corporate Entity or Governmental Entity.

“ Required Regulatory Approvals ” shall mean each of (i) Federal Reserve Board approval required by Section 4 of the Bank Holding Company Act (12 USC 1843) and its implementing regulations 12 CFR 225.24, (ii) Texas Department of Banking approval pursuant to Texas Finance Code Sec. 202.004, (iii) Bank Merger Approval pursuant to Texas Finance Code Sec. 32.301 and Texas Administrative Code Sec. 15.104, (iv) Federal Deposit Insurance Corporation approval pursuant to the Bank Merger Act (12 USC 1828(c)), (iv) Office of the Comptroller of the Currency notice pursuant to 12 CFR 163.22(b) and (v) notice required to be delivered to the Federal Home Loan Bank of Dallas.

“ Subsidiary ” shall mean, when used with respect to any party, any corporation, partnership, limited liability company, association or other business entity of which (i) such party directly or indirectly owns or controls at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the board of directors or others performing similar functions or (ii) such party is or directly or indirectly has the power to appoint a general partner, manager or managing member.

“ Tax ” or “ Taxes ” shall mean all federal, state, local and foreign income, excise, gross receipts, gross income, ad valorem, profits, gains, property, capital, sales, transfer, use, value-added, stamp,

documentation, payroll, employment, severance, withholding, duties, license, intangibles, franchise, backup withholding, environmental, occupation, alternative or add-on minimum taxes imposed by any Governmental Entity, all liabilities with respect to escheat or unclaimed property, and other taxes, charges, levies or like assessments, and including all penalties and additions to tax and interest thereon.

“ Tax Return ” shall mean any return, declaration, report, statement, information statement and other document filed or required to be filed with respect to Taxes, including any schedule or attachment thereto, and including any amendment thereof, supplied to a Governmental Entity.

“ Trading Day ” shall mean any day on which the NASDAQ Stock Market is open for trading.

9.10 Severability . If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced under any present or future Law or public policy in any jurisdiction, as to that jurisdiction, (a) such term or other provision shall be fully separable, (b) this Agreement shall be construed and enforced as if such invalid, illegal or unenforceable provision had never comprised a part hereof, (c) all other conditions and provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable term or other provision or by its severance herefrom so long as the economic or legal substance of the transactions contemplated by this Agreement is not affected in any manner materially adverse to any party, and (d) such terms or other provision shall not affect the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced in any jurisdiction, the Parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that transactions contemplated by this Agreement be consummated as originally contemplated to the fullest extent possible.

9.11 Authorship . The parties agree that the terms and language of this Agreement are the result of negotiations between the parties and their respective advisors and, as a result, there shall be no presumption that any ambiguities in this Agreement shall be resolved against any party. Any controversy over construction of this Agreement shall be decided without regard to events of authorship or negotiation.

9.12 Assignment ; Third-Party Beneficiaries. Neither this Agreement nor any of the rights, interests or obligations shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties; provided that Parent may assign any of its rights under this Agreement to a direct or indirect wholly owned Subsidiary of Parent. Subject to the preceding sentence, this Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. Except as otherwise specifically provided in Section 6.7, this Agreement (including the documents and instruments referred to herein) is not intended to confer upon any Person other than the parties hereto any rights or remedies hereunder.

[ Signature page follows ]

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written.

SOUTHSIDE BANCSHARES, INC.

By: /s/ Sam Dawson

Sam Dawson

Chief Executive Officer and President

OMEGA MERGER SUB, INC.

By: /s/ Sam Dawson

Sam Dawson

Chief Executive Officer and President

OMNIAMERICAN BANCORP, INC.

By: /s/ Elaine Anderson

Name: Elaine Anderson

Title: Chairman

Signature Page to Merger Agreement

SCHEDULE A


1.	Elaine Anderson


2.	Joan Anthony


3.	Wayne P. Burchfield, Jr.


4.	Patti Callan


5.	Norman G. Carroll


6.	Patrick D. Conley


7.	James Herring


8.	John F. Sammons, Jr.


9.	Wesley R. Turner

SCHEDULE B


1.	Imelda Andrade


2.	Peggy Allen


3.	T.L.Arnold


4.	Shannon Bettis


5.	Landon Brim


6.	Stephen Brittain


7.	Tim Carter


8.	Douglas Cassidy


9.	Mark Cundiff


10.	John Dalri


11.	Robert Duffy


12.	Laura Franks


13.	Deborah Hogland


14.	Anne Holland


15.	Julie Hunter


16.	Christopher Katri


17.	Carl Pruitt


18.	Misty Purner


19.	Michael Ramirez


20.	William Regian


21.	Brian Riera


22.	Dina Robles


23.	Mike Scott


24.	Wesley Thomas


25.	Theresa Turnage


26.	David Wilcox


27.	Deborah Wilkinson


28.	John Wood


29.	Matthew Zohfeld

EXHIBIT A

FORM OF

STOCKHOLDER VOTING AND SUPPORT AGREEMENT

This Stockholder Voting AND SUPPORT Agreement (this “ Agreement ”) is made and entered into as of __________ ___, 2014, by and between SOUTHSIDE BANCSHARES, INC., a Texas corporation (“ Parent ”), and the undersigned stockholder (“ Stockholder ”) of OmniAmerican Bancorp, Inc., a Maryland corporation (“ Company ”).

RECITALS

A. Concurrently with the execution and delivery hereof, Parent, Omega Merger Sub, Inc., a Maryland corporation and a direct wholly owned subsidiary of Parent (“ Merger Sub ”), and Company are entering into an Agreement and Plan of Merger of even date herewith (as it may be amended or supplemented from time to time pursuant to the terms thereof, the “ Merger Agreement ”), which provides for, among other things, the merger of Merger Sub with and into Company (the “ First Merger ”), with Company as the surviving corporation resulting from the First Merger (the “ Surviving Corporation ”), and then immediately after the First Merger and as part of an integrated plan, the merger of the Surviving Corporation with and into Parent (the “ Second Merger ” and together with the First Merger, the “ Mergers ”).

B. Stockholder is the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of such number of shares of each class of capital stock of Company as is indicated on the signature page of this Agreement and a director of Company.

C. As a material inducement to the willingness of Parent and Merger Sub to enter into the Merger Agreement, Parent has required that Stockholder enter into this Agreement.

NOW, THEREFORE, intending to be legally bound, the parties hereby agree as follows:

1. Certain Definitions . Capitalized terms used but not otherwise defined herein shall have the meanings ascribed thereto in the Merger Agreement. For all purposes of and under this Agreement, the following terms shall have the following respective meanings:

“ Constructive Sale ” means with respect to any security, a short sale with respect to such security, entering into or acquiring a derivative contract with respect to such security, entering into or acquiring a futures or forward contract to deliver such security, or entering into any other hedging or other derivative transaction that has the effect of either directly or indirectly materially changing the economic benefits or risks of ownership of such security.

“ Shares ” means (i) all shares of capital stock of Company owned, beneficially or of record, and which Stockholder has the sole right to vote and dispose of, by Stockholder as of the date hereof, and (ii) all additional shares of capital stock of Company acquired by Stockholder, beneficially or of record, and which Stockholder has the sole right to vote and dispose of, during the period commencing with the execution and delivery of this Agreement and expiring on the Expiration Date (as such term is defined in Section 10 below).

“ Transfer ” means, with respect to any security, the direct or indirect assignment, sale, transfer, tender, exchange, pledge, hypothecation, or the grant, creation, or suffrage of a lien, security interest, or encumbrance in or upon, or the gift, grant, or placement in trust, or the Constructive Sale or other disposition of such security (including transfers by testamentary or intestate succession, by domestic relations order or other court order, or otherwise by operation of law) or any right, title, or interest therein (including any right or power to vote to which the holder thereof may be entitled, whether such right or power is granted by proxy or otherwise), or the record or beneficial ownership thereof, the offer to make such a sale, transfer, Constructive Sale, or other disposition, and each agreement, arrangement, or understanding, whether or not in writing, to effect any of the foregoing; provided, however, that the foregoing shall not prohibit Stockholder from disposing of or surrendering Shares in connection with the vesting, settlement or exercise of Company Options or restricted stock of Company for the payment of taxes thereon or, in the case of Company Options, the exercise price.

2. Transfer and Voting Restrictions .

(a) At all times during the period commencing with the execution and delivery of this Agreement and expiring on the Expiration Date, Stockholder shall not, except in connection with the Mergers, Transfer or suffer a Transfer of any of the Shares.

(b) Except as otherwise permitted by this Agreement or by order of a court of competent jurisdiction, Stockholder will not commit any act that could restrict or affect Stockholder’s legal power, authority, and right to vote all of the Shares then owned of record or beneficially by Stockholder or otherwise prevent or disable Stockholder from performing any of his obligations under this Agreement. Without limiting the generality of the foregoing, except for this Agreement and as otherwise permitted by this Agreement, Stockholder shall not enter into any voting agreement with any person or entity with respect to any of the Shares, grant any person or entity any proxy (revocable or irrevocable) or power of attorney with respect to any of the Shares, deposit any of the Shares in a voting trust, or otherwise enter into any agreement or arrangement with any person or entity limiting or affecting Stockholder’s legal power, authority, or right to vote the Shares in favor of the approval of the Proposed Transaction (as defined in Section 3(a) herein).

3. Agreement to Vote Shares .

(a) Prior to the Expiration Date, at every meeting of the stockholders of Company called, and at every adjournment or postponement thereof, and on every action or approval by written consent of the stockholders of Company (except for Company’s Annual Meeting of Stockholders to be held on May 27, 2014), Stockholder (in Stockholder’s capacity as such) shall appear at the meeting or otherwise cause the Shares to be present thereat for purposes of establishing a quorum and, to the extent not voted by the persons appointed as proxies pursuant to this Agreement, vote (i) in favor of the adoption of the Merger Agreement and the approval of the First Merger and the other transactions contemplated thereby (collectively, the “ Proposed Transaction ”), (ii) against the approval or adoption of any proposal made in opposition to, or in competition with, the Proposed Transaction, and (iii) against any of the following (to the extent unrelated to the Proposed Transaction): (A) any merger, consolidation, or business combination involving Company or any of its subsidiaries other than the Proposed Transaction; (B) any sale, lease, or transfer of all or substantially all of the assets of Company or any of its subsidiaries; (C) any reorganization, recapitalization, dissolution, liquidation, or winding up of Company or any of its subsidiaries; or (D) any other action that is intended, or could reasonably be expected, to result in a breach of any covenant, representation, or warranty or any other obligation or agreement of Company under the Merger Agreement or of Stockholder under this Agreement or otherwise impede, interfere with, delay, postpone, discourage, or adversely affect the consummation of the Proposed Transaction.

(b) If Stockholder is the beneficial owner, but not the record holder, of the Shares, Stockholder agrees to take all actions necessary to cause the record holder and any nominees to vote all of the Shares in accordance with Section 3(a).

4. Grant of Irrevocable Proxy .

(a) Stockholder hereby irrevocably appoints Parent and each of its executive officers or other designees (the “ Proxyholders ”), as Stockholder’s proxy and attorney-in-fact (with full power of substitution and resubstitution), and grants to the Proxyholders full authority, for and in the name, place, and stead of Stockholder, to vote the Shares, to instruct nominees or record holders to vote the Shares, or grant a consent or approval in respect of such Shares in accordance with Section 3 hereof and, in the discretion of the Proxyholders, with respect to any proposed adjournments or postponements of any meeting of Stockholders at which any of the matters described in Section 3 hereof are to be considered.

(b) Stockholder hereby revokes any proxies heretofore given by Stockholder in respect of the Shares.

(c) Stockholder hereby affirms that the irrevocable proxy set forth in this Section 4 is given in connection with the execution of the Merger Agreement, and that such irrevocable proxy is given to secure the performance of the duties of Stockholder under this Agreement. Stockholder hereby further affirms that the irrevocable proxy is coupled with an interest, is intended to be irrevocable in accordance with the provisions of Section 2-507 of the Maryland General Corporation Law, and may under no circumstances be revoked. The irrevocable proxy granted by Stockholder herein is a durable power of attorney and shall survive the dissolution, bankruptcy, or incapacity of Stockholder.

(d) The Proxyholders may not exercise this irrevocable proxy on any matter except as provided in Section 3 above. Stockholder may vote the Shares on all other matters.

(e) Parent may terminate this proxy at any time by written notice to Stockholder.

5. No Solicitation . In his, her or its capacity as a stockholder of Company, and not in his or her capacity as a director or officer of Company, as applicable (in which capacity Stockholder may act in accordance with Section 6.9 of the Merger Agreement), Stockholder shall not, directly or indirectly, (a) solicit, initiate, knowingly encourage, induce, or facilitate the making, submission, or announcement of any Acquisition Proposal or take any action that could reasonably be expected to lead to an Acquisition Proposal, (b) furnish any nonpublic information regarding Company or any of its subsidiaries to any Person in connection with or in response to an Acquisition Proposal or an inquiry or indication of interest that could reasonably be expected to lead to an Acquisition Proposal, (c) engage in discussions or negotiations with any Person with respect to any Acquisition Proposal, (d) approve, endorse, or recommend any Acquisition Proposal or (e) enter into any letter of intent or similar document or any agreement or contract contemplating or otherwise relating to any Acquisition Proposal.

6. Action in Stockholder Capacity Only . Stockholder is entering into this Agreement solely in Stockholder’s capacity as a record holder and beneficial owner, as applicable, of Shares and, except as provided in Section 9, not in Stockholder’s capacity as a director or officer of Company. Nothing herein shall limit or affect Stockholder’s ability to act as an officer or director of Company.

7. Representations and Warranties of Stockholder . Stockholder hereby represents and warrants to Parent as follows:

(a) (i) Except as provided hereunder, and except for such transfer restrictions of general applicability as may be provided under the Securities Act of 1933, as amended, and the “blue sky” laws of the various States of the United States and except as would not impair Stockholder’s ability to perform his, her or its obligations under this Agreement, Stockholder is the beneficial or record owner of the shares of capital stock of Company indicated on the signature page of this Agreement free and clear of any and all pledges, liens, security interests, mortgages, claims, charges, restrictions, options, title defects, or encumbrances; and (ii) Stockholder does not beneficially own any securities of Company other than the shares of capital stock and rights to purchase shares of capital stock of Company set forth on the signature page of this Agreement.

(b) As of the date hereof and for so long as this Agreement remains in effect (including as of the date of the Company Stockholders’ Meeting, which, for purposes of this Agreement, includes any adjournment or postponement thereof), except as otherwise provided in this Agreement, Stockholder has full power and authority to (i) make, enter into, and carry out the terms of this Agreement and to grant the irrevocable proxy as set forth in Section 4; and (ii) vote all of the Shares in the manner set forth in this Agreement without the consent or approval of, or any other action on the part of, any other person or entity (including any Governmental Entity). Without limiting the generality of the foregoing, Stockholder has not entered into any voting agreement (other than this Agreement) with any Person with respect to any of the Shares, granted any Person any proxy (revocable or irrevocable) or power of attorney with respect to any of the Shares, deposited any of the Shares in a voting trust, or entered into any arrangement or agreement with any Person limiting or affecting Stockholder’s legal power, authority, or right to vote the Shares on any matter.

(c) This Agreement has been duly and validly executed and delivered by Stockholder and constitutes a valid and binding agreement of Stockholder enforceable against Stockholder in accordance with its terms (except in all cases as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, receivership, conservatorship, moratorium, or similar laws affecting the enforcement of creditors’ rights generally and except that the availability of the equitable remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding may be brought). The execution and delivery of this Agreement and the performance by Stockholder of the agreements and obligations hereunder will not result in any breach or violation of or be in conflict with or constitute a default under any term of any contract to or by which Stockholder is a party or bound, or any Law to which Stockholder (or the Shares or any of Stockholder’s other assets) is subject or bound, except for any such breach, violation, conflict, or default which, individually or in the aggregate, would not reasonably be expected to impair or adversely affect Stockholder’s ability to perform Stockholder’s obligations under this Agreement or render inaccurate any of the representations made herein.

(d) Stockholder understands and acknowledges that Parent and Merger Sub are entering into the Merger Agreement in reliance upon Stockholder’s execution and delivery of this Agreement and the representations and warranties of Stockholder contained herein.

8. Representations and Warranties of Parent . Parent hereby represents and warrants to Stockholder as follows:

(a) Parent is duly organized, validly existing and in good standing under the Laws of the State of Texas. The consummations of the transactions contemplated hereby are within Parent’s corporate

powers and have been duly authorized by all necessary corporate actions on the part of Parent. Parent has full corporate power and authority to execute, deliver and perform this Agreement.

(b) This Agreement has been duly and validly executed and delivered by Parent and constitutes a valid and binding agreement of Parent enforceable against Parent in accordance with its terms (except in all cases as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, receivership, conservatorship, moratorium, or similar laws affecting the enforcement of creditors’ rights generally and except that the availability of the equitable remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding may be brought). The execution and delivery of this Agreement and the performance by Parent of the agreements and obligations hereunder will not result in any breach or violation of or be in conflict with or constitute a default under any term of any contract to or by which Parent is a party or bound, or any Law to which Parent is subject or bound, except for any such breach, violation, conflict, or default which, individually or in the aggregate, would not reasonably be expected to impair or adversely affect Parent’s ability to perform Parent’s obligations under this Agreement or render inaccurate any of the representations made herein.

9. Certain Agreements . The undersigned covenants and agrees with Parent that for a period of two years after the Effective Time, the undersigned shall not, without the prior written consent of Parent, (i) directly or indirectly serve as a consultant to, serve as a Management Official of, or be or become a Major Stockholder of, any Financial Institution having an office in any county in the State of Texas in which Company or any of its subsidiaries maintains an office as of the date of this Agreement, (ii) directly or indirectly, on the undersigned’s own behalf or as a principal or representative of any Person, solicit or induce any Protected Employee to terminate his or her employment relationship with Parent or any subsidiary of Parent or to enter into employment with any other Person, (iii) directly or indirectly, on the undersigned’s own behalf or as a principal or representative of any Person, solicit, divert, take away or attempt to solicit, divert, take away a Protected Customer for the purpose of providing or selling any product or service provided by Parent; provided, however, that the prohibition of the covenant included in this clause (iii) shall apply only to Protected Customers with whom the undersigned had Material Contact on behalf of Company or any of its subsidiaries during the 18 months immediately preceding the date of this Agreement. The term Material Contact with a Protected Customer shall be deemed to have had existed if the undersigned (i) had business dealings with the Protected Customer on behalf of Company or any of its subsidiaries, (ii) was responsible for supervising or coordinating the dealings between the Protected Customer and Company or any of its subsidiaries, or (iii) obtained trade secrets or confidential information about the Protected Customer as a result of his or her association with Company or any of its subsidiaries. It is expressly understood that the covenants contained in clause (i) of the second preceding sentence of this Section 9 do not apply to (i) Management Official positions which the undersigned holds with Financial Institutions other than Company or any of its subsidiaries as of the date of this Agreement, (ii) securities holdings which cause the undersigned to be deemed a Major Stockholder of a Financial Institution other than Company as of the date of this Agreement, or (iii) advisory relationships with a Financial Institution which the undersigned has as of the date of this Agreement or may have after the date hereof solely in the capacity as legal counsel, consultant, accountants or investment advisor. For the purposes of the covenants contained in this Section 9, the following terms shall have the following respective meanings:

(a) The term “ Financial Institution ” shall refer to any bank, bank holding company, savings and loan association, savings and loan holding company, or any other similar financial institution which engages in the business of accepting deposits or making loans or which owns or controls a company which engages in the business of accepting deposits or making loans. It is expressly understood that the term Financial Institution shall include any Financial Institution as defined herein

that after the date of this Agreement makes application to an appropriate federal or state regulatory authority for approval to organize.

(b) The term “ Major Stockholder ” shall refer to the beneficial ownership of 5% or more of any class of voting securities of such company or the ownership of 5% or more of the total equity interest in such company, however denominated.

(c) The term “ Management Official ” shall refer to service of any type which gives the undersigned the authority to participate, directly or indirectly, in policy-making functions of the Financial Institution. This includes, but is not limited to, service as an organizer, officer, director, or advisory director of the Financial Institution.

(d) The term “ Person ” shall refer to any individual or any corporation, partnership, joint venture, limited liability company, association, or other entity or enterprise.

(e) The term “ Protected Customer ” shall refer to any Person to whom Company or any of its subsidiaries has sold its products or services or solicited to sell its products or services during the 18 months prior to the date of this Agreement.

(f) The term “ Protected Employee ” shall refer to any employee of Company or any of its subsidiaries who was employed by Company or any of its subsidiaries on the Effective Date or at any time within 18 months prior to the Effective Date.

10. Termination . This Agreement shall terminate and be of no further force or effect whatsoever as of the earlier of (a) such date and time as the Merger Agreement shall have been validly terminated pursuant to the terms of Article VIII thereof or (b) the Effective Time (the “ Expiration Date ”); provided , that (i) Sections 9 and 11 shall survive the Effective Time and (ii) the termination of this Agreement shall not relieve Stockholder from any liability for any material breach of any representation, warranty, or covenant contained in this Agreement.

11. Miscellaneous Provisions .

(a) Amendments . No amendment of this Agreement shall be effective against any party unless it shall be in writing and signed by Parent and Stockholder.

(b) Waivers . No action taken pursuant to this Agreement, including any investigation by or on behalf of any party, or any failure or delay on the part of any party in the exercise of any right hereunder, shall be deemed to constitute a waiver by the party taking such action of compliance with any representations, warranties, or covenants contained in this Agreement. The waiver by any party of a breach of any provision hereunder shall not operate or be construed as a waiver of any prior or subsequent breach of the same or any other provision hereunder. Any waiver by a party of any provision of this Agreement shall be valid only if set forth in a written instrument signed on behalf of such party.

(c) Entire Agreement . This Agreement constitutes the entire agreement between the parties to this Agreement and supersedes all other prior agreements, arrangements, and understandings, both written and oral, between the parties with respect to the subject matter hereof. The effectiveness of this Agreement shall be conditioned upon the execution and delivery of the Merger Agreement by the parties thereto.

(d) Governing Law . This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, regardless of any laws or legal principles that might otherwise govern under applicable principles of conflicts of law thereof.

(e) Consent to Exclusive Jurisdiction; Venue; Service of Process . In any action or proceeding between any of the parties arising out of or relating to this Agreement or any of the transactions contemplated by this Agreement, each of the parties: (i) irrevocably and unconditionally consents and submits to the exclusive jurisdiction and venue of the Court of Chancery of the State of Delaware or to the extent such court does not have subject matter jurisdiction, the Superior Court of the State of Delaware or the United States District Court for the District of Delaware, (ii) agrees that all claims in respect of such action or proceeding shall be heard and determined exclusively in accordance with clause (i) of this Section 11(e), (iii) waives any objection to laying venue in any such action or proceeding in such courts, (iv) waives any objection that such courts are an inconvenient forum or do not have jurisdiction over any party, and (v) agrees that service of process upon such party in any such action or proceeding shall be effective if notice is given in accordance with Section 11(n) of this Agreement.

(f) WAIVER OF JURY TRIAL . EACH OF THE PARTIES IRREVOCABLY WAIVES ANY AND ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BETWEEN THE PARTIES ARISING OUT OF OR RELATING TO THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.

(g) Attorneys’ Fees . In any action at law or suit in equity with respect to this Agreement or the rights of any of the parties, the prevailing party in such action or suit shall be entitled to receive its reasonable attorneys’ fees and all other reasonable costs and expenses incurred in such action or suit.

(h) Assignment and Successors . This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns, including Stockholder’s estate and heirs upon the death of Stockholder, provided that except as otherwise specifically provided herein, neither this Agreement nor any of the rights, interests, or obligations of the parties may be assigned or delegated by any of the parties without prior written consent of the other parties except that Parent, without obtaining the consent of any other party, shall be entitled to assign this Agreement or all or any of its rights hereunder. No assignment by Parent under this Section 11(h) shall relieve Parent of its obligations under this Agreement. Any assignment in violation of the foregoing shall be void and of no effect.

(i) No Third-Party Rights . Nothing in this Agreement, express or implied, is intended to or shall confer upon any Person (other than the parties) any right, benefit, or remedy of any nature whatsoever under or by reason of this Agreement.

(j) Further Assurances . Stockholder agrees to reasonably cooperate with Parent and to execute and deliver such further documents, certificates, agreements, and instruments and to take such other actions as may be reasonably requested by Parent to evidence or reflect the transactions contemplated by this Agreement and to carry out the intent and purpose of this Agreement. Stockholder hereby agrees that Parent may publish and disclose in the Form S-4 Registration Statement (including all documents and schedules filed with the SEC) such Stockholder’s identity and ownership of Shares and the nature of such Stockholder’s commitments, arrangements, and understandings under this Agreement and may further file this Agreement as an Exhibit to the Form S-4 or in any other filing made by Parent with the SEC relating to the Proposed Transaction. Stockholder agrees to notify Parent promptly of any additional shares of capital stock of Company of which Stockholder becomes the record or beneficial owner after the date of this Agreement.

(k) Severability . If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and

effect, and the parties shall use their reasonable best efforts to substitute a valid, legal and enforceable provision which, insofar as practical, implements the purpose and intents of this Agreement. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable.

(l) Time of Essence . Time is of the essence with regard to all dates and time periods set forth or referred to in this Agreement.

(m) Specific Performance; Injunctive Relief . The parties agree that substantial irreparable damage would occur and would not be adequately remedied by monetary damages in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached or threatened to be breached. Accordingly, each of the parties shall be entitled to an injunction or injunctions to prevent breaches or threatened breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement without proof of actual damages or otherwise, this being in addition to any other remedy to which such party is entitled at law or in equity. Each of the parties hereby further waives any requirement under any law to post bond or other security as a prerequisite to obtaining or enforcing equitable relief. In addition, any third party participating with the Stockholder or receiving from the Stockholder assistance in violation of this Agreement and of the rights of Parent hereunder, and any such participation by such third party with the Stockholder in activities in violation of the Stockholder’s agreement with Parent set forth in this Agreement may give rise to claims by Parent against such third party and the Stockholder acknowledges that the Stockholder may be responsible for any associated liabilities cause by such third party.

(n) Notices . All notices and other communications required or permitted to be given hereunder shall be sent to the party to whom it is to be given and be either delivered personally against receipt, by facsimile, email or other wire transmission, by registered or certified mail (postage prepaid, return receipt requested) or deposited with an express courier (with confirmation) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (i) if to Parent, to the address, e-mail address, or facsimile provided in the Merger Agreement, including to the persons designated therein to receive copies; and (ii) if to Stockholder, to Stockholder’s address, e-mail address, or facsimile shown below Stockholder’s signature on the last page hereof.

(o) Counterparts . This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which together shall be deemed one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the parties hereto and delivered (by telecopy, electronic delivery or otherwise) to the other parties hereto. Signatures to this Agreement transmitted by facsimile transmission, by electronic mail in “portable document form” (“ pdf ”), or by any other electronic means intended to preserve the original graphic and pictorial appearance of a document, will have the same effect as physical delivery of the paper document bearing the original signature.

(p) Headings . The headings contained in this Agreement are for the convenience of reference only, shall not be deemed to be a part of this Agreement, and shall not be referred to in connection with the construction or interpretation of this Agreement.

(q) Construction . In this Agreement, unless a clear contrary intention appears, (i) “hereunder,” “hereof,” “hereto,” and words of similar import shall be deemed references to this Agreement as a whole and not to any particular Section or other provision; (ii) “including” (and with correlative meaning “include”) means including without limiting the generality of any description preceding such term; (iii) “or”

is used in the inclusive sense of “and/or”; and (iv) with respect to the determination of any period of time, “from” means “from and including” and “to” means “to but excluding.”

(r) Legal Representation . This Agreement was negotiated by the parties with the benefit of legal representation and any rule of construction or interpretation otherwise requiring this Agreement to be construed or interpreted against any party shall not apply to any construction or interpretation thereof.

IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed as of the date first above written.



PARENT: SOUTHSIDE BANCSHARES, INC.	STOCKHOLDER:
By: _______________________________ Name: _______________________________ Title: _______________________________ Address: _____________________________________ _____________________________________ _____________________________________ Telephone:(___) _____-________ Facsimile:(___) _____-________ E-mail Address:___________________	By: _______________________________ Name: _______________________________ Title: _______________________________ Address: _____________________________________ _____________________________________ _____________________________________ Telephone:(___) _____-________ Facsimile:(___) _____-________ E-mail Address:___________________
	Shares Beneficially Owned by Stockholder: __________shares of Company Common Stock __________ Options to acquire Company Common Stock

EXHIBIT B

AGREEMENT AND PLAN OF MERGER OF

OMNIAMERICAN BANK

WITH AND INTO

SOUTHSIDE BANK

THIS AGREEMENT OF MERGER (“ Plan of Merger ”) is made and entered into as of [•], 2014, by and between OMNIAMERICAN BANK , a federal savings association organized and existing under the laws of the United States with its main office located in Fort Worth, Texas (“ OmniAmerican ”), and SOUTHSIDE BANK , a bank organized and existing under the laws of the State of Texas with its main office located in Tyler, Texas (“ Southside ”).

WHEREAS, Southside and OmniAmerican are wholly-owned subsidiaries of Southside Bancshares, Inc., a corporation organized and existing under the laws of the State of Texas (“ Parent ”); and

WHEREAS, the Boards of Directors of OmniAmerican and Southside are of the opinion that the best interests of their respective banks would be served if OmniAmerican is now merged with and into Southside on the terms and conditions provided in this Plan of Merger.

NOW, THEREFORE, in consideration of the foregoing and the covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, OmniAmerican and Southside hereby make, adopt and approve this Plan of Merger in order to set forth the terms and conditions for the merger of OmniAmerican with and into Southside Bank.

ARTICLE ONE

DEFINITIONS

Except as otherwise provided herein, the capitalized terms set forth below shall have the following meanings:

1.1 For purposes of the Bank Merger, “Applicable Laws” shall mean Title 12, United States Code, Sections 1467a(s) and 1828(c), Title 12 Code of Federal Regulations, Section 163.22, and Title 3, Chapter 32, Subchapter D of the Texas Finance Code.

1.2 “Bank Merger” shall mean the merger of OmniAmerican with and into Southside as provided in Section 2.1 of this Plan of Merger.

1.3 “Certificate of Merger” shall mean the Certificate of Merger to be issued by the Texas Department of Banking approving the Bank Merger.

1.4 “Commissioner” shall mean the Commissioner of the Texas Department of Banking.

1.5 “Department” shall mean the Texas Department of Banking.

1.6 “Effective Time” shall mean the date and time on which the Bank Merger becomes effective as specified in the Certificate of Merger.

1.7 “Holdco Merger Agreement” shall mean that certain Agreement and Plan of Merger dated as of April 28, 2014, by and among Southside Bancshares, Inc., Omega Merger Sub, Inc. and OmniAmerican Bancorp, Inc.

1.8 “OmniAmerican Common Stock” shall mean the $0.01 par value common stock of OmniAmerican.

1.9 “Southside Common Stock” shall mean the $2.50 par value common stock of Southside.

ARTICLE TWO

THE BANK MERGER

2.1 Bank Merger. OmniAmerican shall be merged with and into Southside under the Articles of Association of Southside pursuant to the provisions of and with the effect provided in the Applicable Laws. Southside shall be the surviving bank resulting from the Bank Merger and shall continue to conduct its business under the name “SOUTHSIDE BANK.” The Bank Merger shall be consummated pursuant to the terms of this Plan of Merger, which has been approved and adopted by the respective Boards of Directors of Southside Bank and OmniAmerican and by the sole shareholder of OmniAmerican.

2.2 Method of Converting Shares. All of the shares of Southside Common Stock issued and outstanding at the Effective Time shall remain issued and outstanding after the Effective Time and shall be unaffected by the Bank Merger. At the Effective Time, the certificates representing all of the issued and outstanding shares of OmniAmerican Common Stock shall be surrendered to Southside for cancellation and no consideration shall be issued in exchange therefor.

ARTICLE THREE

EFFECT OF BANK MERGER

3.1 Business of Southside . The business of Southside from and after the Effective Time shall continue to be that of a Texas chartered bank. The business shall be conducted from its main office located in Tyler, Texas and at its legally established branches as set forth in Schedule 3.1, which shall also include the main office and all branches, whether in operation or approved but unopened, of OmniAmerican at the Effective Time.

3.2 Assumption of Rights. At the Effective Time, the separate existence and corporate organization of OmniAmerican shall be merged into and continued in Southside, as the surviving bank of the Bank Merger. All rights, franchises and interests of OmniAmerican in and to every type of property (real, personal and mixed), and all choses in action of OmniAmerican shall be transferred to and vested in Southside as the surviving bank by virtue of the Bank Merger without any deed or other transfer. Southside, upon consummation of the Bank Merger and without any order or other action on the part of any court or otherwise, shall hold and enjoy all rights of property, franchises and interests, including appointments, designations and nominations, and all other rights and interests as trustee, executor, administrator, registrar of stocks and bonds, guardian of estates, assignee, receiver and committee of estates of lunatics, and in every other fiduciary capacity, in the same manner and to the same extent as such rights, franchises, and interests were held or enjoyed by either of OmniAmerican or by Southside at the Effective Time, subject to any conditions imposed by the Applicable Laws.

3.3 Assumption of Liabilities. All liabilities and obligations of OmniAmerican of every kind and description, including the liquidation account established by OmniAmerican pursuant to 12 C.F.R. Part 192, shall be assumed by Southside as the surviving bank by virtue of the Bank Merger, and Southside shall be bound thereby in the same manner and to the same extent that OmniAmerican was so bound at the Effective Time. All savings accounts acquired as a result of the Bank Merger will be issued in the name of Southside.

3.4 Articles of Association and Bylaws. At the Effective Time, following consummation of the Bank Merger, (i) the Articles of Association of Southside shall be in the form set forth in Annex A to this Plan of Merger, unchanged from the Articles of Association of Southside prior to the consummation of the Bank Merger, and (ii) the Bylaws of Southside shall be in the form set forth in Annex B to this Plan of Merger, unchanged from the Bylaws of Southside prior to the consummation of the Bank Merger.

3.5 Officers, Employees and Directors. The officers and employees of Southside immediately following the Effective Time shall include, among others, the officers and employees of Southside and OmniAmerican immediately prior to the Effective Time. The Board of Directors of Southside immediately following the Effective Time shall consist of the Board of Directors of Southside immediately prior to the Effective Time.

3.6 Capital Stock of Southside. The capital stock of Southside upon completion of the Bank Merger shall be approximately $[•] million, consisting of [•] million authorized shares and [•] million issued and outstanding shares of common stock of a par value of $2.50 per share. In addition, Southside shall have a surplus of approximately $[•] million and undivided profits, including capital reserves, of approximately $[•] million adjusted, however, for earnings and expenses between [September 30, 2014] and the Effective Time.

ARTICLE FOUR

EFFECTIVENESS

4.1 Conditions Precedent. Consummation of the Bank Merger is conditioned upon (i) receipt of all approvals, consents, waivers, and other clearances of all federal and state regulatory authorities having jurisdiction over the transactions contemplated by this Bank Plan of Merger, including without limitation approval of the Commissioner and the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, pursuant to the Applicable Laws and (ii) the consummation of the First Merger and Second Merger, as each term is defined in the Holdco Merger Agreement.

4.2 Termination. This Plan of Merger may be terminated at any time prior to the Effective Time by the parties hereto in accordance with the provisions of Section 5.1 thereof.

4.3 Effectiveness. Subject to the satisfaction of all waiting periods, requirements of applicable laws and regulations and the terms and conditions set forth herein, the Bank Merger contemplated by this Plan of Merger shall be and become effective at the time and on the date specified in the Certificate of Merger.

ARTICLE FIVE

MISCELLANEOUS

5.1 Termination; Amendment. To the extent permitted by law, this Plan of Merger may be amended by a subsequent written instrument upon the approval of the Boards of Directors of each of the parties hereto and upon execution of such instrument by the duly authorized officers of each; provided that no amendment to this Plan of Merger shall modify the requirements of regulatory approval as set forth in Section 4.1 hereof. This Plan of Merger may be terminated at any time prior to the Effective Time by the

written agreement of each of the parties hereto and shall terminate automatically and concurrently, without any further action by either party hereto, upon the termination of the Holdco Merger Agreement.

5.2 Governing Law. This Plan of Merger shall be governed by and construed in accordance with the laws of the State of Texas, except to the extent that the federal laws of the United States apply to consummation of the Bank Merger.

5.3 Headings. The headings in this Plan of Merger are for convenience only and shall not affect the construction or interpretation of this Plan of Merger.

5.4 Counterparts. This Plan of Merger may be executed, by facsimile or otherwise, in two or more counterparts, each of which shall be deemed an original instrument, but all of which together shall constitute one and the same instrument.

[Remainder of Page Intentionally Left Blank. Signatures Appear on Following Page(s).]

IN WITNESS WHEREOF OmniAmerican and Southside have caused this Plan of Merger to be executed on their behalf by their officers thereunto duly authorized as of the date first above written.



ATTEST:	OMNIAMERICAN BANK
By: _______________________________ Mary-Margaret Lemons Board Secretary	By: _______________________________ Tim Carter President and Chief Executive Officer
ATTEST:	SOUTHSIDE BANK
By: _______________________________ Sam Dawson Assistant Corporate Secretary	By: _______________________________ Lee R. Gibson Executive Vice President and Chief Financial Officer

Signature Page to Bank Plan of Merger

ANNEX A

ARTICLES OF ASSOCIATION

ANNEX B

BYLAWS

Schedule 3.1

EXHIBIT 3(a)

RESTATED

CERTIFICATE OF FORMATION

(With Amendments)

SOUTHSIDE BANCSHARES, INC.

Pursuant to the Texas Business Organizations Code (the “TBOC”), Southside Bancshares, Inc., a Texas corporation (the “Corporation”), hereby adopts this Restated Certificate of Formation (with Amendments) (the “Restated Certificate”), which accurately reflects the original Certificate of Formation of the Corporation and all previous amendments thereto that are in effect (collectively, the “Original Certificate”) as further amended by such Restated Certificate as hereinafter set forth:

1. The name of the Corporation is Southside Bancshares, Inc., a for-profit corporation.


2.	The Corporation was formed as a for-profit corporation on August 11, 1982, and issued file number 61819600 by the Secretary of State of the State of Texas.


3.	Articles One, Two, Three, Eight, Nine, Ten, Eleven, Twelve and Thirteen of the Original Certificate are each amended and restated in their entirety to read as set forth in Articles One, Two, Three, Eight, Nine, Ten, Eleven, Twelve and Thirteen of the Restated Certificate.


4.	The amendments to the Original Certificate described in Paragraph 3 above have been made in accordance with the provisions of the TBOC. The amendments to the Original Certificate and the Restated Certificate have been approved in the manner required by the provisions of the TBOC and the governing documents of the Corporation.

The Restated Certificate attached hereto as Exhibit A accurately states the text of the Original Certificate as restated by the Restated Certificate. The attached Restated Certificate does not contain any other change except for the information permitted to be omitted by the provisions of the TBOC applicable to the Corporation. The Original Certificate and all amendments and supplements thereto are hereby superseded by the Restated Certificate attached hereto.

6. This document becomes effective when filed by the Secretary of State of the State of Texas.

The undersigned affirms that the person designated as registered agent in the Restated Certificate has consented to the appointment. The undersigned signs this document subject to the penalties imposed by law for the submission of a materially false or fraudulent instrument and certifies under penalty of perjury that the undersigned is authorized under the provisions of law governing the Corporation to execute this Restated Certificate.



Date: May 2, 2014	By:	/s/ SAM DAWSON
	Name:	Sam Dawson
	Title:	President and Chief Executive Officer

RESTATED

CERTIFICATE OF FORMATION

SOUTHSIDE BANCSHARES, INC.

ARTICLE ONE

The name of the for-profit Corporation formed hereby is Southside Bancshares, Inc. (the “Corporation”).

ARTICLE TWO

The period of the Corporation's duration is perpetual.

ARTICLE THREE

The purpose or purposes for which the Corporation is organized are:


(a)	To engage in the acquisition and ownership of equity or debt securities of national or state banks; the acquisition and ownership of equity or debt securities of other corporations, and the conduct of such other businesses as will not be in violation of any state or national laws, including banking laws, or rules or regulations promulgated from time to time thereunder; and


(b)	To engage in all other lawful acts or activities for which for-profit corporations may be organized under the laws of the State of Texas.

ARTICLE FOUR

The total number of shares of capital stock that the Corporation shall have authority to issue is 40,000,000 shares of common stock, $1.25 par value per share.

ARTICLE FIVE

The Corporation will not commence business until it has received for the issuance of its shares consideration of the value of at least $1,000.00.

ARTICLE SIX

The shareholders of the Corporation shall not be entitled to cumulate their votes in the election of directors.

ARTICLE SEVEN

The shareholders of the Corporation shall not have preemptive rights.

ARTICLE EIGHT

The Corporation, at the option of the Board of Directors, may purchase, directly or indirectly, its own shares to the extent of the aggregate of unrestricted capital surplus available therefor and unrestricted reduction surplus available therefor, and to any further extent that may be allowed by law.

ARTICLE NINE

No contract or other transaction between the Corporation and one or more of its directors or officers or between the Corporation and another corporation, partnership, joint venture, trust or other enterprise or organization of which one or more of the Corporation's directors or officers are officers, directors, security holders, members or employees or in which they are otherwise financially interested, directly or indirectly, shall be invalid solely because of such relationship, or solely because such director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract

or other transaction or signs, in such person's capacity as a director or committee member, a unanimous written consent of the Board of Directors or a committee thereof authorizing the contract or transaction, if (a) the material facts as to the director's or officer's relationship or interest and as to the contract or other transaction are known or disclosed to the Board of Directors or a committee thereof, and the Board of Directors or a committee thereof in good faith authorizes the contract or other transaction by the affirmative votes of a majority of the disinterested directors or committee members, even if the disinterested directors or committee members constitute less than a quorum; or (b) the material facts as to the director's or officer's relationship or interest and as to the contract or other transaction are known or disclosed to the shareholders entitled to vote thereon, and the contract or other transaction is specifically approved in good faith by vote of the shareholders; or (c) the contract or other transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board of Directors or a committee thereof or the shareholders.

ARTICLE TEN

The address of the Corporation's Registered Office is 1201 S. Beckham, Tyler, Texas 75701, and the name of the Corporation's Registered Agent at such address is Leigh Anne Rozell.

ARTICLE ELEVEN

The number of directors shall be set at thirteen (13) until changed in the manner provided in the By-Laws of the Corporation, except that no such change shall shorten the term of an incumbent director. The directors shall be classified with respect to the time for which they severally hold office into three (3) classes, as nearly equal in number as possible as determined by the Board of Directors. The terms of office of the initial directors constituting the first class expired at the first annual meeting of shareholders after the initial election of the directors of that class (and thereafter such class shall hold office for a three-year term expiring at the annual meeting of shareholders), the terms of office of the initial directors constituting the second class expired at the second annual meeting of shareholders after the initial election of the directors of that class (and thereafter such class shall hold office for a three-year term expiring at the annual meeting of shareholders), and the terms of office of the initial directors constituting the third class expired at the third annual meeting of shareholders after the initial election of the directors of that class (and thereafter such class shall hold office for a three-year term expiring at the annual meeting of shareholders). The members of each class shall hold office until their successors are elected and qualified, until his or her death or retirement or until he or she shall resign or be removed in the manner provided in the By-Laws. In any such event, such director's successor shall become a member of the same class of directors as his predecessor.

The names of the current directors are listed below and the address of each of the directors is 1201 South Beckham Avenue, Tyler, Texas 75701.



Lawrence Anderson, M.D.	Melvin B. Lovelady
Herbert C. Buie	Joe Norton
Alton Cade	Paul W. Powell
Sam Dawson	William Sheehy
Pierre de Wet	Preston L. Smith
John R. Garrett	Donald W. Thedford
B. G. Hartley

ARTICLE TWELVE

The name and address of the Corporation's organizer is Gary F. Kissiah, 1400 United Bank Tower, 400 West 15th Street, Austin, Texas 78701.

ARTICLE THIRTEEN

To the fullest extent permitted by Texas statutory or decisional law, as the same exists or may hereafter be amended or interpreted, a director of the Corporation shall not be liable to the Corporation or its shareholders for any act or omission in such director's capacity as a director. Any repeal or amendment of this Article or adoption of any other provision of this Certificate of Formation inconsistent with this Article by the shareholders of the Corporation shall be prospective only and shall not adversely affect any limitation on the liability to the Corporation or its shareholders of a director of the Corporation existing at the time of such repeal, amendment or adoption of an inconsistent provision.

Exhibit 31.1

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Sam Dawson, certify that:


1.	I have reviewed this quarterly report on Form 10-Q of Southside Bancshares, Inc.;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date:	May 9, 2014	By:	/s/ SAM DAWSON
			Sam Dawson
			President and Chief Executive Officer

Exhibit 31.2

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Lee R. Gibson, certify that:


1.	I have reviewed this quarterly report on Form 10-Q of Southside Bancshares, Inc.;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date:	May 9, 2014	By:	/s/ LEE R. GIBSON
			Lee R. Gibson, CPA
			Senior Executive Vice President and Chief Financial Officer

Exhibit 32

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the filing of the Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 (the “Report”) by Southside Bancshares, Inc. (“Registrant”), each of the undersigned hereby certifies that to his knowledge:


1.	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and


2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Registrant.



Date:	May 9, 2014	By:	/s/ SAM DAWSON
			Sam Dawson
			President and Chief Executive Officer

Date:	May 9, 2014	By:	/s/ LEE R. GIBSON
			Lee R. Gibson, CPA
			Senior Executive Vice President and Chief Financial Officer