form10qa.htm
UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q/A
Amendment No. 1
 
(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, 2011

OR

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 o 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.  (Check one):

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 22, 2011 was 16,441,417 shares.
 
 
1
 
 
Explanatory Note

This Amendment No. 1 on Form 10-Q/A amends the Quarterly Report on Form 10-Q for the period ended March 31, 2011, which was originally filed with the Securities and Exchange Commission (the “SEC”) on May 6, 2011 (the “Original Filing”).  This amendment is being filed to reflect the restatement of i) the quarterly results of Southside Bancshares, Inc. (the “Company”), as discussed in Note 2 to the unaudited consolidated financial statements contained herein, and ii) other information related to such restated financial information.  Except for Items 1, 2 and 4 of Part I and Item 6 of Part II, no other information included in the Original Filing  is amended by this Form 10-Q/A.

During the preparation of the Form 10-K for the year ended December 31, 2011 (the “2011 Form 10-K”), the Company determined that in periods prior to December 31, 2011, it incorrectly accounted for securities acquired with a significant purchase premium that included an embedded derivative. These securities were mainly acquired in 2010 and 2011. Pursuant to GAAP, the Company is required to bifurcate and account for the embedded derivative separately or to account for the securities including the embedded derivative at fair value through income, if the bifurcation was impractical.  The Company determined that valuing the embedded derivative separately was not readily identifiable and measurable and as such, cannot be bifurcated.  Therefore, the Company determined that all securities meeting the above criteria should be reflected at fair value with the change in fair value reflected through income.

In addition, the Company determined that during the first three quarters of 2011, it incorrectly priced securities acquired with a significant premium and did not account for the impairment of FHLB advance option fees that became impaired during the third quarter of 2011.

The Company evaluated the effect of these three errors and concluded that they were immaterial to any of the previously issued consolidated financial statements except for the unaudited consolidated financial statements included in the Company’s Quarterly Reports on Form 10-Q for the periods ended March 31,  June 30, and September 30, 2011.  Accordingly, on March 8, 2012, the Company filed a Form 8-K reporting that the Audit Committee of the Board of Directors of the Company determined based on the recommendation of management, that the Company should restate its unaudited consolidated financial statements in each of these Quarterly Reports on Form 10-Q.  In addition, the Company revised its 2010 consolidated financial statements in the 2011 Form 10-K to correct for these errors.

See Note 2 – Restatement to Previously Issued Financial Statements contained in the Notes to Financial Statements included in this Form 10-Q/A which further describes the effect of this restatement.
 
Pursuant to Rule 12b-15 of the Securities Exchange Act of 1934, as amended, this Form 10-Q/A includes new certifications by our principal executive officer and principal financial officer under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. Except for the items noted above, no other information included in the Original Filing is being amended by this Form 10-Q/A. This Form 10-Q/A continues to speak as of the date of the Original Filing and we have not updated the filing to reflect events occurring subsequent to the date of the Original Filing other than those associated with the restatement of the Company’s financial statements.  Accordingly, this Form 10-Q/A should be read in conjunction with the Company’s filings with the SEC subsequent to the Original Filing, including any amendments to those filings.
 
 
2
 
 
TABLE OF CONTENTS
 
PART I.  FINANCIAL INFORMATION
  
  3
  35
  52
  53
PART II.  OTHER INFORMATION
  
  54
  54
  54
  54
  54
  54
  54
56
57
EXHIBIT 31.1 – CERTIFICATION PURSUANT TO SECTION 302
  
EXHIBIT 31.2 – CERTIFICATION PURSUANT TO SECTION 302
  
EXHIBIT 32 – CERTIFICATION PURSUANT TO SECTION 906
  
 
 
PART I.   FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share amounts)
   
March 31,
    
December 31,
  
   
2011
    
2010
  
ASSETS
  
(Restated)
        
             
Cash and due from banks
   $ 48,185     $ 56,188  
Interest earning deposits
     1,435       22,885  
Total cash and cash equivalents
     49,620       79,073  
Investment securities:
                
Available for sale, at estimated fair value
     320,720       299,344  
Held to maturity, at amortized cost
     1,495       1,495  
Mortgage-backed and related securities:
                
Available for sale, at estimated fair value
     874,693       886,574  
Securities carried at fair value through income
     233,260       72,176  
Held to maturity, at amortized cost
     396,579       405,367  
FHLB stock, at cost
     29,216       34,712  
Other investments, at cost
     2,064       2,064  
Loans held for sale
     2,665       6,583  
Loans:
                
Loans
     1,063,644       1,077,920  
Less:  allowance for loan losses
     (19,780 )     (20,711 )
Net Loans
     1,043,864       1,057,209  
Premises and equipment, net
     50,340       50,144  
Goodwill
     22,034       22,034  
Other intangible assets, net
     708       777  
Interest receivable
     15,215       18,033  
Deferred tax asset
     4,560       6,603  
Other assets
     54,857       57,571  
TOTAL ASSETS
   $ 3,101,890     $ 2,999,759  
LIABILITIES AND EQUITY
                
Deposits:
                
Noninterest bearing
   $ 459,906     $ 423,304  
Interest bearing
     1,740,917       1,711,124  
Total Deposits
     2,200,823       2,134,428  
Short-term obligations:
                
Federal funds purchased and repurchase agreements
     2,981       3,844  
FHLB advances
     214,456       189,094  
Other obligations
     2,144       2,651  
Total Short-term obligations
     219,581       195,589  
Long-term obligations:
                
FHLB  advances
     322,242       373,479  
Long-term debt
     60,311       60,311  
Total Long-term obligations
     382,553       433,790  
Other liabilities
     73,376       20,378  
TOTAL LIABILITIES
     2,876,333       2,784,185  
                 
Off-Balance-Sheet Arrangements, Commitments and Contingencies (Note 11)
                
                 
Shareholders' equity:
                
Common stock - $1.25 par, 40,000,000 shares authorized, 18,465,255 shares issued in 2011 (including 790,405 shares declared on March 31, 2011 as a stock dividend) and 17,660,312 shares issued in 2010
     23,081       22,075  
Paid-in capital
     178,274       162,877  
Retained earnings
     53,786       64,179  
Treasury stock (2,023,838 shares at cost)
     (28,377 )     (28,377 )
Accumulated other comprehensive loss
     (3,070 )     (6,293 )
TOTAL SHAREHOLDERS' EQUITY
     223,694       214,461  
Noncontrolling interest
     1,863       1,113  
TOTAL EQUITY
     225,557       215,574  
TOTAL LIABILITIES AND EQUITY
   $ 3,101,890     $ 2,999,759  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
  
Three Months Ended March 31,
  
   
2011
    
2010
  
   
(Restated)
        
Interest income
            
Loans
   $ 17,271     $ 17,765  
Investment securities – taxable
     18       26  
Investment securities – tax-exempt
     3,229       2,826  
Mortgage-backed and related securities
     11,297       14,277  
FHLB stock and other investments
     80       82  
Other interest earning assets
     10       11  
Total interest income
     31,905       34,987  
Interest expense
                
Deposits
     4,036       5,005  
Short-term obligations
     1,729       1,680  
Long-term obligations
     3,881       5,226  
Total interest expense
     9,646       11,911  
Net interest income
     22,259       23,076  
Provision for loan losses
     2,138       3,867  
Net interest income after provision for loan losses
     20,121       19,209  
Noninterest income
                
Deposit services
     3,879       4,064  
Gain on sale of securities available for sale
     1,551       8,355  
Gain on sale of securities carried at fair value through income
     254       –  
                 
Total other-than-temporary impairment losses
     –       (39 )
Portion of loss recognized in other comprehensive income (before taxes)
     –       (36 )
Net impairment losses recognized in earnings
     –       (75 )
                 
Fair value gain (loss) – securities
     1,627       –  
Gain on sale of loans
     283       281  
Trust income
     651       530  
Bank owned life insurance income
     286       285  
Other
     1,105       933  
Total noninterest income
     9,636       14,373  
Noninterest expense
                
Salaries and employee benefits
     11,691       10,942  
Occupancy expense
     1,721       1,643  
Equipment expense
     493       437  
Advertising, travel & entertainment
     553       537  
ATM and debit card expense
     215       167  
Director fees
     191       177  
Supplies
     224       270  
Professional fees
     555       406  
Postage
     179       186  
Telephone and communications
     337       373  
FDIC Insurance
     763       679  
Other
     1,810       1,635  
Total noninterest expense
     18,732       17,452  
                 
Income before income tax expense
     11,025       16,130  
Provision for income tax expense
     1,786       3,955  
Net income
     9,239       12,175  
Less: Net income attributable to the noncontrolling interest
     (865 )     (530 )
Net income attributable to Southside Bancshares, Inc.
   $ 8,374     $ 11,645  
Earnings per common share – basic
   $ 0.51     $ 0.70  
Earnings per common share – diluted
   $ 0.51     $ 0.70  
Dividends paid per common share
   $ 0.17     $ 0.17  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)
(in thousands, except share amounts)
                 
Accu-
mulated-
              
   
Common
Stock
    
Paid In
Capital
    
Retained
Earnings
    
Treasury
Stock
    
Other
Compre-
Hensive
Income
(Loss)
    
Noncon-
trolling
Interest
    
Total
Equity
  
                                           
Balance at December 31, 2009
   $ 20,928     $ 146,357     $ 53,812     $ (23,545 )   $ 4,229     $ 468     $ 202,249  
Comprehensive income:
                                                        
Net Income
                     11,645                       530       12,175  
Net unrealized gains on available for sale securities, net of tax
                                     560               560  
Reclassification adjustment for gains on sales of available for sale securities included in net income, net of tax
                                     (5,431 )             (5,431 )
Noncredit portion of other-than-temporary impairment losses on available for sale securities, net of tax
                                     23               23  
Reclassification of other-than-temporary impairment charges on available for sale securities included in net income, net of tax
                                     49               49  
Adjustment to net periodic benefit cost, net of tax
                                     161               161  
Total comprehensive income
                                                     7,537  
Issuance of common stock (60,543 shares)
     76       396                                       472  
Purchase of common stock (1,101 shares)
                             (24 )                     (24 )
Tax benefit of incentive stock options
             145                                       145  
Capital distribution to noncontrolling interest shareholders
                                             (156 )     (156 )
Dividends paid on common stock ($0.17 per share)
                     (2,552 )                             (2,552 )
Stock dividend declared
     942       14,562       (15,504 )                             –  
Balance at March 31, 2010
   $ 21,946     $ 161,460     $ 47,401     $ (23,569 )   $ (409 )   $ 842     $ 207,671  
                                                         
                                                         
Balance at December 31, 2010
   $ 22,075     $ 162,877     $ 64,179     $ (28,377 )   $ (6,293 )   $ 1,113     $ 215,574  
Comprehensive income:
                                                        
Net Income
                     8,374                       865       9,239  
Net unrealized gains on available for sale securities, net of tax
                                     4,000               4,000  
Reclassification adjustment for gains on sales of available for sale securities included in net income, net of tax
                                     (1,008 )             (1,008 )
Adjustment to net periodic benefit cost, net of tax
                                     231               231  
Total comprehensive income
                                                     12,462  
Issuance of common stock (14,538 shares)
     18       274                                       292  
Tax benefit of incentive stock options
             2                                       2  
Capital distribution to noncontrolling interest shareholders
                                             (115 )     (115 )
Dividends paid on common stock ($0.17 per share)
                     (2,658 )                             (2,658 )
Stock dividend declared
     988       15,121       (16,109 )                             –  
Balance at March 31, 2011 (Restated)
   $ 23,081     $ 178,274     $ 53,786     $ (28,377 )   $ (3,070 )   $ 1,863     $ 225,557  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
(UNAUDITED)
(in thousands)
   
Three Months Ended
March 31,
  
   
2011
    
2010
  
   
(Restated)
        
OPERATING ACTIVITIES:
            
Net income
   $ 9,239     $ 12,175  
Adjustments to reconcile net income to net cash provided by operations:
                
Depreciation
     806       775  
Amortization of premium
     8,708       7,120  
Accretion of discount and loan fees
     (1,171 )     (1,271 )
Provision for loan losses
     2,138       3,867  
Deferred tax expense (benefit)
     308       (50 )
Gain on sale of securities carried at fair value through income
     (254 )     –  
Gain on sale of securities available for sale
     (1,551 )     (8,355 )
Fair value (gain) loss – securities
     (1,627 )     –  
Net other-than-temporary impairment losses
     –       75  
Gain on sale of assets
     –       (7 )
Loss on retirement of assets
     90       –  
Impairment on other real estate owned
     130       20  
Gain on sale of other real estate owned
     –       (15 )
Net change in:
                
Interest receivable
     2,818       3,134  
Other assets
     (2,299 )     1,052  
Interest payable
     (409 )     (430 )
Other liabilities
     1,356       4,380  
Loans held for sale
     3,918       821  
Net cash provided by operating activities
     22,200       23,291  
                 
INVESTING ACTIVITIES:
                
Securities held to maturity:
                
Purchases
     (5,301 )     (215,686 )
Maturities, calls and principal repayments
     12,554       18,129  
Securities available for sale:
                
Purchases
     (252,881 )     (333,042 )
Sales
     169,172       401,174  
Maturities, calls and principal repayments
     79,645       99,766  
Securities carried at fair value through income:
                
Purchases
     (130,064 )     –  
Sales
     12,983       –  
Maturities, calls and principal repayments
     3,812       –  
Proceeds from redemption of FHLB stock
     9,738       2,360  
Purchases of FHLB stock and other investments
     (4,242 )     (36 )
Net decrease in loans
     10,529       11,328  
Purchases of premises and equipment
     (1,092 )     (1,795 )
Proceeds from sales of premises and equipment
     –       38  
Proceeds from sales of other real estate owned
     –       419  
Proceeds from sales of repossessed assets
     1,517       1,199  
Net cash used in investing activities
     (93,630 )     (16,146 )

(continued)
 
 
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
(UNAUDITED) (continued)
(in thousands)
   
Three Months Ended
March 31,
  
   
2011
    
2010
  
   
(Restated)
        
FINANCING ACTIVITIES:
            
Net increase in demand and savings accounts
     44,367       125,151  
Net increase (decrease) in certificates of deposit
     26,827       (67,420 )
Net decrease in federal funds purchased and repurchase agreements
     (863 )     (6,155 )
Proceeds from FHLB advances
     1,074,136       1,203,170  
Repayment of FHLB advances
     (1,100,011 )     (1,273,780 )
Net capital distributions to noncontrolling interest in consolidated entities
     (115 )     (156 )
Tax benefit of incentive stock options
     2       145  
Purchase of common stock
     –       (24 )
Proceeds from the issuance of common stock
     292       472  
Dividends paid
     (2,658 )     (2,552 )
Net cash provided by (used in) financing activities
     41,977       (21,149 )
                 
Net decrease in cash and cash equivalents
     (29,453 )     (14,004 )
Cash and cash equivalents at beginning of period
     79,073       52,166  
Cash and cash equivalents at end of period
   $ 49,620     $ 38,162  
                 
                 
                 
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
                
                 
Interest paid
   $ 10,055     $ 12,341  
Income taxes paid
   $ –     $ –  
                 
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
                
                 
Acquisition of other repossessed assets and real estate through foreclosure
   $ 1,576     $ 1,930  
Adjustment to pension liability
   $ (355 )   $ (247 )
5% stock dividend
   $ 16,109     $ 15,504  
Unsettled trades to purchase securities
   $ (52,044 )   $ (37,458 )
Unsettled trades to sell securities
   $ –     $ 1,453  
Unsettled issuances of brokered CDs
   $ –     $ 19,830  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO 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 (which, subsequent to the internal merger of Fort Worth National Bank (“FWNB”) with and into Southside Bank, includes FWNB).  “FWBS” refers to Fort Worth Bancshares, Inc., a bank holding company acquired by Southside of which FWNB was a wholly-owned subsidiary.  “SFG” refers to Southside Financial Group, LLC, of which Southside owns a 50% interest and consolidates for financial reporting.

The consolidated balance sheet as of March 31, 2011, and the related consolidated statements of income, equity and cash flows and notes to the financial statements for the three month period ended March 31, 2011 and 2010 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, 2010.  All share data has been adjusted to give retroactive recognition to stock splits and stock dividends.

Summary of Significant Accounting and Reporting Policies

Securities Carried at Fair Value through Income.  Debt securities purchased at significant premiums that contain an embedded derivative where the embedded derivative is not readily identifiable and measurable and as such cannot be bifurcated, are classified as securities carried at fair value through income.  Fair value is determined using quoted market prices.  If quoted market prices are not available, fair values are based on quoted market prices for similar securities or estimates from independent pricing services.  Changes in fair value are reported through the income statement as fair value gain (loss) – securities.

FHLB Advance Option Fees.  Option fees paid to the FHLB giving us the option to enter into long-term advance commitments at specified interest rates in the future are capitalized and reviewed for impairment.  Once the option is exercised, the FHLB advance option fee is amortized over the term of the advance as interest expense.

For a description of our other significant accounting and reporting policies, refer to Note 1 of the Notes to Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2010.

Accounting Standards
 
ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures About Fair Value Measurements.” ASU 2010-06 requires expanded disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements. ASU 2010-06 further clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (ii) company should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy became effective for us on January 1, 2011. The remaining disclosure requirements and clarifications made by ASU 2010-06 became effective for us on January 1, 2010. See Note 9 – Fair Value Measurements.
 
 
ASU No. 2010-18 “Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset”.  ASU 2010-18 provides that modifications of loans that are accounted for within a pool do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. ASU 2010-18 does not affect the accounting for loans that are not accounted for within pools. Loans accounted for individually continue to be subject to the troubled debt restructuring accounting provisions.  ASU 2010-18 is effective prospectively for modifications of loans accounted for within pools occurring in the first interim or annual period ending on or after July 15, 2010. Early application is permitted. Upon initial adoption of ASU 2010-18, an entity may make a one-time election to terminate accounting for loans as a pool. This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration.  The provisions of ASU 2010-18 did not have a significant impact on our consolidated financial statements.

ASU No. 2010-20, “Receivables (Topic 310) - Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” ASU 2010-20 requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment.  The required disclosures include, among other things, a roll forward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators. ASU 2010-20 became effective for our financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period became effective for our financial statements that include periods on or after January 1, 2011.

ASU No. 2010-28, “Intangibles - Goodwill and Other (Topic 350) - When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist such as if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The provisions of ASU 2010-28 became effective on January 1, 2011 and did not have a significant impact on our financial statements.

ASU No. 2011-01, “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20 (Topic 310)”, was issued January 2011 deferring the new disclosure requirements (paragraphs 310-10-50-31 through 50-34 of the FASB Accounting Standards Codification) about troubled debt restructurings to be concurrent with the effective date of the guidance for determining what constitutes a troubled debt restructuring, as presented in proposed Accounting Standards Update, Receivables (Topic 310): Clarifications to Accounting for Troubled Debt Restructurings by Creditors. As a result of the issuance of Update 2011-02, the provisions of Update 2011-01 are effective for the first interim or annual period beginning on or after June 15, 2011 or September 30, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. We do not expect the adoption of the Update to have a material effect on our financial statements at the date of adoption.

ASU No. 2011-02, “Receivables (Topic 310) - A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” ASU 2011-02 clarifies which loan modifications constitute troubled debt restructurings and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude, under the guidance clarified by ASU 2011-02, that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. ASU 2011-02 will be effective on July 1, 2011, and applies retrospectively to restructurings occurring on or after January 1, 2011. Adoption of ASU 2011-02 is not expected have a significant impact on our financial statements.

2.         Restatement of Previously Issued Financial Statements

During the preparation of the 2011 Form 10-K, we determined that in periods prior to December 31, 2011, we incorrectly accounted for securities acquired with a significant purchase premium that included an embedded derivative. These securities were mainly acquired in 2010 and 2011. Pursuant to GAAP, we are required to bifurcate and account for the embedded derivative separately or to account for the securities including the embedded derivative at fair value through income, if the bifurcation was impractical.  We determined that valuing the embedded derivative separately was not readily identifiable and measurable and as such, cannot be bifurcated.  Therefore, we determined that all securities meeting the above criteria should be reflected at fair value with the change in fair value reflected through income.
 
 
In addition to the error related to the accounting for securities with an embedded derivative mentioned above, we determined that during the first quarter of 2011, we incorrectly priced securities acquired with a significant premium.

We evaluated the effect of these errors and concluded that they were immaterial to any of the previously issued consolidated financial statements except for the unaudited consolidated financial statements included in the Company’s Quarterly Reports on Form 10-Q for the periods ended March 31,  June 30, and September 30, 2011.  Accordingly, on March 8, 2012, we filed a Form 8-K reporting that our Audit Committee of the Board of Directors determined based on the recommendation of management, that we should restate our unaudited consolidated financial statements in each of these Quarterly Reports on Form 10-Q.  In addition, we revised our 2010 consolidated financial statements in the 2011 Form 10-K to correct for these errors.

The aggregate income resulting from the changes in the fair value of certain securities for the first quarter of 2011 was approximately $1.6 million, which should have been recorded during the first quarterly period of 2011.

The correction of the errors resulted in an increase in net income of $1.1 million for the three months ended March 31, 2011 resulting in net income attributable to Southside Bancshares, Inc. of $8.4 million for that period.
 
 
A summary of the adjustments made and their effect on the financial statements is presented below (dollars in thousands):

   
As of March 31, 2011
  
   
As
Originally
Reported
    
Corrections
    
As Restated
  
Consolidated Balance Sheet
                  
                   
Mortgage-backed and related securities:
                  
Available for sale, at estimated fair value (1)
   $ 1,091,710     $ (217,017 )   $ 874,693  
Securities carried at fair value through income (1)
     –       233,260       233,260  
Held to maturity, at amortized cost (1)
     407,939       (11,360 )     396,579  
Deferred tax asset (4)
     6,269       (1,709 )     4,560  
Total assets
     3,098,716       3,174       3,101,890  
                         
Retained earnings (2)
     53,117       669       53,786  
Accumulated other comprehensive income (loss) (3)
     (5,575 )     2,505       (3,070 )
Total shareholders’ equity
     220,520       3,174       223,694  
Total equity
     222,383       3,174       225,557  
Total liabilities and equity
     3,098,716       3,174       3,101,890  

“As Originally Reported” reflects balances reported in the March 31, 2011 Form 10-Q filed on May 6, 2011.

“As Restated” reflects the final restated balances.

“Corrections” reflect changes to the originally reported balances and are described below.

Balance Sheet Corrections:

 
(1)
The decrease in mortgage-backed securities available for sale and held to maturity for the three months ended March 31, 2011 reflects the reclassification of securities with an embedded derivative and purchased at a significant premium, which we have defined as greater than 111.111%, to securities carried at fair value through income.

 
(2)
Retained earnings increased due to the increase in fair value gains on securities carried at fair value through income for the three months ended March 31, 2011.

 
(3)
Accumulated other comprehensive income increased as a result of reversing the incorrect fair values on the securities previously classified as available for sale at March 31, 2011.

 
(4)
The correction to deferred tax asset occurred as a result of recording the fair value on securities through income rather than accumulated other comprehensive income.  In addition, deferred taxes changed as a result of the deferral of taxability of fair value gains on securities carried at fair value through income.
 
 
   
For the three months ended
 March 31, 2011
  
   
As
Originally
Reported
    
Corrections
    
As Restated
  
                   
                   
Consolidated Statement of Income
                  
                   
Gain on sale of securities available for sale (1)
   $ 1,805     $ (254 )   $ 1,551  
Gain on sale of securities carried at fair value through income (1)
     –       254       254  
Fair value gain (loss) – securities (2)
     –       1,627       1,627  
Total noninterest income
     8,009       1,627       9,636  
Income before income tax expense
     9,398       1,627       11,025  
Provision for income tax expense (3)
     1,216       570       1,786  
Net income
     8,182       1,057       9,239  
Net income attributable to Southside Bancshares, Inc.
     7,317       1,057       8,374  
Earnings per common share – basic
     0.45       0.06       0.51  
Earnings per common share – diluted
     0.45       0.06       0.51  

“As Originally Reported” reflects balances reported in the March 31, 2011 Form 10-Q filed on May 6, 2011.

“As Restated” reflects the final restated balances.

“Corrections” reflect changes to the originally reported balances and are described below.

Income Statement Corrections:

 
(1)
The change in gains on securities available for sale is a result of reclassifying gains on sales of securities carried at fair value through income separately in the statement of income.

 
(2)
The correction to fair value gain (loss) – securities is a result of recording the changes in fair value on securities carried at fair value through the income statement rather than accumulated other comprehensive income.

 
(3)
The change in provision (benefit) for income tax expense is a direct result of the changes in income.
 
 
   
As of and for the three months ended
March 31, 2011
  
   
As
Originally
Reported
    
Corrections
    
As Restated
  
                   
Consolidated Statement of Changes in Equity
                  
                   
Retained earnings:
                  
Balance, beginning of period
   $ 64,567     $ (388 )   $ 64,179  
Net income attributable to Southside Bancshares, Inc.
     7,317       1,057       8,374  
Balance, end of period
     53,117       669       53,786  
                         
Accumulated other comprehensive income (loss):
                        
Balance, beginning of period
     (6,819 )     526       (6,293 )
Net unrealized gains on available for sale securities, net of tax
     2,187       1,813       4,000  
Reclassification adjustment for gains on sales of available for sale securities included in net income, net of tax
     (1,174 )     166       (1,008 )
Net change in accumulated other comprehensive income (loss)
     1,244       1,979       3,223  
Balance, end of period
     (5,575 )     2,505       (3,070 )
                         
Total shareholders’ equity
     220,520       3,174       223,694  
Total equity
     222,383       3,174       225,557  
                         
Comprehensive income:
                        
Net income
     8,182       1,057       9,239  
Net change in accumulated other comprehensive income (loss)
     1,244       1,979       3,223  
Comprehensive income
     9,426       3,036       12,462  
Comprehensive income attributable to Southside Bancshares, Inc.
     8,561       3,036       11,597  
                         
Consolidated Statement of Cash Flow
                        
                         
Operating Activities:
                        
Net income
   $ 8,182     $ 1,057     $ 9,239  
Deferred tax expense (benefit)
     (262 )     570       308  
Gain on sale of securities carried at fair value through income
     –       (254 )     (254 )
Gain on sale of securities available for sale
     (1,805 )     254       (1,551 )
Fair value gain (loss) – securities
     –       (1,627 )     (1,627 )
Net cash provided by operating activities
     22,200       –       22,200  
                         
Investing Activities:
                        
Securities held to maturity:
                        
Maturities, calls and principal repayments
     13,356       (802 )     12,554  
Securities available for sale:
                        
Purchases
     (382,945 )     130,064       (252,881 )
Sales
     182,155       (12,983 )     169,172  
Maturities, calls and principal repayments
     82,655       (3,010 )     79,645  
Securities carried at fair value through income:
                        
Purchases
     –       (130,064 )     (130,064 )
Sales
     –       12,983       12,983  
Maturities, calls and principal repayments
     –       3,812       3,812  
Net cash used in investing activities
     (93,630 )     –       (93,630 )

“As Originally Reported” reflects balances reported in the March 31, 2011 Form 10-Q filed on May 6, 2011.

“As Restated” reflects the final restated balances.

“Corrections” reflect changes to the originally reported balances.
 
 
3.         Earnings Per Share – (2011 Restated)

Earnings per share attributable to Southside Bancshares, Inc. on a basic and diluted basis have been adjusted to give retroactive recognition to stock splits and stock dividends and is calculated as follows (in thousands, except per share amounts):
   
Three Months
  
   
Ended March 31,
  
   
2011
    
2010
  
Basic and Diluted Earnings:
 
          
Net Income - Southside Bancshares, Inc.
 
$
8,374
    
$
11,645
  
 
 
              
Basic weighted-average shares outstanding:
 
  
16,429
      
16,546
  
Add:   Stock options
 
  
5
      
67
  
Diluted weighted-average shares outstanding
 
  
16,434
      
16,613
  
                 
Basic Earnings Per Share:
 
              
Net Income - Southside Bancshares, Inc.
 
$
0.51
    
$
0.70
  
                 
Diluted Earnings Per Share:
 
              
Net Income - Southside Bancshares, Inc.
 
$
0.51
    
$
0.70
  

On March 31, 2011, our board of directors declared a 5% stock dividend to common stock shareholders of record as of April 20, 2011, and payable on May 11, 2011.

For the three month period ended March 31, 2011 and 2010, there were no antidilutive options.

4.         Comprehensive Income (Loss) – (2011 Restated)

The components of other comprehensive income (loss) are as follows (in thousands):

 
Three Months Ended March 31, 2011
  
 
Before-Tax
  
Tax
  
Net-of-Tax
  
 
Amount
  
Expense
  
Amount
  
Unrealized gains on securities:
 
  
 
  
 
  
Unrealized holding gains arising during period
   $ 6,154     $ (2,154 )   $ 4,000  
Less:  reclassification adjustment for gains included in net income
     1,551       (543 )     1,008  
Net unrealized gains on securities
     4,603       (1,611 )     2,992  
Change in pension plans
     355       (124 )     231  
Other comprehensive income
   $ 4,958     $ (1,735 )   $ 3,223  

 
Three Months Ended March 31, 2010
  
 
Before-Tax
  
Tax (Expense)
  
Net-of-Tax
  
 
Amount
  
Benefit
  
Amount
  
Unrealized losses on securities:
 
  
 
  
 
  
Unrealized holding gains arising during period
   $ 861     $ (301 )   $ 560  
Noncredit portion of other-than-temporary impairment losses on the AFS securities
     36       (13 )     23  
Less:  reclassification adjustment for gains included in net income
     8,355       (2,924 )     5,431  
Less:  reclassification of other-than-temporary impairment charges on AFS securities included in net income
     (75 )     26       (49 )
Net unrealized losses on securities
     (7,383 )     2,584       (4,799 )
Change in pension plans
     247       (86 )     161  
Other comprehensive loss
   $ (7,136 )   $ 2,498     $ (4,638 )
 
5.         Securities – (2011 Restated)

The amortized cost and estimated market value of investment and mortgage-backed securities as of March 31, 2011 and December 31, 2010, are reflected in the tables below (in thousands):

   
March 31, 2011
  
         
Gross
    
Gross Unrealized Losses
        
   
Amortized
    
Unrealized
    
Non-Credit
          
Estimated
  
 AVAILABLE FOR SALE:
  
Cost
    
Gains
    
OTTI
    
Other
    
Market Value
  
Investment Securities:
                              
U.S. Treasury
   $ 4,700     $ –     $ –     $ –     $ 4,700  
State and Political Subdivisions
     308,998       8,837       –       2,820       315,015  
Other Stocks and Bonds
     2,925       –       1,920       –       1,005  
Mortgage-backed Securities:
                                        
U.S. Government Agencies
     161,731       4,982       –       630       166,083  
Government-Sponsored Enterprises
     697,823       13,477       –       2,690       708,610  
Total
   $ 1,176,177     $ 27,296     $ 1,920     $ 6,140     $ 1,195,413  

   
March 31, 2011
  
         
Gross
    
Gross Unrealized Losses
      
   
Amortized
    
Unrealized
    
Non-Credit
      
Estimated
  
 HELD TO MATURITY:
  
Cost
    
Gains
    
OTTI
  
Other
  
Market Value
  
Investment Securities:
                              
State and Political Subdivisions
   $ 1,011     $ 81     $ –     $ –     $ 1,092  
Other Stocks and Bonds
     484       20       –       –       504  
Mortgage-backed Securities:
                                        
U.S. Government Agencies
     19,348       554       –       16       19,886  
Government-Sponsored Enterprises
     377,231       6,972       –       1,187       383,016  
Total
   $ 398,074     $ 7,627     $ –     $ 1,203     $ 404,498  

   
December 31, 2010
  
         
Gross
    
Gross Unrealized Losses
        
   
Amortized
    
Unrealized
    
Non-Credit
          
Estimated
  
 AVAILABLE FOR SALE:
  
Cost
    
Gains
    
OTTI
    
Other
    
Market Value
  
Investment Securities:
                              
U.S. Treasury
   $ 4,700     $ –     $ –     $ –     $ 4,700  
State and Political Subdivisions
     296,357       4,445       –       6,540       294,262  
Other Stocks and Bonds
     3,117       1       2,736       –       382  
Mortgage-backed Securities:
                                        
U.S. Government Agencies
     145,136       5,296       –       159       150,273  
Government-Sponsored Enterprises
     721,908       16,035       –       1,642       736,301  
Total
   $ 1,171,218     $ 25,777     $ 2,736     $ 8,341     $ 1,185,918  

   
December 31, 2010
  
         
Gross
    
Gross Unrealized Losses
      
   
Amortized
    
Unrealized
    
Non-Credit
      
Estimated
  
 HELD TO MATURITY:
  
Cost
    
Gains
    
OTTI
  
Other
  
Market Value
  
Investment Securities:
                              
State and Political Subdivisions
   $ 1,012     $ 44     $ –     $ –     $ 1,056  
Other Stocks and Bonds
     483       14       –       –       497  
Mortgage-backed Securities:
                                        
U.S. Government Agencies
     20,821       566       –       55       21,332  
Government-Sponsored Enterprises
     384,546       8,576       –       589       392,533  
Total
   $ 406,862     $ 9,200     $ –     $ 644     $ 415,418  
 
 
Securities carried at fair value through income were as follows (in thousands):

   
At March 31,
    
At December 31,
  
   
2011
    
2010
  
Mortgage-backed Securities:
            
U.S. Government Agencies
   $ 3,875     $ 5,392  
Government-Sponsored Enterprises
     229,385       66,784  
Total
   $ 233,260     $ 72,176  

Net gains and losses on securities carried at fair value through income were as follows (in thousands):

   
Three Months Ended March 31,
  
   
2011
    
2010
  
Net gain on sales transactions
   $ 254     $ –  
Net mark-to-market gains (losses)
     1,627       –  
Net gain on securities carried at fair value through income
   $ 1,881     $ –  

The following table represents the unrealized loss on securities for the three months ended March 31, 2011 and year ended December 31, 2010 (in thousands):

 
Less Than 12 Months
  
More Than 12 Months
  
Total
  
 
Fair Value
  
Unrealized
Loss
  
Fair Value
  
Unrealized
Loss
  
Fair Value
  
Unrealized
Loss
  
As of March 31, 2011:
                        
                         
Available for Sale
 
  
 
  
 
  
 
  
 
  
 
  
State and Political Subdivisions
   $ 98,793     $ 2,778     $ 268     $ 42     $ 99,061     $ 2,820  
Other Stocks and Bonds
     –       –       1,005       1,920       1,005       1,920  
Mortgage-Backed Securities
     340,453       3,312       1,919       8       342,372       3,320  
Total
   $ 439,246     $ 6,090     $ 3,192     $ 1,970     $ 442,438     $ 8,060  
                                                 
Held to Maturity
                                                
Mortgage-Backed Securities
   $ 62,218     $ 249     $ 34,296     $ 954     $ 96,514     $ 1,203  
Total
   $ 62,218     $ 249     $ 34,296     $ 954     $ 96,514     $ 1,203  

As of December 31, 2010:
                                    
                                     
Available for Sale
  
 
    
 
    
 
    
 
    
 
    
 
  
State and Political Subdivisions
   $ 136,671     $ 6,501     $ 270     $ 39     $ 136,941     $ 6,540  
Other Stocks and Bonds
     –       –       189       2,736       189       2,736  
Mortgage-Backed Securities
     267,014       1,712       12,184       89       279,198       1,801  
Total
   $ 403,685     $ 8,213     $ 12,643     $ 2,864     $ 416,328     $ 11,077  
                                                 
Held to Maturity
                                                
Mortgage-Backed Securities
   $ 52,676     $ 644     $ –     $ –     $ 52,676     $ 644  
Total
   $ 52,676     $ 644     $ –     $ –     $ 52,676     $ 644  

When it is determined that a decline in fair value of Held to Maturity (“HTM”) and Available for Sale (“AFS”) securities 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 the noncredit portion to other comprehensive income.  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.  Additionally, we do not currently intend to sell the securities and 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.

The turmoil in the capital markets had a significant impact on our estimate of fair value for certain of our securities.  We believe the market values are reflective of illiquidity and credit impairment.  At March 31, 2011, we have in AFS Other Stocks and Bonds, $2.9 million amortized cost basis in pooled trust preferred securities (“TRUPs”).  Those securities are structured products with cash flows dependent upon securities issued by U.S. financial institutions, including banks and insurance companies.  Our estimate of fair value at March 31, 2011 for the TRUPs is approximately $1.0 million and reflects the market illiquidity.  With the exception of the TRUPs, to the best of management’s knowledge and based on our consideration of the qualitative factors associated with each security, there were no securities in our investment and mortgage-backed securities portfolio at March 31, 2011 with an other-than-temporary impairment.
 
 
Given the facts and circumstances associated with the TRUPs we performed detailed cash flow modeling for each TRUP using an industry-accepted cash flow model. Prior to loading the required assumptions into the model we reviewed the financial condition of each of the underlying issuing banks within the TRUP collateral pool that had not deferred or defaulted as of March 31, 2011.  Management’s best estimate of a deferral assumption was assigned to each issuing bank based on the category in which it fell.  Our analysis of the underlying cash flows contemplated various default, deferral and recovery scenarios to arrive at our best estimate of cash flows.  Based on that detailed analysis, we have concluded that the other-than-temporary impairment, which captures the credit component in compliance with FASB ASC Topic 320, “Investments – Debt and Equity Securities,” was estimated at $3.1 million at both March 31, 2011 and December 31, 2010. The noncredit charge to other comprehensive income was estimated at $1.9 million and $2.7 million at March 31, 2011 and December 31, 2010, respectively.  The carrying amount of the TRUPs was written down with $75,000 and $3.0 million recognized in earnings for the three months ended March 31, 2010 and for the year ended December 31, 2009, respectively.  There was no additional write-down of the TRUPs recognized in earnings for the three months ended March 31, 2011.  The cash flow model assumptions represent management’s best estimate and consider 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 TRUP.  Management believes that the detailed review of the collateral and cash flow modeling support the conclusion that the TRUPs had an other-than-temporary impairment at March 31, 2011.  We will continue to update our assumptions and the resulting analysis each reporting period to reflect changing market conditions.  Additionally, we do not currently intend to sell the TRUPs and it is not more likely than not that we will be required to sell the TRUPs before the anticipated recovery of their amortized cost basis.

The table below provides more detail on the TRUPs at March 31, 2011 (in thousands).
 
TRUP
    
Par
    
Credit
Loss
    
Amortized
Cost
    
Fair Value
    
Tranche
    
Credit
Rating
  
                                       
1     $ 2,000     $ 1,075     $ 925     $ 285     C1    
Ca
  
2       2,000       550       1,450       360     B1    
Ca
  
3       2,000       1,450       550       360     B2     C  
      $ 6,000     $ 3,075     $ 2,925     $ 1,005              

The following table presents the impairment activity related to credit loss, which is recognized in earnings, and the impairment activity related to all other factors, which are recognized in other comprehensive income (in thousands).

   
Three Months Ended March 31, 2011
  
    Impairment
Related to
Credit Loss
     Impairment
Related to All
Other Factors
    
Total
Impairment
  
                   
Balance, beginning of the period
   $ 3,075     $ 2,694     $ 5,769  
Charges on securities for which other-than-temporary impairment charges were not previously recognized
     –       –       –  
Additional charges on securities for which other-than-temporary impairment charges were previously recognized
     –       –       –  
Balance, end of the period
   $ 3,075     $ 2,694     $ 5,769  
 
 
Interest income recognized on securities for the periods presented (in thousands):