Edgar Filing: SOUTHSIDE BANCSHARES INC

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 September 30, 2011

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		(I.R.S. Employer
incorporation or organization)		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. (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 October 31, 2011 was 16,465,690 shares.

Explanatory Note

This Amendment No. 1 on Form 10-Q/A amends the Quarterly Report on Form 10-Q for the period ended September 30, 2011, which was originally filed with the Securities and Exchange Commission (the “SEC”) on November 8, 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.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS	2
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	38
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	56
	ITEM 4. CONTROLS AND PROCEDURES	57
PART II. OTHER INFORMATION		58
	ITEM 1. LEGAL PROCEEDINGS	58
	ITEM 1A. RISK FACTORS	58
	ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	58
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES	58
	ITEM 4. (REMOVED AND RESERVED)	58
	ITEM 5. OTHER INFORMATION	58
	ITEM 6. EXHIBITS	58
SIGNATURES		60
EXHIBIT INDEX		61
EXHIBIT 23.1 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 31.1 – CERTIFICATION PURSUANT TO SECTION 302
EXHIBIT 31.2 – CERTIFICATION PURSUANT TO SECTION 302
EXHIBIT 32 – CERTIFICATION PURSUANT TO SECTION 906

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except share amounts)

	September 30,			December 31,
	2011			2010
ASSETS	(Restated)

Cash and due from banks	$	42,527		$	56,188
Interest earning deposits		4,604			22,885
Total cash and cash equivalents		47,131			79,073
Investment securities:
Available for sale, at estimated fair value		304,994			299,344
Held to maturity, at amortized cost		1,496			1,495
Mortgage-backed and related securities:
Available for sale, at estimated fair value		715,192			886,574
Securities carried at fair value through income		567,639			72,176
Held to maturity, at amortized cost		379,336			405,367
FHLB stock, at cost		29,057			34,712
Other investments, at cost		2,064			2,064
Loans held for sale		5,491			6,583
Loans:
Loans		1,040,471			1,077,920
Less: allowance for loan losses		(18,189	)		(20,711	)
Net Loans		1,022,282			1,057,209
Premises and equipment, net		50,481			50,144
Goodwill		22,034			22,034
Other intangible assets, net		580			777
Interest receivable		15,957			18,033
Deferred tax asset		–			6,603
Other assets		48,186			57,571
TOTAL ASSETS	$	3,211,920		$	2,999,759
LIABILITIES AND EQUITY
Deposits:
Noninterest bearing	$	477,128		$	423,304
Interest bearing		1,816,632			1,711,124
Total Deposits		2,293,760			2,134,428
Short-term obligations:
Federal funds purchased and repurchase agreements		2,997			3,844
FHLB advances		287,204			189,094
Other obligations		2,226			2,651
Total Short-term obligations		292,427			195,589
Long-term obligations:
FHLB advances		275,458			373,479
Long-term debt		60,311			60,311
Total Long-term obligations		335,769			433,790
Deferred tax liability		7,604			–
Other liabilities		23,150			20,378
TOTAL LIABILITIES		2,952,710			2,784,185

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

Shareholders' equity:
Common stock - $1.25 par, 40,000,000 shares authorized, 18,489,528 shares issued in 2011 and 17,660,312 shares issued in 2010		23,112			22,075
Paid-in capital		176,086			162,877
Retained earnings		69,340			64,179
Treasury stock (2,023,838 shares at cost)		(28,377	)		(28,377	)
Accumulated other comprehensive income (loss)		19,049			(6,293	)
TOTAL SHAREHOLDERS' EQUITY		259,210			214,461
Noncontrolling interest		–			1,113
TOTAL EQUITY		259,210			215,574
TOTAL LIABILITIES AND EQUITY	$	3,211,920		$	2,999,759

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

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)	Three Months						Nine Months
(in thousands, except per share data)	Ended September 30,						Ended September 30,
	2011			2010			2011			2010
	(Restated)						(Restated)
Interest income
Loans	$	16,229		$	16,926		$	50,630		$	52,128
Investment securities – taxable		11			20			49			72
Investment securities – tax-exempt		3,069			2,366			9,507			8,209
Mortgage-backed and related securities		13,292			13,378			37,899			37,937
FHLB stock and other investments		50			59			182			200
Other interest earning assets		2			4			15			19
Total interest income		32,653			32,753			98,282			98,565
Interest expense
Deposits		3,879			4,874			11,966			14,612
Short-term obligations		1,643			2,086			5,077			5,633
Long-term obligations		3,115			4,504			10,397			14,585
Total interest expense		8,637			11,464			27,440			34,830
Net interest income		24,016			21,289			70,842			63,735
Provision for loan losses		1,454			3,201			5,452			9,328
Net interest income after provision for loan losses		22,562			18,088			65,390			54,407
Noninterest income
Deposit services		4,098			4,280			12,005			12,744
Gain on sale of securities available for sale		3,609			8,008			9,080			23,024
Gain on sale of securities carried at fair value through income		254			–			592			–

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		3,274			–			7,357			–
FHLB advance option impairment charges		(7,819	)		–			(7,819	)		–
Gain on sale of loans		402			517			967			1,197
Trust income		672			645			1,968			1,736
Bank owned life insurance income		288			297			835			867
Other		957			931			3,021			2,728
Total noninterest income		5,735			14,678			28,006			42,221
Noninterest expense
Salaries and employee benefits		11,280			10,891			34,593			33,048
Occupancy expense		1,866			1,720			5,365			5,025
Equipment expense		540			532			1,558			1,441
Advertising, travel & entertainment		591			616			1,694			1,697
ATM and debit card expense		235			223			716			602
Director fees		193			197			584			590
Supplies		186			189			571			665
Professional fees		571			418			1,583			1,363
Postage		178			195			543			612
Telephone and communications		285			349			967			1,068
FDIC Insurance		212			804			1,710			2,172
Other		1,559			1,521			4,660			4,803
Total noninterest expense		17,696			17,655			54,544			53,086

Income before income tax expense		10,601			15,111			38,852			43,542
Provision for income tax expense		2,038			3,811			7,924			10,296
Net income		8,563			11,300			30,928			33,246
Less: Net income attributable to the noncontrolling interest		–			(252	)		(1,358	)		(1,301	)
Net income attributable to Southside Bancshares, Inc.	$	8,563		$	11,048		$	29,570		$	31,945
Earnings per common share – basic	$	0.52		$	0.67		$	1.80		$	1.93
Earnings per common share – diluted	$	0.52		$	0.67		$	1.80		$	1.93
Dividends paid per common share	$	0.18		$	0.17		$	0.52		$	0.51

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

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(UNAUDITED)												Accu-
(in thousands, except share amounts)												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							31,945									1,301			33,246
Net unrealized gains on available for sale securities, net of tax													13,669						13,669
Reclassification adjustment for gains on sales of available for sale securities included in net income, net of tax													(14,966	)					(14,966	)
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													611						611
Total comprehensive income																			32,632
Issuance of common stock (136,419 shares)		171		1,080															1,251
Purchase of common stock (255,377 shares)										(4,716	)								(4,716	)
Tax benefit of incentive stock options				328															328
Capital distribution to noncontrolling interest shareholders																(310	)		(310	)
Dividends paid on common stock ($0.51 per share)							(7,916	)											(7,916	)
Stock dividend declared		943		14,570			(15,513	)											–
Balance at September 30, 2010	$	22,042	$	162,335		$	62,328		$	(28,261	)	$	3,615		$	1,459		$	223,518

Balance at December 31, 2010	$	22,075	$	162,877		$	64,179		$	(28,377	)	$	(6,293	)	$	1,113		$	215,574
Comprehensive income:
Net Income							29,570									1,358			30,928
Net unrealized gains on available for sale securities, net of tax													30,551						30,551
Reclassification adjustment for gains on sales of available for sale securities included in net income, net of tax													(5,902	)					(5,902	)
Adjustment to net periodic benefit cost, net of tax													693						693
Total comprehensive income																			56,270
Issuance of common stock (44,352 shares)		56		804															860
Stock compensation expense				143															143
Tax benefit of incentive stock options				2															2
Capital distribution to noncontrolling interest shareholders																(475	)		(475	)
Purchase of noncontrolling interest				(2,754	)											(1,996	)		(4,750	)
Dividends paid on common stock ($0.52 per share)							(8,414	)											(8,414	)
Stock dividend declared		981		15,014			(15,995	)											–
Balance at September 30, 2011 (Restated)	$	23,112	$	176,086		$	69,340		$	(28,377	)	$	19,049		$	–		$	259,210

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

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOW

(UNAUDITED)

(in thousands)

	Nine Months Ended September 30,
	2011			2010
	(Restated)
OPERATING ACTIVITIES:
Net income	$	30,928		$	33,246
Adjustments to reconcile net income to net cash provided by operations:
Depreciation		2,515			2,397
Amortization of premium		26,175			25,982
Accretion of discount and loan fees		(3,386	)		(3,497	)
Provision for loan losses		5,452			9,328
Stock compensation expense		143			–
Deferred tax expense		561			998
Gain on sale of securities carried at fair value through income		(592	)		–
Gain on sale of securities available for sale		(9,080	)		(23,024	)
Fair value (gain) loss – securities		(7,357	)		–
FHLB advance option impairment charges		7,819			–
Net other-than-temporary impairment losses		–			75
Loss (gain) on sale of assets		3			(7	)
Loss on retirement of assets		90			–
Impairment on other real estate owned		184			20
Gain on sale of other real estate owned		(242	)		(26	)
Net change in:
Interest receivable		2,076			3,417
Other assets		(2,413	)		(4,726	)
Interest payable		(861	)		(696	)
Other liabilities		3,598			3,504
Loans held for sale		1,092			(3,241	)
Net cash provided by operating activities		56,705			43,750

INVESTING ACTIVITIES:
Securities held to maturity:
Purchases		(11,875	)		(258,935	)
Maturities, calls and principal repayments		34,097			55,656
Securities available for sale:
Purchases		(512,910	)		(1,102,150	)
Sales		516,571			1,060,449
Maturities, calls and principal repayments		195,097			280,606
Securities carried at fair value through income:
Purchases		(707,222	)		–
Sales		180,723			–
Maturities, calls and principal repayments		32,132			–
Proceeds from redemption of FHLB stock		16,461			2,638
Purchases of FHLB stock and other investments		(10,806	)		(139	)
Net decrease (increase) in loans		27,344			(15,193	)
Purchases of premises and equipment		(2,951	)		(5,582	)
Proceeds from sales of premises and equipment		6			38
Proceeds from sales of other real estate owned		676			948
Proceeds from sales of repossessed assets		3,933			3,713
Net cash (used in) provided by investing activities		(238,724	)		22,049

(continued)

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOW

(UNAUDITED) (continued)

(in thousands)

	Nine Months Ended September 30,
	2011			2010
	(Restated)

FINANCING ACTIVITIES:
Net increase in demand and savings accounts		133,513			117,405
Net increase in certificates of deposit		30,099			49,927
Net decrease in federal funds purchased and repurchase agreements		(847	)		(9,514	)
Proceeds from FHLB advances		8,005,080			6,119,530
Repayment of FHLB advances		(8,004,991	)		(6,304,778	)
Net capital distributions to noncontrolling interest in consolidated entities		(475	)		(310	)
Purchase of noncontrolling interest		(4,750	)		–
Tax benefit of incentive stock options		2			328
Purchase of common stock		–			(4,716	)
Proceeds from the issuance of common stock		860			1,251
Dividends paid		(8,414	)		(7,916	)
Net cash provided by (used in) financing activities		150,077			(38,793	)

Net (decrease) increase in cash and cash equivalents		(31,942	)		27,006
Cash and cash equivalents at beginning of period		79,073			52,166
Cash and cash equivalents at end of period	$	47,131		$	79,172



SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:

Interest paid	$	28,301		$	35,525
Income taxes paid	$	6,500		$	9,550

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:

Acquisition of other repossessed assets and real estate through foreclosure	$	4,790		$	5,416
Adjustment to pension liability	$	(1,066	)	$	(939	)
5% stock dividend	$	15,995		$	15,513
Unsettled trades to purchase securities	$	–		$	(18,160	)
Unsettled trades to sell securities	$	–		$	18,723

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

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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 Bank owns a 100% interest as of September 30, 2011. On July 15, 2011, Southside Bank acquired the remaining 50% interest in SFG increasing our ownership to 100%. The purchase price was $4.8 million and resulted in a decrease to shareholders’ equity of approximately $2.8 million and the elimination of the noncontrolling interest. SFG is consolidated in our financial statements and this purchase will not limit or change our ability to allocate capital.

The consolidated balance sheet as of September 30, 2011, and the related consolidated statements of income, equity and cash flows and notes to the financial statements for the three and nine month periods ended September 30, 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. 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 became effective for us on September 30, 2011, and was applied retrospectively to the beginning of the annual period of adoption. The adoption of the Update did not have a material effect on our consolidated financial statements.

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 became effective for us on July 1, 2011, and was applied retrospectively to restructurings occurring on or after January 1, 2011. The adoption of ASU 2011-02 did not have a significant impact on our consolidated financial statements.

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ASU No. 2011-03, “Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreements.” ASU 2011-03 is intended to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 removes from the assessment of effective control (i) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (ii) the collateral maintenance guidance related to that criterion. ASU 2011-03 will be effective for us on January 1, 2012 and is not expected to have a significant impact on our consolidated financial statements.

ASU 2011-04, “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 amends Topic 820, “Fair Value Measurements and Disclosures,” to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on our consolidated financial statements.

ASU 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income.” ASU 2011-05 amends Topic 220, “Comprehensive Income,” to require that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. ASU 2011-05 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on our consolidated financial statements.

ASU 2011-08, “Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment.” ASU 2011-08 amends Topic 350, “Intangibles – Goodwill and Other,” to give entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. ASU 2011-08 is effective for annual and interim impairment tests beginning after December 15, 2011, and is not expected to have a significant impact on our consolidated financial statements.

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

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 three quarters of 2011 was approximately $7.4 million, which should have been recorded between the first three quarterly periods of 2011. The impairment charge for the FHLB advance option fees was approximately $7.8 million, all of which should have been recorded in the third quarter of 2011.

The correction of the errors resulted in a decrease in net income of $3.0 million for the three months ended September 30, 2011 resulting in net income of $8.6 million for that period, and a decrease in net income of approximately $300,000 for the nine months ended September 30, 2011, resulting in net income attributable to Southside Bancshares, Inc. of $29.6 million for that period.

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A summary of the adjustments made and their effect on the financial statements is presented below (dollars in thousands):

	As of September 30, 2011
	As Originally Reported		Corrections			As Restated
Consolidated Balance Sheet

Mortgage-backed and related securities:
Available for sale, at estimated fair value (1)	$	1,263,528	$	(548,336	)	$	715,192
Securities carried at fair value through income (1)		–		567,639			567,639
Held to maturity, at amortized cost (1)		389,178		(9,842	)		379,336
Other assets (2)		56,006		(7,820	)		48,186
Total assets		3,210,279		1,641			3,211,920

Deferred tax liability (3)		7,030		574			7,604
Total liabilities		2,952,136		574			2,952,710

Retained earnings (4)		70,028		(688	)		69,340
Accumulated other comprehensive income (loss) (5)		17,294		1,755			19,049
Total shareholders’ equity		258,143		1,067			259,210
Total equity		258,143		1,067			259,210
Total liabilities and equity		3,210,279		1,641			3,211,920

“As Originally Reported” reflects balances reported in the September 30, 2011 Form 10-Q filed on November 8, 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 nine months ended September 30, 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)

Reflects the impairment charge for FHLB advance option fees at September 30, 2011 of approximately $7.8 million, all of which has been recorded in the third quarter of 2011.

(3)

The correction to the deferred tax liability occurred as a result of recording the fair value on the securities through income rather than accumulated other comprehensive income. In addition, the deferred tax liability changed as a result of the deferral of tax deductibility on the impairment charges on the FHLB advance option fees that was partially offset by the fair value gain on securities carried at fair value through income.

(4)

Retained earnings decreased due to the impairment of the FHLB advance option fees that were partially offset by the increase in fair value gains on securities carried at fair value through income for the nine months ended September 30, 2011.

(5)

Accumulated other comprehensive income increased as a result of reversing the incorrect fair values on the securities previously classified as available for sale at September 30, 2011.

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	For the nine months ended September 30, 2011
	As Originally Reported		Corrections			As Restated
Consolidated Statement of Income

Gain on sale of securities available for sale (1)	$	9,672	$	(592	)	$	9,080
Gain on sale of securities carried at fair value through income (1)		–		592			592
Fair value gain (loss) – securities (2)		–		7,357			7,357
FHLB advance option impairment charges (3)		–		(7,819	)		(7,819	)
Total noninterest income		28,468		(462	)		28,006
Income before income tax expense		39,314		(462	)		38,852
Provision for income tax expense (4)		8,086		(162	)		7,924
Net income		31,228		(300	)		30,928
Net income attributable to Southside Bancshares, Inc.		29,870		(300	)		29,570
Earnings per common share – basic		1.82		(0.02	)		1.80
Earnings per common share – diluted		1.82		(0.02	)		1.80

	For the three months ended September 30, 2011
	As Originally Reported		Corrections			As Restated
Consolidated Statement of Income

Gain on sale of securities available for sale (1)	$	3,863	$	(254	)	$	3,609
Gain on sale of securities carried at fair value through income (1)		–		254			254
Fair value gain (loss) – securities (2)		–		3,274			3,274
FHLB advance option impairment charges (3)		–		(7,819	)		(7,819	)
Total noninterest income		10,280		(4,545	)		5,735
Income before income tax expense		15,146		(4,545	)		10,601
Provision for income tax expense (4)		3,629		(1,591	)		2,038
Net income		11,517		(2,954	)		8,563
Net income attributable to Southside Bancshares, Inc.		11,517		(2,954	)		8,563
Earnings per common share – basic		0.70		(0.18	)		0.52
Earnings per common share – diluted		0.70		(0.18	)		0.52

“As Originally Reported” reflects balances reported in the September 30, 2011 Form 10-Q filed on November 8, 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 correction to FHLB advance option impairment charges is the result of the write-down in value of the FHLB advance option fees carried on the balance sheet in other assets.

(4)

The change in provision (benefit) for income tax expense is a direct result of the changes in income.

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	As of and for the nine months ended September 30, 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.		29,870			(300	)		29,570
Balance, end of period		70,028			(688	)		69,340

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		29,707			844			30,551
Reclassification adjustment for gains on sales of available for sale securities included in net income, net of tax		(6,287	)		385			(5,902	)
Net change in accumulated other comprehensive income (loss)		24,113			1,229			25,342
Balance, end of period		17,294			1,755			19,049

Total shareholders’ equity		258,143			1,067			259,210
Total equity		258,143			1,067			259,210

Comprehensive income:
Net income		31,228			(300	)		30,928
Net change in accumulated other comprehensive income (loss)		24,113			1,229			25,342
Comprehensive income		55,341			929			56,270
Comprehensive income attributable to Southside Bancshares, Inc.		53,983			929			54,912

Consolidated Statement of Cash Flow

Operating Activities:
Net income	$	31,228		$	(300	)	$	30,928
Deferred tax expense (benefit)		723			(162	)		561
Gain on sale of securities carried at fair value through income		–			(592	)		(592	)
Gain on sale of securities available for sale		(9,672	)		592			(9,080	)
Fair value gain (loss) – securities		–			(7,357	)		(7,357	)
FHLB advance option impairment charges		–			7,819			7,819
Net cash provided by operating activities		56,705			–			56,705

Investing Activities:
Securities held to maturity:
Maturities, calls and principal repayments		35,876			(1,779	)		34,097
Securities available for sale:
Purchases		(1,220,132	)		707,222			(512,910	)
Sales		697,294			(180,723	)		516,571
Maturities, calls and principal repayments		225,450			(30,353	)		195,097
Securities carried at fair value through income:
Purchases		–			(707,222	)		(707,222	)
Sales		–			180,723			180,723
Maturities, calls and principal repayments		–			32,132			32,132
Net cash used in investing activities		(238,724	)		–			(238,724	)

“As Originally Reported” reflects balances reported in the September 30, 2011 Form 10-Q filed November 8, 2011.

“As Restated” reflects the final restated balances.

“Corrections” reflect changes to the originally reported balances.

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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				Nine Months
	Ended September 30,				Ended September 30,
	2011		2010		2011		2010
Basic and Diluted Earnings:
Net income – Southside Bancshares, Inc.	$	8,563	$	11,048	$	29,570	$	31,945

Basic weighted-average shares outstanding		16,454		16,543		16,439		16,563
Add: Stock options		7		10		7		35
Diluted weighted-average shares outstanding		16,461		16,553		16,446		16,598

Basic Earnings Per Share:
Net Income - Southside Bancshares, Inc.	$	0.52	$	0.67	$	1.80	$	1.93

Diluted Earnings Per Share:
Net Income - Southside Bancshares, Inc.	$	0.52	$	0.67	$	1.80	$	1.93

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.

During the second quarter, our board of directors approved equity grants in the form of stock options and restricted stock units. These equity grants were made pursuant to the shareholder-approved Southside Bancshares, Inc. 2009 Incentive Plan.

For the three and nine month periods ended September 30, 2011, there were approximately 28,000 and 9,000 antidilutive options, respectively. For the three and nine months ended September 30, 2010, there were no antidilutive options.

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

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

	Nine Months Ended September 30, 2011
	Before-Tax			Tax				Net-of-Tax
	Amount			Expense				Amount
Unrealized gains on securities:
Unrealized holding gains arising during period		$	47,002		$	(16,451	)		$	30,551
Less: reclassification adjustment for gains included in net income			9,080			(3,178	)			5,902
Net unrealized gains on securities			37,922			(13,273	)			24,649
Change in pension plans			1,066			(373	)			693
Other comprehensive income		$	38,988		$	(13,646	)		$	25,342

	Three Months Ended September 30, 2011
	Before-Tax			Tax				Net-of-Tax
	Amount			Expense				Amount
Unrealized gains on securities:
Unrealized holding gains arising during period		$	20,722		$	(7,253	)		$	13,469
Less: reclassification adjustment for gains included in net income			3,609			(1,263	)			2,346
Net unrealized gains on securities			17,113			(5,990	)			11,123
Change in pension plans			355			(124	)			231
Other comprehensive income		$	17,468		$	(6,114	)		$	11,354

	Nine Months Ended September 30, 2010
	Before-Tax				Tax (Expense)				Net-of-Tax
	Amount				Benefit				Amount
Unrealized losses on securities:
Unrealized holding gains arising during period		$	21,029			$	(7,360	)		$	13,669
Noncredit portion of other-than-temporary impairment losses on the AFS securities			36				(13	)			23
Less: reclassification adjustment for gains included in net income			23,024				(8,058	)			14,966
Less: reclassification of other-than-temporary impairment charges on AFS securities included in net income			(75	)			26				(49	)
Net unrealized losses on securities			(1,884	)			659				(1,225	)
Change in pension plans			939				(328	)			611
Other comprehensive loss		$	(945	)		$	331			$	(614	)

	Three Months Ended September 30, 2010
	Before-Tax				Tax (Expense)				Net-of-Tax
	Amount				Benefit				Amount
Unrealized losses on securities:
Unrealized holding gains arising during period		$	7,170			$	(2,509	)		$	4,661
Noncredit portion of other-than-temporary impairment losses on the AFS securities			–				–				–
Less: reclassification adjustment for gains included in net income			8,008				(2,802	)			5,206
Less: reclassification of other-than-temporary impairment charges on AFS securities included in net income			–				–				–
Net unrealized losses on securities			(838	)			293				(545	)
Change in pension plans			313				(109	)			204
Other comprehensive loss		$	(525	)		$	184			$	(341	)

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5.	Securities - (2011 Restated)

The amortized cost and estimated market value of investment and mortgage-backed securities as of September 30, 2011 and December 31, 2010, are reflected in the tables below (in thousands):

	September 30, 2011
				Gross			Gross Unrealized Losses
	Amortized			Unrealized			Noncredit					Estimated
AVAILABLE FOR SALE:	Cost			Gains			OTTI			Other		Fair Value
Investment Securities:
State and Political Subdivisions		$	275,170		$	28,906		$	–	$	29		$	304,047
Other Stocks and Bonds			2,925			–			1,978		–			947
Mortgage-backed Securities:
U.S. Government Agencies			115,394			6,996			–		98			122,292
Government-Sponsored Enterprises			574,232			19,551			–		883			592,900
Total		$	967,721		$	55,453		$	1,978	$	1,010		$	1,020,186

	September 30, 2011
				Gross			Gross Unrealized Losses
	Amortized			Unrealized			Noncredit					Estimated
HELD TO MATURITY:	Cost			Gains			OTTI			Other		Fair Value
Investment Securities:
State and Political Subdivisions		$	1,011		$	188		$	–	$	–		$	1,199
Other Stocks and Bonds			485			18			–		–			503
Mortgage-backed Securities:
U.S. Government Agencies			23,556			1,124			–		75			24,605
Government-Sponsored Enterprises			355,780			13,546			–		10			369,316
Total		$	380,832		$	14,876		$	–	$	85		$	395,623

	December 31, 2010
			Gross		Gross Unrealized Losses
	Amortized		Unrealized		Noncredit				Estimated
AVAILABLE FOR SALE:	Cost		Gains		OTTI		Other		Fair 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

Noncredit