SBSI 9.30.2013 10-Q/A
Table of Contents


 
 
 
 
 
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, 2013

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  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, 2013 was 17,900,001 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, 2013, which was originally filed with the Securities and Exchange Commission (the “SEC”) on November 6, 2013 (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, 2013 (the “2013 Form 10-K”), the Company determined that in periods prior to December 31, 2013, it incorrectly accounted for the recognition of interest income on its municipal bonds purchased at a premium based on amortizing the premium to the earliest call date instead of amortizing the premium to maturity as prescribed pursuant to GAAP. Therefore, the Company determined the municipal bonds purchased at a premium should be re-amortized to maturity.
The Company evaluated the effect of this error and concluded that it was 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, 2013. Accordingly, on February 10, 2014, 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 will record, in the fourth quarter of 2013, the immaterial cumulative effect of the error relating to prior years, which will increase net income by approximately $1.1 million for the year ended December 31, 2013.
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
 
PART II.  OTHER INFORMATION
 
EXHIBIT 31.1 – CERTIFICATION PURSUANT TO SECTION 302
 
EXHIBIT 31.2 – CERTIFICATION PURSUANT TO SECTION 302
 
EXHIBIT 32 – CERTIFICATION PURSUANT TO SECTION 906
 


Table of Contents


PART I.   FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share amounts)
 
 
September 30,
2013
 
December 31,
2012
ASSETS
 
 (Restated)
 
 
Cash and due from banks
 
$
51,823

 
$
47,312

Interest earning deposits
 
7,853

 
103,318

Total cash and cash equivalents
 
59,676

 
150,630

Investment securities:
 
 

 
 

Available for sale, at estimated fair value
 
363,640

 
617,707

Held to maturity, at amortized cost
 
392,208

 
1,009

Mortgage-backed and related securities:
 
 

 
 

Available for sale, at estimated fair value
 
861,845

 
806,360

Held to maturity, at amortized cost
 
293,712

 
245,538

FHLB stock, at cost
 
32,781

 
27,889

Other investments, at cost
 
2,064

 
2,064

Loans held for sale
 
496

 
3,601

Loans:
 
 

 
 

Loans
 
1,317,568

 
1,262,977

Less:  Allowance for loan losses
 
(19,356
)
 
(20,585
)
Net Loans
 
1,298,212

 
1,242,392

Premises and equipment, net
 
51,213

 
50,075

Goodwill
 
22,034

 
22,034

Other intangible assets, net
 
211

 
324

Interest receivable
 
16,701

 
18,936

Deferred tax asset
 
23,178

 
4,120

Other assets
 
51,652

 
44,724

TOTAL ASSETS
 
$
3,469,623

 
$
3,237,403

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Deposits:
 
 

 
 

Noninterest bearing
 
$
557,996

 
$
595,093

Interest bearing
 
1,850,370

 
1,756,804

Total deposits
 
2,408,366

 
2,351,897

Short-term obligations:
 
 

 
 

Federal funds purchased and repurchase agreements
 
858

 
984

FHLB advances
 
229,103

 
150,985

Other obligations
 
219

 
219

Total short-term obligations
 
230,180

 
152,188

Long-term obligations:
 
 

 
 

FHLB advances
 
468,139

 
369,097

Long-term debt
 
60,311

 
60,311

Total long-term obligations
 
528,450

 
429,408

Unsettled trades to purchase securities
 
25,414

 
10,047

Other liabilities
 
36,256

 
36,100

TOTAL LIABILITIES
 
3,228,666

 
2,979,640

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


 


 
 
 
 
 
Shareholders' equity:
 
 

 
 

Common stock ($1.25 par, 40,000,000 shares authorized, 20,360,959 shares issued at September 30, 2013 and 19,446,187 shares issued at December 31, 2012)
 
25,451

 
24,308

Paid-in capital
 
213,242

 
195,602

Retained earnings
 
72,044

 
70,708

Treasury stock (2,469,638 and 2,379,338 shares at cost)
 
(37,692
)
 
(35,793
)
Accumulated other comprehensive (loss) income
 
(32,088
)
 
2,938

TOTAL SHAREHOLDERS' EQUITY
 
240,957

 
257,763

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
3,469,623

 
$
3,237,403

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

1

Table of Contents


SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Interest income
(Restated)
 
 
 
(Restated)
 
 
Loans
$
18,625

 
$
17,847

 
$
54,680

 
$
52,143

Investment securities – taxable
139

 
22

 
672

 
73

Investment securities – tax-exempt
6,927

 
3,839

 
17,322

 
9,467

Mortgage-backed and related securities
5,069

 
6,695

 
13,685

 
27,730

FHLB stock and other investments
36

 
57

 
135

 
190

Other interest earning assets
15

 
4

 
93

 
19

Total interest income
30,811

 
28,464

 
86,587

 
89,622

Interest expense
 

 
 

 
 

 
 

Deposits
2,011

 
2,455

 
6,082

 
8,615

Short-term obligations
116

 
1,551

 
1,755

 
4,877

Long-term obligations
2,043

 
2,450

 
5,778

 
7,581

Total interest expense
4,170

 
6,456

 
13,615

 
21,073

Net interest income
26,641

 
22,008

 
72,972

 
68,549

Provision for loan losses
3,640

 
3,265

 
6,153

 
8,491

Net interest income after provision for loan losses
23,001

 
18,743

 
66,819

 
60,058

Noninterest income
 

 
 

 
 

 
 

Deposit services
4,005

 
3,907

 
11,662

 
11,493

(Loss) gain on sale of securities available for sale
(142
)
 
4,302

 
9,204

 
13,571

Loss on sale of securities carried at fair value through income

 

 

 
(498
)



 


 


 


Total other-than-temporary impairment losses

 

 
(52
)
 
(21
)
Portion of loss recognized in other comprehensive income (loss) (before taxes)

 

 
10

 
(160
)
Net impairment losses recognized in earnings

 

 
(42
)
 
(181
)



 


 


 


FHLB advance option impairment charges

 
(195
)
 

 
(2,031
)
Gain on sale of loans
130

 
314

 
690

 
743

Trust income
759

 
705

 
2,212

 
2,051

Bank owned life insurance income
327

 
260

 
845

 
780

Other
1,334

 
1,205

 
3,178

 
3,439

Total noninterest income
6,413

 
10,498

 
27,749

 
29,367

Noninterest expense
 

 
 

 
 

 
 

Salaries and employee benefits
13,167

 
11,919

 
39,777

 
35,894

Occupancy expense
1,922

 
1,980

 
5,690

 
5,589

Advertising, travel & entertainment
599

 
606

 
1,896

 
1,813

ATM and debit card expense
310

 
251

 
994

 
817

Director fees
263

 
261

 
800

 
802

Supplies
173

 
178

 
592

 
559

Professional fees
730

 
781

 
1,932

 
2,084

Telephone and communications
383

 
416

 
1,218

 
1,267

FDIC insurance
433

 
429

 
1,263

 
1,313

FHLB prepayment fees

 

 
988

 

Other
2,284

 
2,255

 
6,599

 
6,556

Total noninterest expense
20,264

 
19,076

 
61,749

 
56,694

 
 
 
 
 
 
 
 
Income before income tax expense
9,150

 
10,165

 
32,819

 
32,731

Provision for income tax expense
257

 
1,558

 
3,816

 
6,256

Net income
$
8,893

 
$
8,607

 
$
29,003

 
$
26,475

Earnings per common share – basic
$
0.50

 
$
0.47

 
$
1.62

 
$
1.45

Earnings per common share – diluted
$
0.50

 
$
0.47

 
$
1.62

 
$
1.45

Dividends paid per common share
$
0.20

 
$
0.20

 
$
0.60

 
$
0.58

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

2

Table of Contents


SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(in thousands)
 
Three Months Ended
 
Nine Months Ended

September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
(Restated)

 
 
 
(Restated)

 
 
Net income
$
8,893

 
$
8,607

 
$
29,003

 
$
26,475

Other comprehensive income (loss):
 

 
 

 
 

 
 

Unrealized holding (losses) gains on available for sale securities during the period
(2,686
)
 
15,469

 
(46,966
)
 
11,425

Change in net unrealized (gain) loss on securities transferred to held to maturity
165

 

 
193

 

Noncredit portion of other-than-temporary impairment losses on the AFS securities

 

 
(10
)
 
181

Reclassification adjustment for loss (gain) on sale of available for sale securities, included in net income
142

 
(4,302
)
 
(9,204
)
 
(13,571
)
Reclassification of other-than-temporary impairment charges on available for sale securities, included in net income

 

 
42

 
181

Amortization of net actuarial loss, included in net periodic benefit cost
697

 
505

 
2,091

 
1,516

Amortization of prior service credit, included in net periodic benefit cost
(10
)
 
(10
)
 
(32
)
 
(32
)
Other comprehensive (loss) income, before tax
(1,692
)
 
11,662

 
(53,886
)
 
(300
)
Income tax benefit related to other items of comprehensive income
592

 
(4,081
)
 
18,860

 
106

Other comprehensive (loss) income, net of tax
(1,100
)
 
7,581

 
(35,026
)
 
(194
)
Comprehensive income (loss)
$
7,793

 
$
16,188

 
$
(6,023
)
 
$
26,281


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

3

Table of Contents


SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)
(in thousands, except share and per share data)
 
Common
Stock
 
Paid In
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders'
Equity
Balance at December 31, 2011
$
23,146

 
$
176,791

 
$
72,646

 
$
(28,377
)
 
$
14,721

 
$
258,927

Net Income
 

 
 

 
26,475

 
 

 
 

 
26,475

Other comprehensive loss
 

 
 

 
 

 
 

 
(194
)
 
(194
)
Issuance of common stock (45,620 shares)
57

 
906

 
 

 
 

 
 

 
963

Stock compensation expense
 

 
303

 
 

 
 

 
 

 
303

Tax benefits related to stock awards
 

 
11

 
 

 
 

 
 

 
11

Net issuance of common stock under employee stock plans
10

 
49

 
(63
)
 
 
 
 
 
(4
)
Cash dividends paid on common stock ($0.58 per share)
 

 
 

 
(9,908
)
 
 

 
 

 
(9,908
)
Stock dividend declared
1,034

 
16,425

 
(17,459
)
 
 

 
 

 

Balance at September 30, 2012
$
24,247

 
$
194,485

 
$
71,691

 
$
(28,377
)
 
$
14,527

 
$
276,573

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
$
24,308

 
$
195,602

 
$
70,708

 
$
(35,793
)
 
$
2,938

 
$
257,763

Net Income (Restated)
 

 
 

 
29,003

 
 

 
 

 
29,003

Other comprehensive loss (Restated)
 

 
 

 
 

 
 

 
(35,026
)
 
(35,026
)
Issuance of common stock (43,733 shares)
54

 
959

 
 

 
 

 
 

 
1,013

Purchase of common stock (90,300 shares)
 
 
 
 
 
 
(1,899
)
 
 
 
(1,899
)
Stock compensation expense
 

 
571

 
 

 
 

 
 

 
571

Tax benefits related to stock awards
 

 
43

 
 

 
 

 
 

 
43

Net issuance of common stock under employee stock plans
24

 
72

 
(68
)
 
 

 
 

 
28

Cash dividends paid on common stock ($0.60 per share)
 

 
 

 
(10,539
)
 
 

 
 

 
(10,539
)
Stock dividend declared
1,065

 
15,995

 
(17,060
)
 
 

 
 

 

Balance at September 30, 2013 (Restated)
$
25,451

 
$
213,242

 
$
72,044

 
$
(37,692
)
 
$
(32,088
)
 
$
240,957


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

4

Table of Contents


SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(in thousands)
 
Nine Months Ended
 
September 30,
 
2013
 
2012
OPERATING ACTIVITIES:
(Restated)
 
 
Net income
$
29,003

 
$
26,475

Adjustments to reconcile net income to net cash provided by operations:
 

 
 

Depreciation
2,756

 
2,706

Amortization of premium
24,029

 
35,354

Accretion of discount and loan fees
(4,462
)
 
(3,611
)
Provision for loan losses
6,153

 
8,491

Stock compensation expense
571

 
303

Deferred tax expense (benefit)
(202
)
 
(1,988
)
Excess tax benefits from stock-based compensation
(43
)
 
(11
)
Loss on sale of securities carried at fair value through income

 
498

Gain on sale of securities available for sale
(9,204
)
 
(13,571
)
Net other-than-temporary impairment losses
42

 
181

FHLB advance option impairment charges

 
2,031

Loss on sale of assets
4

 

Impairment on other real estate owned

 
28

Gain on sale of other real estate owned
(59
)
 
(2
)
Net change in:
 

 
 

Interest receivable
2,235

 
4,698

Other assets
(6,796
)
 
(1,171
)
Interest payable
(447
)
 
(559
)
Other liabilities
2,661

 
(1,683
)
Loans held for sale
3,105

 
2,394

Net cash provided by operating activities
49,346

 
60,563

 
 
 
 
INVESTING ACTIVITIES:
 

 
 

Securities held to maturity:
 

 
 

Purchases
(127,479
)
 

Maturities, calls and principal repayments
150,737

 
67,162

Securities available for sale:
 

 
 

Purchases
(1,303,285
)
 
(1,446,425
)
Sales
697,458

 
745,085

Maturities, calls and principal repayments
287,582

 
279,995

Securities carried at fair value through income:
 

 
 

Purchases

 
(57,606
)
Sales

 
675,255

Maturities, calls and principal repayments

 
25,279

Proceeds from redemption of FHLB stock
5,819

 
12,266

Purchases of FHLB stock and other investments
(10,711
)
 
(12,336
)
Net increase in loans
(62,287
)
 
(142,126
)
Purchases of premises and equipment
(3,898
)
 
(2,036
)
Proceeds from sales of other real estate owned
480

 
401

Proceeds from sales of repossessed assets
3,155

 
3,416

Net cash (used in) provided by investing activities
(362,429
)
 
148,330

 
 
 
 
(continued)
 
 
 

5

Table of Contents


SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED) (continued)
(in thousands)
 
Nine Months Ended
 
September 30,
 
2013
 
2012
FINANCING ACTIVITIES:
 
 
 
Net increase in demand and savings accounts
$
23,483

 
$
157,650

Net increase (decrease) in certificates of deposit
32,966

 
(178,046
)
Net decrease in federal funds purchased and repurchase agreements
(126
)
 
(1,477
)
Proceeds from FHLB advances
13,062,172

 
12,560,845

Repayment of FHLB advances
(12,885,012
)
 
(12,650,197
)
Excess tax benefits from stock-based awards
43

 
11

Net issuance of common stock under employee stock plan
28

 

Purchase of common stock
(1,899
)
 

Proceeds from the issuance of common stock
1,013

 
963

Cash dividends paid
(10,539
)
 
(9,908
)
Net cash provided by (used in) financing activities
222,129

 
(120,159
)
 
 
 
 
Net (decrease) increase in cash and cash equivalents
(90,954
)
 
88,734

Cash and cash equivalents at beginning of period
150,630

 
43,238

Cash and cash equivalents at end of period
$
59,676

 
$
131,972

 
 
 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
 

 
 


 
 
 
Interest paid
$
14,062

 
$
21,633

Income taxes paid
$
2,700

 
$
11,200

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 

 
 


 
 
 
Loans transferred to other repossessed assets and real estate through foreclosure
$
3,931

 
$
4,028

Transfer of available for sale securities to held to maturity securities
$
452,884

 
$

Adjustment to pension liability
$
(2,059
)
 
$
(1,484
)
5% stock dividend
$
17,060

 
$
17,459

Unsettled trades to purchase securities
$
(25,414
)
 
$
(17,326
)

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. “FWBS” refers to Fort Worth Bancshares, Inc., a bank holding company acquired by Southside. “SFG” refers to SFG Finance, LLC (formerly Southside Financial Group, LLC) which is a wholly-owned subsidiary of the Bank as of July 15, 2011.

As mentioned in our 10-K for the year ended December 31, 2012, we made a decision to close our broker-dealer subsidiary, Southside Securities, Inc. The closure was completed during the second quarter of 2013.

The consolidated balance sheet as of September 30, 2013, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows and notes to the financial statements for the three- and nine-month periods ended September 30, 2013 and 2012 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, 2012.  For a description of our 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, 2012. Additionally, we add the following to our significant accounting and reporting policies: For securities purchased at a premium or discount the recognition of interest income on an individual security is accounted for by amortizing the premium or discount to the maturity of that security.

On March 28, 2013 our board of directors declared a 5% stock dividend to common stock shareholders of record as of April 18, 2013, which was paid on May 9, 2013. All share data has been adjusted to give retroactive recognition to stock dividends.  

Subsequent Event

During the three months ended December 31, 2013, we will record approximately $2.0 million of income related to death benefit proceeds.

Accounting Pronouncements

We adopted an accounting standard on January 1, 2013, requiring an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement.  The adoption of this standard did not have a significant impact on our consolidated financial statements.

In addition, we adopted an accounting standard on January 1, 2013, requiring entities to provide information about the significant amounts reclassified out of accumulated other comprehensive income by component. This update also requires companies to disclose the income statement line items impacted by any significant reclassifications. The adoption of this standard as disclosed in “Note 3 - Accumulated Other Comprehensive Income (Loss),” did not 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 2013 Form 10-K, we determined that in periods prior to December 31, 2013, we incorrectly accounted for the recognition of interest income on our municipal bonds purchased at a premium based on amortizing the premium to the earliest call date instead of amortizing the premium to maturity as prescribed pursuant to GAAP. These municipal bonds included in bonds classified as available for sale and held to maturity. As a result, we determined the municipal bonds purchased at a premium should be re-amortized to maturity.
We evaluated the effect of this error and concluded that it was immaterial to any of the previously issued consolidated financial statements except for the unaudited consolidated financial statements included in our Quarterly Reports on Form 10-Q for the periods ended March 31, June 30, and September 30, 2013. Accordingly, on February 10, 2014, we 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, we will record in the fourth quarter of 2013, the immaterial cumulative effect of the error relating to prior years, which will increase net income by approximately $1.1 million for the year ended December 3l, 2013.
The aggregate net income resulting from the change in the amortization method for municipal securities purchased at a premium to maturity from the earliest call date for the third quarter of 2013 was $1.3 million which should have been recorded during the third quarterly period of 2013.
The correction of the error resulted in an increase in net income of $1.3 million and $2.8 million for the three and nine months ended September 30, 2013, respectively, resulting in net income on a restated basis of $8.9 million and $29.0 million for those same periods.
A summary of the adjustments made and their effect on the financial statements is presented below (dollars in thousands):
 
 
As of September 30, 2013
Consolidated Balance Sheet
(unaudited)
 
As Originally Reported
 
Corrections
 
As Restated
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
Held to maturity, at amortized cost (1)
 
$
391,242

 
$
966

 
$
392,208

Deferred tax asset (4)
 
22,361

 
817

 
23,178

Other assets (5)
 
51,786

 
(134
)
 
51,652

Total assets
 
3,467,974

 
1,649

 
3,469,623

 
 
 
 
 
 
 
Retained earnings (2)
 
69,252

 
2,792

 
72,044

Accumulated other comprehensive loss (3)
 
(30,945
)
 
(1,143
)
 
(32,088
)
Total shareholders’ equity
 
239,308

 
1,649

 
240,957

Total liabilities and shareholders' equity
 
3,467,974

 
1,649

 
3,469,623

“As Originally Reported” reflects balances reported in the September 30, 2013 Form 10-Q filed on November 6, 2013.
“Corrections” reflect changes to the originally reported balances and are described below.
“As Restated” reflects the final restated balances.
Balance Sheet Corrections:
(1)
The increase in investment securities held to maturity for the nine months ended September 30, 2013 reflects the reduction in amortization expense that resulted in an increase in book value.
(2)
Retained earnings increased due to the decrease in amortization expense associated with amortizing our municipal securities purchased at a premium to the maturity of the security. The increase was partially offset by a reduction in the gain on the sale of available for sale municipal securities sold during the period due to the increase in book value of the securities sold during the nine months ended September 30, 2013.
(3)
Accumulated other comprehensive loss increased as a result of an increase in the unrealized loss on the available for sale securities due to an increase in the book value of the municipal securities resulting from a decrease in amortization at September 30, 2013.
(4)
The correction to the deferred tax asset occurred as a result of recording the increase in the unrealized loss on available for sale securities for the municipal securities. In addition, deferred taxes changed as a result of the additional alternative minimum tax recorded as a result of recording the additional tax-exempt interest income.
(5)
The correction of other assets relates to a decrease in taxes receivable as a result of recording the additional alternative minimum tax.

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For the Three Months Ended
September 30, 2013
 
For the Nine Months Ended
September 30, 2013
 
 
(in thousands)
 
(in thousands)
Consolidated Statement of Income
(unaudited)
 
As Originally Reported
 
Corrections
 
As Restated
 
As Originally Reported
 
Corrections
 
As Restated
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities - tax-exempt (1)
 
$
5,556

 
$
1,371

 
$
6,927

 
$
14,391

 
$
2,931

 
$
17,322

Total interest income
 
29,440

 
1,371

 
30,811

 
83,656

 
2,931

 
86,587

Net interest income
 
25,270

 
1,371

 
26,641

 
70,041

 
2,931

 
72,972

Net interest income after provision for loan losses
 
21,630

 
1,371

 
23,001

 
63,888

 
2,931

 
66,819

Gain on sale of securities available for sale (2)
 
(3
)
 
(139
)
 
(142
)
 
9,414

 
(210
)
 
9,204

Total noninterest income
 
6,552

 
(139
)
 
6,413

 
27,959

 
(210
)
 
27,749

Income before income tax expense
 
7,918

 
1,232

 
9,150

 
30,098

 
2,721

 
32,819

Provision for income tax expense (3)
 
304

 
(47
)
 
257

 
3,887

 
(71
)
 
3,816

Net income
 
7,614

 
1,279

 
8,893

 
26,211

 
2,792

 
29,003

Earnings per common share – basic
 
0.43

 
0.07

 
0.50

 
1.47

 
0.15

 
1.62

Earnings per common share – diluted
 
0.42

 
0.08

 
0.50

 
1.46

 
0.16

 
1.62


“As Originally Reported” reflects balances reported in the September 30, 2013 Form 10-Q filed on November 6, 2013.
“Corrections” reflect changes to the originally reported balances and are described below.
“As Restated” reflects the final restated balances.
Income Statement Corrections:
(1)
The correction to investment securities - tax-exempt is a result of the reduction in tax-free amortization due to amortizing our municipal securities purchased at a premium to the maturity of the security.
(2)
The decrease in the gain on sale of securities available for sale is a result of the increase in book value on the municipal securities due to the decrease in amortization expense as a result of changing the amortization method to maturity from the earliest call date.
(3)
The change in provision for income tax expense is a direct result of the tax benefit associated with the decrease in the gain on sale of available for sale securities.

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As of and For the Three Months Ended
September 30, 2013
 
As of and For the Nine Months Ended
September 30, 2013
 
 
(in thousands)
 
(in thousands)
Consolidated Statement of Comprehensive Income
(unaudited)
 
As Originally Reported
 
Corrections
 
As Restated
 
As Originally Reported
 
Corrections
 
As Restated
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
7,614

 
$
1,279

 
$
8,893

 
$
26,211

 
$
2,792

 
$
29,003

 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding losses on available for sale
securities during the period
 
(1,960
)
 
(726
)
 
(2,686
)
 
(44,841
)
 
(2,125
)
 
(46,966
)
Change in net unrealized gain on securities transferred to held to maturity
 
67

 
98

 
165

 
37

 
156

 
193

Reclassification adjustment for gain on sale of
available for sale securities included in net income
 
3

 
139

 
142

 
(9,414
)
 
210

 
(9,204
)
Other comprehensive loss, before tax
 
(1,203
)
 
(489
)
 
(1,692
)
 
(52,127
)
 
(1,759
)
 
(53,886
)
Income tax benefit related to other items of comprehensive income
 
420

 
172

 
592

 
18,244

 
616

 
18,860

Other comprehensive loss, net of tax
 
(783
)
 
(317
)
 
(1,100
)
 
(33,883
)
 
(1,143
)
 
(35,026
)
Comprehensive income
 
6,831

 
962

 
7,793

 
(7,672
)
 
1,649

 
(6,023
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of and For the Nine Months Ended
September 30, 2013
Consolidated Statement of Changes in Equity
 
 
 
 
 
 
(unaudited)
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Retained earnings:
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
26,211

 
2,792

 
29,003

Balance, at September 30, 2013
 
 
 
 
 
 
 
69,252

 
2,792

 
72,044

 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive loss
 
 
 
 
 
 
 
(33,883
)
 
(1,143
)
 
(35,026
)
Balance, at September 30, 2013
 
 
 
 
 
 
 
(30,945
)
 
(1,143
)
 
(32,088
)
Total shareholders' equity
 
 
 
 
 
 
 
239,308

 
1,649

 
240,957

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of and For the Nine Months Ended
September 30, 2013
Consolidated Statement of Cash Flow
 
 
 
 
 
 
(unaudited)
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Activities:
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
26,211

 
2,792

 
29,003

Amortization of premium
 
 
 
 
 
 
 
27,203

 
(3,174
)
 
24,029

Accretion of discount and loan fees
 
 
 
 
 
 
 
(4,705
)
 
243

 
(4,462
)
Deferred tax expense (benefit)
 
 
 
 
 
 
 
3

 
(205
)
 
(202
)
Gain on sale of securities available for sale
 
 
 
 
 
 
 
(9,414
)
 
210

 
(9,204
)
Other assets
 
 
 
 
 
 
 
(6,930
)
 
134

 
(6,796
)
“As Originally Reported” reflects balances reported in the September 30, 2013 Form 10-Q filed on November 6, 2013.
“Corrections” reflect changes to the originally reported balances.
“As Restated” reflects the final restated balances.


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3.     Earnings Per Share - (2013 Restated)

Earnings per share on a basic and diluted basis have been adjusted to give retroactive recognition to stock dividends and is calculated as follows (in thousands, except per share amounts):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Basic and Diluted Earnings:
 
 
 
 
 
 
 
Net income
$
8,893

 
$
8,607

 
$
29,003

 
$
26,475

Basic weighted-average shares outstanding
17,876

 
18,233

 
17,860

 
18,211

Add:   Stock options
49

 
15

 
32

 
12

Diluted weighted-average shares outstanding
17,925

 
18,248

 
17,892

 
18,223

 
 

 
 

 
 

 
 

Basic Earnings Per Share:
$
0.50

 
$
0.47

 
$
1.62

 
$
1.45

 
 

 
 

 
 

 
 

Diluted Earnings Per Share:
$
0.50

 
$
0.47

 
$
1.62

 
$
1.45


There were no anti-dilutive shares for the three month period ended September 30, 2013. For the nine month period ended September 30, 2013, there were approximately 6,000 anti-dilutive shares. For the three- and nine-month periods ended September 30, 2012, there were approximately 17,000 and 10,000 anti-dilutive shares, respectively.

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4.     Accumulated Other Comprehensive (Loss) Income - (2013 Restated)

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

 
Nine Months Ended September 30, 2013
 
Unrealized Gains (Losses) on Securities
 
Pension Plans
 
 
 
Other
 
OTTI
 
Net Prior
 Service
 (Cost)
 Credit
 
Net Gain (Loss)
 
Total
Beginning balance, net of tax
$
30,500

 
$
(1,140
)
 
$
248

 
$
(26,670
)
 
$
2,938

Other comprehensive (loss) income before reclassifications
(46,960
)
 
177

 

 

 
(46,783
)
Reclassified from accumulated other comprehensive income
(9,204
)
 
42

 
(32
)
 
2,091

 
(7,103
)
Income tax benefit (expense)
19,657

 
(76
)
 
11

 
(732
)
 
18,860

Net current-period other comprehensive (loss) income, net of tax
(36,507
)
 
143

 
(21
)
 
1,359

 
(35,026
)
Ending balance, net of tax
$
(6,007
)
 
$
(997
)
 
$
227

 
$
(25,311
)
 
$
(32,088
)

 
Three Months Ended September 30, 2013
 
Unrealized Gains (Losses) on Securities
 
Pension Plans
 
 
 
Other
 
OTTI
 
Net Prior
 Service
 (Cost)
 Credit
 
Net Gain (Loss)
 
Total
Beginning balance, net of tax
$
(4,446
)
 
$
(1,012
)
 
$
234

 
$
(25,764
)
 
$
(30,988
)
Other comprehensive (loss) income before reclassifications
(2,544
)
 
23

 

 

 
(2,521
)
Reclassified from accumulated other comprehensive income
142

 

 
(10
)
 
697

 
829

Income tax benefit (expense)
841

 
(8
)
 
3

 
(244
)
 
592

Net current-period other comprehensive (loss) income, net of tax
(1,561
)
 
15

 
(7
)
 
453

 
(1,100
)
Ending balance, net of tax
$
(6,007
)
 
$
(997
)
 
$
227

 
$
(25,311
)
 
$
(32,088
)

 
Nine Months Ended September 30, 2012
 
Unrealized Gains (Losses) on Securities
 
Pension Plans
 
 
 
Other
 
OTTI
 
Net Prior
 Service
 (Cost)
 Credit
 
Net Gain (Loss)
 
Total
Beginning balance, net of tax
$
37,271

 
$
(1,577
)
 
$
276

 
$
(21,249
)
 
$
14,721

Other comprehensive income before reclassifications
11,402

 
204

 

 

 
11,606

Reclassified from accumulated other comprehensive income
(13,571
)
 
181

 
(32
)
 
1,516

 
(11,906
)
Income tax benefit (expense)
760

 
(135
)
 
11

 
(530
)
 
106

Net current-period other comprehensive (loss) income, net of tax
(1,409
)
 
250

 
(21
)
 
986

 
(194
)
Ending balance, net of tax
$
35,862

 
$
(1,327
)
 
$
255

 
$
(20,263
)
 
$
14,527



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Table of Contents


 
Three Months Ended September 30, 2012
 
Unrealized Gains (Losses) on Securities
 
Pension Plans
 
 
 
Other
 
OTTI
 
Net Prior
 Service
 (Cost)
 Credit
 
Net Gain (Loss)
 
Total
Beginning balance, net of tax
$
28,655

 
$
(1,379
)
 
$
262

 
$
(20,592
)
 
$
6,946

Other comprehensive income before reclassifications
15,389

 
80

 

 

 
15,469

Reclassified from accumulated other comprehensive income
(4,302
)
 

 
(10
)
 
505

 
(3,807
)
Income tax benefit (expense)
(3,880
)
 
(28
)
 
3

 
(176
)
 
(4,081
)
Net current-period other comprehensive (loss) income, net of tax
7,207

 
52


(7
)
 
329

 
7,581

Ending balance, net of tax
$
35,862

 
$
(1,327
)
 
$
255


$
(20,263
)
 
$
14,527


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

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Unrealized gains on available for sale securities:
 
 
 
 
 
 
 
Realized (loss) gain on sale of securities (1)
$
(142
)
 
$
4,302

 
$
9,204

 
$
13,571

Impairment losses (2)

 

 
(42
)
 
(181
)
Total before tax
(142
)
 
4,302

 
9,162

 
13,390

Tax benefit (expense)
50

 
(1,506
)
 
(3,207
)
 
(4,687
)
Net of tax
$
(92
)
 
$
2,796

 
$
5,955

 
$
8,703

 
 
 
 
 
 
 
 
Amortization of pension plan items:
 
 
 
 
 
 
 
Net loss (3)
$
(697
)
 
$
(505
)
 
$
(2,091
)
 
$
(1,516
)
Prior service credit (3)
10

 
10

 
32

 
32

Total before tax
(687
)
 
(495
)
 
(2,059
)
 
(1,484
)
Tax benefit (expense)
241

 
173

 
721

 
519

Net of tax
$
(446
)
 
$
(322
)
 
$
(1,338
)
 
$
(965
)
Total reclassifications for the period, net of tax
$
(538
)
 
$
2,474

 
$
4,617

 
$
7,738


(1) Listed as Gain on sale of securities available for sale on the Statements of Income.
(2) Listed as Net impairment losses recognized in earnings on the Statements of Income.
(3) These accumulated other comprehensive income components are included in the computation of net periodic pension cost presented in “Note 8 - Employee Benefit Plans.”

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5.     Securities - (2013 Restated)

The amortized cost and estimated fair value of investment and mortgage-backed securities as of September 30, 2013 and December 31, 2012, are reflected in the tables below (in thousands):
 
 
September 30, 2013
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
AVAILABLE FOR SALE
 
 
OTTI
 
Other
 
Investment Securities:
 
 
 
 
 
 
 
 
 
U.S. Government Agency Debentures
$
12,624

 
$

 
$

 
$
1,449

 
$
11,175

State and Political Subdivisions
345,254

 
5,884

 

 
13,006

 
338,132

Other Stocks and Bonds
15,773

 
145

 
1,535

 
50

 
14,333

Mortgage-backed Securities: (1)
 

 
 

 
 

 
 

 
 

Residential
783,586

 
16,141

 

 
2,322

 
797,405

Commercial
67,102

 
257

 

 
2,919

 
64,440

Total
$
1,224,339

 
$
22,427

 
$
1,535

 
$
19,746

 
$
1,225,485

 
 
September 30, 2013
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
HELD TO MATURITY
 
 
OTTI
 
Other
 
Investment Securities:
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
$
392,208

 
$
1,618

 
$

 
$
14,056

 
$
379,770

Mortgage-backed Securities: (1)
 

 
 

 
 

 
 

 
 

Residential
92,127

 
4,581

 

 

 
96,708

Commercial
201,585

 
711

 

 
6,153

 
196,143

Total
$
685,920

 
$
6,910

 
$

 
$
20,209

 
$
672,621


 
 
December 31, 2012
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
AVAILABLE FOR SALE
 
 
OTTI
 
Other
 
Investment Securities:
 
 
 
 
 
 
 
 
 
U.S. Government Agency Debentures
$
61,461

 
$

 
$

 
$
598

 
$
60,863

State and Political Subdivisions
515,116

 
30,888

 

 
316

 
545,688

Other Stocks and Bonds
12,807

 
104

 
1,754

 
1

 
11,156

Mortgage-backed Securities: (1)
 

 
 

 
 

 
 

 
 

Residential
789,356

 
18,003

 

 
999

 
806,360

Total
$
1,378,740

 
$
48,995

 
$
1,754

 
$
1,914

 
$
1,424,067


 

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December 31, 2012