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.