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 two quarters 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 two quarters of 2011 was approximately $4.1 million, which should have been recorded between the first two quarterly periods of 2011.

The correction of the errors resulted in an increase in net income of $1.6 million for the three months ended June 30, 2011 resulting in net income attributable to Southside Bancshares, Inc. of $12.6 million for that period, and an increase in net income of approximately $2.7 million for the six months ended June 30, 2011, resulting in net income attributable to Southside Bancshares, Inc. of $21.0 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 June 30, 2011
	As Originally Reported		Corrections			As Restated
Consolidated Balance Sheet

Mortgage-backed and related securities:
Available for sale, at estimated fair value (1)	$	1,136,961	$	(353,373	)	$	783,588
Securities carried at fair value through income (1)		-		367,140			367,140
Held to maturity, at amortized cost (1)		395,728		(10,507	)		385,221
Total assets		3,115,208		3,260			3,118,468

Deferred tax liability (2)		1,255		1,141			2,396
Total liabilities		2,870,733		1,141			2,871,874

Retained earnings (3)		61,472		2,266			63,738
Accumulated other comprehensive income (loss) (4)		7,842		(147	)		7,695
Total shareholders' equity		242,479		2,119			244,598
Total equity		244,475		2,119			246,594
Total liabilities and equity		3,115,208		3,260			3,118,468

"As Originally Reported" reflects balances reported in the June 30, 2011 Form 10-Q filed on August 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 six months ended June 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)

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 of the fair value gains on securities carried at fair value through income.

(3)

Retained earnings increased due to the increase in fair value gains on securities carried at fair value through income for the six months ended June 30, 2011.

(4)

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



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

Gain on sale of securities available for sale (1)	$	5,809	$	(338	)	$	5,471
Gain on sale of securities carried at fair value through income (1)		-		338			338
Fair value gain (loss) - securities (2)		-		4,083			4,083
Total noninterest income		18,188		4,083			22,271
Income before income tax expense		24,168		4,083			28,251
Provision for income tax expense (3)		4,457		1,429			5,886
Net income		19,711		2,654			22,365
Net income attributable to Southside Bancshares, Inc.		18,353		2,654			21,007
Earnings per common share - basic		1.12		0.16			1.28
Earnings per common share - diluted		1.12		0.16			1.28

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

Gain on sale of securities available for sale (1)	$	4,004	$	(84	)	$	3,920
Gain on sale of securities carried at fair value through income (1)		-		84			84
Fair value gain (loss) - securities (2)		-		2,456			2,456
Total noninterest income		10,179		2,456			12,635
Income before income tax expense		14,770		2,456			17,226
Provision for income tax expense (3)		3,241		859			4,100
Net income		11,529		1,597			13,126
Net income attributable to Southside Bancshares, Inc.		11,036		1,597			12,633
Earnings per common share - basic		0.67		0.10			0.77
Earnings per common share - diluted		0.67		0.10			0.77

"As Originally Reported" reflects balances reported in the June 30, 2011 Form 10-Q filed on August 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 change in provision (benefit) for income tax expense is a direct result of the changes in income.

	As of and for the six months ended June 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.		18,353			2,654			21,007
Balance, end of period		61,472			2,266			63,738

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		17,975			(893	)		17,082
Reclassification adjustment for gains on sales of available for sale securities included in net income, net of tax		(3,776	)		220			(3,556	)
Net change in accumulated other comprehensive income (loss)		14,661			(673	)		13,988
Balance, end of period		7,842			(147	)		7,695

Total shareholders' equity		242,479			2,119			244,598
Total equity		244,475			2,119			246,594

Comprehensive income:
Net income		19,711			2,654			22,365
Net change in accumulated other comprehensive income (loss)		14,661			(673	)		13,988
Comprehensive income		34,372			1,981			36,353
Comprehensive income attributable to Southside Bancshares, Inc.		33,014			1,981			34,995

Consolidated Statement of Cash Flow

Operating Activities:
Net income	$	19,711		$	2,654		$	22,365
Deferred tax expense (benefit)		38			1,429			1,467
Gain on sale of securities carried at fair value through income		-			(338	)		(338	)
Gain on sale of securities available for sale		(5,809	)		338			(5,471	)
Fair value gain (loss) - securities		-			(4,083	)		(4,083	)
Net cash provided by operating activities		35,753			-			35,753

Investing Activities:
Securities held to maturity:
Maturities, calls and principal repayments		24,730			(1,357	)		23,373
Securities available for sale:
Purchases		(694,934	)		344,728			(350,206	)
Sales		342,949			(16,248	)		326,701
Maturities, calls and principal repayments		150,738			(12,562	)		138,176
Securities carried at fair value through income:
Purchases		-			(344,728	)		(344,728	)
Sales		-			16,248			16,248
Maturities, calls and principal repayments		-			13,919			13,919
Net cash used in investing activities		(140,073	)		-			(140,073	)

"As Originally Reported" reflects balances reported in the June 30, 2011 Form 10-Q filed on August 8, 2011.

"As Restated" reflects the final restated balances.

"Corrections" reflect changes to the originally reported balances.