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.

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.

	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.

	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.