<PAGE>   1





















                           SOUTHSIDE BANCSHARES CORP.

                                 Annual Report

                               December 31, 1997

                  (With Independent Auditors' Report Thereon)




<PAGE>   2




                           SOUTHSIDE BANCSHARES CORP.

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                   Page
<S>                                                                                <C>
Letter to Our Shareholders ......................................................   2
Southside Bancshares Corp. - Organization .......................................   4
Financial Highlights ............................................................   5
Management's Discussion and Analysis of Financial Condition
   and Results of Operations ....................................................   6
Statement of Management's Responsibility for Financial Statements ...............  27
Independent Auditors' Report ....................................................  28
Consolidated Financial Statements of Southside Bancshares Corp. and Subsidiaries:
   Balance Sheets ...............................................................  29
   Statements of Income .........................................................  30
   Statements of Shareholders' Equity ...........................................  31
   Statements of Cash Flows .....................................................  32
   Notes to Consolidated Financial Statements ...................................  33
Southside Bancshares Corp. and Subsidiaries - Directors and Officers:
   Southside Bancshares Corp. ...................................................  47
   South Side National Bank in St. Louis ........................................  48
   State Bank of Jefferson County ...............................................  49
   Bank of Ste. Genevieve .......................................................  49
   The Bank of St. Charles County ...............................................  50
</TABLE>




                                       1


<PAGE>   3

LETTER TO OUR SHAREHOLDERS
Southside Bancshares Corp. and Subsidiaries


Dear Shareholders:

     This past year was marked by several significant milestones: the Company
achieved its fourth consecutive increase in core annual net earnings, which
also represent a new record level for the Company; the quarterly dividend was
increased each quarter during 1997; and, on February 25, 1998, the Company
entered into a definitive agreement that provides for the acquisition and
merger of Public Service Bank, fsb (PSB) with the Company's lead subsidiary
bank, South Side National Bank in St. Louis.  This acquisition is expected to
be completed in the third quarter of 1998 and represents the Company's first
acquisition since 1990.

     The Company earned $6,302,000 or $2.30 per common share in 1997, compared
to $6,158,000 or $2.27 per share in 1996, which represents an increase of
$144,000 or approximately 2% during 1997.  This increase in net earnings was
largely attributable to an increase in net interest income.  The 1997 earnings
resulted in a return on average assets (ROA) of 1.18% and a return on average
shareholders' equity (ROE) of 11.44%, compared to an ROA of 1.20% and an ROE of
12.27% in 1996.  The slight decline in ROA during 1997 was largely the result
of growth at the Company's subsidiary banks, as average assets increased
$20,819,000 or 4%.  Due to four straight years of strong earnings, the ROE also
declined slightly.  Management and the Board of Directors has taken steps to
utilize this excess capital during the year, including the aforementioned
acquisition of PSB, increased dividends to shareholders, and the purchase of
treasury stock.

     With the increase in the March 15, 1998 dividend to $.20 per common share,
the quarterly dividend has been raised a total of 25% over the past four
quarters, and over the past two years, the quarterly dividend rate doubled from
$.10 in March 1996 to its present level. We believe these increases in the
dividend level demonstrate our commitment to increasing shareholder
value and our confidence in the Company's ability to sustain current levels of
profitability.

     We are very excited about the potential of the PSB acquisition.  With the
acquisition we will acquire facilities in two markets, which the Company views
as a natural fit, one in St. Louis Hills in the City of St. Louis and the other
in West St. Louis County.  PSB also has a very successful residential mortgage
loan origination business, which will give the Company an opportunity to enter
this highly competitive area with an experienced staff, a solid referral
network, and instant credibility with investors.  Finally, the acquisition
gives PSB's employees and customers access to additional products and resources
not previously available to them, including commercial and construction loan
products, an ATM and debit card network, increased lending capacity, and
additional branch locations.
        
     Total assets of the Company increased by approximately $22,000,000 or 4%
during 1997, and total assets have increased by approximately $37,000,000 over
the past two years.  One of the components of our strategic business plan was
to achieve growth without negatively impacting earnings or asset quality.  We
will continue to evaluate opportunities for growth in the future as means of
better utilizing our existing capital structure; however, we do not intend to
sacrifice earnings or asset quality to accomplish this objective.

     Total nonperforming assets increased to $4,518,000, as of December 31,
1997, from $2,043,000, in 1996.  This increase was primarily due to one
commercial borrowing relationship, which is currently undergoing a
reorganization through the bankruptcy courts.  Even with the increase,
nonperforming assets represent only .82% of total assets, which is comparable
to our peers in the industry.


                                       2


<PAGE>   4

LETTER TO OUR SHAREHOLDERS (CONT.)
Southside Bancshares Corp. and Subsidiaries


     Much has been written about the year 2000 and its potential impact on the
business community.  We began reviewing and testing our computer hardware,
computer software, and other affected areas during 1997.  Based on the results
of the preliminary procedures, management does not believe year 2000 will pose
any major problems for the Company, nor should it result in any significant
expense or capital expenditures.  We will continue to review and test our
systems during 1998 and 1999 to ensure that our entry into the new millennium
is without incident.

     Looking ahead to 1998 and beyond, we are very excited about the potential
for the Company.  As mergers and acquisitions change the face of the financial
institution landscape, it is our belief that strong independent organizations,
like ours, will thrive.  We have the capabilities to provide products and
services comparable to larger institutions, we have the capital structure to
sustain continued growth, and we have a commitment to customer service that
should allow the Company to capitalize on our competitors weaknesses.

     As always, we would like to take this opportunity to thank our entire
staff, customers, fellow directors, and shareholders for their support during
the past year.  We are proud of each of our dedicated employees who work hard
in providing superior customer service.



Sincerely,



Howard F. Etling                      Thomas M. Teschner
Chairman of the Board                 President and Chief Executive Officer

                                      3


<PAGE>   5




                  SOUTHSIDE BANCSHARES CORP. - ORGANIZATION

     Southside Bancshares Corp. (the Company) was incorporated in 1982 and has
operated as a registered bank holding company since 1983 under the Bank Holding
Company Act of 1956, as amended.  The Company and its subsidiaries had
consolidated total assets of approximately $549,864,000 at December 31, 1997.
The following table shows the total assets at December 31, 1997, before
elimination of intercompany accounts, of each of the Company's subsidiary
banks, all of which are located in Missouri.

<TABLE>
<CAPTION>
                                                       TOTAL ASSETS AT
                                                      DECEMBER 31, 1997
        SUBSIDIARY BANKS                               (IN THOUSANDS)
        --------------------------------------------  -----------------
        <S>                                                    <C>
        South Side National Bank in St. Louis (SSNB)           $353,316
        State Bank of Jefferson County (SBJC)                    57,683
        Bank of Ste. Genevieve (BSG)                             84,805
        The Bank of St. Charles County (BSCC)                    54,120
</TABLE>


     The Company's subsidiary banks, which operate 13 banking offices in
Missouri, are engaged in the general banking business of accepting funds for
deposit, making loans, renting safe deposit boxes, and performing such other
banking services as are usual and customary in banks of similar size and
character.

     Customers of the subsidiary banks are also offered fiduciary services
through the trust department of South Side National Bank in St. Louis (South
Side National Bank).  At December 31, 1997, the combined market value of
fiduciary and custodial assets under management of the trust department was
approximately $307,000,000.  These assets are not reflected in the consolidated
financial statements, as they do not represent assets of the Company.

     The responsibility for the management of the subsidiary banks remains with
the officers and directors of the respective banks.  The Company provides its
subsidiary banks with assistance and service in auditing, record keeping, tax
planning, trust operations, new business development, lending, regulatory
compliance, and human resources management.

     Southside Bancshares Corp. has nine officers, the majority of whom are
also officers of South Side National Bank.  South Side National Bank is a
national banking organization and employs 132 full-time and 16 part-time
employees.  State Bank of Jefferson County, Bank of Ste. Genevieve, and The
Bank of St. Charles County are Missouri state-chartered banks and employ a
total of 79 full-time and 9 part-time employees.



                                       4


<PAGE>   6




                              FINANCIAL HIGHLIGHTS

                FIVE-YEAR COMPARISON OF SELECTED FINANCIAL DATA
                   (dollars in thousands, except share data)




<TABLE>
<CAPTION>
                                                                     As of and For the Years Ended December 31,
                                               ------------------------------------------------------------------------------------
                                                              %                          %                         %
                                                           CHANGE                     Change                     Change
                                                 1997       97/96         1996         96/95         1995         95/94    
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>            <C>       <C>              <C>        <C>           <C>
EARNINGS                                                                                                                   
    Total interest income                      $39,355         4%       $37,868           2%       $37,263           8%   
    Total interest expense                      18,243         4         17,526           1         17,335          18    
    Net interest income                         21,112         4         20,342           2         19,928           2    
    Provision for possible loan losses              60         -             60         (14)            70         (64)   
    Net interest income after                                                                                             
      provision for possible loan losses        21,052         4         20,282           2         19,858           2    
    Net income                                   6,302         2          6,158          (9)         6,734          34    
-----------------------------------------------------------------------------------------------------------------------------------
SHARE DATA                                                                                                                
    Earnings per common share:                                                                                            
       Basic                                     $2.30         1%         $2.27         (11)%        $2.55          32%    
       Diluted                                    2.25        (1)          2.26         (11)          2.54          34    
    Dividends paid per common share                .70        40            .50          37           .365         103    
    Book value                                   20.90         8          19.30           9          17.64          20    
    Tangible book value                          20.81         8          19.18          10          17.49          21    
    Shares outstanding (year-end)(1)         2,797,670        (1)     2,836,670           -      2,849,650          10    
    Average shares outstanding               2,735,859         1      2,712,775           3      2,643,890           2    
    Average shares outstanding,                                                                                           
       including potentially                                                                                              
       dilutive shares                       2,798,105         3      2,730,214           3      2,650,551           2    
-----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION                                                                                                        
    Total assets                              $549,864         4%      $527,907           3%   $   512,908          (1)%   
    Total deposits                             483,363         3        467,276           2        457,567          (2)   
    Total loans                                326,437        11        294,463          (3)       303,824           1    
    Allowance for possible loan losses           6,120         9          5,602          (1)         5,635         (21)   
    Short-term borrowings                        5,333       229          1,623         108            779         (77)   
    ESOP debt                                        -      (100)         1,779         (40)         2,987         100    
    Subordinated capital notes                       -                        -           -              -        (100)   
    Total shareholders' equity                  56,653         7         52,841          12         47,300          24    
-----------------------------------------------------------------------------------------------------------------------------------

<CAPTION>                                     
                                        As of and For the Years Ended December 31,
                                        ------------------------------------------
                                                        %
                                                      Change
                                            1994      94/93           1993
----------------------------------------------------------------------------------
<S>                                        <C>        <C>         <C>
EARNINGS                                      
    Total interest income                  $34,383      (5)%      $     36,052
    Total interest expense                  14,753      (8)             16,059
    Net interest income                     19,630      (2)             19,993
    Provision for possible loan losses         193     (93)              2,608
    Net interest income after                                  
      provision for possible loan losses    19,437      12              17,385
    Net income                               5,014      65               3,041
------------------------------------------------------------------------------
SHARE DATA                                                     
    Earnings per common share:                                 
       Basic                                 $1.93      65%     $         1.17
       Diluted                                1.93      62                1.17
    Dividends paid per common share            .18       9                .165
    Book value                               14.66       5               13.93
    Tangible book value                      14.43       6               13.66
    Shares outstanding (year-end)(1)     2,591,440       -           2,591,440
    Average shares outstanding           2,591,440       -           2,591,440
    Average shares outstanding,                                
       including potentially                                   
       dilutive shares                   2,600,022       -           2,591,440
------------------------------------------------------------------------------
FINANCIAL POSITION                                             
    Total assets                          $517,118      (3)%    $      530,649
    Total deposits                         468,093      (3)            484,308
    Total loans                            301,397      (2)            308,231
    Allowance for possible loan losses       7,144     (14)              8,334
    Short-term borrowings                    3,378      (8)              3,678
    ESOP debt                                    -       -                   -
    Subordinated capital notes               4,190       -               4,190
    Total shareholders' equity              38,002       5              36,102
------------------------------------------------------------------------------
</TABLE>



                                SELECTED RATIOS

<TABLE>
<CAPTION>
                                                                            As of and For the Years Ended December 31,
                                                                        ----------------------------------------------------
                                                                         1997        1996       1995       1994       1993    
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>         <C>        <C>        <C>        <C>      
Loan-to-deposit ratio                                                     67.53%     63.02%     66.40%     64.39%     63.64%  
Allowance for possible loan losses to total loans                          1.87       1.90       1.85       2.37       2.70   
Dividend payout ratio (2)                                                 30.43      22.03      14.31       9.33      14.10   
Return on average assets                                                   1.18       1.20       1.33        .97        .57   
Return on average shareholders' equity                                    11.44      12.27      15.47      13.48       8.86   
Average shareholders' equity to average total assets                      10.28       9.75       8.62       7.19       6.48   
Net interest margin on average interest-earning assets                     4.34       4.42       4.41       4.27       4.30   
Allowance for possible loan losses to nonperforming loans                175.16     473.54     172.11     136.13      62.95   
Allowance for possible loan losses as a multiple of net charge-offs       N/A (3)    60.2x       4.5x       5.2x       2.0x   
----------------------------------------------------------------------------------------------------------------------------
</TABLE>


(1)  Shares outstanding at December 31, 1997 and 1996 include 86,478 and
     98,832 shares, respectively, held by the ESOP which have not been
     allocated to participants' accounts and thus are not considered
     outstanding for purposes of computing book value and tangible book value
     per share.
(2)  Dividends paid per common share divided by basic earnings per common
     share.
(3)  The ratio was not applicable in 1997 as recoveries exceeded charge-offs
     for the year.


                                       5


<PAGE>   7




                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS


     This discussion is presented to provide an understanding of the
consolidated financial condition and results of operations for the fiscal year
ended December 31, 1997 and prior years of the Company and its subsidiaries.

     As a registered bank holding company, the Company is subject to
supervision and regulation by the Board of Governors of the Federal Reserve
System (Federal Reserve) pursuant to the Bank Holding Company Act of 1956, as
amended.  All subsidiary banks are subject to regulation by the Federal Reserve
and are also members of and subject to regulation by the Federal Deposit
Insurance Corporation (FDIC).  The national banking subsidiary, South Side
National Bank in St. Louis, is subject to supervision and regulation by the
Office of the Comptroller of the Currency (OCC).  The three state-chartered
banks are subject to supervision and regulation by the Missouri Division of
Finance.



                             BALANCE SHEET ANALYSIS

     Total consolidated assets of the Company increased $21,957,000 to
$549,864,000 at December 31, 1997 when compared to $527,907,000 at December 31,
1996.  The increase was the result of continued growth at three of the
Company's four subsidiary banks.  An integral component of management's
strategic business plan has been to achieve controlled, profitable growth at
each of the subsidiary banks and, as a result, total assets have increased
$36,956,000 over the past two years.

LOAN PORTFOLIO
     The Company's loan portfolio consists of business loans to small and
medium size companies, commercial, construction and residential real estate
loans, and consumer loans.  Traditionally, the majority of the loan portfolio
has focused on real estate as an integral component of a credit's underlying
source of collateral.  Management expects real estate to continue to be a major
factor in future loan relationships, but recognizes that continued competitive
pressure from the secondary market for traditional residential loans will
result in further diversification in the portfolio.

     The table below sets forth the components of the Company's loan portfolio
for each of the last five years:


<TABLE>
<CAPTION>
                                                             (in thousands)
                                    1997           1996          1995            1994           1993          
                                 --------       --------         -------       --------       --------        
<S>                              <C>            <C>             <C>            <C>            <C>             
Commercial, financial, and                                                                                    
    agricultural                 $ 69,168       $ 62,016        $ 62,214       $ 69,219       $ 73,566        
Real estate - commercial           98,759         82,045          88,321         82,807         86,258        
Real estate - construction         30,836         26,067          15,510         11,019          9,540        
Real estate - residential          92,028         96,039         102,418        108,134        110,806        
Consumer                           23,627         17,304          17,626         18,334         18,849        
Industrial revenue bonds            5,517          6,373           7,789          9,311          8,544        
Other                               6,502          4,619           9,946          2,573            668        
                                 --------       --------        --------       --------       --------        
                                 $326,437       $294,463        $303,824       $301,397       $308,231        
                                 ========       ========        ========       ========       ========        
</TABLE>


                                       6


<PAGE>   8

BALANCE SHEET ANALYSIS (CONT.)
Southside Bancshares Corp. and Subsidiaries


     Total loans increased $31,974,000 during 1997, as the Company experienced
growth in all lending categories, with the exception of residential real estate
loans and industrial revenue bonds.  St. Louis and the surrounding communities
continue to remain a very competitive lending environment; however, recent
acquisitions and mergers by other institutions have created opportunities to
compete for lending relationships with customers who feel displaced or
uncomfortable with their recently merged or acquired lender.  With the
continued economic stability in the Company's market areas, management decided
that 1997 was an appropriate time to take a more aggressive approach toward
obtaining new lending relationships.  While pursuing a slightly more aggressive
approach, management continues to remain committed to maintaining acceptable
asset quality levels and a solid net interest margin.

     Total loans decreased by $9,361,000 during 1996 due to an intensely
competitive lending environment.  Unlike 1997, management believed that 1996
was not the appropriate time to begin a more aggressive lending approach.
Consequently, some of the Company's more aggressive competitors were able to
take advantage of the situation, and offered more attractive financing packages
than the Company.

     Following is a more detailed analysis of the changes in the individual
loan categories during 1997.

   -    Commercial, financial, and agricultural loans increased $7,152,000
        during 1997, after having remained relatively stable during 1996.  The
        1997 increase can be largely attributed to two credit relationships
        with customers in the broadcasting industry.  This was an entry into a
        new lending area for the Company; however, given the merger and
        consolidation activity which is currently taking place in the radio and
        television industry, it is unlikely that this is an area which will
        provide an opportunity for significant continued growth.

   -    Commercial and construction real estate loans increased $16,714,000
        and $4,769,000, respectively, during 1997, while residential real
        estate loans declined by $4,011,000 during the year.  The increase in
        commercial real estate loans was due, in part, to a strong economic
        environment which has encouraged businesses to expand operations and
        invest in real property.  Also contributing to the loan growth was
        consolidation among some of the Company's competitors for commercial
        and construction real estate loans.  The Company's legal lending
        capacity allows it to fulfill the financial needs of medium-sized
        commercial customers who are too large for smaller independent
        financial institutions.  The increase in construction loans relates to
        the aforementioned consolidation within the banking industry; however,
        this lending category has also benefited from new home sales remaining
        strong throughout 1997.  Residential real estate loans declined for the
        fifth straight year.  In the current interest rate environment, the
        majority of residential loan activity is being placed with the
        secondary market mortgage lenders.

   -    Consumer loans increased by $6,323,000 during 1997, which reversed
        a trend of four straight years in which the balance of this category
        had declined.  During the fourth quarter of 1996, the Company began to
        renew its focus on automobile financing.  The majority of the growth
        occurred after the Company began utilizing the services of a direct
        marketing firm.  The firm identifies recent purchasers of new and used
        vehicles, and the Company's subsidiary banks solicit refinancing of the
        vehicles in their individual market territories, which proved very
        successful during 1997.

   -    Industrial revenue bonds continue to decline as normal payments and
        early repayments reduce the size of the existing portfolio.  In
        addition, there is very little new loan origination activity in this
        area, as tax law changes in the late 1980s made it more difficult and
        less advantageous to pursue this form of financing.


                                       7


<PAGE>   9

BALANCE SHEET ANALYSIS (CONT.)
Southside Bancshares Corp. and Subsidiaries




ALLOWANCE FOR POSSIBLE LOAN LOSSES AND RISK ELEMENTS
     Implicit in lending activities is the consideration that losses will be
experienced and the amount of such losses will vary from time to time,
depending upon the risk characteristics of the portfolio as affected by
economic conditions, competition, and the financial experience of borrowers.
The allowance for possible loan losses, which is designed to provide for the
risk of loss inherent in the lending process, is increased by the provision for
possible loan losses charged to expense and decreased by the amount of loans
charged off, net of recoveries.  The allowance for possible loan losses
provides for anticipated potential loan losses and is maintained at a level
commensurate with management's evaluation of the risks inherent in the
subsidiary banks' loan portfolios.  In order to identify potential risks in the
loan portfolios of the subsidiary banks, monthly reports, which contain
information on the overall characteristics of the subsidiary banks' loan
portfolios and specific analyses of loans requiring special attention,
including nonperforming and certain criticized loans, are reviewed by each
subsidiary bank's senior management personnel and Board of Directors.  In
addition, the Company performs periodic examinations of individual loans and of
the overall loan portfolio of each banking subsidiary through the Company's
loan review process.


                 SUMMARY OF ALLOWANCE FOR POSSIBLE LOAN LOSSES




<TABLE>
<CAPTION>
                                                           (in thousands)                   
                                                      Years Ended December 31,             
                                    ----------------------------------------------------------
                                     1997       1996         1995         1994          1993      
                                    ------     -------      -------      -------      --------    
<S>                                 <C>        <C>          <C>          <C>           <C>        
BALANCE AT BEGINNING OF YEAR        $5,602      $5,635       $7,144       $8,334        $9,994    
Provision charged to expense            60          60           70          193         2,608    
Adjustment due to sale of                                                                         
   Bay-Hermann-Berger Bank               -           -         (327)           -             -    
                                                                                                  
Loans charged off                     (367)     (1,219)      (2,174)      (2,318)       (5,499)   
Recoveries                             825       1,126          922          935         1,231    
                                    ------     -------      -------      -------      --------    
   Net recoveries (charge-offs)        458         (93)      (1,252)      (1,383)       (4,268)   
                                    ------     -------      -------      -------      --------    
BALANCE AT END OF YEAR              $6,120      $5,602       $5,635       $7,144        $8,334    
                                    ======     =======      =======      =======      ========    
</TABLE>



<TABLE>
<CAPTION>
                                                            Years Ended December 31,
                                             -----------------------------------------------------
                                              1997        1996        1995        1994       1993
                                             ------      ------      ------      ------      -----
 <S>                                         <C>         <C>         <C>         <C>         <C>
 RATIOS:                    
    Allowance for possible loan losses:                    
       As % of total loans                     1.87%       1.90%       1.85%       2.37%      2.70%
       As % of nonperforming loans           175.16      473.54      172.11      136.13      62.95
       As multiple of net charge-offs             *       60.2x        4.5x        5.2x       2.0x
    Net charge-offs:                    
       As % of total loans at year-end            *         .03%        .41%        .46%      1.38%
       As % of average total loans                *         .03         .42         .47       1.29
       As % of allowance for possible                    
         loan losses at year-end                  *        1.66       22.22       19.36      51.21
</TABLE>                    
                    
                    
*    Ratios are not applicable for 1997, as recoveries exceeded charge-offs
     for the year.

                                       8


<PAGE>   10

BALANCE SHEET ANALYSIS (CONT.)
Southside Bancshares Corp. and Subsidiaries




     The allowance for possible loan losses at December 31, 1997 was $6,120,000
or 1.87% of the total loans outstanding compared to $5,602,000 or 1.90% in 1996
and $5,635,000 or 1.85% in 1995.  The $518,000 increase in the allowance for
possible loan losses reflects recoveries of loans previously charged-off
exceeding loan charge-offs for the year, as the provision for possible loan
losses remained at $60,000.  The ratio of the allowance for possible loan
losses as a percentage of total loans declined slightly because loan growth
outpaced the increase in the allowance for possible loan losses.

     As indicated above, the Company experienced net recoveries during 1997 of
$458,000, after having posted net charge-offs of $93,000 and $1,252,000 in 1996
and 1995, respectively.  This represents the first time in the 15-year history
of the Company that net recoveries were achieved for an entire fiscal year,
and, as a result, management of the Company was able to maintain a relatively
low provision for possible loan losses.  The provision for possible loan losses
charged to expense was $60,000, $60,000, and $70,000 in 1997, 1996, and 1995,
respectively.

     Management records provisions for possible loan losses in amounts
sufficient to result in an allowance for possible loan losses that covers
current net charge-offs and risks believed to be inherent in the loan
portfolio.  Amounts charged against current income are based on such factors as
past loan loss experience as it relates to current portfolio mix, evaluation of
potential losses in the loan portfolio, prevailing economic conditions, and
regular reviews of the portfolio conducted by loan officers, internal loan
review staff, and bank regulatory agencies. The loan review process entails
analyzing the borrower's financial condition, payment performance, impact of
economic and business conditions on certain borrowers, loan concentration risk,
sufficiency of collateral, and any other known risks inherent in borrowing
relationships.  This process is used as the basis for determining the adequacy
of the allowance for possible loan losses.  Company management believes the
allowance for possible loan losses is adequate to cover actual and potential
losses in the loan portfolio under current conditions.


                              NONPERFORMING ASSETS


<TABLE>
<CAPTION>
                                                                    (dollars in thousands)
                                                                         December 31,
                                                  -------------------------------------------------------------
                                                    1997         1996          1995          1994         1993   
                                                    ----         ----          ----          ----         ----
<S>                                               <C>          <C>            <C>          <C>           <C>
Nonaccrual loans                                  $2,977        $1,037        $1,811        $2,829       $8,038  
Past due 90 days and still accruing interest         517           146         1,463         2,419        5,187  
Loans not included above which are                                                                               
    "troubled debt restructurings" as                                                                            
    defined in SFAS 15                                 -             -             -             -           15  
                                                  ------      --------       -------       -------      -------  
            TOTAL NONPERFORMING LOANS              3,494         1,183         3,274         5,248       13,240  
Other real estate owned                            1,024           860           554         1,833        4,316  
                                                  ------      --------       -------       -------      -------  
            TOTAL NONPERFORMING ASSETS            $4,518        $2,043        $3,828        $7,081      $17,556  
                                                  ======      ========       =======       =======      =======  
RATIOS:                                                                                                          
    Nonperforming loans as % of                                                                                  
         total loans                                1.07%         0.40%         1.08%         1.74%        4.30% 
    Nonperforming assets as % of                                                                                 
         total loans and other real                                                                              
         estate owned                               1.38          0.69          1.26          2.34         5.62  
    Nonperforming assets as % of                                                                                 
         total assets                               0.82          0.39          0.75          1.37         3.31  
    Allowance for possible loan losses                                                                           
         as % of nonperforming loans              175.16        473.54        172.11        136.13        62.95  
</TABLE>    
    

                                      9


<PAGE>   11

BALANCE SHEET ANALYSIS (CONT.)
Southside Bancshares Corp. and Subsidiaries




     Nonperforming loans totaled $3,494,000 or 1.07% of the loan portfolio at
December 31, 1997 compared to $1,183,000 or .40% of the loan portfolio at
December 31, 1996.  Nonperforming assets totaled $4,518,000 or 0.82% of total
assets at December 31, 1997 compared to $2,043,000 or .39% of total assets at
December 31, 1996.  The increase in both nonperforming loans and nonperforming
assets was primarily the result of a $2.5 million commercial lending
relationship which was placed on nonaccrual status during the year.  The
borrower is currently in bankruptcy and has a reorganization plan pending
before the court.  The Company is receiving payments on the debt as part of the
bankruptcy court proceedings, and management believes this borrower will
ultimately fulfill its financial obligations to the Company.  However, in the
event foreclosure becomes necessary, management believes adequate reserves have
been allocated to this credit.

     Current standards require that a loan be reported as impaired when it is
probable that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement.  The Company's loan policy
generally requires that a credit meeting the above criteria be placed on
nonaccrual status; however, loans which are past due more than 90 days as to
the payment of principal or interest are also considered to be impaired.  These
loans are included in the total of nonperforming assets.  Loans past due less
than 90 days are generally not considered impaired; however, a loan which is
current as to payments may be determined by management to demonstrate some of
the characteristics of an impaired loan.  In these cases, the loan is
classified as impaired while management evaluates the appropriate course of
action.  The Company's primary basis for measurement of impaired loans is the
collateral underlying the identified loan.

     Any loans classified for regulatory purposes, but not included above in
nonperforming loans, do not represent material credits, about which management
is aware of any information which causes management to have serious doubts as
to the borrower's ability to comply with the loan repayment terms or which
management reasonably expects will materially impact future operating results
or capital resources.  As of December 31, 1997, there were no concentrations of
loans exceeding 10% of total loans which were not disclosed as a category of
loans in note 3 to the consolidated financial statements of the Company.

     The amounts received in cash and recognized as interest income on
nonaccrual loans were $113,000 and $27,000 for the years ended December 31,
1997 and 1996, respectively.  If the contractual interest on these loans had
been recognized, such income would have been $232,000 and $133,000,
respectively.  There were no restructured loans at December 31, 1997 or 1996.


INVESTMENT PORTFOLIO
     The Company's investment portfolio has historically provided a stable
earnings base, a secondary source of long-term liquidity, and is one of the
primary means of adjusting interest rate sensitivity, thereby managing
interest-rate risk. The investment portfolio contains a mixture of debt
securities in terms of the types of securities, interest rates, and maturity
distribution.  This diversity, as well as management's conservative philosophy
towards risk management, has resulted in a solid investment portfolio.  Debt
securities included in the held to maturity category are stated at cost,
adjusted for amortization of premiums and accretion of discounts, in the
Company's consolidated financial statements.  Debt securities included in the
available for sale category are recorded in the consolidated financial
statements at their market value.

     The carrying value of the Company's investment portfolio decreased by
$14,155,000 during 1997 as funds from maturing investments were used to fund
the increase in loan volume.  The Company's loan-to-deposit ratios throughout
1997 remained below 70%.  Accordingly, management believes that utilizing
maturing investment securities to fund loan growth is a more effective means of
increasing net income, as compared to aggressively

                                       10


<PAGE>   12

BALANCE SHEET ANALYSIS (CONT.)
Southside Bancshares Corp. and Subsidiaries




pursuing time deposits to fund loan growth.  This strategy was particularly
effective during 1997 because of the intense deposit rate competition within
the subsidiary banks' markets and the relatively low yield available on
investment securities.

     The carrying value of the Company's investment portfolio increased by
$27,520,000 in 1996, largely because of a decrease in loan demand at the
subsidiary banks.

     The amortized cost and estimated market value of the Company's available
for sale and held to maturity debt securities at December 31, 1997, 1996, and
1995 are shown below:



<TABLE>
<CAPTION>
                                                                   (in thousands)
                                       1997                             1996                             1995
                              -------------------------       --------------------------      -------------------------
                                              ESTIMATED                       Estimated                       Estimated   
                              AMORTIZED        MARKET         Amortized        Market         Amortized        Market     
                                COST            VALUE           Cost            Value           Cost            Value     
                              ---------       ---------       ---------       ---------       ---------       ---------   
<S>                           <C>             <C>             <C>             <C>             <C>             <C>         
AVAILABLE FOR SALE:                                                                                                       
  U.S. Treasury securities                                                                                                
     and obligations of U.S.                                                                                              
     Government agencies                                                                                                  
     and corporations         $  26,899       $  27,058       $  18,861       $  18,845       $   7,569       $   7,609   
  Obligations of states and                                                                                               
     political subdivisions         300             304             445             451             530             543   
  Other securities                1,575           1,575           1,279           1,279           1,260           1,262   
                              ---------       ---------       ---------       ---------       ---------       ---------   
                                 28,774          28,937          20,585          20,575           9,359           9,414   
  Mortgage-backed securities     44,483          44,523          46,444          46,075          40,981          40,738   
                              ---------       ---------       ---------       ---------       ---------       ---------   
                              $  73,257       $  73,460       $  67,029       $  66,650       $  50,340       $  50,152   
                              =========       =========       =========       =========       =========       =========   
                                                                                                                          
HELD TO MATURITY:                                                                                                         
  U.S. Treasury securities                                                                                                
     and obligations of U.S.                                                                                              
     Government agencies                                                                                                  
     and corporations         $  72,065       $  72,348       $  92,469       $  92,396       $  83,086       $  82,939   
  Obligations of states and                                                                                               
     political subdivisions      23,544          24,316          21,709          22,461          21,875          22,822   
  Other securities                    -               -             300             300             471             471   
                              ---------       ---------       ---------       ---------       ---------       ---------   
                                 95,609          96,664         114,478         115,157         105,432         106,232   
  Mortgage-backed securities      4,070           4,174           6,166           6,220           4,190           4,262   
                              ---------       ---------       ---------       ---------       ---------       ---------   
                              $  99,679       $ 100,838       $ 120,644       $ 121,377       $ 109,622       $ 110,494   
                              =========       =========       =========       =========       =========       =========   
</TABLE>


     The Company has designated certain debt securities with a market value of
approximately $73,460,000 and $66,650,000 as available for sale at December 31,
1997 and 1996, respectively, with the differences of $203,000 and $379,000,
respectively, between the market value and amortized cost of such securities
being recorded in a valuation reserve.  Debt securities with an amortized cost
of $99,679,000 and $120,644,000 at December 31, 1997 and 1996, respectively,
remain as held to maturity securities, to be used for the Company's longer-term
liquidity needs.  The held to maturity securities at December 31, 1997 and 1996
reflected market values of $100,838,000 and $121,377,000, respectively, which
represent net unrealized gains of $1,159,000 and $733,000 in 1997 and 1996,
respectively.  Because it is not management's intention to sell securities from
the portfolio, these gains or losses are not anticipated to be realized by the
Company.


                                       11


<PAGE>   13

BALANCE SHEET ANALYSIS (CONT.)
Southside Bancshares Corp. and Subsidiaries




     The market value of the Company's portfolio in relationship to the
amortized cost of the portfolio remained relatively stable during 1997 and 1996
after having improved significantly during 1995.

     There were no sales of securities during 1997, 1996, and 1995.

     At December 31, 1997, there were no securities of a single issuer that
exceeded 10% of shareholders' equity.

DEPOSITS
     Deposits are the primary funding source for the Company's subsidiary banks
and are acquired from a broad base of local markets, including both individual
and commercial customers.  Total deposits increased $16,087,000 and $9,709,000
in 1997 and 1996, respectively.

     The increase in deposits during 1997 was due to a combined increase in
interest-bearing and noninterest-bearing demand deposits of $13,965,000 and
time deposits $100,000 and over of $3,882,000, which was partially offset by a
$488,000 decline in savings deposits and a $1,272,000 decline in time deposits
under $100,000.  The increase in noninterest-bearing demand deposits was the
result of normal activity within this category.  The increase in
interest-bearing demand deposit accounts was largely due to an increase in
money market deposits.  In recent years, commercial and retail customers have
become increasingly more sophisticated in managing their cash positions and
more sensitive to the rate of interest being earned.  During much of 1997,
there was very little spread between the rates paid on a preferred money market
account, which is tied to the 90-day U.S. Treasury bill rate, and the rates
being offered on longer term certificates of deposit.  Consequently, many
depositors opted for the increased flexibility of the money market account over
the small increase in yield offered by the certificates of deposit.  This also
explains the decline in certificates of deposit under $100,000.  Time deposits
$100,000 and over continue to increase, although the Company has not actively
pursued these deposits.  Much of the growth in the current year can be directly
attributed to the mergers and consolidations within the industry.  Many of the
city, county, and local government offices in the Company's markets prefer to
conduct business with banks headquartered in their area.  Oftentimes, these
relationships are rather large relationships, which exceed $100,000.

     The 1996 deposit growth was largely in interest-bearing demand deposits
and time deposits $100,000 and over.  The growth in these two portfolios was
partially offset by small declines in noninterest-bearing demand deposits,
savings deposits, and time deposits under $100,000.  Interest-bearing demand
deposits increased by $4,850,000 during 1996, with the majority of this growth
attributable to deposit migration from noninterest-bearing demand and savings
deposits.  Time deposits $100,000 and over increased $12,929,000 during 1996.
This increase was largely the result of a few larger public fund accounts, for
which the Company was the successful bidder.  In each case, the Company was not
overly aggressive in the pricing of these deposits, and the yields were such
that profit margins existed between the rates paid on the deposits and
comparable investment securities.  The decline in time deposits under $100,000
was largely due to the highly competitive market for these deposits during
1996.  Several of the Company's competitors offered a number of special rates
throughout the year in an effort to build market share.  Management of the
Company opted not to pursue the same course of action because, with the
decrease in loans during the year, the impact would have been detrimental to
the net interest margin.


                                       12


<PAGE>   14

BALANCE SHEET ANALYSIS (CONT.)
Southside Bancshares Corp. and Subsidiaries




     The following table shows the breakdown of deposits at December 31, 1997,
1996, and 1995:


<TABLE>
<CAPTION>
                                                      (dollars in thousands)
                                          1997                 1996                   1995
                                  ------------------  ------------------------  ------------------
                                            PERCENT                Percent                Percent
                                            OF TOTAL               of Total               of Total
                                  AMOUNT    DEPOSITS     Amount    Deposits     Amount    Deposits
                                  --------  --------  -----------  -----------  --------  --------
<S>                               <C>           <C>     <C>            <C>      <C>          <C>
Noninterest-bearing                                                        
    demand deposits               $ 61,308        12%    $ 58,046       12%     $ 60,999        13%
Interest-bearing demand deposits   139,177        29      128,474       28       123,624        27
Savings deposits                    56,627        12       57,115       12        60,134        13
Time deposits under $100,000       172,830        36      174,102       37       176,200        39
                                  --------      ----     --------      ---      --------      ----
        Total core deposits        429,942        89      417,737       89       420,957        92
Time deposits $100,000 and                                                                    
    over                            53,421        11       49,539       11        36,610         8
                                  --------      ----     --------      ---      --------      ----
        Total deposits            $483,363       100%    $467,276      100%     $457,567       100%
                                  ========      ====     ========      ===      ========      ====
</TABLE>



     The following table shows the amount of time deposits $100,000 and over by
time remaining until maturity at December 31, 1997, 1996, and 1995:

<TABLE>
<CAPTION>
                                              (in thousands)
                                        1997      1996      1995
                                        -------  --------  -------
        <S>                             <C>       <C>      <C>
        Three months or less            $24,733   $12,899  $17,039
        Over three through six months    12,494    19,850    9,723
        Over six through twelve months   11,328    11,904    4,016
        Over twelve months                4,866     4,886    5,832
                                        -------  --------  -------
                                        $53,421   $49,539  $36,610
                                        =======  ========  =======
</TABLE>


     The following table reflects the average daily balances, by category, at
December 31, 1997, 1996, and 1995, and their weighted average interest rates
for the respective years:



<TABLE>
<CAPTION>
                                                     (dollars in thousands)
                                         1997                 1996                   1995
                                  -----------------  ------------------------  -----------------
                                  AVERAGE   AVERAGE    Average      Average     Average   Average
                                   BALANCE   RATE      Balance        Rate      Balance    Rate
                                  --------  -------  -----------  -----------  --------  -------
<S>                               <C>       <C>      <C>          <C>          <C>       <C>
Noninterest-bearing demand
    deposits                      $ 55,323      -  %    $ 54,965          -  %  $59,162     -   %
Interest-bearing demand deposits   130,046     3.34      123,924         3.33   120,098     3.41
Savings deposits                    58,029     2.51       60,332         2.53    64,381     2.62
Time deposits under $100,000       173,382     5.37      175,239         5.40   176,943     5.36
Time deposits $100,000 and over     52,601     5.32       41,456         5.18    29,270     5.40
                                  --------    =====  -----------         ====  --------    =====
                                  $469,381              $455,916               $449,854
                                  ========           ===========               ========
</TABLE>


SHORT-TERM BORROWINGS
     Short-term borrowings are an alternative to other funding sources and
consist primarily of federal funds purchased, securities sold under agreements
to repurchase, U.S. Treasury tax and loan notes, and other short-term
borrowings.  These sources of funding are utilized primarily by South Side
National Bank and the Company itself.  Depending on funding requirements and
liquidity strategies employed by the Company's Asset/Liability

                                       13


<PAGE>   15

BALANCE SHEET ANALYSIS (CONT.)
Southside Bancshares Corp. and Subsidiaries




Management Committee, these funds are used on a short-term basis.  Securities
sold under agreements to repurchase (REPO) increased during 1997 and 1996
because of the introduction of a daily REPO Sweep account.  This cash
management product allows commercial customers to more effectively invest their
operating capital.

     The following table is a summary of short-term borrowings at December 31,
1997, 1996, and 1995:



<TABLE>
<CAPTION>
                                              (in thousands)
                                            1997    1996    1995
                                           ------  -------  ----
                                                   
         <S>                               <C>      <C>     <C>
         Securities sold under agreements          
             to repurchase                 $5,333   $1,623  $307
         U.S. Treasury tax and loan notes       -        -   472
                                           ------  -------  ----
                                           $5,333   $1,623  $779
                                           ======  =======  ====
</TABLE>


     The average daily balances, weighted average daily interest rates, maximum
month-end amounts outstanding, and average interest rates at year-end for
short-term borrowings were as follows:


<TABLE>
<CAPTION>
                                                   (dollars in thousands)
                                        1997                    1996                  1995
                                --------------------  ------------------------  ----------------
                                 AVERAGE     AVERAGE    Average      Average   Average   Average
                                 BALANCE      RATE      Balance       Rate     Balance     Rate
                                --------    --------   --------      -------  --------   -------
<S>                            <C>        <C>      <C>          <C>          <C>      <C>
Federal funds purchased         $     42     5.41%     $   188         5.85%    $399      5.76%
Securities sold under
    agreements to
    repurchase                     5,053     4.47          893         4.37      747      4.82
U.S. Treasury tax and loan
    notes                          -            -          703         5.97    1,333      5.40
Other short-term borrowings        -            -            -            -      479      8.77
                                --------  =======      -------        =====  -------      ====
                                $  5,095               $ 1,784                $2,958
                                ========               =======               =======
Total maximum short-term
    borrowings outstanding
    at any month-end during
    the year                    $ 10,693               $ 3,308                $8,161
                                ========               =======               =======
Average short-term borrowings
    rate at end of year                      4.40%                     4.85%              6.70%
                                            =====                     =====               ====
</TABLE>


ASSET/LIABILITY MANAGEMENT
     The Company's overall goal in asset/liability management is to achieve a
reasonable balance of rate-sensitive assets with rate-sensitive liabilities in
order to minimize the impact of changing rates on net income.  As assets and
liabilities tend to become more rate sensitive, whether due to customer demands
or Company initiatives, it becomes more important that rates earned are matched
with rates paid, and that repricing dates are matched so the next earning
interval will have both components at current rates.  Assets and liabilities
that mature or are repriced in one year or less are considered in the financial
services industry to be "rate sensitive."  This means that as rates in the
marketplace change, the rates on these assets or liabilities will soon be
impacted.  Given a reasonably balanced rate sensitivity position if rates are
increasing, the Company will have more interest income and more interest
expense.  Conversely, if rates are decreasing, the Company will have less
interest income and less interest expense.


                                       14


<PAGE>   16

BALANCE SHEET ANALYSIS (CONT.)
Southside Bancshares Corp. and Subsidiaries




     Short-term interest rate sensitive positions are critical in managing net
interest income, as they have an immediate impact on earnings during periods of
changing interest rates.  Interest rate sensitivity is measured by
interest-sensitive gaps defined as the difference between interest-sensitive
assets and interest-sensitive liabilities within any specific time period.  A
positive or negative interest-sensitive gap demonstrates the relative exposure
to interest rate movements.  To the extent that these gaps are close to zero,
net interest income is protected from interest rate fluctuations for the
specific time period being examined.  Examples of interest-sensitive assets and
liabilities include commercial loans whose interest rates are tied to the prime
commercial lending rate and money market deposit accounts whose interest rates
are tied to the three-month treasury bill rate.  The objective of an interest
sensitivity analysis is to measure the potential impact of changes in the
levels of market interest rates on net interest income.

     Management believes maintenance of appropriate rate-sensitive positions is
imperative in maintaining an adequate degree of liquidity and acceptable profit
margins, and has structured its deposit, investment, and loan portfolios
accordingly.  It is the opinion of management that the Company has maintained
an adequate liquidity position and management will endeavor to do so in the
future.


RATE SENSITIVITY
     Interest rate sensitivity is a key component of asset/liability management
and is related to liquidity, because each is affected by maturing assets and
sources of funds.  Interest sensitivity, however, also takes into consideration
those assets and liabilities with interest rates which are subject to change
prior to maturity.  The objective of interest sensitivity management is to
optimize earnings results, while managing, within internal policy constraints,
interest rate risk.  The Company's policy on interest rate sensitivity is to
manage exposure to potential risk associated with changing interest rates by
maintaining a balance sheet posture in which annual net income is not
significantly affected by interest rate movements.  The total absence of risk,
as well as excessive risk, can result in less than acceptable returns;
therefore, the Company manages its interest sensitivity risk between those two
extremes.

     The table on the following page is an analysis of interest-sensitive
assets and liabilities at December 31, 1997 over various time horizons.
Because such an analysis does not capture many factors which determine interest
rate risk, the Company has put more emphasis on the use of a simulation model
to measure its exposure to changes in interest rates.  Under different rate and
growth assumptions, these projections enable the Company to adjust its
strategies to protect the net interest margin against significant rate
fluctuations.  Uniform sensitivity reports and guidelines are used by all
subsidiary banks of the Company.  Current model projections indicate annual net
interest income would change by less than 10% should rates rise or fall within
200 basis points from their current level.  Based on the Company's historical
analysis, interest-bearing demand and savings deposits have proven to be very
stable core deposits even through interest rate fluctuations.  Accordingly,
management believes these deposits are not 100% rate sensitive within the
period of three months or less.  As a result, these deposits have been
allocated between the four repricing categories as follows:  three months or
less - 35%, three months through 12 months - 20%, over one year through five
years - 25%, and over five years - 20%.

     As reflected on the Repricing and Interest Rate Sensitivity Analysis on
the following page, the Company has a well-balanced interest rate sensitivity
position.  Generally, a one-year gap ratio in a range of .80x - 1.20x indicates
an entity is not subject to any undue interest rate risk.  The Company's
current one-year gap of 1.08x is within an acceptable range.


                                       15


<PAGE>   17

BALANCE SHEET ANALYSIS (CONT.)
Southside Bancshares Corp. and Subsidiaries




                REPRICING AND INTEREST RATE SENSITIVITY ANALYSIS

                             (dollars in thousands)

                               December 31, 1997


<TABLE>
<CAPTION>
                                                    OVER      OVER
                                                  3 MONTHS   1 YEAR
                                        3 MONTHS   THROUGH   THROUGH   OVER
                                        OR LESS   12 MONTHS  5 YEARS  5 YEARS   TOTAL
                                        --------  ---------  -------  -------  -------
<S>                                     <C>       <C>        <C>      <C>      <C>
Interest-earning assets:
   Federal funds sold                   $ 17,200   $      -  $       -  $     -  $ 17,200
   Investments available for sale         19,928      9,247     37,615    6,670    73,460
   Investments held to maturity            6,763     18,858     55,736   18,322    99,679
   Loans, net of unearned discount (1)   175,586     53,668     78,623   18,560   326,437
                                        --------  ---------  ---------  -------  --------
      Total interest-earning
          assets                         219,477     81,773    171,974   43,552   516,776
                                        --------  ---------  ---------  -------  --------

Cumulative interest-earning assets       219,477    301,250    473,224  516,776   516,776
                                        --------  ---------  ---------  -------  --------

Interest-bearing liabilities:           
   Interest-bearing demand deposits       48,712     27,835     34,795   27,835   139,177
   Savings deposits                       19,819     11,325     14,158   11,325    56,627
   Time deposits under $100,000           44,472     70,513     57,845        -   172,830
   Time deposits $100,000 and over        26,034     23,821      3,566        -    53,421
   Short-term borrowings                   5,333          -          -        -     5,333
                                        --------  ---------  ---------  -------  --------
      Total interest-bearing
          liabilities                    144,370    133,494    110,364   39,160   427,388
                                        --------  ---------  ---------  -------  --------

Cumulative interest-bearing
   liabilities                           144,370    277,864    388,228  427,388   427,388
                                        --------  ---------  ---------  -------  --------

Gap analysis:
   Interest sensitivity gap             $ 75,107  $ (51,721) $  61,610  $ 4,392  $ 89,388
                                        ========  =========  =========  =======  ========
   Cumulative interest
      sensitivity gap                   $ 75,107  $  23,386  $  84,996  $89,388  $ 89,388
                                        ========  =========  =========  =======  ========

Cumulative gap ratio of interest-
   earning assets to interest-bearing
   liabilities                             1.52x      1.08x      1.22x    1.21x     1.21x
                                        ========  =========  =========  =======  ========
</TABLE>


(1)  Nonaccrual loans are reported in the "over 1 year through 5 years"
     column.

LIQUIDITY
     The Company's Asset/Liability Management Committee also formulates
guidelines for and monitors the composition of assets and liabilities.  The
objective is to meet earnings goals by producing the optimal yield and maturity
mix consistent with interest rate expectations and projected liquidity needs.

     Achieving these goals is the central role of liquidity management, which
must ensure that the Company has ready access to sufficient funds to meet
existing commitments and future financial obligations.  In addition, liquidity
management enables the Company to withstand fluctuations in deposit levels and
to provide for customers' credit needs in a timely and cost-effective manner.
Liquidity management, therefore, is viewed from both an asset and liability
perspective.


                                       16


<PAGE>   18

BALANCE SHEET ANALYSIS (CONT.)
Southside Bancshares Corp. and Subsidiaries




     Asset liquidity is normally provided through the maturities of various
assets, the receipt of loan payments, and the interest collected on assets.
Additionally, as part of its overall asset/liability management strategy, the
Company designates certain investment securities as available for sale.  In the
event that liquidity needs arise, these securities are available to be
converted to cash.

     The most important source of liquidity for the Company is deposit
liquidity, which is the ability to raise new funds and renew maturing
liabilities.  The Company's long-term customer relationships in the various
local markets are the foundation of the Company's long-term liquidity.

     Short-term liquidity needs arise from continuous fluctuations in the flow
of funds on both sides of the balance sheet.  The subsidiary banks control
their own asset/liability mix within guidelines of Company policy and their
individual loan demand and deposit structure, with guidance from the
Asset/Liability Management Committee.  Other than South Side National Bank, the
subsidiary banks do not generally borrow funds.

     As the parent company, Southside Bancshares Corp. maintains its liquidity
position and provides for its cash flow needs through dividends and management
fees received from its subsidiary banks.

     It is the opinion of management that the Company has historically
maintained an adequate liquidity position and management will endeavor to
continue to do so in the future.


CAPITAL RESOURCES
     A strong capital base is vital to any banking organization as capital
provides a solid foundation for anticipated future asset growth and promotes
depositor and investor confidence.

     Assets vary with respect to risk.  Some assets, such as cash or short-term
government securities, are practically risk free.  Other assets, such as loans,
have increased risk associated with them.  Capital requirements depend to some
extent on the degree of risk within a bank's asset categories and the level of
assets in those risk categories.

     Bank regulators consider a range of factors when determining capital
adequacy.  Such factors include the organization's size, quality and stability
of earnings, risk diversification, management expertise, asset quality,
liquidity, and internal controls.  The risk-based capital guidelines, adopted
in 1990, define the components of capital, categorize assets into different
risk classes, and include certain off-balance-sheet items in the calculation of
capital requirements.  Off-balance-sheet items are converted into
on-balance-sheet credit equivalents and are categorized into different risk
classes to determine the required capital associated with each class.
On-balance-sheet items are also assigned different risk weights to determine
required capital.  Together, these two items comprise the risk-weighted asset
denominator of the required capital ratios.

     Capital itself is categorized into two types:  Tier I and Tier II.  Tier I
capital elements include total shareholders' equity less goodwill and exclude
the effects of net unrealized gains or losses on available-for-sale securities.
Tier II capital includes other supplementary capital elements, subject to
certain limitations, such as mandatory convertible notes, subordinated debt,
and the allowance for possible loan losses.  The maximum amount of the
allowance for possible loan losses which can be included as Tier II capital is
1.25% of risk-weighted assets.


                                       17


<PAGE>   19

BALANCE SHEET ANALYSIS (CONT.)
Southside Bancshares Corp. and Subsidiaries




     The capital guidelines require banking organizations to maintain a minimum
total capital ratio of 8% (of which at least 4% must be Tier I capital).  The
Company's total capital ratios under the risk-weighted guidelines at December
31, 1997 and 1996 were 17.38% and 17.88%, respectively, which included Tier I
capital ratios of 16.12% and 16.62%, respectively.  In addition, the Company
and its subsidiary banks must maintain a minimum Tier I leverage ratio (Tier I
capital to adjusted total assets) of at least 3%.  The Company's Tier I
leverage ratios were 10.34% and 10.12% at December 31, 1997 and 1996,
respectively.  These ratios are well above the minimum risk-weighted capital
requirements.

     All of the subsidiary banks of the Company also exceeded the various
regulatory capital requirements at December 31, 1997, 1996, and 1995.
Management reviews the various capital measures monthly to ensure that they are
within internal guidelines and within external guidelines as established by
law, and management believes that the Company's current capital position is
adequate to support its banking operations.

     The following is a summary of data and ratios pertaining to the Company's
capital position at December 31, 1997, 1996, and 1995:

<TABLE>
<CAPTION>
                                                    (dollars in thousands)
                                               1997       1996         1995
                                             -------  -----------  -----------
  <S>                                        <C>        <C>          <C>
  RISK-BASED CAPITAL:
     Tier I capital                          $56,279      $52,778      $47,030
     Total capital                            60,664       56,767       50,986
     Risk-weighted assets                    349,079      317,494      314,770
  RISK-BASED CAPITAL RATIOS:
     Tier I capital to risk-weighted assets   16.12%       16.62%       14.94%
     Minimum requirement                        4.00         4.00         4.00
     Total capital to risk-weighted assets     17.38        17.88        16.20
     Minimum requirement                        8.00         8.00         8.00
                                             =======     ========     ========
-------------------------------------------------------------------------------

  TIER I CAPITAL:
     Tier I capital                          $56,279      $52,778      $47,030
     Average fourth quarter total
       consolidated assets less
       intangibles                           544,380      521,523      507,108
  LEVERAGE CAPITAL RATIOS:
     Tier I capital to average total
       consolidated assets less
       intangibles                            10.34%       10.12%        9.27%
     Minimum requirement                       3.00         3.00         3.00
                                             =======      =======      =======
</TABLE>





                                       18


<PAGE>   20

RESULTS OF OPERATIONS
Southside Bancshares Corp. and Subsidiaries




                             RESULTS OF OPERATIONS

EARNINGS SUMMARY
The consolidated net income of the Company was $6,302,000, $6,158,000, and
$6,734,000 for the years ended December 31, 1997, 1996, and 1995, respectively,
which resulted in basic earnings per common share of $2.30, $2.27, and $2.55 in
each of those years.  The results for 1997 represent the fourth consecutive
year in which the Company has achieved record core net earnings, as net income
in 1995 included the effects of two nonrecurring items which totaled
$1,370,000.  Excluding the effects of these two nonrecurring items, core net
earnings were $5,364,000 in 1995.  The increases in core net earnings were
$144,000, $794,000, $350,000 in 1997, 1996, and 1995, respectively.  The net
income in 1997 results in a return on average assets (ROA) of 1.18%, compared
to 1.20% and 1.33% in 1996 and 1995, respectively.  The slight decline in ROA
in 1997 was largely the result of growth at the Company's subsidiary banks, as
average assets increased $20,819,000 or 4.0%.  In addition, the return on
average shareholders' equity (ROE) in 1997 was 11.44%, compared to 12.27% and
15.47% in 1996 and 1995, respectively.  The decline in the ROE over the past
three years is largely due to the Company's strengthened capital position.

     As previously discussed, 1995 net income was impacted by two nonrecurring
items.  The first of the two nonrecurring items was a litigation settlement
received by the Company's lead bank, South Side National Bank, and the second
was the gain recognized on the sale of the Company's subsidiary,
Bay-Hermann-Berger Bank.


NET INTEREST INCOME
     Net interest income on a tax-equivalent basis increased by $529,000,
$584,000, and $298,000 in 1997, 1996, and 1995, respectively.  The 1997
increase was the result of an increase in average earning assets, which was
partially offset by a narrowing net interest margin.  Average earning assets
increased $20,281,000 or 4% during 1997, with the majority of the growth in the
loan portfolio.  However, rate competition in the Company's markets caused the
average yield on the loan portfolio to decline by 21 basis points from 9.19% in
1996 to 8.98% in 1997.  This decrease in yield was the primary cause for the
drop in the net interest margin from 4.42% in 1996 to 4.34% in 1997, as the
Company's cost of funds remained relatively unchanged for the year at 4.3%.

     The increase in 1996 was due to increased earnings on investment
securities and short-term investments, which were partially offset by a
decrease in interest income on loans and an increase in interest expense on
deposits.  The $736,000 increase in the tax-equivalent interest earned on
investment securities was due to a combination of an increase in the average
balance outstanding during the year and an increase in the average yield in the
portfolio.  Because of the deposit growth experienced during the year and a
slight decline in average loans outstanding, the Company had more funds
available to purchase securities during 1996.  In addition, favorable interest
rate spreads between short-term rates and securities with maturities in the two
to five year range made securities more attractive and contributed to the
increase in the overall portfolio yield.  The decline in loan interest was due
to the decrease in the average balance, while the increase in interest expense
was largely due to deposit growth.  The average rate paid on almost all of the
Company's deposit products declined during 1996; however, an increase in the
average balance of time deposits $100,000 and over caused the overall interest
expense to increase.  As indicated previously, the Company was not overly
aggressive in pricing these larger deposit relationships, as evidenced by the
fact that while the average balance outstanding increased more than $12
million, the average rate paid on these deposits declined 22 basis points.



                                       19


<PAGE>   21

RESULTS OF OPERATIONS (CONT.)
Southside Bancshares Corp. and Subsidiaries




         CONSOLIDATED AVERAGE BALANCE SHEETS AND AVERAGE INTEREST RATES


<TABLE>
<CAPTION>
                                                          (dollars in thousands)
                                                          YEAR ENDED DECEMBER 31,
                                                        ---------------------------
                                                                   1997
                                                        ---------------------------
                                                                             AVERAGE
                                                                  INTEREST    RATES
                                                        AVERAGE   INCOME/    EARNED/
                                                        BALANCE   EXPENSE     PAID
                                                        --------  -------   --------
<S>                                                     <C>       <C>       <C>
ASSETS:
    Loans, net of unearned discount (1) (2) (3)         $311,266   $27,937     8.98%
    Investments in debt securities:
      Taxable (4)                                        155,938     9,478     6.08
      Exempt from Federal income taxes (3) (4)            23,124     1,953     8.45
    Short-term investments                                16,103       871     5.41
                                                        --------  --------
            Total interest-earning assets/
                interest income/overall yield (3)        506,431    40,239     7.95
                                                                  --------     ====
    Allowance for loan losses                             (6,061)
    Cash and due from banks                               14,817
    Other assets                                          20,622
                                                        --------
            TOTAL ASSETS                                $535,809
                                                        ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
    Interest-bearing demand deposits                    $130,046     4,346     3.34
    Savings deposits                                      58,029     1,459     2.51
    Time deposits under $100,000                         173,382     9,309     5.37
    Time deposits $100,000 and over                       52,601     2,796     5.32
    Short-term borrowings                                  5,095       228     4.47
    ESOP debt                                              1,235       105     8.50
    Subordinated capital notes                                 -         -        -
                                                        --------  --------
            Total interest-bearing liabilities/
                interest expense/overall rate            420,388    18,243     4.34
                                                                  --------    =====
    Noninterest-bearing demand deposits                   55,323
    Other liabilities                                      5,022
    Shareholders' equity                                  55,076
                                                        --------
            TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY  $535,809
                                                        ========
NET INTEREST INCOME                                                $21,996
                                                                  ========
NET INTEREST MARGIN ON AVERAGE INTEREST-EARNING ASSETS                         4.34%
                                                                               ====
</TABLE>


(1)  Interest income includes loan origination fees.

(2)  Average balance includes nonaccrual loans.

(3)  Interest yields are presented on a tax-equivalent basis.  Nontaxable
     income has been adjusted upward by the amount of Federal income tax that
     would have been paid if the income had been taxable at a rate of 34%,
     adjusted downward by the disallowance of the interest cost to carry
     nontaxable loans and securities.

(4)  Includes investments available for sale.


                                       20


<PAGE>   22

RESULTS OF OPERATIONS (CONT.)
Southside Bancshares Corp. and Subsidiaries







<TABLE>
<CAPTION>
                              (dollars in thousands)
                              Years ended December 31,
     ----------------------------------------------------------------------
                  1996                                   1995
     ------------------------------------   -------------------------------
                              Average                              Average
                    Interest  Rates                   Interest      Rates
     Average        Income/   Earned/       Average   Income/      Earned/
     Balance        Expense   Paid          Balance   Expense       Paid
     ------------------------------------   -------------------------------
     <S>          <C>         <C>           <C>        <C>         <C>
                                
     $295,683     $   27,164     9.19%      $297,480   $27,331     9.19%

      148,780          8,917     5.99        140,073     8,175     5.84
       22,943          1,918     8.36         22,273     1,924     8.64
       18,744            994     5.30         13,708       788     5.75
     --------       --------                --------   -------

      486,150         38,993     8.02        473,534    38,218     8.07
                    --------     ====                  -------     ====
       (5,646)                                (6,175)
       15,317                                 17,356
       19,169                                 20,015
     --------                               --------
     $514,990                               $504,730
     ========                               ========

     $123,924          4,125     3.33%      $120,098     4,095     3.41%
       60,332          1,529     2.53         64,381     1,685     2.62
      175,239          9,462     5.40        176,943     9,491     5.36
       41,456          2,148     5.18         29,270     1,582     5.40
        1,784             92     5.16          2,958       173     5.85
        2,060            170     8.25          2,160       190     8.80
            -              -        -          1,233       119     9.65
     --------       --------                 -------   -------

      404,795         17,526     4.33        397,043    17,335     4.37
                    --------     ====                  -------     ====
       54,965                                 59,162
        5,038                                  4,997
       50,192                                 43,528
     --------                               --------
     $514,990                               $504,730
     ========                               ========
                  $   21,467                           $20,883
                    ========                           =======
                                 4.42%                             4.41%
                                 ====                              ====
</TABLE>



                                       21


<PAGE>   23

RESULTS OF OPERATIONS (CONT.)
Southside Bancshares Corp. and Subsidiaries




                   ANALYSIS OF CHANGES IN NET INTEREST INCOME
                 DUE TO CHANGES IN VOLUME AND CHANGES IN RATES

     The following table sets forth on a tax-equivalent basis, for the periods
indicated, a summary of the changes in interest income and interest expense
resulting from changes in volume and changes in rates.  The change in interest
due to both volume and rate has been allocated in proportion to the
relationship of the absolute dollar amounts of the change in each.

<TABLE>
<CAPTION>
                                                               (in thousands)
                                                          Years ended December 31,
                                  ------------------------------------------------------------------------------ 
                                            1997 COMPARED TO 1996                   1996 Compared to 1995
                                  ------------------------------------------  ----------------------------------
                                                  INCREASE (DECREASE)                   Increase (Decrease)
                                                   DUE TO CHANGE IN                      Due to Change in
                                     NET        ----------------------      Net       ----------------------
                                   INCREASE     AVERAGE     AVERAGE      Increase    Average     Average
                                  (DECREASE)    VOLUME       RATE       (Decrease)    Volume       Rate
                                  ----------   ----------  ----------   ----------  ---------  -----------
<S>                               <C>          <C>          <C>         <C>         <C>         <C>

Changes in interest income on:
   Loans                            $    773    $ 1,405      $(632)      $(167)      $(167)     $    -
   Investment securities:
      Taxable                            561        427        134         742         525         217
      Exempt from Federal income
        taxes                             35         15         20          (6)         57         (63)
   Short-term investments               (123)      (143)        20         206         272         (66)
                                    --------    -------      -----       -----       -----      ------
        TOTAL INTEREST INCOME          1,246      1,704       (458)        775         687          88
                                    --------    -------      -----      ------       -----      ------
Changes in interest expense on:
   Interest-bearing demand
      deposits                           221        208         13          30         128         (98)
   Savings deposits                      (70)       (58)       (12)       (156)       (101)        (55)
   Time deposits under $100,000         (153)      (100)       (53)        (29)        (96)         67
   Time deposits $100,000
      and over                           648        589         59         566         633         (67)
   Short-term borrowings                 136        150        (14)        (81)        (62)        (19)
   ESOP debt                             (65)       (70)         5         (20)         (9)        (11)
   Subordinated capital notes              -          -          -        (119)       (119)          -
                                    --------    -------      -----       -----       -----      ------
        TOTAL INTEREST EXPENSE           717        719         (2)        191         374        (183)
                                    --------    -------      -----      ------       -----      ------
CHANGE IN NET INTEREST INCOME       $    529    $   985      $(456)       $584        $313      $  271
                                    ========    =======      =====      ======       =====      ======
</TABLE>


PROVISION FOR POSSIBLE LOAN LOSSES
     The provision for possible loan losses was again relatively low in 1997,
largely due to the fact that the Company experienced $458,000 in net recoveries
during the year.  The provision for possible loan losses was $60,000 in 1997
and 1996 compared to $70,000 in 1995.

NONINTEREST INCOME
     Noninterest income increased $127,000 in 1997 due to increases in trust
department and service charge revenue, which were partially offset by net
losses on the disposition of other real estate owned (OREO).  The $128,000
increase in trust revenue was the result of a strong stock market and growth
resulting from recent acquisitions and mergers in the industry.  Because the
majority of trust fees are based on the market value of the individual
accounts, a strong stock market translates into increased revenue for the
department.  Merger activity in the Company's market has left some small to
mid-sized trust customers feeling unappreciated by their trust company's new
owners, as a result, many of the individuals have sought out smaller more
personalized trust departments, like the Company's.  Trust department growth
was approximately $30,000,000 or 10% during 1997.


                                       22

<PAGE>   24

RESULTS OF OPERATIONS (CONT.)
Southside Bancshares Corp. and Subsidiaries




     The increase in service charge revenue was attributable to a continuing
focus on this area.  Because the Company has historically trailed its peers in
this category, the focus has been on reversing that trend.  The increase in net
losses in OREO transactions is part of the normal course of business.
Depending on the timing of foreclosures, buyer interest levels and other
factors, sales of properties result in small gains or losses.  Management
believes the valuation of OREO is based on the fair market value of the
underlying property.

     Noninterest income decreased by $2,083,000 during 1996 as a result of the
effects of two nonrecurring items which were included in other income in 1995.
In February 1995, the Company settled a lawsuit in which the Company's
subsidiary, South Side National Bank, was plaintiff.  Under the terms of the
settlement agreement executed by the parties, the Bank received a cash payment
of $1,400,000, which was offset by remaining legal expenses of approximately
$300,000.  The legal expenses are included in noninterest expense as a part of
"attorney fees."  In March 1995, the Company sold its wholly owned subsidiary,
Bay-Hermann-Berger Bank, which resulted in a pretax gain to the Company of
$825,000.  Excluding the effects of these two items, noninterest income
increased by $113,000 during 1996 due, in large part, to gains on the sales of
other real estate owned.


NONINTEREST EXPENSE
     Noninterest expense increased $622,000 during 1997 as a result of small
increases in employee costs and net occupancy and equipment expense and a
$530,000 increase in other expenses.  The primary components of other expense
resulting in the increase over the prior year were other real estate owned
expense, amortization of investments in low-income housing projects and
advertising expense.  The increase in other real estate owned expense relates
to a 61 unit mobile home park which the Company's lead bank acquired through
foreclosure.  The units were renovated during 1997 and occupancy was at
approximately 50% at year end.  Once the project is near full capacity it will
be self sufficient, until that time it will continue to generate losses.  The
amortization of investments in low-income projects relate to the aforementioned
mobile home park, as well as, investments in four partnerships with the St.
Louis Equity Fund.  The amortization of these investments is more than offset
by the federal and state tax credits generated by the projects and assist the
Company in reducing its effective tax rate.  Late in 1996, the Company began to
increase its marketing efforts including expanded radio and media advertising.
With the mergers and consolidations occurring in the Company's markets,
management believes it is the appropriate time to focus on image enhancement
and customer awareness.

     Total noninterest expense declined by $702,000 during 1996, aided largely
by a decline in the Federal Deposit Insurance Corporation (FDIC) assessment.
In addition to a $848,000 decrease in the FDIC assessments, attorney fees
decreased by $120,000, data processing expense was $371,000 lower, and other
expense was reduced by $147,000.  Offsetting these expense reductions were
increases in salaries and benefits and net occupancy and equipment expense.
The reduction in the FDIC assessment was due to the substantial rate reduction
effected in 1995 when the Bank Insurance Fund reached its federally mandated
fully funded level.  The reduction in data processing costs was due in part to
additional costs associated with the data processing conversion in 1995.  The
remainder is due to the lower monthly servicing fees now being paid by each of
the banks.  The increase in net occupancy and equipment expense can be
partially attributed to a new facility opened by South Side National Bank in
February 1996, as well as additional equipment costs as a result of the 1995
data processing conversion. Management anticipates occupancy expense will
continue to grow as additional locations are added and facilities are updated.
The increase in salaries and employee benefits was due in large part to normal
annual salary increases.  In addition, costs associated with the Company's
employee benefit plans increased during 1996.


INCOME TAXES
     Federal income tax expense was $2,308,000 in 1997 compared to $2,177,000
in 1996 and $2,558,000 in 1995.  The changes in Federal income tax expense have
been relatively consistent with the changes in pretax income,

                                       23


<PAGE>   25

RESULTS OF OPERATIONS (CONT.)
Southside Bancshares Corp. and Subsidiaries




although the Company's effective tax rate increased to 26.8% in 1997 from 26.1%
in 1996 and 27.5% in 1995.  The increase in 1997 in the effective tax rate was
the result of a decrease in tax-exempt loan income.


ACCOUNTING PRONOUNCEMENTS
     During 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, Disclosures about Segments of an Enterprise on Related Information
(SFAS 131).  SFAS 131 establishes standards for the way public business
enterprises report information about operating segments in annual financial
statements and requires those enterprises report selected information about
operating segments in interim financial reports issued to shareholders.
Additionally, SFAS 131 establishes standards for related disclosures about
products and services, geographic areas, and major customers superseding SFAS
No. 14, Financial Reporting for Segments of a Business Enterprise.  The Company
does not believe expanded disclosure information will be required to be
included in its consolidated financial statements beginning in 1998.


EFFECTS OF INFLATION
     Persistent high rates of inflation can have a significant effect on the
reported financial condition and results of operations of all industries.
However, the asset and liability structure of a bank is substantially different
from that of an industrial company, in that virtually all assets and
liabilities of a bank are monetary in nature.  Accordingly, changes in interest
rates may have a significant impact on a bank's performance.  Interest rates do
not necessarily move in the same direction, or in the same magnitude, as the
prices of other goods and services.

     Inflation does have an impact on the growth of total assets in the banking
industry, often resulting in a need to increase equity capital at higher than
normal rates to maintain an appropriate equity-to-assets ratio.

     Although it is obvious that inflation affects the growth of total assets,
it is difficult to measure the impact precisely.  Only new assets acquired in
each year are directly affected, so a simple adjustment of asset totals by use
of an inflation index is not meaningful.  The results of operations also have
been affected by inflation, but again there is no simple way to measure the
effect on the various categories of income and expense.

     Interest rates in particular are significantly affected by inflation, but
neither the timing nor the magnitude of the changes coincides with changes in
standard measurements of inflation such as the Consumer Price Index.
Additionally, changes in interest rates on some types of consumer deposits may
be delayed.  These factors in turn affect the composition of sources of funds
by reducing the growth of deposits that are less interest rate sensitive and
increasing the need for funds that are more interest rate sensitive.


FINANCIAL INSTRUMENT MARKET VALUE
     As disclosed in note 15 to the Company's consolidated financial
statements, the fair value of financial instrument assets exceeded the balance
sheet amounts of those instruments by $6,663,000 and $6,854,000 as of December
31, 1997 and 1996, respectively, while the fair value of financial instrument
liabilities was less than the amounts included in the balance sheet by $508,000
and $704,000 as of December 31, 1997 and 1996, respectively.

     Such comparative information reflects the effect of the current rate
environment, as well as the Company's asset/liability and credit risk
management programs.  The fair value estimates are based on existing financial
instruments at December 31, 1997 and do not reflect amounts which would be
ultimately realized in the normal course of business.


                                       24

<PAGE>   26

RESULTS OF OPERATIONS (CONT.)
Southside Bancshares Corp. and Subsidiaries


YEAR 2000 COMPLIANCE
     The Company began reviewing and testing its computer hardware, computer
software, and other affected areas during 1997 for their compliance with the
year 2000 considerations.  Based on the results of the preliminary procedures,
management does not believe year 2000 will pose any major problems for the
Company, nor should it result in any significant expense or capital
expenditures.  The Company will continue to review and test its systems during
1998 and 1999 to ensure that its entry into the new millennium is without
incident.


                   COMMON STOCK - MARKET PRICE AND DIVIDENDS

     The Company's common stock is traded on the National Association of
Company Securities Dealers, Inc./SmallCap Market System (NASDAQ/SCM) under the
symbol SBCO.

     The table below sets forth the high and low bid prices for the Company's
common stock for the periods presented.



<TABLE>
<CAPTION>
                                1997                                 1996
                 -------------------------------     -------------------------------
QUARTER          1ST        2ND     3RD      4TH       1st     2nd      3rd     4th
                 ---        ---     ---      ---       ---     ---      ---     ---
<S>             <C>        <C>      <C>     <C>       <C>     <C>     <C>      <C> 

Low bid         $22.75     $21.50   $33.50  $33.25    $19.00  $19.00   $20.25  $20.50
High bid         25.00      37.00    40.50   35.50     21.00   20.00    20.50   22.75
Dividends paid
   per common
   share           .16        .17      .18     .19       .10     .12      .13     .15
                ======     ======    =====   ======   ======  ======    =====  ======
</TABLE>


     The market price of the Company's common stock on February 25, 1998 was
$35.25 bid, $36.00 asked.  The approximate number of shareholders of the common
stock of the Company as of February 25, 1998 was 700.


FINANCIAL REPORT
     A copy of the Company's 1997 Annual Report on Form 10-K as filed with the
Securities and Exchange Commission, including all exhibits and financial
statements thereto, is available without charge to shareholders on written
request to Joseph W. Pope, Senior Vice President and Chief Financial Officer,
Southside Bancshares Corp., 3606 Gravois Avenue, St. Louis, Missouri  63116.


ANNUAL MEETING OF SHAREHOLDERS
     The Annual Meeting of Shareholders of Southside Bancshares Corp. will be
held at 2:00 p.m. on April 23, 1998 at South Side National Bank's Lansdowne
facility, which is located at 4666 Lansdowne, St. Louis, Missouri.

     The Company's bylaws require that notice of shareholder nominations for
directors at the Company's Annual Meeting of Shareholders must be received by
the Secretary of the Company not less than 75 days prior to the date of the
Annual Meeting.


                                       25


<PAGE>   27

COMMON STOCK - MARKET PRICE AND DIVIDENDS (CONT.)
Southside Bancshares Corp. and Subsidiaries




TRANSFER AGENT AND STOCK LISTING
     The Company's transfer agent is UMB Bank, N.A., Securities Transfer
Division, P.O. Box 410064, Kansas City, Missouri  64141-0064, (816) 860-7786.

     The stock is traded on the NASDAQ SmallCap Market under the symbol SBCO.



                                       26


<PAGE>   28




                           SOUTHSIDE BANCSHARES CORP.
                              3606 Gravois Avenue
                              St. Louis, MO  63116
                                 (314) 776-7000

                    STATEMENT OF MANAGEMENT'S RESPONSIBILITY
                            FOR FINANCIAL STATEMENTS

                               February 25, 1998




The management of Southside Bancshares Corp. is responsible for the preparation
and integrity of all information contained in the accompanying consolidated
financial statements.  The consolidated financial statements have been prepared
in conformity with generally accepted accounting principles appropriate in the
circumstances.  In preparing the consolidated financial statements, management
makes informed judgments and estimates.

To help meet this responsibility, the Company maintains a system of internal
control that is reviewed and revised, as necessary, in view of the results of
internal and independent audits, management recommendations, changes in the
Company's business, and other conditions that come to management's attention.
Management believes that the Company's system, taken as a whole, provides
reasonable assurance that (1) transactions are executed in accordance with
management's general or specific authorization, (2) transactions are recorded
as necessary to permit preparation of consolidated financial statements in
conformity with generally accepted accounting principles and to maintain
accountability for assets, (3) access to assets is permitted only in accordance
with management's general or specific authorization, and (4) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.

Management also seeks to assure the objectivity and integrity of the Company's
financial data by careful selection of managers, an internal audit function,
and organizational arrangements that provide an appropriate division of
responsibility.

The Company's consolidated financial statements have been audited by KPMG Peat
Marwick LLP, independent certified public accountants.  Their Independent
Auditors' Report, which is based on an audit made in accordance with generally
accepted auditing standards, expresses an opinion as to the fair presentation
of the consolidated financial statements.  In performing their audit, KPMG Peat
Marwick LLP considers the Company's internal control to the extent they deem
necessary in order to issue their opinion on the consolidated financial
statements.

The Audit Committee of the Board of Directors is composed solely of directors
who are not employees of the Company.  The Committee meets periodically and
privately with the independent auditors, the internal auditors, and the
financial officers of the Company to review matters relating to the quality of
the financial reporting of the Company, the related internal controls, and the
scope and results of audit examinations.  It is also responsible for
recommending the appointment of the Company's independent auditors, subject to
shareholder approval.





Thomas M. Teschner                                     Joseph W. Pope
President and Chief Executive Officer                  Senior Vice President and
                                                       Chief Financial Officer


                                       27


<PAGE>   29


                    THIS PAGE WAS INTENTIONALLY LEFT BLANK


<PAGE>   30

                      [KPMG PEAT MARWICK LLP LETTERHEAD]







                          INDEPENDENT AUDITORS' REPORT

The Board of  Directors and Shareholders
Southside Bancshares Corp.:

     We have audited the accompanying consolidated balance sheets of Southside
Bancshares Corp. and subsidiaries as of  December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1997.  These
consolidated financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.  An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.  We believe our audits provide a reasonable basis for
our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Southside
Bancshares Corp. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.



                                     KPMG PEAT MARWICK LLP


St. Louis, Missouri
February 25, 1998

                                       28


<PAGE>   31




                  SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 1997 AND 1996

                   (dollars in thousands, except share data)





<TABLE>
<CAPTION>
                               ASSETS                                    1997      1996
                                                                       --------   -------
<S>                                                                    <C>       <C>

Cash and due from banks .............................................  $ 18,302  $ 17,156
Short-term investments ..............................................    17,200    13,500
Investments in debt securities:
   Available for sale, at market value ..............................    73,460    66,650
   Held to maturity, at amortized cost (approximate
     market value of $100,838 in 1997 and $121,377 in 1996) .........    99,679   120,644
                                                                       --------  --------
         Total investments in debt securities .......................   173,139   187,294
                                                                       --------  --------
Loans, net of unearned discount .....................................   326,437   294,463
   Less allowance for possible loan losses ..........................     6,120     5,602
                                                                       --------  --------
         Loans, net .................................................   320,317   288,861
                                                                       --------  --------
Bank premises and equipment .........................................    10,866    10,785
Other assets ........................................................    10,040    10,311
                                                                       --------  --------
         TOTAL ASSETS ...............................................  $549,864  $527,907
                                                                       ========  ========

           LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits:
   Noninterest-bearing ..............................................  $ 61,308  $ 58,046
   Interest-bearing .................................................   422,055   409,230
                                                                       --------  --------
         Total deposits .............................................   483,363   467,276
Securities sold under agreements to repurchase ......................     5,333     1,623
ESOP debt.... .......................................................         -     1,779
Other liabilities ...................................................     4,515     4,388
                                                                       --------  --------
         Total liabilities ..........................................   493,211   475,066
                                                                       --------  --------
Commitments and contingent liabilities
Shareholders' equity:
   Cumulative preferred stock, no par value, 1,000,000 shares
     authorized and unissued ........................................         -         -
   Common stock, $1 par value, 5,000,000 shares authorized,
     2,859,010 shares issued and outstanding ........................     2,859     2,859
   Surplus. .........................................................     6,023     5,819
   Retained earnings ................................................    50,841    46,448
   Unearned ESOP shares .............................................    (1,384)   (1,581)
   Treasury stock, at cost, 61,340 and 22,340 shares, respectively ..    (1,820)     (450)
   Net unrealized gain (loss) on available for sale securities ......       134      (254)
                                                                       --------  --------
         Total shareholders' equity .................................    56,653    52,841
                                                                       --------  --------
         TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................  $549,864  $527,907
                                                                       ========  ========
</TABLE>



See accompanying notes to consolidated financial statements.

                                       29


<PAGE>   32


                  SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF INCOME
                 YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
                   (dollars in thousands, except share data)




<TABLE>
<CAPTION>
                                                                        1997        1996       1995
                                                                        ----        ----       ----
<S>                                                                   <C>        <C>        <C>
Interest income:
    Interest and fees on loans .....................................  $  27,717  $  26,691  $  27,030
    Interest on investments in debt securities available for sale:
      Taxable ......................................................      4,336      3,701      3,238
      Exempt from Federal income taxes .............................         24         32         41
    Interest on investments in debt securities held to maturity:
      Taxable ......................................................      5,142      5,216      4,937
      Exempt from Federal income taxes .............................      1,265      1,234      1,229
    Interest on short-term investments .............................        871        994        788
                                                                      ---------  ---------  ---------
            TOTAL INTEREST INCOME ..................................     39,355     37,868     37,263
                                                                      ---------  ---------  ---------
Interest expense:
    Interest on deposits ...........................................     17,910     17,264     16,853
    Interest on short-term borrowings ..............................        228         92        173
    Interest on ESOP debt ..........................................        105        170        190
    Interest on subordinated capital notes .........................          -          -        119
                                                                      ---------  ---------  ---------
            TOTAL INTEREST EXPENSE .................................     18,243     17,526     17,335
                                                                      ---------  ---------  ---------
            NET INTEREST INCOME ....................................     21,112     20,342     19,928
Provision for possible loan losses .................................         60         60         70
                                                                      ---------  ---------  ---------
            NET INTEREST INCOME AFTER PROVISION
                FOR POSSIBLE LOAN LOSSES ...........................     21,052     20,282     19,858
                                                                      ---------  ---------  ---------
Noninterest income:
    Trust department ...............................................      1,046        918        940
    Service charges on deposit accounts ............................      1,330      1,256      1,230
    Net (losses) gains on sales of other real estate owned and other
      foreclosed property ..........................................       (64)         29       (88)
    Settlement of  litigation ......................................          -          -      1,400
    Gain on sale of Bay-Hermann-Berger Bank ........................          -          -        825
    Other ..........................................................        485        467        446
                                                                      ---------  ---------  ---------
            TOTAL NONINTEREST INCOME ...............................      2,797      2,670      4,753
                                                                      ---------  ---------  ---------
Noninterest expense:
    Salaries and employee benefits .................................      7,561      7,463      6,940
    Net occupancy and equipment expense ............................      2,384      2,328      2,067
    Data processing ................................................        465        467        838
    Federal Deposit Insurance Corporation assessment ...............         47        138        986
    Attorney fees ..................................................        407        376        496
    Other ..........................................................      4,375      3,845      3,992
                                                                      ---------  ---------  ---------
            TOTAL NONINTEREST EXPENSE ..............................     15,239     14,617     15,319
                                                                      ---------  ---------  ---------
            INCOME BEFORE FEDERAL INCOME
                TAX EXPENSE ........................................      8,610      8,335      9,292
Federal income tax expense .........................................      2,308      2,177      2,558
                                                                      ---------  ---------  ---------
            NET INCOME .............................................  $   6,302  $   6,158  $   6,734
                                                                      =========  =========  =========
SHARE DATA:
    Earnings per common  share - basic .............................  $    2.30  $    2.27  $    2.55
                                                                      =========  =========  =========
    Earnings per common share - diluted ............................  $    2.25  $    2.26  $    2.54
                                                                      =========  =========  =========
    Dividends paid per common share ................................  $     .70  $     .50  $    .365
                                                                      =========  =========  =========
    Average common shares outstanding ..............................  2,735,859  2,712,775  2,643,890
                                                                      =========  =========  =========
    Average common shares outstanding, including
      potentially dilutive shares ..................................  2,798,105  2,730,214  2,650,551
                                                                      =========  =========  =========
</TABLE>


See accompanying notes to consolidated financial statements.

                                       30


<PAGE>   33




                  SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                 YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

                   (dollars in thousands, except share data)




<TABLE>
<CAPTION>
                                                                                              NET
                                                                                           UNREALIZED
                                                                                              GAIN
                                                                                            (LOSS) ON
                                                                     UNEARNED               AVAILABLE
                                          COMMON           RETAINED    ESOP    TREASURY     FOR SALE
                                          STOCK   SURPLUS  EARNINGS   SHARES    STOCK     SECURITIES    TOTAL
                                          ------  -------  --------  --------  --------  ------------   ------
<S>                                       <C>     <C>      <C>       <C>       <C>       <C>            <C>

BALANCE AT DECEMBER 31, 1994 ...........  $2,591   $1,698   $35,890   $     -   $     -  $ (2,177)      $38,002
Net income .............................       -        -     6,734         -         -         -         6,734
Cash dividends paid ($.365 per share) ..       -        -      (969)        -         -         -          (969)
Issued 266,680 common shares ...........     267    4,000         -         -         -         -         4,267
Exercise of stock options
    (890 shares) .......................       1       11         -         -         -         -            12
Purchase of 186,670 common
    shares by ESOP .....................       -        -         -    (2,987)        -         -        (2,987)
Allocation of 18,670 shares to
    ESOP participants ..................       -       57         -       299         -         -           356
Purchase of 9,360 common shares
    for treasury .......................       -        -         -         -      (167)        -          (167)
Change in net unrealized gain
    (loss) on available for sale
    securities, net of  tax effect .....       -        -         -         -         -     2,052         2,052
                                          ------  -------  --------   -------  --------  --------      --------
BALANCE AT DECEMBER 31, 1995 ...........   2,859    5,766    41,655    (2,688)     (167)     (125)       47,300
Net income .............................       -        -     6,158         -         -         -         6,158
Cash dividends paid ($.50 per
    share) .............................       -        -    (1,365)        -         -         -        (1,365)
Allocation of 12,354 shares to
    ESOP participants ..................       -       53         -       198         -         -           251
Purchase of 56,814 shares by ESOP
    participants .......................       -        -         -       909         -         -           909
Purchase of 12,980 common shares
    for treasury .......................       -        -         -         -      (283)         -         (283)
Change in net unrealized gain
    (loss) on available for sale
    securities, net of tax effect ......       -        -         -         -         -      (129)         (129)
                                          ------  -------  --------   -------  --------  --------      --------
BALANCE AT DECEMBER 31, 1996 ...........   2,859    5,819    46,448    (1,581)     (450)     (254)       52,841
Net income .............................       -        -     6,302         -         -         -         6,302
Cash dividends paid ($.70 per share) ...       -        -    (1,909)        -         -         -        (1,909)
Allocation of 12,354 shares to
    ESOP participants ..................       -      204         -       197         -         -           401
Purchase of 39,000 common shares
    for treasury .......................       -        -         -         -    (1,370)         -       (1,370)
Change in net unrealized gain
    (loss) on available for sale
    securities, net of tax effect ......       -        -         -         -         -       388           388
                                          ------  -------  --------   -------  --------  --------     ---------
BALANCE AT DECEMBER 31, 1997 ...........  $2,859   $6,023   $50,841   $(1,384)  $(1,820) $    134     $  56,653
                                          ======  =======  ========   =======  ========  ========     =========
</TABLE>



          See accompanying notes to consolidated financial statements.

                                       31


<PAGE>   34




                  SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                 YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

                                 (in thousands)



<TABLE>
<CAPTION>
                                                                                1997      1996      1995
                                                                              --------   --------  --------
<S>                                                                           <C>       <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income ..............................................................   $ 6,302    $6,158    $6,734
   Adjustments to reconcile net income to net cash provided by
      operating activities:
         Depreciation and amortization .....................................     1,626     1,920     1,877
         Provision for possible loan losses ................................        60        60        70
         Provision for deferred income taxes ...............................      (286)       50       395
         Net losses (gains) on sales of other real estate owned and
            other foreclosed property ......................................        64       (29)       88
         Gain on sale of Bay-Hermann-Berger Bank ...........................         -         -      (825)
         Increase (decrease) in income taxes payable .......................      (245)     (381)      571
         Decrease in accrued interest receivable ...........................        34       118       111
         Increase in accrued interest payable ..............................        32        10       364
         ESOP compensation expense .........................................       401       251       356
         Other operating activities, net ...................................       403      (495)     (183)
                                                                              --------  --------  --------
             Total adjustments .............................................     2,089     1,504     2,824
                                                                              --------  --------  --------
             NET CASH PROVIDED BY OPERATING ACTIVITIES .....................     8,391     7,662     9,558
                                                                              --------  --------  --------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Net (increase) decrease in short-term investments .......................    (3,700)    5,618    (9,271)
   Proceeds from maturities of and principal payments on debt securities:
      Available for sale ...................................................    14,092     7,984     4,636
      Held to maturity .....................................................    33,461    37,260    23,455
   Purchases of debt securities:.
      Available for sale ...................................................   (19,391)  (24,729)   (4,700)
      Held to maturity .....................................................   (13,720)  (48,720)  (18,462)
   Purchase of life insurance ..............................................         -    (1,250)        -
   Net (increase) decrease in loans ........................................   (32,596)    7,083   (17,266)
   Recoveries of loans previously charged off ..............................       825     1,126       922
   Purchases of bank premises and equipment ................................    (1,213)   (1,194)   (2,344)
   Proceeds from sales of other real estate owned ..........................       258       798     1,774
   Proceeds from sale of Bay-Hermann-Berger Bank, net of cash transferred ..         -         -     2,213
                                                                              --------  --------  --------
             NET CASH USED IN INVESTING ACTIVITIES .........................   (21,984)  (16,024)  (19,043)
                                                                              --------  --------  --------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Net increase (decrease) in demand and savings deposits ..................    13,477    (1,122)  (14,002)
   Net increase in time deposits ...........................................     2,610    10,831    25,153
   Net increase (decrease) in short-term borrowings ........................     3,710       844      (138)
   Payments for ESOP debt ..................................................    (1,779)     (299)        -
   Payments for maturing long-term debt ....................................         -         -    (2,250)
   Payments for subordinated capital notes .................................         -         -    (4,190)
   Proceeds from issuance of common stock ..................................         -         -     4,279
   Payments to acquire treasury stock ......................................    (1,370)     (283)     (167)
   Cash dividends paid .....................................................    (1,909)   (1,365)     (969)
                                                                              --------  --------  --------
             NET CASH PROVIDED BY FINANCING ACTIVITIES .....................    14,739     8,606     7,716
                                                                              --------  --------  --------
             NET INCREASE (DECREASE) IN CASH AND CASH
                 EQUIVALENTS ...............................................     1,146       244    (1,769)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ...............................    17,156    16,912    18,681
                                                                              --------  --------  --------
CASH AND CASH EQUIVALENTS, END OF YEAR .....................................   $18,302   $17,156   $16,912
                                                                              ========  ========  ========
Supplemental disclosures of cash flow information:
   Cash paid during the year for:
      Interest on deposits and borrowings ..................................   $18,275   $17,516   $16,971
      Income taxes .........................................................     2,498     2,497     2,026
                                                                              ========  ========  ========
   Noncash transactions:
      Transfers to other real estate owned in settlement of loans ..........      $492    $1,059      $989
      Loans made to facilitate the sale of other real estate owned .........         -         -       388
      Guarantee of ESOP debt ...............................................         -         -     2,987
                                                                              ========  ========  ========
</TABLE>


See accompanying notes to consolidated financial statements.

                                      32


<PAGE>   35


SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995




NOTE 1 -- SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
     Southside Bancshares Corp. and its banking subsidiaries (the Company)
provide a full range of banking services to individual and corporate customers
throughout the eastern portions of Missouri, including the City of St. Louis
and the counties of Franklin, Jefferson, St. Charles, St. Francois, Ste.
Genevieve, St. Louis, and Washington, through its four subsidiary banks.  In
February 1995 the Company sold its wholly owned subsidiary, Bay-Hermann-Berger
Bank, which accounted for less than 5% of total assets as of the date of sale,
in a cash transaction with an unaffiliated financial institution.

     The Company is subject to competition from other financial and
nonfinancial institutions providing financial products in these Missouri
markets.  Additionally, the Company is subject to the regulations of certain
federal and state agencies and undergoes periodic examinations by those
regulatory agencies.

     The accounting and reporting policies of the Company conform, in all
material respects, to generally accepted accounting principles within the
banking industry.  The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions, including the determination of the allowance
for possible loan losses, that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period.  Actual results could differ from those
estimates.

     The more significant of the Company's accounting policies are set forth
below:

CONSOLIDATION
     The consolidated financial statements include the accounts of the Company
and its banking subsidiaries, after elimination of all significant intercompany
accounts and transactions.

SHORT-TERM INVESTMENTS
     Short-term investments primarily represent federal funds sold.


INVESTMENTS IN DEBT SECURITIES
     At the time of purchase, debt securities are classified into one of three
categories:  trading, available for sale, or held to maturity.  The Company has
not and does not intend to hold any trading securities.  Held to maturity
securities are those securities for which the Company has the ability and
intent to hold until maturity.  All other securities not included in held to
maturity are classified as available for sale.

     Available for sale securities are recorded at fair value.  Held to
maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts.  Unrealized gains and
losses, net of the related tax effect, on available for sale securities are
excluded from earnings and reported as a separate component of shareholders'
equity until realized.  A decline in the market value of any available for sale
or held to maturity security below cost that is deemed other than temporary
results in a charge to earnings and the establishment of a new cost basis for
the security.

     Premiums and discounts are amortized or accreted over the lives of the
respective securities as an adjustment to yield using the interest method.
Dividend and interest income are recognized when earned.  Realized gains and
losses for securities classified as available for sale and held to maturity are
included in earnings and are derived using the specific-identification method
for determining the cost of securities sold.

INTEREST ON LOANS
     Interest on commercial, real estate mortgage, and installment loans is
credited to income based on the principal amount outstanding.  Loans are placed
on a nonaccrual basis when interest is past due 90 days or more and when, in
the opinion of management, full collection of principal or interest is
unlikely.  At the time a loan is placed on nonaccrual status, interest accrued
in the current year but not collected is charged against current income, with
any prior year interest accrued and unpaid charged against the allowance for
possible loan losses.  Subsequent interest payments received on such loans are
applied to principal if there is any doubt as to the collectibility of such
principal; otherwise, such receipts are recorded as interest

                                       33


<PAGE>   36

SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

income.  Loans are returned to accrual status only when borrowers have brought
all past due principal and interest payments current and, in the opinion of
management, the borrowers have demonstrated the ability to make future payments
of principal and interest as scheduled.

     Loan origination fees and costs, to the extent deemed significant, are
deferred and amortized over the life of the underlying loan.

ALLOWANCE FOR POSSIBLE LOAN LOSSES
     The allowance for possible loan losses is increased by provisions charged
to expense and reduced by loans charged off, net of recoveries.  The allowance
for possible loan losses is maintained at a level considered adequate to
provide for potential loan losses based on management's evaluation of current
economic conditions, changes in the character and size of the loan portfolio,
portfolio risk characteristics, prior loss experience, and results of periodic
credit reviews of the loan portfolio.

     Management believes the allowance for possible loan losses is adequate to
absorb losses in the loan portfolio.  While management uses available
information to recognize loan losses, future additions to the allowance may be
necessary based on changes in economic conditions.  Additionally, regulatory
agencies, as an integral part of their examination process, periodically review
the subsidiary banks' allowances for possible loan losses.  Such agencies may
require the subsidiary banks to increase their allowances for possible loan
losses based on their judgments and interpretations about information available
to them at the time of their examinations.

     A loan is considered impaired when it is probable a creditor will be
unable to collect all amounts due, both principal and interest, according to
the contractual terms of the loan agreement.  When measuring impairment, the
expected future cash flows of an impaired loan must be discounted at the loan's
effective interest rate.  Alternatively, impairment can be measured by
reference to an observable market price, if one exists, or the fair value of
the collateral for a collateral-dependent loan.  Regardless of the historical
method used, the Company measures impairment based on the fair value of the
collateral when the creditor has determined foreclosure is probable.
Additionally, impairment of a restructured loan is measured by discounting the
total expected future cash flows at the loan's effective rate of interest as
stated in the original loan agreement. The Company continues to use existing
nonaccrual methods for recognizing interest income on impaired loans.

BANK PREMISES AND EQUIPMENT
     Bank premises and equipment are stated at cost, less accumulated
depreciation and amortization.  Depreciation and amortization are computed
using the straight-line method over periods of 10 to 40 years for buildings and
3 to 15 years for furniture and equipment.  Rents collected under lease
agreements for space in subsidiary bank buildings are credited to occupancy
expense in the noninterest expenses category.

OTHER REAL ESTATE OWNED
     Other real estate owned, included in other assets in the accompanying
consolidated balance sheets, represents property acquired through foreclosure
or deeded to the Company's banking subsidiaries in lieu of foreclosure on real
estate loans for which the borrowers have defaulted as to payment of principal
and interest.  Other real estate owned is recorded on an individual asset basis
at the lower of fair value minus estimated selling costs, or fair value at the
date of acquisition (cost).  If the fair value minus estimated selling costs is
less than cost, the deficiency is recorded in a valuation reserve account
through a charge against income.  Subsequent increases in the fair value minus
estimated selling costs are recorded through a reversal of the valuation
reserve, but not below zero.

     Gains and losses resulting from the sale of other real estate owned are
credited or charged to current period earnings.  Costs of maintaining and
operating other real estate owned are expensed as incurred and expenditures to
complete or improve other real estate owned properties are capitalized if the
expenditures are expected to be recovered upon ultimate sale of the property.

INTANGIBLE ASSETS
     Intangible assets, consisting primarily of goodwill and a core deposit
base premium, are included in other assets in the consolidated balance sheets.
Goodwill, the excess of cost over the fair value of net assets acquired in
business combinations accounted for as purchases, is amortized using the
straight-line method over 15 years.  The core deposit base premium is 


                                       34


<PAGE>   37

SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)


being amortized over 10 years, the estimated life of the deposit base acquired.

INCOME TAXES
     The Company and its subsidiary banks file consolidated income tax returns.
Provisions for income taxes are based on the tax effects of transac-tions
which are included in the determination of pretax accounting income.

     Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.  Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled.  The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.

TRUST ASSETS
     Assets held by the Company's national banking subsidiary in a fiduciary or
agency capacity for customers are not included in the consolidated financial
statements, as such items are not assets of the Company or its subsidiaries.
Trust department operating expense, included in noninterest expenses on the
consolidated statements of income, excludes salaries and employee benefits of
trust department personnel.

STOCK OPTION PLAN
     On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), which
permits entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant.  Alternatively, SFAS 123 also
allows entities to continue to apply the provision of APB Opinion No. 25 and
provide pro forma net income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and later years as if the fair value
based method defined in SFAS 123 had been applied.  The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosure provisions of SFAS 123.
        

EARNINGS PER COMMON SHARE
     Effective December 31, 1997, the Company adopted SFAS No. 128, Earnings
Per Share (SFAS 128).  SFAS 128 supersedes APB Opinion No. 15, Earnings Per
Share (APB 15) and specifies the computation, presentation, and disclosure
requirements for earnings per share (EPS) for entities with publicly held
common stock or potential common stock.  SFAS 128 was issued to simplify the
com-putation of EPS and to make the U.S. standard more compatible with the EPS
standards of other countries and that of the International Accounting Standards
Committee (IASC).  It replaces the presentation of primary EPS with a
presentation of basic EPS and fully diluted EPS with diluted EPS.   It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures.  Basic EPS, unlike
primary EPS, excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period.  Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity.  Diluted EPS is computed similarly
to fully diluted EPS under APB 15.

CONSOLIDATED STATEMENTS OF CASH FLOWS
     For purposes of the consolidated statements of cash flows, the Company
considers cash and due from banks to be cash and cash equivalents.

IMPAIRMENT OF LONG-LIVED ASSETS AND
LONG-LIVED ASSETS TO BE DISPOSED OF
     Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.  Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future net cash flow expected to be generated by the asset.  If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets.  Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.


                                       35


<PAGE>   38

SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)


TRANSFERS AND SERVICING FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES
     The Company adopted the provisions of SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities
(SFAS 125) on January 1, 1997 which provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishment of
liabilities based on the consistent application of a financial-components
approach that focuses on control.

     Under the financial-components approach, the Company recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished.  SFAS 125 also provides consistent
standards for distinguishing transfers of financial assets that are secured
borrowings.  The adoption of SFAS 125 did not have a material impact on the
Company's consolidated financial position, results of operations, or liquidity.

RECLASSIFICATIONS
     Certain prior year information has been reclassified to conform with the
current year presentation.

NOTE 2 -- INVESTMENTS IN DEBT SECURITIES
     The amortized cost and estimated market values of debt securities
classified as available for sale at December 31, 1997 and 1996 are as follows:


<TABLE>
<CAPTION>
                               (in thousands)
                                   1997
                   -------------------------------------
                                 GROSS
                   AMOR-      UNREALIZED       ESTIMATED
                   TIZED     -------------      MARKET
                   COST     GAINS   LOSSES      VALUE
                   -------  ------ --------   ---------
<S>                <C>      <C>     <C>       <C>
U.S. Treasury
   securities and
   obligations of
   U.S. Govern-
   ment agencies
   and corpora-
   tions           $26,899  $167    $  (8)     $27,058
Obligations of
   states and
   political
   subdivisions        300     4        -          304
Mortgage-backed
   securities       44,483   288     (248)      44,523
Other securities     1,575     -        -        1,575
                   -------  ----   ------      --------
                   $73,257  $459   $ (256)     $ 73,460
                   =======  ====  =======      ========


</TABLE>


<TABLE>
<CAPTION>
                             (in thousands)
                                  1996
                   ---------------------------------
                                Gross  
                    Amor-    Unrealized    Estimated
                    tized   -------------   Market
                    Cost    Gains  Losses    Value
                   -------  -----  ------  ---------
<S>                <C>      <C>    <C>     <C>
U.S. Treasury
   securities and
   obligations of
   U.S. Govern-
   ment agencies
   and corpora-
   tions           $18,861    $51   $(67)    $18,845
Obligations of
   states and
   political
   subdivisions        445      6      -         451
Mortgage-backed
   securities       46,444    132   (501)     46,075
Other securities     1,279      -      -       1,279
                   -------  -----  ------  ---------
                   $67,029   $189  $(568)    $66,650
                   =======  =====  ======  =========
</TABLE>


     The amortized cost and estimated market value of debt securities
classified as available for sale at December 31, 1997, by contractual maturity,
are shown below.  Expected maturities may differ from contractual maturities
because borrowers have the right to call or prepay obligations with or without
prepayment penalties.

<TABLE>
<CAPTION>
                                          (in thousands)
                                        AMOR-    ESTIMATED
                                        TIZED     MARKET
                                        COST      VALUE
                                       -------  ---------
<S>                                    <C>       <C>
Due in one year or less                $ 9,367    $ 9,369
Due after one year through
  five years                            15,367     15,472
Due after five years through
  ten years                              2,565      2,621
Mortgage-backed securities              44,483     44,523
Federal Home Loan Bank stock -
  no stated maturity                     1,283      1,283
Federal National Mortgage Association
  stock - no stated maturity                 5          5
Federal Reserve Bank stock -
  no stated maturity                       187        187
                                       -------    -------
                                       $73,257    $73,460
                                       =======    =======
</TABLE>



                                      36

                                       
<PAGE>   39

SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

     The amortized cost and estimated market values of debt securities
classified as held to maturity at December 31, 1997 and 1996 are as follows:


<TABLE>
<CAPTION>
                            (in thousands)
                                1997
                   ----------------------------------
                                Gross
                   Amor-      Unrealized     Estimated
                   tized    --------------    Market
                   Cost     Gains   Losses     Value
                   -------  -----   ------   ---------
<S>                <C>      <C>     <C>      <C>
U.S. Treasury
   securities and
   obligations of
   U.S. Govern-
   ment agencies
   and corpora-
   tions           $72,065  $ 429    $(146)   $ 72,348
Obligations of                                   
   states and
   political
   subdivisions     23,544    775       (3)     24,316
Mortgage-backed
   securities        4,070    104        -       4,174
                   -------  ------   ------   --------
                   $99,679  $1,308   $(149)   $100,838
                   =======  ======   =====    ========

</TABLE>


<TABLE>
<CAPTION>
                              (in thousands)
                                   1996
                   -----------------------------------
                    Amor-        Gross       Estimated
                    tized      Unrealized     Market
                     Cost    Gains   Losses    Value
                   --------  ------  ------  ---------
<S>                <C>       <C>     <C>     <C>
U.S. Treasury
   securities and
   obligations of
   U.S. Govern-
   ment agencies
   and corpora-
   tions            $92,469    $354  $(427)    $92,396
Obligations of
   states and
   political
   subdivisions      21,709     774    (22)     22,461
Mortgage-backed
   securities         6,166      73    (19)      6,220
Other debt
   securities           300       -      -         300
                   --------  ------  ------  ---------
                   $120,644  $1,201  $(468)   $121,377
                   ========  ======  ======  =========
</TABLE>


     The amortized cost and estimated market value of debt securities
classified as held to maturity at December 31, 1997, by contractual maturity,
are shown below.  Expected maturities may differ from contractual maturities
because borrowers have the right to call or prepay obligations with or without
prepayment penalties.


<TABLE>
<CAPTION>
                               (in thousands)
                              Amor-    Estimated
                              tized      Market
                              Cost       Value
                              -------  ---------
<S>                           <C>      <C>
Due in one year or less       $21,892    $21,916
Due after one year through
   five years                  55,395     55,933
Due after five years through
   ten years                   16,498     16,951
Due after ten years             1,824      1,864
Mortgage-backed securities      4,070      4,174
                              -------  ---------
                              $99,679   $100,838
                              =======  =========
</TABLE>


     There were no sales of debt securities during 1997, 1996, and 1995.

     The carrying value of securities pledged to secure deposits and
collateralize borrowings amounted to $69,100,000 and $56,844,000 at December
31, 1997 and 1996, respectively.

NOTE  3 -- LOANS
     Loans, by category, at December 31, 1997 and 1996 are as follows:


<TABLE>
<CAPTION>
                              (in thousands)
                               1997       1996
                               ----       ----
<S>                           <C>      <C>
Commercial, financial,
   and agricultural          $ 69,168  $ 62,016
Real estate - commercial       98,759    82,045
Real estate - construction     30,836    26,067
Real estate - residential      92,028    96,039
Consumer                       23,627    17,304
Industrial revenue bonds        5,517     6,373
Other                           6,502     4,619
                             --------  --------
            Total loans       326,437   294,463
Less allowance for possible
    loan losses                 6,120     5,602
                             --------  --------
            Loans, net       $320,317  $288,861
                             ========  ========
</TABLE>


     The Company's banking subsidiaries grant agricultural, commercial,
residential, and consumer loans to customers throughout their service area,
which consists primarily of the eastern portion of Missouri, including the City
of St. Louis and the counties of Franklin, Jefferson, St. Charles, St.
Francois, St. Louis, Ste. Genevieve, and Washington.  The Company has a
diversified loan portfolio, with no particular concentration of credit in any
one economic sector in this service area; however, a substantial portion of the
portfolio is concentrated in and secured by real estate.  The ability of  the
Company's borrowers to honor their contractual obligations is dependent upon
the local economies and their effect on the real estate market.


                                      37


<PAGE>   40

SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)




     The Company's investment in industrial revenue  bonds are classified as
held to maturity.  The estimated market value of these instruments was
$5,738,000 and $6,628,000 at December 31, 1997 and 1996, respectively.

     Transactions in the allowance for possible loan losses for the years ended
December 31, 1997, 1996, and 1995 were as follows:

<TABLE>
<CAPTION>
                               (in thousands)
                           1997     1996     1995
                           ----    -----    -----
<S>                        <C>     <C>      <C>
Balance at beginning of
   year                    $5,602   $5,635   $ 7,144
Provision charged
   to expense                  60       60        70
Adjustment due to sale of
   Bay-Hermann-Berger
   Bank                         -        -      (327)
Loans charged off            (367)  (1,219)   (2,174)
Recoveries                    825    1,126       922
                           ------  -------   -------
Balance at end of year     $6,120   $5,602   $ 5,635
                           ======  =======   =======
</TABLE>


     A summary of impaired loans, including nonaccrual loans, at December 31,
1997 and 1996 follows:

                                 

<TABLE>
<CAPTION>                        (in thousands)
                                  1997     1996
                                 -------  ------
<S>                              <C>      <C>

Nonaccrual loans                  $2,977  $1,037
Impaired loans continuing
   to accrue interest              1,176   3,528
                                 -------  ------
           Total impaired loans   $4,153  $4,565
                                 =======  ======

Allowance for possible losses
   on impaired loans              $1,637  $1,759
                                 =======  ======
Impaired loans with no related
   allowance for possible
   loan losses                    $1,374  $  951
                                 =======  ======
</TABLE>


     As of January 1, 1995, the Company had impaired loans of $5,248,000 for
which specific reserves of $733,000 were allocated.

     The average balance of impaired loans during the year was $2,997,000,
$6,821,000, and $5,569,000 at December 31, 1997, 1996, and 1995, respectively.

     If interest on nonaccrual loans, including amounts computed on principal
balances charged off on such loans, had been accrued, such income would have
been $232,000, $133,000, and $160,000 for the years ended December 31, 1997,
1996, and 1995, respectively.  The amount recognized as interest income
on nonaccrual loans was $113,000, $27,000, and $66,000 for the years ended
December 31, 1997, 1996, and 1995, respectively.

     The amount recognized as interest income on other impaired loans
continuing to accrue interest was $102,000, $277,000, and $365,000 for the
years ended December 31, 1997, 1996, and 1995, respectively.

     There were no restructured loans at December 31, 1997 and 1996.

     Aggregate loan transactions involving executive officers and directors of
the Company and its subsidiaries for the year ended December 31, 1997 are
summarized below (in thousands).  This summary excludes all loans to executive
officers and directors whose indebtedness to the Company and its subsidiaries
did not exceed $60,000 at any time during 1997.

<TABLE>
<S>                                   <C>
Aggregate balance, December 31, 1996    $12,084
New loans and advances                   18,113
Repayments                              (20,860)
                                        -------
Aggregate balance, December 31, 1997    $ 9,337
                                        =======
</TABLE>

     All such loans to executive officers and directors were made in the normal
course of business on substantially the same terms, including interest rates
and collateral, as those prevailing at the same time for comparable
transactions with other persons, and did not involve more than the normal risk
of collectibility.  There were no loans involving executive officers and
directors which were on nonaccrual status or past due 90 days and still
accruing interest as of December 31, 1997.

NOTE  4 -- BANK PREMISES AND EQUIPMENT
     Bank premises and equipment at December 31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                  (in thousands)
                                 1997     1996
                                 ----     ----
<S>                             <C>      <C>
Land                            $3,216   $2,804
Buildings                       10,013    9,841
Furniture and equipment          5,868    6,033
                               -------  -------
                                19,097   18,678
Less accumulated depreciation
   and amortization              8,231    7,893
                               -------  -------
                               $10,866  $10,785
                               =======  =======
</TABLE>



                                      38


<PAGE>   41

SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

     Depreciation and amortization of bank premises and equipment charged to
noninterest expense amounted to $1,108,000, $1,167,000, and $960,000 for 1997,
1996, and 1995, respectively.

     Rents collected and credited to net occupancy expense of bank premises
amounted to $116,000, $137,000, and $102,000 for 1997, 1996, and 1995,
respectively.

NOTE  5 -- DEPOSITS
     Deposits, by category, at December 31, 1997 and 1996 and the respective
weighted average interest rates paid thereon for the years then ended are as
follows:


<TABLE>
<CAPTION>
                               (dollars in thousands)
                           1997                1996
                     ------------------  -----------------
                               Average             Average
                     Amount      Rate      Amount    Rate
                     ------    -------   --------- -------
<S>                  <C>       <C>       <C>       <C>
Noninterest-bearing
  demand deposits     $61,308     -%     $ 58,046       -%
Interest-bearing
  demand deposits     139,177  3.34       128,474    3.33
Savings deposits       56,627  2.51        57,115    2.53
Time deposits:
  Under $100,000      172,830  5.37       174,102    5.40
  $100,000 and over    53,421  5.32        49,539    5.18
                     --------  ====      --------    ====
                     $483,363            $467,276
                     ========            ========
</TABLE>


     A summary of time deposits as of December 31, 1997 by time remaining until
maturity is as follows:



<TABLE>
<S>                                       <C>
Due in one year or less                   $158,771
Due after one year through two years        42,404
Due after two years through three years     15,618
Due after three years through four years     4,604
Due after four years through five years      4,755
Thereafter                                      99
                                          --------
                                          $226,251
                                          ========
</TABLE>



     Interest paid on deposits consists of the following for the years ended
December 31, 1997, 1996, and 1995:



<TABLE>
<CAPTION>
                          (in thousands)
                       1997     1996     1995
                     -------  -------  -------
<S>                  <C>      <C>      <C>
Interest-bearing
  demand deposits     $4,346  $ 4,125  $ 4,095
Savings deposits       1,459    1,529    1,685
Time deposits:
  Under $100,000       9,309    9,462    9,491
  $100,000 and over    2,796    2,148    1,582
                     -------  -------  -------
                     $17,910  $17,264  $16,853
                     =======  =======  =======
</TABLE>



NOTE  6 -- SHORT-TERM BORROWINGS
     A summary of short-term borrowings at December 31, 1997 and 1996 is as
follows:

<TABLE>
<CAPTION>
                              (in thousands)
                              1997     1996
                              ----     ----
<S>                           <C>      <C>
Securities sold under agree-
   ments to repurchase         $5,333   $1,623
                               ======   ======
</TABLE>


     The average balance of securities sold under agreements to repurchase for
1997, 1996, and 1995 was $5,053,000, $893,000, and $747,000, respectively.
The maximum month-end balance of such borrowings for 1997, 1996, and 1995 was
$9,693,000, $2,039,000, and $1,988,000, respectively.

NOTE  7 -- ESOP DEBT
     In April 1995, the Company's Employee Stock Ownership Plan borrowed
$2,987,000 from an unaffiliated financial institution, the proceeds of which
were used to purchase 186,670 shares of the Company's common stock.  During
September 1997, the Company borrowed $1,581,000 from South Side National Bank
and repaid the unaffiliated financial institution.  As discussed more fully in
note 10, the debt is guaranteed by the Company and, while it was maintained at
an unaffiliated financial institution, was reflected on the Company's
consolidated balance sheet.  The debt is secured by the remaining 98,832 shares
of unreleased and released but unallocated shares of the Company's common
stock.    The debt agreement requires ten equal annual installment payments.
During 1996, the first installment payment was made.  In addition, a
supplemental principal payment of $909,000 was made for the purchase and
allocation of 56,814 shares of stock for plan participants under the 401(k)
provisions of the plan.  The note bears interest at the prime rate, which was
8.50% at December 31, 1997.

NOTE  8 -- SUBORDINATED CAPITAL NOTES
     On April 17, 1995, the Company retired, prior to scheduled maturity,
$4,190,000 of 9.65% subordinated capital notes with a stated maturity of
October 23, 1995 (Notes), which represented all of the outstanding Notes.  In
accordance with the provisions of the Notes, the funds necessary to liquidate
the securities were provided through the issuance of capital securities in a
private placement of the Company's common stock.  A total of 266,680 shares of
the Company's $1 par value common stock were issued at $16.00 per share.



                                      39


<PAGE>   42
SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE  9 -- FEDERAL INCOME TAXES
     The current and deferred portions of Federal income tax expense for 1997,
1996, and 1995 are as follows:

<TABLE>
<CAPTION>
                             (in thousands)
                         1997     1996     1995
                        ------  -------  -------
<S>                     <C>     <C>      <C>

Current                 $2,594   $2,127   $2,163
Deferred tax expense      (286)      50      395
                        ------  -------  -------
    Federal income tax
      expense           $2,308   $2,177   $2,558
                        ======  =======  =======
</TABLE>


     A reconciliation of reported Federal income tax expense to income tax
expense computed by applying the federal statutory rate of 34% in 1997, 1996,
and 1995 to income before Federal income tax expense is as follows:

<TABLE>
<CAPTION>
                                 (in thousands)
                            1997    1996     1995
                            ------  -------  -------
<S>                         <C>     <C>      <C>
Computed income tax  ex-
   pense                    $2,928   $2,834   $3,159
Tax-exempt interest income    (517)    (674)    (562)
Other, net                    (103)      17      (39)
                            ------  -------  -------
   Federal income tax
     expense                $2,308   $2,177   $2,558
                            ======  =======  =======
</TABLE>


     The components of deferred tax assets and liabilities at December 31, 1997
and 1996 are as follows:

<TABLE>
<CAPTION>
                                        (in thousands)
                                         1997     1996
                                        -------  -------
<S>                                     <C>      <C>
Deferred tax assets:
   Allowance for possible loan losses    $2,081   $1,905
   Deferred expense                         288      214
   Available for sale securities              -      123
   Other, net                                78       28
                                        -------  -------
        Total deferred tax assets         2,447    2,270
                                        -------  -------
Deferred tax liabilities:
   Available for sale securities            (67)       -
   Depreciation of premises and
     equipment                             (388)    (390)
   Discount on debt securities, net        (157)    (111)
   Deferred loan fees                      (133)    (163)
                                         -------  -------
        Total deferred tax liabilities     (745)    (664)
                                        -------  -------
        Net deferred tax assets          $1,702   $1,606
                                        =======  =======
</TABLE>


     The Company has not established a valuation allowance for deferred tax
assets as of December 31, 1997 or 1996 due to management's belief that all
criteria for recognition of the assets have been met.

NOTE  10 -- EMPLOYEE BENEFIT PLANS

PENSION
     The Company has a noncontributory pension plan which covers substantially
all of its employees.  The Company accrues and makes contributions designed to
fund normal service costs on a current basis using a projected unit credit cost
method and to amortize unfunded past service costs over a period of 30 years.
        
     During 1997, the Board of Directors of the Company voted to terminate the
Company's noncon-tributory pension plan effective May 31, 1997.  The benefits
under the plan were frozen as of March 31, 1997 and plan benefits ceased to
accrue.  As the fair value of plan assets exceeded the value of accumulated
benefit obligations as of December 31, 1997, the Company has elected to provide
benefits with all plan assets.  Although the termination of the plan has not
been approved by regulatory authorities, management expects the termination to
be approved in 1998 and the pension plan will be liquidated at the time of
regulatory approval.  Upon termination, all benefits will become 100% vested,
and all persons entitled to benefits will be eligible to request an immediate
lump-sum settlement of the benefit entitlement.  Management anticipates a
pension curtailment gain of approximately $400,000 in 1998 in conjunction with
the termination of the plan.

     Accumulated plan benefit information, as estimated by the consulting
actuary, and plan net assets determined as of and for the years ended December
31, 1997 and 1996 are as follows:
        
<TABLE>
<CAPTION>
                                       (in thousands)
                                      1997      1996
                                     -------   ------
<S>                                 <C>       <C>
 Actuarial present value of
    benefit obligations:
       Vested benefit obligations    $ 869    $  790
                                     =====    ======
       Accumulated benefit
         obligations                   869    $  834
                                     =====    ======
       Projected benefit obligation  1,075     1,397
 Plan assets at fair value           1,075       879
                                     -----    ------
 Projected benefit obligation in
    excess of plan assets                -      (518)
 Unrecognized portion of net
    transition obligation                -       120
 Unrecognized net gain                   -         -
                                     -----    ------
 Accrued pension cost                $   -    $ (398)
                                     =====    ======

<CAPTION>
                                        (in thousands)
                                      1997    1996     1995
                                     ------  -------  -----
<S>                                  <C>      <C>      <C>
 Net pension cost included the       
    following  components:
       Service cost - benefits
         earned during period         $162     $139     $124
       Interest cost on projected
         benefit obligation             97       87       89
       Return on plan assets           (61)     (60)     (52)
       Net amortization and
         deferral                       29       22       26
                                      ----     ----     ----
               Net periodic pen-
                 sion cost            $227     $188     $187
                                      ====     ====     ====
</TABLE>

                                      40
<PAGE>   43

SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)



 Assumptions used were as follows:

<TABLE>
<CAPTION>
                                     1997     1996      1995
                                    -----   --------   ------
<S>                                 <C>       <C>      <C>
 Discount rate in determining
    benefit obligations               6.5%      7.0%     7.0%
 Rate of increase in compensa-
    tion levels                       4.5       4.5      4.5
 Expected long-term rate on assets    6.5       7.0      7.0
                                     ====      ====      ===
</TABLE>


ESOP
     The Company's Board of Directors authorized the adoption of an employee
stock ownership plan with 401(k) provisions (ESOP) for substantially all
employees of the Company's subsidiary banks.  Effective during 1996, the
provisions of the Company's 401(k) thrift plan were combined under the ESOP
plan.

     In April 1995, the Company leveraged the ESOP plan through a $2,987,000
borrowing from an unaffiliated financial institution, the proceeds of which
were used to purchase 186,670 shares of the Company's common stock.  In
September 1997, the Company repaid the unaffiliated financial institution
through borrowings from South Side National Bank.  The Company now makes annual
contributions to the ESOP equal to the ESOP's debt service less dividends
received by the ESOP.  All dividends on unallocated shares received by the ESOP
are used to pay debt service.  As the debt is repaid, shares are released from
collateral and allocated to active employees, based on the proportion of debt
service paid in the year.  Accordingly, the debt of the ESOP was recorded as
debt and the shares pledged as collateral were reported as unearned ESOP shares
in the consolidated balance sheet.  As shares are released from collateral, the
Company reports compensation expense equal to the current market price of the
shares, and the shares become outstanding for earnings-per-share computations.
Dividends on allocated ESOP shares are recorded as a reduction of retained
earnings; dividends on unallocated ESOP shares are recorded as a reduction of
debt and accrued interest. ESOP compensation expense was $401,000, $251,000,
and $356,000 for the years ended December 31, 1997, 1996, and 1995,
respectively.  The ESOP shares as of December 31, 1997 were as follows:

<TABLE>
<S>                                 <C>
Allocated shares                       303,429
Shares released for allocation          12,354
Unreleased shares                       86,478
                                    ----------
Total ESOP shares                      402,261
                                    ==========
Fair value of unreleased shares at
   December 31, 1997                $2,983,000
                                    ==========
</TABLE>

     In addition, under the 401(k) provisions the ESOP provides for a 50%
matching contribution by the Company on employee elective deferral amounts up
to 6% of annual compensation.  The matching contribu-tions charged to expense
for the years 1997, 1996, and 1995 were $107,000, $99,000, and $78,000,
respectively.

STOCK OPTIONS
     The Company maintains a nonqualified stock option plan under which options
to purchase up to 200,000 shares of common stock could be granted to certain
executive officers of the Company and its subsidiary banks.  Options granted
under the plan vest on a pro rata basis over a five-year period and expire at
the end of ten years from the date of grant.  In 1993, 25,000 options were
granted at $11.00 per share.  Of the options granted, 2,400 have been
exercised, 5,600 have been forfeited, and 17,000 are still outstanding.  There
were no options granted during 1995.  In 1996, 75,000 options were granted at
$19.00 per share, all of which remain outstanding as of December 31, 1996, and
100,000 options remain available for future grants.  In 1997, the remaining
100,000 options were granted at $24 per share, all of which remain outstanding
as of December 31, 1997.

     The Company has adopted the disclosure-only provisions of SFAS 123.
Accordingly, no compensation cost has been recognized for the stock option
plans.  Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant date for awards in 1996 and
1997 consistent with the provisions of SFAS 123, the Company's net income and
earnings per common share would have been the pro forma amounts indicated
below:

<TABLE>
<CAPTION>
                                                       1997         1996
                                                    ---------     --------
   <S>                                              <C>           <C>
   Net income - as reported                         $  6,302,000  $6,158,000
   Net income - pro forma                              6,170,000   6,115,000
   Earnings per common share -
      diluted, as reported                                  2.25        2.26
   Earnings per common share -
      pro forma diluted                                     2.21        2.24
                                                    ============  ==========
</TABLE>


     Pro forma net income reflects only options granted in 1996 and 1997.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS 123 is not reflected in the pro forma net income amounts presented
above because compensation cost is reflected over the options' vesting period


                                      41


<PAGE>   44

SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)


of five years and compensation cost for options granted prior to January 1, 1996
is not considered.
        
     The fair value of each option grant for 1997 is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants:


<TABLE>
<CAPTION>
                          1997     1996
                         -------  -------
<S>                      <C>      <C>
Volatility                 30.0%    30.0%
Risk-free interest rate     6.0%     6.0%
Expected life            7 YEARS  5 years
Expected dividend yield     3.6%     2.6%
                         =======  =======
</TABLE>


     The pro forma information is provided for informational purposes only and
is not necessarily indicative of the results of operations that would have
occurred or of the future anticipated results of operations of the Company.

NOTE 11 -- EARNINGS PER SHARE
     The computation of EPS at December 31, 1997, 1996, and 1995 follows:

<TABLE>
<CAPTION>
                                     1997            1996            1995
                                --------------  --------------  --------------
                                   (in thousands, except per share amounts)
  <S>                           <C>             <C>             <C>
  Basic EPS:
     Income available to
        common shareholders         $    6,302   $    6,158      $    6,734
     Average common shares
        outstanding                  2,735,859    2,712,775       2,643,890
                                    ==========   ==========      ==========
     Basic EPS                      $     2.30   $     2.27      $     2.55
                                    ==========   ==========      ==========
  Diluted EPS:
     Income available to
        common shareholders         $    6,302   $    6,158      $    6,734
                                    ==========   ==========      ==========
     Average common shares
        outstanding                  2,735,859    2,712,775       2,643,890
     Dilutive potential due to
        stock options                   62,246       17,439           6,661
                                    ----------   ----------      ----------
     Average number of
        common shares and
        dilutive potential
        common shares
        outstanding                  2,798,105    2,730,214       2,650,551
                                    ==========   ==========      ==========
     Diluted EPS                    $     2.25   $     2.26      $     2.54
                                    ==========   ==========      ==========
</TABLE>


NOTE 12 -- SUPERVISION AND REGULATION
     The Company's subsidiary banks are required to maintain certain daily
reserve balances on hand in accordance with regulatory requirements.
Restricted funds used to meet regulatory reserve requirements amounted to
$3,292,000 and $3,131,000 at December 31, 1997 and 1996, respectively.

     The Company is registered with and subject to supervision and regulation
by the Board of Governors of the Federal Reserve System pursuant to the Bank
Holding Company Act of 1956 as amended.  The Company is also subject to
periodic reporting requirements and regulation by the Securities and Exchange
Commission.  All subsidiary banks are subject to regulation by the Board of
Governors of the Federal Reserve System and, in addition, they are also members
of and subject to regulation by the FDIC.  The state-chartered subsidiary banks
are subject to supervision and regulation by the Missouri Division of Finance.
The national bank subsidiary is subject to supervision and regulation by the
Office of the Comptroller of the Currency (OCC).

     The earnings of the subsidiary banks are affected not only by competing
financial institutions and general economic conditions, but also by the
policies of various governmental regulatory authorities and state and federal
laws, particularly as they relate to powers authorized to banks and bank
holding companies.  The Company and all subsidiary banks are also subject to
the provisions of the Community Reinvestment Act.

     Subsidiary bank dividends are the principal source of funds for the
payment of dividends by the Company to its shareholders.  By regulation, the
Company's national banking subsidiary is prohibited from paying dividends in
excess of its current year's net income plus its retained net income from the
preceding two years, unless prior regulatory approval is obtained.  The
subsidiary banks are also required to maintain certain minimum capital ratios,
which further limit their ability to pay dividends to the Company.  At December
31, 1997, $13,089,000 was available for dividends to the Company without
reducing capital of the subsidiary banks below minimum standards.

     The Company's subsidiary banks are subject to various regulatory capital
requirements administered by the federal banking agencies.  Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Company's consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company's subsidiary banks must meet specific capital
guidelines that involve quantitative measures of the Company's subsidiary
banks' assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices.  The Company's subsidiary banks' capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.

                                       42


<PAGE>   45



SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

     Quantitative measures established by regulations to ensure capital
adequacy require the Company and its subsidiary banks to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier I capital
(as defined in the regulations) to risk-weighted assets (as defined), and of
Tier I capital (as defined) to average assets (as defined).  Management
believes, as of December 31, 1997, the Company and its subsidiary banks meet
all capital adequacy requirements to which they are subject.

     As of the most recent notification from regulatory authorities, the
subsidiary banks were categorized as well capitalized under the regulatory
framework for prompt corrective action.  To be categorized as well capitalized,
the subsidiary banks must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table.  There are no conditions
or events since that notification that management believes have changed the
subsidiary banks' categories.

     The Company and subsidiary banks' actual and required capital amounts (in
thousands) and ratios as of December 31, 1997 and 1996 are as follows:


<TABLE>
<CAPTION>
                                                        1997
                             --------------------------------------------------------
                                                                         To Be
                                                                   Well Capitalized
                                                                         Under
                                                                   Prompt Corrective
                                                  For Capital           Action
                                   Actual       Adequacy Purposes       Provisions
                             ----------------  -------------------  --------------------
                             Amount    Ratio   Amount    Ratio      Amount     Ratio
                             -------  -------  -------  -------   --------   ---------
<S>                          <C>      <C>      <C>        <C>      <C>         <C>
TOTAL CAPITAL (TO RISK-
     WEIGHTED ASSETS)
        COMPANY              $60,664  17.38%   $27,926      8%   $     -           -  %
        SSNB                  38,434  17.21     17,871      8     22,339          10
        SBJC                   6,255  17.14      2,920      8      3,650          10
        BSG                   10,174  19.65      4,143      8      5,179          10
        BSCC                   4,842  13.89      2,790      8      3,487          10
TIER I CAPITAL (TO RISK-
     WEIGHTED ASSETS)
        COMPANY              $56,279  16.12%   $13,963      4%   $     -           - %
        SSNB                  35,624  15.95      8,935      4     13,403           6
        SBJC                   5,798  15.89      1,460      4      2,190           6
        BSG                    9,525  18.39      2,071      4      3,107           6
        BSCC                   4,405  12.63      1,395      4      2,092           6
TIER I CAPITAL (TO ADJUSTED
     AVERAGE ASSETS)
        COMPANY              $56,279  10.34%   $16,331      3%  $      -           - %
        SSNB                  35,624  10.26     10,416      3     17,359           5
        SBJC                   5,798   9.96      1,747      3      2,911           5
        BSG                    9,525  11.10      2,575      3      4,292           5
        BSCC                   4,405   8.67      1,523      3      2,539           5
</TABLE>


<TABLE>
<CAPTION>
                                                        1996
                             --------------------------------------------------------
                                                                         To Be
                                                                   Well Capitalized
                                                                         Under
                                                                   Prompt Corrective
                                                  For Capital           Action
                                   Actual       Adequacy Purposes       Provisions
                             ----------------  -------------------  --------------------
                             Amount    Ratio   Amount       Ratio      Amount     Ratio
                             -------  -------  -------     -------   --------   ---------
<S>                          <C>      <C>      <C>         <C>      <C>         <C>
TOTAL CAPITAL (TO RISK-
   (WEIGHTED ASSETS)                                                                
       COMPANY               $56,767   17.88%    $25,400    8.00%    $      -         -  %
       SSNB                   36,406   18.32      15,897    8.00       19,871      10.00
       SBJC                    5,929   18.09       2,621    8.00        3,277      10.00
       BSG                     9,752   19.77       3,945    8.00        4,931      10.00
       BSCC                    4,565   14.57       2,506    8.00        3,133      10.00
TIER I CAPITAL (TO RISK-
   (WEIGHTED ASSETS)
       COMPANY               $52,778   16.62%    $12,700    4.00%    $      -         -  %
       SSNB                   33,906   17.06       7,949    4.00        11,923      6.00
       SBJC                    5,518   16.84       1,311    4.00         1,966      6.00
       BSG                     9,133   18.52       1,973    4.00         2,959      6.00
       BSCC                    4,171   13.31       1,253    4.00         1,880      6.00
TIER I CAPITAL (TO ADJUSTED
   (AVERAGE ASSETS)
       COMPANY               $52,778   10.12%    $15,646    3.00%    $      -         -  %
       SSNB                   33,906   10.19       9,980    3.00         16,633     5.00
       SBJC                    5,518   10.22       1,621    3.00          2,701     5.00
       BSG                     9,133   10.52       2,604    3.00          4,340     5.00
       BSCC                    4,171    9.46       1,323    3.00          2,205     5.00
</TABLE>


NOTE 13 -- CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
     Following are condensed financial statements of Southside Bancshares Corp.
(parent company only) for the periods indicated:

                            CONDENSED BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1996
                                 (in thousands)


<TABLE>
<CAPTION>
                           ASSETS                1997       1996
                                                -------    -------
               <S>                              <C>        <C>

               Cash                             $ 1,198     $   297
               Investment in subsidiary banks    56,092      53,349
               Other assets                       1,736       1,490
                                                -------     -------
                      TOTAL ASSETS              $59,026     $55,136
                                                =======     =======
<CAPTION>
                           LIABILITIES AND
                        SHAREHOLDERS' EQUITY

               ESOP debt                         $1,581     $ 1,779
               Other liabilities                    792         516
               Shareholders' equity              56,653      52,841
                                                -------     -------
                      TOTAL LIABILITIES AND
                          SHAREHOLDERS' EQUITY  $59,026     $55,136
                                                =======     =======
</TABLE>




                                      43


<PAGE>   46

SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)




                         CONDENSED STATEMENTS OF INCOME
                 YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
                                 (in thousands)



<TABLE>
<CAPTION>
                                 1997    1996    1995
                                ------  ------  ------
<S>                             <C>     <C>     <C>
REVENUE:
   Dividends received from
     subsidiary banks           $5,050  $3,000  $  239
   Gain on sale of Bay-
     Hermann-Berger Bank             -       -     825
   Other                           368     297      91
                                ------  ------  ------
     Total revenue               5,418   3,297   1,155
                                ------  ------  ------
EXPENSES:
   Interest expense                139     170     351
   Other                         1,952   1,558     623
                                ------  ------  ------
     Total expenses              2,091   1,728     974
                                ------  ------  ------
     Income before income
        tax benefit and un-
        distributed earnings
        of subsidiary banks      3,327   1,569     181
Income tax benefit                 496     431      52
                                ------  ------  ------
     Income before
        undistributed earnings
        of subsidiary banks      3,823   2,000     233
Undistributed earnings of
   subsidiary banks              2,479   4,158   6,501
                                ------  ------  ------
     NET INCOME                 $6,302  $6,158  $6,734
                                ======  ======  ======
</TABLE>


                       CONDENSED STATEMENTS OF CASH FLOWS
                 YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
                                 (in thousands)

<TABLE>
<CAPTION>
                                          1997           1996            1995
                                         ------         ------          ------
<S>                                      <C>           <C>              <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income                           $6,302        $   6,158        $ 6,734
    Adjustments to reconcile net income
      to net cash provided by (used in)
      operating activities:
        Undistributed earnings
           of subsidiary banks           (2,479)          (4,158)        (6,501)
        Gain on sale of Bay-
           Hermann-Berger Bank                -              -             (825)
        Other operating activities, net     555              688            479
                                       --------        ---------          -----
               Net cash provided
                  by (used in)
                  operating activities    4,378            2,688           (113)
                                       --------        ---------          -----
CASH FLOWS FROM INVESTING ACTIVITIES:
      Purchase of life insurance              -           (1,250)             -
      Proceeds from the sale
        of Bay-Hermann-Berger Bank            -              -            3,145
                                       --------        --------          ------
               Net cash provided
                  by (used in)
                  investing activities        -           (1,250)         3,145
                                       --------        ---------          -----
CASH FLOWS FROM FINANCING  ACTIVITIES:
    Payments for ESOP debt               (1,779)            (299)             -
    Proceeds from ESOP debt               1,581               -               -
    Principal reductions
      on notes payable                        -               -          (6,440)
    Proceeds from issuance of
      common stock                            -               -           4,279
    Payments to acquire treasury stock   (1,370)            (283)          (167)
    Cash dividends paid                  (1,909)          (1,365)          (969)
                                       --------        ---------          -----
               Net cash used in
                  financing activities   (3,477)          (1,947)        (3,297)
                                       --------        ---------         ------ 
               Net increase (de-
                  crease) in cash           901             (509)          (265)
Cash, beginning of year                     297              806          1,071
                                       --------        ---------         ------
Cash, end of year                      $  1,198        $     297        $   806
                                       ========        =========        =======
Supplemental disclosures of cash
    flow information - cash paid
    during the year for:
      Interest on subordinated
        capital notes  and debt        $    139        $     170        $   351
      Income taxes                        2,498            2,497          2,026
      Guarantee of ESOP debt                  -              -            2,987
                                         ======        =========         ======
</TABLE>

NOTE 14 -- CONTINGENCIES
     In the normal course of business, the Company had certain litigation
pending at December 31, 1996.  In the opinion of management, after consultation
with legal counsel, none of this litigation will have a material adverse effect
on the consolidated financial condition of the Company.

NOTE 15 -- DISCLOSURES ABOUT
FINANCIAL INSTRUMENTS
     The Company is party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit.  Those instruments may involve, to varying degrees, elements
of credit and interest rate risk in excess of the amounts recognized in the
consolidated balance sheets.  The amounts of those instruments reflect the
extent of involvement the Company has in particular classes of financial
instruments.

     The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual amount of those
instruments.  The Company uses the same credit policies in making commitments
and conditional obligations as it does for financial instruments included on
the consolidated balance sheets.

     Following is a summary of the Company's off-balance-sheet financial
instruments at December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                 (in thousands)
                                               Contractual Amount
                                               --------------------
                                                 1997       1996
                                               ---------  ---------
            <S>                                <C>        <C>
            Financial instruments whose
               contractual amounts represent:
                 Commitments to extend
                    credit                       $60,971    $60,599
                 Standby letters of credit         2,758      1,984
                                               =========  =========
</TABLE>


     Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee.  Of the total commitments to extend credit at
December 31, 1997 and 1996, $8,428,000 and $8,121,000, respectively, represent
fixed rate loan commitments.  Since many of the commitments are expected to
expire 

                                      44

                                       
<PAGE>   47

SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)




without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.  The Company evaluates each customer's
creditworthiness on a case-by-case basis.

     The amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
counterparty.  Collateral held varies, but includes residential or
income-producing commercial property, marketable securities, inventory,
accounts receivable, and premises and equipment.

     Standby letters of credit written are conditional commitments issued by
the Company to guarantee the performance of a customer to a third party.  Those
guarantees are primarily issued to support public and private borrowing
arrangements.  The Company's policy is to issue letters of credit which have a
maximum expiration date of one year.  The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loans
to customers.

     Following is a summary of the carrying amounts and fair values of the
Company's financial instruments which were on the consolidated balance sheets
at December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                  (in thousands)
                        1997                1996
                        ------------------  ------------------
                        CARRYING  FAIR      Carrying  Fair
                        AMOUNT    VALUE     Amount    Value
                        --------  --------  --------  --------
<S>                     <C>       <C>       <C>       <C>
Balance sheet assets:
   Cash and due
      from banks         $18,302  $ 18,302  $ 17,156  $ 17,156
   Short-term
      investments         17,200    17,200    13,500    13,500
   Investments in
      debt securities:
       Available
         for sale         73,460    73,460    66,650    66,650
       Held to
         maturity         99,679   100,840   120,644   121,377
   Loans, net            320,317   325,819   288,861   294,982
                        ========  ========  ========  ========
Balance sheet
   liabilities:
      Deposits          $483,363  $482,855  $467,276  $466,572
      Short-term
       borrowings          5,333     5,333     1,623     1,623
      ESOP debt                -         -     1,779     1,779
                        ========  ========  ========  ========
</TABLE>


     The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:

CASH AND OTHER SHORT-TERM INSTRUMENTS
     Cash and due from banks, federal funds sold (purchased), securities sold
under agreements to repurchase, U.S. Treasury tax and loan notes, and other
short-term borrowings are either demand instruments or reprice in a short time
period.  Accordingly, the carrying amount is a reasonable estimate of fair
value.

DEBT SECURITIES
     The fair value of debt securities in which the Company has invested to
hold to maturity and investments available for sale are based on quoted market
prices or dealer quotes.

LOANS
     The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.

DEPOSITS
     The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date.  The
fair value of fixed maturity time deposits is estimated using the rates
currently offered for deposits of similar remaining maturities.

ESOP DEBT AND SUBORDINATED CAPITAL NOTES
     The estimate of the fair value of ESOP debt and subordinated capital notes
is the carrying value of the instruments.  Due to the interest rates and risk
characteristics, carrying value is a reasonable approximation of fair value.

COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
     The fair value of commitments to extend credit and standby letters of
credit is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements, the
likelihood of the counterparties drawing on such financial instruments, and the
present creditworthiness of such counterparties.  The Company believes such
commitments have been made on terms which are competitive in the markets in
which it operates; however, no premium or discount is offered thereon and,
accordingly, the Company has not assigned a value to such instruments for
purposes of this disclosure.

LIMITATIONS
     Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial

                                      45


<PAGE>   48

SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)




instrument.  Because no market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors.  These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.

     Fair value estimates are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments.  For example, the Company has a trust department that
contributes net fee income annually.  The trust department is not considered a
financial instrument, and its value has not been incorporated into the fair
value estimates.  Other assets and liabilities that are not considered
financial assets or liabilities include property, equipment, and goodwill.  In
addition, the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and have
not been considered in many of the estimates.

NOTE 16 -- SHAREHOLDER
PROTECTION RIGHTS PLAN
     On May 27, 1993, the Company's Board of Directors adopted a Shareholder
Protection Rights Plan (the Plan).

     Under the terms of the Plan, one Preferred Share Purchase Right (Right) is
attached to each share of common stock and trades automatically with such
shares.  The Rights, which can be redeemed by the Company's Board of Directors
in certain circumstances and expire by their terms on May 27, 2003, have no
voting rights.

     The Rights become exercisable and will trade separately from the common
stock ten days after a person or a group either becomes the beneficial owner or
announces an intention to commence a tender offer for 25% or more of the
Company's outstanding common stock.  When exercisable, each Right entitles the
registered holder to purchase from the Company 1/100th of a share of a new
series of Junior Participating Preferred Stock, Series D, substantially equal
to one share of common stock without voting rights, at an exercise price of
$37.50 per unit. In the event a person acquires beneficial ownership of 25% or
more of the Company's common stock, holders of Rights (other than the acquiring
person or group) may purchase, at the Rights' then current exercise price,
common stock or its equivalent of the Company having a value at that time equal
to twice the exercise price.  In the event the Company merges into or otherwise
transfers 50% or more of its assets or earnings power to any person after the
Rights become exercisable, holders of Rights may purchase, at the then current
exercise price, common stock or its equivalent of the acquiring entity having a
value at that time equal to twice the exercise price.
        
NOTE 17 -- SUBSEQUENT EVENT
     On February 25, 1998, the Company entered into a definitive agreement that
provides for the acquisition and merger of Public Service Bank, FSB (PSB) with
the Company's subsidiary bank, South Side National Bank.  As of September 30,
1997, PSB had total assets of $70,470,000, stockholders' equity of $4,364,000,
and three offices in the St. Louis metropolitan area.  The agreement provides
for the Company to acquire 100% of PSB from its stockholders, who shall receive
either cash, shares of the Company's common stock, or a combination of cash and
the Company's common stock, at the election of each PSB stockholder subject to
certain limitations as set forth in the agreement.  The value of the
transaction is expected to be approximately $8.5 million or two times PSB's
adjusted book value as of the closing date.  The acquisition should be
completed in the third quarter of 1998, and it is subject to, among other
things, regulatory approval.


                                       46


<PAGE>   49




                  SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
                             DIRECTORS AND OFFICERS

SOUTHSIDE BANCSHARES CORP.
     The name and principal occupation or employment of each director and
officer of Southside Bancshares Corp. and the name and principal business of
any organization by which such person is employed is set forth below:

<TABLE>
<CAPTION>
                        BOARD OF DIRECTORS
<S><C>
JOSEPH W. BEETZ                                    NORVILLE K. MCCLAIN                         
   President                                          President                                
   Joseph H. Beetz Plumbing Company, Inc.             Essex Contracting, Inc.                  
   Director                                           Director                                 
   South Side National Bank in St. Louis              South Side National Bank in St. Louis    
RALPH CRANCER, JR.                                 DANIEL J. QUEEN                             
   Deputy Sheriff                                     President                                
   St. Louis County, Missouri                         Highland Diversified                     
   Former President                                   Director                                 
   South Side Furniture Co.                           South Side National Bank in St. Louis    
   Director                                           Director                                 
   South Side National Bank in St. Louis              State Bank of DeSoto                     
HOWARD F. ETLING                                   RICHARD G. SCHROEDER, SR.                   
   Publisher Emeritus                                 President                                
   Journal Newspaper                                  St. Louis Fabrication Services, Inc.     
   Former President                                   Director                                 
   South County Publications, Inc.                    South Side National Bank in St. Louis    
   Chairman of the Board                           THOMAS M. TESCHNER                          
   Southside Bancshares Corp.                         President and Chief Executive Officer    
   Chairman of the Board                              Southside Bancshares Corp.               
   South Side National Bank in St. Louis              President and Chief Executive Officer    
DOUGLAS P. HELEIN                                     South Side National Bank in St. Louis    
   Insurance Broker                                   Director                                 
   Welsch, Flatness & Lutz, Inc.                      South Side National Bank in St. Louis    
   Director                                           Director                                 
   South Side National Bank in St. Louis              Bank of Ste. Genevieve                   
EARLE J. KENNEDY, JR.                                 Director                                 
   Former President                                   State Bank of DeSoto                     
   Westway Services, Inc.                             Director                                 
   Former President                                   The Bank of St. Charles County           
   Continental Boiler Works, Inc.
   Director
   South Side National Bank in St. Louis




                                    OFFICERS


THOMAS M. TESCHNER
 President and Chief                                      LAURA L. THOMAS                 
 Executive Officer           CAROLE A. MATT                Assistant Secretary to the Board
JOSEPH W. POPE                Vice President/Compliance   NEIL P. FINNEGAN                
 Senior Vice President and   STEVEN D. VOSS                Assistant Vice President/       
 Chief Financial Officer      Vice President and Auditor   Loan Review                     
DAVID J. ABELN               JOANNE M. SCHNEIDER          NANETTE M. BELLER               
 Vice President/Investments   Secretary to the Board       Assistant Auditor               
</TABLE>


                                      47


<PAGE>   50




     The following is a summary description of the four subsidiary banks of
Southside Bancshares Corp.

SOUTH SIDE NATIONAL BANK IN ST. LOUIS

     The main office of South Side National Bank in St. Louis is located at
3606 Gravois Avenue, St. Louis, Missouri  63116.  Facilities are located at
3420 Iowa Street, St. Louis, Missouri  63118; 9914 Kennerly Road, St. Louis
County, Missouri  63128; 8440 Morganford, St. Louis County, Missouri 63123;
4666 Lansdowne, St. Louis, Missouri  63116; 10385 West Florissant, Ferguson,
Missouri  63136; and 11330 Gravois, St. Louis, Missouri  63126.  A
24-hour automated teller machine is maintained at St. Anthony's Medical Center,
10010 Kennerly Road, St. Louis County, Missouri  63128.  The Bank has 20
drive-in windows and eight 24-hour automated teller machines.  The Bank is a
member of the Honor and CIRRUS automated teller networks.  The Bank serves St.
Louis City and St. Louis County.

     The total assets of the Bank at December 31, 1997 were $353,316,000.
Total deposits at December 31, 1997 were $309,297,000.  Total loans at December
31, 1997 were $197,175,000.


                              BOARD OF DIRECTORS

HOWARD F. ETLING        DOUGLAS P. HELEIN      DANIEL J. QUEEN          
 Chairman of the Board  EARLE J. KENNEDY, JR.  RICHARD G. SCHROEDER, SR.
JOSEPH W. BEETZ         NORVILLE K. MCCLAIN    THOMAS M. TESCHNER       
RALPH CRANCER, JR.                                                      


                         ADVISORY BOARD OF DIRECTORS

TIM DRURY               GENE SCHWARTZ          FLOYD E. WRIGHT   
THOMAS H. ETLING        FRANCIS G. SLACK       THOMAS M. TESCHNER
SAMUEL D. ORLANDO, SR.  MALCOLM J. SWEET, JR.  JOSEPH S. WEINMANN
STEVEN C. ROBERTS                                                

                                   OFFICERS

<TABLE>
<S>                                                 <C>                                       <C>
THOMAS M. TESCHNER                                   ROBERT D. JOSEPH                         PAMELA A. HALE                       
   President and Chief Executive Officer               Vice President                            Assistant Vice President          
WILLIAM E. MUHLKE                                    COLETTE A. LETENDRE                      DOLORES G. HENSEL                    
   Senior Vice President and Comptroller               Vice President                            Assistant Vice President          
LAURIE A. PENNYCOOK                                  JUDI M. SCHULZ                           CONNIE HORNAK                        
   Senior Vice President and Cashier                   Vice President                            Assistant Vice President          
STEVEN L. RAY                                        DONALD A. SEILER                         BRENDA L. HUDDLESTON                 
   Senior Vice President and Senior Trust Officer      Vice President                            Assistant Vice President          
MARK D. SKORNIA                                      JOHN R. SHIVERS                          D. MICHAEL MINOR                   
   Senior Vice President and Senior Loan Officer       Vice President                            Assistant Vice President          
KENNETH E. MARSCHUETZ                                JEFFERY M. BERRY                         ROLAND G. SPIES                      
   Senior Vice President                               Assistant Vice President                  Assistant Vice President          
JOSEPH W. POPE                                       ANNA SMITH-CRAFT                         PAUL L. STEUBE                       
   Senior Vice President                               Assistant Vice President                  Assistant Vice President          
CAROLE A. MATT                                       GAIL R. DICKSON                          JACQUELINE A. YOCHIM                 
   Vice President and Compliance Officer               Assistant Vice President                  Assistant Vice President          
DAVID J. ABELND.                                     SUE DOERING                              WENDY HAMILTON                       
   Vice President/Investments                          Assistant Vice President                  Marketing Officer                 
RAYMOND H. BAYER                                     BETTY J. DUNSCOMBE                       SHARON MOORE                         
   Vice President                                      Assistant Vice President                  Data Processing Officer           
MARK D. CHAPMAN                                      CRISTA ELLIOTT                           GLENDA L. POPPLETON                  
   Vice President/Human Resources                      Assistant Vice President                  Loan Administration Officer       
JAMES A. DEGUIRE                                     DONNA M. FELDMANN                        SUSAN SUN                            
   Vice President                                      Assistant Vice President                  Community Banking Officer         
BARBARA E. GLIEDT                                    LISA M. FRICK                            JOANNE M. SCHNEIDER                  
   Vice President                                      Assistant Vice President                  Secretary to the Board            
                                                    CYNTHIA L. GOLDSCHMIDT                    LAURA L. THOMAS                      
                                                       Assistant Vice President                  Assistant Secretary to the Board  
                                                    DANNY C. GRAHAM                         
                                                       Assistant Vice President             
</TABLE>





                                      48
<PAGE>   51




STATE BANK OF JEFFERSON COUNTY
     The main office of State Bank of Jefferson County is located at 224 S.
Main Street, DeSoto, Missouri  63020, and a facility is located at 2000 Rock
Road, DeSoto, Missouri  63020.  The Bank has two drive-in windows at each
location and a 24-hour automated teller machine at the Rock Road facility.  The
Bank is a member of the Honor and CIRRUS automated teller networks.  The Bank
serves Jefferson County, part of Franklin County, Washington County, and St.
Francois County.

     The total assets of the Bank at December 31, 1997 were $57,683,000.  Total
deposits at December 31, 1997 were $51,533,000.  Total loans at December 31,
1997 were $41,377,000.



<TABLE>
<S><C>

                               BOARD OF DIRECTORS

            ROBERT G. PURCELL                    CLARENCE M. JONES
             Chairman of the Board               KENNETH MCCLAIN   
            CLAUDE J. COOK                       DANIEL J. QUEEN   
            PAUL F. DICKINSON                    STEVAN H. ROWE    
            RICHARD B. FRANCIS                   THOMAS M. TESCHNER

                                   OFFICERS

RICHARD B. FRANCIS              ANN GAMBER                   DIANE HUMPHREY
  President and Chief             Compliance Officer           Assistant Cashier
  Executive Officer             KEVIN L. BOREN               ELAINE WATTERS 
MARGARET A. ARMBRUSTER            Assistant Vice President     Assistant Cashier
  Vice President                PHYLLIS POOLE                PAULINE WILLIAMSON 
BARBARA A. DONTRICH               Assistant Vice President     Assistant Cashier
  Vice President, Cashier, and    and Secretary to the Board     
  Security Officer              
</TABLE>

BANK OF STE. GENEVIEVE
     The main office of Bank of Ste. Genevieve is located at 198 Market Street
in Ste. Genevieve, Missouri  63670, and a facility, Plaza Bank, is located at
710 Parkwood Drive in Ste. Genevieve, Missouri  63670.  The Bank has two
drive-in windows at the main office and three drive-in windows and two 24-hour
automated teller machines at the Plaza Bank location and the Family Inn
Restaurant, 17050 Bremen Road, Ste, Genevieve, Missouri  63670.  The Bank is a
member of the CIRRUS and Shazam automated teller networks.  The Bank serves
Ste. Genevieve County.

     The total assets of the Bank at December 31, 1997 were $84,805,000.  Total
deposits at December 31, 1997 were $74,627,000.  Total loans at December 31,
1997 were $55,005,000.


<TABLE>
<S><C>
                              BOARD OF DIRECTORS


            HAROLD J. UDING                      CLARENCE J. KERTZ
              Chairman of the Board              ROY J. PANCHOT    
            PATRICK J. UDING                     KENNETH J. REHM   
              Secretary to the Board             THOMAS M. TESCHNER
                                                 GERALD J. TRAUTMAN


                                   OFFICERS

PATRICK J. UDING                         JERRY V. BERGTHOLDT                 GARY D. FISCHER      
  President & Chief Executive Officer       Assistant Vice President           Vice President     
WILLIAM E. MILES                            and Security Officer             MARY ANN BAUMAN      
  Senior Vice President and              MONICA J. KREITLER                    Assistant Cashier  
  CRA Officer                               Assistant Vice                   MARY ELLEN CABRAL    
STEPHEN J. ABTS                             President and                      Executive Secretary
  Vice President and Cashier                Compliance Officer                                    
</TABLE>


                                      49
<PAGE>   52




THE BANK OF ST. CHARLES COUNTY
     The main office of The Bank of St. Charles County is located at 6004
Highway 94 South, Weldon Springs, Missouri  63304, and a facility is located at
750 First Capitol Drive, St. Charles, Missouri  63301.  The Bank has a 24-hour
automated teller machine at each location, three drive-in windows in Weldon
Spring, and one drive-in window at 750 First Capitol Drive.  The Bank is a
member of the Honor and CIRRUS automated teller networks.  The Bank services
St. Charles County.

     The total assets of the Bank at December 31, 1997 were $54,120,000.  Total
deposits at December 31, 1997 were $49,311,000.  Total loans at December 31,
1997 were $34,461,000



<TABLE>
<S><C>
                              BOARD OF DIRECTORS

                                                                 
  LARRY RICHARDSON                        FREDERICK W. DRAKESMITH
    Chairman of the Board                 WILLIAM O. MULLINS     
  TERRY E. ALEXANDER                      ALAN D. POHLMAN        
  MAX E. MCGOWAN                          THOMAS M. TESCHNER     
  TED E. GLOSIER                          


                                    OFFICERS
                                      
ALAN D. POHLMAN                         JUDY M. BRADY                             LARRY W. NOLTE             
  President and Chief                     Vice President and                         Assistant Vice President
  Executive Officer                       Security Officer                        SUSAN P. FLEMING           
CRAIG D. WOOD                           JAMIE TATRO                                  Assistant Vice President
  Senior Vice President, Cashier, and     Assistant Vice President and            MARK H. KNOBLAUCH          
  Secretary to the Board                  Compliance Officer                         Assistant Vice President
DON R. HAYNES                         
  Vice President                       
</TABLE>


                                      50