<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

                                   (MARK ONE)

[ X ]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
              OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended              SEPTEMBER 30, 1998
                               -------------------------------------------------
                                                 OR

[   ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
              OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from                         to                       
                                ----------------------    ----------------------
Commission file number 0-10849

                           SOUTHSIDE BANCSHARES CORP. 
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

<TABLE>

<S>                                                   <C>
           MISSOURI                                               43-1262037                  
-------------------------------                       -----------------------------------
(State or other jurisdiction of                       (I.R.S. Employer Identification No.)
 incorporation or organization)

</TABLE>


 3606 GRAVOIS AVENUE, ST. LOUIS, MISSOURI             63116
--------------------------------------------------------------------------------
(Address of principal executive offices)            (Zip Code)

Registrant's telephone number, including area code   (314) 776-7000 
                                                     ---------------

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes   X      No        
    ----        ----

         At NOVEMBER 12, 1998 , the number of shares outstanding of the
registrant's common stock was 2,897,286 .



<PAGE>   2


                           SOUTHSIDE BANCSHARES CORP.

                                      INDEX
                                          
<TABLE>
                                                                                             PAGE
                                                                                             ----
<S>                                                                                           <C>
Part I.     FINANCIAL INFORMATION

                  Item 1.  Condensed Consolidated Financial Statements:

                           Condensed Consolidated Balance Sheets at
                              September 30, 1998 and December 31, 1997                          3

                           Condensed Consolidated Statements of Income for
                              the nine months and three months ended
                              September 30, 1998 and September 30, 1997                         4

                           Condensed Consolidated Statements of Cash Flows for
                              the nine months ended September 30, 1998 and September 30,
                              1997                                                              5

                           Notes to Condensed Consolidated Financial Statements                 6

                  Item 2.  Management's Discussion and Analysis of
                              Financial Condition and Results of Operations                     8

                  Item 3.  Quantative and Qualitative Disclosures
                              Regarding Market Risk - There have been no material changes 
                              from the information provided in the 12/31/97 Annual Report on
                              Form 10-K

Part II.    OTHER INFORMATION

                  Item 1.  Legal Proceedings                                                   18

                  Item 6.  Exhibits and Reports on Form 8-K                                    18

                           Signatures                                                          19


</TABLE>



                                       2
<PAGE>   3



                   SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                       SEPTEMBER 30, 1998 AND DECEMBER 31,  1997 
                    (dollars in thousands except share data)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                       SEPTEMBER 30,    December 31,
                                                                                            1998            1997
                                     ASSETS                                            -------------    -----------
<S>                                                                                      <C>            <C>      
Cash and due from banks                                                                  $  16,431      $  18,302
Due from banks-interest bearing                                                              3,868             --
Federal funds sold                                                                          13,425         17,200
Investments in debt securities:
        Available-for-sale, at market value                                                 97,741         73,460
        Held-to-maturity, at amortized cost
           (approximate market value of $99,228
           in 1998, and $100,838 in 1997)                                                   97,289         99,679
                                                                                         ---------      ---------            
              Total investments in debt securities                                         195,030        173,139
                                                                                         ---------      ---------            

Loans, net of unearned discount                                                            364,127        326,437
  Less allowance for possible loan losses                                                    6,222          6,120
                                                                                         ---------      ---------            
            Loans, net                                                                     357,905        320,317
                                                                                         ---------      ---------            
Bank premises and equipment                                                                 15,260         10,866
Other assets                                                                                13,802         10,040
                                                                                         ---------      ---------            
            TOTAL ASSETS                                                                 $ 615,721      $ 549,864
                                                                                         =========      =========            

            LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
  Noninterest-bearing demand                                                             $  64,884      $  61,308
  Interest-bearing demand and savings                                                      213,480        195,804
  Time deposits                                                                            250,640        226,251
                                                                                                        ---------            
            Total deposits                                                                 529,004        483,363

Securities sold under agreements to repurchase                                               1,270          5,333
FHLB borrowings                                                                             16,328              -
Other liabilities                                                                            4,591          4,515
                                                                                         ---------      ---------            
            Total liabilities                                                              551,193        493,211
                                                                                         =========      =========            

Commitments and contingent liabilities
Shareholders' equity:
  Cumulative preferred stock, no par value, 1,000,000 shares
    authorized and unissued                                                                     --             --
  Common stock, $1 par value, 15,000,000 shares authorized,
    2,995,126 shares issued and outstanding in 1998 and
    2,859,010 in 1997                                                                        2,995          2,859
Surplus                                                                                     11,173          6,023
Retained earnings                                                                           54,237         50,841
Unearned employee stock ownership plan shares                                               (1,235)        (1,384)
Treasury stock, at cost, 97,840 and 61,340 shares, respectively                             (3,167)        (1,820)
Other comprehensive income                                                                     525            134
                                                                                         ---------      ---------            
            Total shareholders' equity                                                      64,528         56,653
                                                                                         ---------      ---------            
  TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                             $ 615,721      $ 549,864
                                                                                         =========      =========             
</TABLE>

     See accompanying notes to condensed consolidated financial statements.



                                       3
<PAGE>   4


                   SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
                  CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                   NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
                    (dollars in thousands except share data)
                                  (unaudited)
<TABLE>
<CAPTION>

                                                                       NINE MONTHS ENDED          THREE MONTHS ENDED
                                                                           SEPTEMBER 30,             SEPTEMBER 30,
                                                                       1998         1997          1998          1997
                                                                    ----------    ----------   ----------     ----------
<S>                                                                 <C>           <C>          <C>            <C>       
INTEREST INCOME:
  Interest and fees on loans                                        $   22,347    $   20,388   $    8,051     $    7,090
  Interest on investments in debt securities:
      Taxable                                                            6,897         7,233        2,393          2,332
      Exempt from Federal income taxes                                   1,119           947          423            329
  Interest on short-term investments                                     1,001           602          409            232
                                                                    ----------    ----------   ----------     ----------
           TOTAL INTEREST INCOME                                        31,364        29,170       11,276          9,983
                                                                    ----------    ----------   ----------     ----------

INTEREST EXPENSE:
  Interest on interest-bearing demand and savings deposits               4,879         4,324        1,739          1,468
  Interest on time deposits                                              9,421         9,024        3,432          3,083
  Interest on securities sold under agreements to repurchase               124           158           22             72
  Interest on FHLB borrowings                                              372             -          279              -
  Interest on debt of employee stock ownership plan                        -             105          -               34
                                                                    ----------    ----------   ----------     ----------
         TOTAL INTEREST EXPENSE                                         14,796        13,611        5,472          4,657
                                                                    ----------    ----------   ----------     ----------
         NET INTEREST INCOME                                            16,568        15,559        5,804          5,326
  Provision for possible loan losses                                        47            45           17             15
                                                                    ----------    ----------   ----------     ----------
         NET INTEREST INCOME AFTER PROVISION                     
         FOR POSSIBLE LOAN LOSSES                                       16,521        15,514        5,787          5,311
                                                                    ----------    ----------   ----------     ----------

NONINTEREST INCOME:
  Trust department                                                         828           749          290            244
  Service charges on deposit accounts                                      979           988          340            338
  Gains on sales of loans                                                  245            22          186             15
  Net losses on sale of other real estate                                                                 
      owned and other foreclosed property                                 (15)          (26)         (30)            (4)
  Other                                                                    410           369          133            113
                                                                    ----------    ----------   ----------     ----------
         TOTAL NONINTEREST INCOME                                        2,447         2,102          919            706
                                                                    ----------    ----------   ----------     ----------

NONINTEREST EXPENSES:
  Salaries and employee benefits                                         6,135         5,597        2,151          1,913
  Net occupancy and equipment expense                                    1,661         1,816          581            624
  Data processing                                                          400           343          169            114
  Other                                                                  3,711         3,526        1,392          1,220
                                                                    ----------    ----------   ----------     ----------
         TOTAL NONINTEREST EXPENSES                                     11,907        11,282        4,293          3,871
                                                                    ----------    ----------   ----------     ----------

         INCOME BEFORE FEDERAL INCOME TAX EXPENSE                        7,061         6,334        2,413          2,146
Federal income tax expense                                               1,937         1,680          649            571
                                                                    ----------    ----------   ----------     ----------
         NET INCOME                                                    $ 5,124       $ 4,654       $1,764        $ 1,575
                                                                    ----------    ----------   ----------     ----------
OTHER COMPREHENSIVE INCOME, NET OF TAX:
  Unrealized gains on available-for-sale securities                        391           272          459            211
                                                                    ----------    ----------   ----------     ----------
         COMPREHENSIVE INCOME                                           $5,515        $4,926       $2,223         $1,786
                                                                    ==========    ==========   ==========     ==========

SHARE DATA:
        Earnings per common share - basic                                $1.86         $1.70        $0.62          $0.57
                                                                    ==========    ==========   ==========     ==========
        Earnings per share - diluted                                     $1.81         $1.66        $0.61          $0.56
                                                                    ==========    ==========   ==========     ==========
        Dividends paid per common share                                  $0.63         $0.51        $0.22          $0.18
                                                                    ==========    ==========   ==========     ==========
        Average common shares outstanding                            2,749,042     2,739,926    2,832,652      2,742,181
                                                                    ==========    ==========   ==========     ==========
        Average common shares outstanding
           including potentially diluted shares                      2,827,587     2,797,160    2,906,993      2,819,553
                                                                    ==========    ==========   ==========     ==========
</TABLE>

         See accompanying notes to condensed consolidated financial statements.



                                       4
<PAGE>   5





                   SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                  NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
                             (dollars in thousands)
                                   (unaudited)
<TABLE>
<CAPTION>

                                                                                        1998          1997
                                                                                      --------      --------    
<S>                                                                                   <C>           <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                                          $  5,124      $  4,654
  Adjustments to reconcile net income to
     net cash provided by operating activities:
        Depreciation and amortization                                                    1,146         1,146
        Provision for possible loan losses                                                  47            45
        Other operating activities, net                                                 (1,468)         (255)
                                                                                      --------      --------
          Total adjustments                                                               (275)          936
                                                                                      --------      --------
            NET CASH PROVIDED BY OPERATING ACTIVITIES                                    4,849         5,590
                                                                                      --------      --------

CASH FLOWS FROM INVESTING ACTIVITIES:
        Net increase (decrease) in Federal funds sold                                    3,775          (500)
        Proceeds from maturities of and principal payments
           on debt securities                                                           46,290        37,849
        Purchases of debt securities                                                   (57,562)      (22,891)
        Net decrease (increase) in loans                                                 8,136       (26,276)
        Recoveries of loans previously charged off                                         233           745
        Proceeds from sales of other real estate owned and
           other foreclosed property                                                       188           232
        Cash and cash equivalents acquired, net of cash paid                             8,238            --
        Purchases of bank premises and equipment                                        (3,258)         (963)
                                                                                      --------      --------
            NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                          6,040       (11,804)
                                                                                      --------      --------

CASH FLOWS FROM FINANCING ACTIVITIES:
        Net increase in demand and savings deposits                                      5,588           345
        Net (decrease) increase in time deposits                                       (15,210)        3,627
        Net (decrease) increase in securities sold under agreements to repurchase       (4,063)        3,730
        Net increase in FHLB borrowings                                                  7,958            --
        Payments to acquire treasury stock                                              (1,437)         (387)
        Cash dividends paid                                                             (1,728)       (1,396)
                                                                                      --------      --------
            NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES                         (8,892)        5,919
                                                                                      --------      --------
            NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                         1,997          (295)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                            18,302        17,156
                                                                                      --------      --------
CASH AND CASH EQUIVALENTS, END OF QUARTER                                             $ 20,299      $ 16,861
                                                                                      ========      ========

Supplemental disclosures of cash flow information:
  Cash paid during the year for:
      Interest on deposits and borrowings                                             $ 14,771      $ 13,307
      Income taxes                                                                       2,176         2,010
                                                                                      ========      ========

   Noncash transactions:                                                              
      Transfers to other real estate owned in settlement of loans                     $     57      $    389         
      Issuance of stock in financing of acquisition                                      5,178            --
                                                                                      ========      ========

</TABLE>


  See accompanying notes to condensed consolidated financial statements.




                                       5
<PAGE>   6




                   SOUTHSIDE BANCSHARES CORP. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                           SEPTEMBER 30, 1998 AND 1997
                                   (unaudited)

BASIS OF PRESENTATION
         The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. They do not include all information and footnotes
required by generally accepted accounting principles for complete consolidated
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation have
been included. For further information, refer to Southside Bancshares Corp.'s
(the Company) Annual Report on Form 10-K for the year ended December 31, 1997.
Operating results for the nine months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.

         The Company adopted the provisions of Statement on Financial Accounting
Standards (SFAS) No. 130-Reporting Comprehensive Income (SFAS 130) retroactively
on January 1, 1998. SFAS 130 established standards for reporting and displaying
income and its components (revenues, gains and losses) in a full set of general
purpose financial statements. The statement requires all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. Comparative financial statements
provided for earlier periods have been restated to reflect the application of
SFAS 130. The implementation of SFAS 130 did not have a material impact on the
Company's consolidated financial statements. The Company's only source of other
comprehensive income is unrealized gains or losses on available-for-sale
securities. The accumulated effect of such comprehensive income is included in
shareholders' equity in the consolidated financial statements.



                                       6
<PAGE>   7


1.  ACQUISITION
         On June 29, 1998, the Company acquired Public Service Bank, FSB (PSB)
and merged PSB into the Company's subsidiary bank, South Side National Bank in
St. Louis. As of June 29, 1998, PSB had total assets of $73,731,000, total loans
of $46,318,000, and total deposits of $55,264,000. PSB has three offices in the
St. Louis metropolitan area. The Company paid approximately $3,455,000 in cash
and 136,116 shares of common stock to acquire PSB, in a transaction accounted
for under the purchase method of accounting. The excess of the purchase price
over the fair market value of the assets acquired, approximately $3,500,000, is
included in the total of other assets on the Company's consolidated financial
statements.

         The following information presents the actual results for the three
months ended September 30, 1998 and unaudited pro forma condensed results of
operations of the Company for the three months ended September 30, 1997 and the
nine months ended September 30, 1998 and 1997, combined with the acquisition of
PSB, as if the Company completed the transaction on January 1, 1997.

<TABLE>
<CAPTION>
                                                                               Three Months Ended             Nine Months Ended
                                                                                 September 30,                  September 30,
                                                                               1998         1997              1998         1997
                                                                               ----         ----              ----         ----
                                                                                     (in thousands, except share data)

                                                                            Actual                         Pro forma
                                                                            ------        -----------------------------------------

<S>                                                                       <C>             <C>           <C>               <C> 
Net interest income.....................................................      $5,804         $5,769         $17,453         $16,838
Provision for possible loan losses......................................          17             31              59              73
Net income..............................................................      $1,764         $1,595          $5,227          $4,697
                                                                           =========      =========      ==========       =========

Average shares of outstanding...........................................   2,832,652      2,878,297       2,885,158       2,876,042
                                                                           =========      =========       =========       =========
Average shares outstanding, including potentially dilutive shares.......   2,906,993      2,955,669       2,963,703       2,933,276
                                                                           =========      =========      ==========       =========

Earnings per common share:
         Basic..........................................................        $.62           $.55           $1.81           $1.63
                                                                           =========      =========      ==========       =========
         Diluted........................................................        $.61           $.54           $1.76           $1.60
                                                                           =========      =========      ==========       =========
</TABLE>

         The unaudited pro forma condensed results of operations reflect the
application of the purchase method of accounting for PSB and certain other
assumptions. Purchase accounting adjustments have been applied to investment
securities, bank premises and equipment, deferred tax assets and liabilities and
excess cost required to reflect the assets acquired and liabilities assumed at
fair value. The resulting premiums and discounts are amortized or accreted to
income consistent with the accounting policies of the Company.

2.  EARNINGS PER SHARE
         Effective with the fiscal year ended December 31, 1997, the Company
adopted Statement of Financial Accounting Standards No. 128 (SFAS No. 128). SFAS
No. 128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of stock options. Diluted
earnings per share is similar to the previously reported fully diluted earnings
per share. The weighted average number of shares used in computing diluted
earnings per share was impacted only by stock options outstanding for all
periods presented.


                                       7
<PAGE>   8



ITEM 2.

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

                                     GENERAL

         This discussion is presented to provide an understanding of Southside
Bancshares Corp. and subsidiaries (the "Company" or "Registrant") consolidated
financial condition and the results of operations for the nine months ended
September 30, 1998 and 1997.

         The Company's net income is derived primarily from the net interest
income of its subsidiary banks. Net interest income is the difference (or
spread) between the interest income the subsidiary banks receive from their loan
and investment portfolios and their cost of funds, consisting primarily of the
interest paid on deposits and borrowings. Net income is also affected by the
levels of provisions for possible loan losses, noninterest income, and
noninterest expense.

         Statements contained in this Report and in future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases and in oral statements made with the approval of an authorized
executive officer which are not historical or current facts are "forward-looking
statements" made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of
1993, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended). Such statements are based on management's beliefs, and assumptions
made by and information currently available to management and are subject to
certain risks and uncertainties that could cause actual results to differ
materially from historical earnings and those currently anticipated or
projected. When used in the Company's documents or oral presentations, the words
"anticipates," "believes," "estimates," "expects," "intends," "forecasts,"
"plan," "projects," and similar expressions are intended to identify such
forward-looking statements. There can be no assurance that such forward-looking
statements will in fact transpire. The following important factors, risks and
uncertainties, among others, could cause actual results to differ materially
from such forward-looking statements: (1) credit risk, (2) interest rate risk,
(3) competition, (4) changes in the regulatory environment and (5) changes in
general business and economic trends. The foregoing list should not be construed
as exhaustive and the Company disclaims any obligation to subsequently update or
revise any forward-looking statements after the date of this Report.



                                       8
<PAGE>   9




Item 2. (continued)

                              FINANCIAL HIGHLIGHTS
                      COMPARISON OF SELECTED FINANCIAL DATA
                    (dollars in thousands except share data)

<TABLE>
<CAPTION>

                                                            NINE MONTHS ENDED       Twelve Months Ended         Nine Months Ended
                                                           SEPTEMBER 30, 1998        December 31, 1997         September 30, 1997
                                                           ------------------       -------------------        -------------------
EARNINGS
<S>                                                        <C>                      <C>                        <C>
   Total interest income                                      $  31,364                   $  39,320                  $   29,170
   Total interest expense                                        14,796                      18,243                      13,611
                                                              ---------                   ---------                   ---------
   Net interest income                                           16,568                      21,077                      15,559
   Provision for possible loan losses                                47                          60                          45
                                                              ---------                   ---------                   ---------
   Net interest income after provision for                                              
     possible loan losses                                     $  16,521                     $21,017                   $  15,514
                                                              =========                   =========                   =========  
   Net income                                                 $   5,124                      $6,302                   $   4,654
                                                              =========                   =========                   =========  
                                                                                              
SHARE DATA                                                                             
   Earning per common share:                                                           
     Basic                                                    $    1.86                   $    2.30                   $    1.70
     Diluted                                                       1.81                        2.25                        1.66
   Dividends paid per common share                                  .63                         .70                         .51
   Book value                                                     22.88                       20.90                       20.57  
   Tangible book value                                            21.54                       20.81                       20.47
   Shares outstanding (period-end)(1)                         2,897,286                   2,797,670                   2,825,670  
   Average shares outstanding                                 2,749,042                   2,735,859                   2,739,926  
   Average shares outstanding, including                                                                            
     potentially dilutive shares                              2,827,587                   2,798,105                   2,797,160  
                                                                     
FINANCIAL POSITION
   Total assets                                               $ 615,721                   $ 549,864                   $ 537,468
   Total deposits                                               529,004                     483,363                     471,248
   Total loans, net of unearned discount                        364,127                     326,437                     318,883
   Allowance for possible loan losses                             6,222                       6,120                       6,117
   Goodwill                                                       3,643                         240                         259
   Short-term borrowings                                          1,270                       5,333                       5,353
   FHLB borrowings                                               16,328                           -                           -
   Total shareholders' equity                                    64,528                      56,653                      56,278  
 </TABLE>                                                           


                                SELECTED RATIOS

The table below summarizes various selected ratios as of the end of the periods
indicated.

<TABLE>
<CAPTION>

                                                         NINE MONTHS ENDED       Twelve Months Ended          Nine Months Ended
                                                        SEPTEMBER 30, 1998(2)     December 31, 1997          September 30, 1997(2)
                                                         -------------------     -------------------         ---------------------
<S>                                                        <C>                      <C>                        <C>
   Loan-to-deposit ratio                                       68.83%                       67.53%                     67.67%
   Allowance for possible loan losses to total loans            1.71                         1.87                       1.92
   Dividend payout ratio(3)                                    33.87                        30.43                      30.00
   Return on average assets                                     1.18                         1.18                       1.16
   Return on average shareholders' equity                      11.33                        11.44                      11.36
   Net interest margin on average interest-                           
       earning assets                                           4.25                         4.34                       4.30
   Average shareholders' equity to average total
       assets                                                  10.42                        10.28                      10.24
   Tier I leverage capital to adjusted total                           
       consolidated assets less intangibles                     9.66                        10.34                      10.40
   Tier I capital to risk-weighted assets                      16.04                        16.12                      16.49
   Total capital to risk-weighted assets                       17.29                        17.38                      17.74
</TABLE>


(1) Shares outstanding at September 30, 1998, December 31, 1997, and September
30, 1997 include 77,212, 86,478, 89,567 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. These unallocated shares are also excluded from the average
shares outstanding used to compute earnings per common share.
(2) Statistical information is annualized where applicable. 
(3) Dividends paid per common share divided by basic earnings per common share.



                                       9
<PAGE>   10



Item 2. (continued)

                               FINANCIAL POSITION

         Total consolidated assets of the Company have increased $65,857,000
during 1998 to $615,721,000 at September 30, 1998 compared to $549,864,000 at
December 31, 1997. This increase is attributable to the PSB acquisition.

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. The following table is a breakdown of the Company's loan
portfolio as of the end of the periods indicated.

<TABLE>
<CAPTION>
                                                                                      (in thousands)
                                                          SEPTEMBER 30, 1998        December 31, 1997        September 30, 1997
                                                          ------------------        -----------------        ------------------
<S>                                                           <C>                       <C>                        <C>
      Commercial, financial and agricultural                  $ 67,991                  $ 69,168                   $ 68,740
      Real estate-commercial                                    97,598                    98,759                     90,655
      Real estate-construction                                  32,481                    30,836                     28,485
      Real estate-residential                                  131,257                    92,028                     94,539
      Consumer                                                  23,915                    23,627                     25,776
      Industrial revenue bonds                                   4,935                     5,517                      5,943
      Other                                                      5,950                     6,502                      4,745
                                                              --------                  --------                   --------
                                                              $364,127                  $326,437                   $318,883
                                                              ========                  ========                   ========
</TABLE>

         The Company's loan portfolio totaled $364,127,000 at September 30,
1998, which represents an increase of $37,690,000, or 11.5%, since December 31,
1997. The loan growth was due to the acquisition of PSB during the second
quarter of 1998, which included $46,318,000 in loans, which were primarily
residential real estate loans. Excluding the PSB loans acquired, total loans
have decreased by $8,628,000 during 1998. The majority of this decline was in
the Company's existing residential real estate loan portfolio, as borrowers
continued to seek long term fixed rate refinancing alternatives in the secondary
mortgage market. The Company viewed both PSB's residential real estate loan
portfolio and their secondary market mortgage operation as valuable components
of the acquisition, which compliment the Company's current balance sheet
structure and operating philosophy.

                  SUMMARY OF ALLOWANCE FOR POSSIBLE LOAN LOSSES

<TABLE>
<CAPTION>
                                                                                   (in thousands)
                                                       NINE MONTHS ENDED        Twelve Months Ended           Nine Months Ended
                                                      SEPTEMBER 30, 1998          December 31, 1997           September 30, 1997
                                                      ------------------        -------------------           ------------------
<S>                                                         <C>                       <C>                           <C>
    BALANCE AT BEGINNING OF PERIOD                          $ 6,120                   $ 5,602                       $ 5,602
    Provision charged to expense                                 47                        60                            45
    Loans charged off                                         (435)                     (367)                          (275)
    Recoveries                                                  233                       825                           745
    Balance of allowance for possible loan                                                                               
      losses of PSB at date of acquisition                      257                        --                            --
                                                            -------                   -------                       -------
    BALANCE AT END OF PERIOD                                $ 6,222                   $ 6,120                       $ 6,117
                                                            =======                   =======                       =======
                                                                                                                   
</TABLE>

         The balance of the allowance for possible loan losses increased by
$102,000 during the first nine months of 1998, primarily as a result of the PSB
acquisition. In addition, the Company has recorded provisions for possible loan
losses during the first nine months of $47,000. Based upon the Company's
internal analysis of the adequacy of the allowance for possible loan losses,
management of the Company believes the level is adequate to cover actual and
potential losses in the loan portfolio under current conditions. The ratio of
allowance for possible loan losses as a percentage of total loans was 1.71% as
of September 30, 1998 compared to 1.87% and 1.92% at December 31, 1997 and
September 30, 1997, respectively. The reduction as of September 30, 1998
reflects the addition of the residential portfolio of PSB.


                                       10
<PAGE>   11




Item 2. (continued)
                              NONPERFORMING ASSETS

<TABLE>
<CAPTION>
                                                                                         (dollars in thousands)
                                                                   SEPTEMBER 30, 1998      December 31, 1997     September 30, 1997
                                                                   ------------------      -----------------     ------------------
<S>                                                                    <C>                   <C>                    <C>
     Nonaccrual loans                                                  $ 2,726               $ 2,977                $ 3,279
     Loans past due 90 days or more and still                                                                    
         accruing interest                                               2,404                   517                    670
                                                                       -------               -------                -------
            TOTAL NONPERFORMING LOANS                                    5,130                 3,494                  3,949
     Other real estate owned                                             1,013                 1,024                    991
                                                                       -------               -------                -------
            TOTAL NONPERFORMING ASSETS                                 $ 6,143               $ 4,518                $ 4,940
                                                                       =======               =======                =======

     RATIOS:
       Total nonperforming loans as % of total loans                      1.41%                 1.07%                  1.24%
       Nonperforming assets as % of total loans and
         other real estate owned                                          1.68                  1.38                   1.54
       Nonperforming assets as % of total assets                          1.00                  0.82                   0.92

</TABLE>


         Nonperforming assets totaled $6,143,000 or 1.00% of total assets at
September 30, 1998 compared to $4,518,000 or 0.82% and $4,940,000 or 0.92% at
December 31, 1997 and September 30, 1997, respectively. Fluctuations in the
level of nonperforming assets are a normal part of the Company's business,
however, management is cognizant of the need to continually ensure that
nonperforming assets remain at acceptably low levels.

         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 measurements 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 September 30, 1998, there were no concentrations of
loans exceeding 10% of total loans which were not disclosed as a category of
loans detailed on the previous page.

INVESTMENTS IN DEBT SECURITIES 
         Investments in debt securities have increased $21,891,000 since
December 31, 1997 due in part to the PSB acquisition, which included $10,226,000
in investment securities. The remainder of the increase was attributable to a
return on equity enhancement strategy employed by the Company's lead bank. To
utilize a portion of the bank's excess capital capacity, the bank borrowed
approximately $10,000,000 in FHLB advances to fund the purchase of
mortgage-backed and municipal securities. Overall, the investment portfolio
contains a mixture of debt securities in terms of the types of securities,
interest rates, and maturity distribution. Management believes this diversity,
as well as its conservative philosophy towards risk management, has resulted in
a stable investment portfolio.


                                       11
<PAGE>   12


Item 2. (continued)

DEPOSITS
         Total deposits increased $45,641,000 during the first nine months of
1998 as a result of the PSB acquisition during the second quarter of 1998, which
included $55,264,000 in deposits. Excluding the PSB deposits acquired, total
deposits have declined $9,623,000 for the year. This decline is largely the
result of the Company's subsidiary banks being less aggressive with respect to
the interest rates being paid on deposits than some of their competitors.

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
         Securities sold under agreements to repurchase (REPOs) declined
$4,063,000 during the first nine months of 1998, due to normal daily
fluctuations in the balances of the underlying accounts. The majority of the
Company's REPOs are used by larger commercial customers as a daily cash
management tool, therefore, depending on their individual liquidity positions,
the balances in these accounts can vary considerably.

FHLB BORROWINGS
         The $16,328,000 increase in FHLB borrowings was due in part to FHLB
borrowings acquired as part of the PSB acquisition. In addition, $10,000,000 of
FHLB borrowings was obtained as part of the aforementioned return on equity
enhancement strategy. The remainder of the borrowings are being used by one of
the Company's subsidiary banks to help in funding longer term fixed rate
residential real estate loans. This program allows the bank to offer rates
competitive to those offered by secondary-market mortgage operations, with the
added benefit of letting the customer know their loan will not be sold or the
servicing transferred several times over the life of the loan.



                                       12
<PAGE>   13




Item 2. (continued)

ASSET/LIABILITY MANAGEMENT
         As reflected on the Repricing and Interest Rate Sensitivity Analysis
below, the Company has a reasonably well-balanced interest rate sensitivity
position. The Company's current one-year cumulative gap is 1.08x. Generally, a
one-year cumulative gap ratio in a range of 0.80x - 1.20x indicates an entity is
not subject to undue interest rate risk. A one-year cumulative gap ratio of
1.00x indicates that an institution has an equal amount of assets and
liabilities repricing within twelve months. A ratio in excess of 1.00x indicates
more assets than liabilities will be repriced during the period indicated, and a
ratio less than 1.00x indicates more liabilities than assets will be repriced
during the period indicated. However, actual experience may differ because of
the assumptions used in the allocation of deposits and other factors which are
beyond management's control. Additionally, the following analysis includes the
available-for-sale securities spread throughout their respective repricing
and/or maturity horizons, even though such securities are available for
immediate liquidity should the need arise in any particular time horizon.

                REPRICING AND INTEREST RATE SENSITIVITY ANALYSIS
                             (dollars in thousands)
                               SEPTEMBER 30, 1998
<TABLE>
<CAPTION>

                                                                          Over             Over
                                                                        3 months          1 year
                                                     3 months           through           through           Over 
                                                     or less           12 months         5 Years           5 year            Total
                                                     --------          ---------         --------          ------            -----
<S>                                                  <C>               <C>               <C>              <C>            <C>
Interest-earning assets:
    Interest-bearing due from banks                  $   3,868       $      --         $     --          $     --         $  3,868
    Federal funds sold                                  13,425              --               --                --           13,425
    Investments available-for-sale                      15,421          22,005           41,908            18,407           97,741
    Investments held-to-maturity                         8,647          16,142           50,085            22,415           97,289
    Loans, net of unearned discount (1)                185,356          60,487           80,370            37,914          364,127
                                                     ---------       ---------         --------          --------         --------
        Total interest-earning assets                  226,717          98,634          172,363            78,736          576,450
                                                     ---------       ---------         --------          --------         --------

Cumulative interest-earning assets                     226,717         325,351          497,714           576,450          576,450
                                                     ---------       ---------         --------          --------         --------

Interest-bearing liabilities:
    Interest-bearing demand deposits                    52,042          29,738           37,174            29,738          148,692
    Savings deposits                                    22,676          12,958           16,197            12,957           64,788
    Time deposits under $100,000                        45,029          89,855           65,507                --          200,391
    Time deposits $100,000 and over                     12,818          33,108            4,323                --           50,249
    Securities sold under agreements to repurchase       1,270              --               --                --            1,270
    FHLB borrowings                                         --           2,000           14,328                --           16,328
                                                     ---------       ---------         --------          --------         --------
        Total interest-bearing liabilities             133,835         167,659          137,529            42,695          481,718
                                                     ---------       ---------         --------          --------         --------

Cumulative interest-bearing liabilities                133,835         301,494          439,023           481,718          481,718
                                                     ---------       ---------         --------          --------         --------

Gap analysis:
    Interest sensitivity gap                          $ 92,882        $(69,025)        $ 34,834          $ 36,041         $ 94,732
                                                     =========        ========         ========          ========         ========
    Cumulative interest
        sensitivity gap                               $ 92,882       $  23,857         $ 58,691          $ 94,732         $ 94,732
                                                     =========       =========         ========          ========         ========

Cumulative gap ratio of interest-
    earning assets to interest-bearing
    liabilities                                           1.69x           1.08x            1.13x             1.20x            1.20x
                                                     ==========      ==========        =========         =========        =========

</TABLE>


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



                                       13
<PAGE>   14


Item 2. (continued)

CAPITAL RESOURCES
         The regulatory capital guidelines require banking organizations to
maintain a minimum total capital ratio of 8% of risk-weighted assets (of which
at least 4% must be Tier I capital). The Company's total capital ratios under
the risk-weighted guidelines were 17.29%, 17.38% and 17.74% as of September 30,
1998, December 31, 1997, and September 30, 1997, respectively, which included
Tier I capital ratios of 16.04%, 16.12%, and 16.49%, respectively. These ratios
are well above the minimum risk-weighted capital requirements.

         In addition, the Company and its subsidiary banks must maintain a
minimum Tier I leverage ratio (Tier I capital to total adjusted consolidated
assets) of at least 3%. Capital, as defined under these guidelines, is total
shareholders' equity less goodwill and excluding unrealized gains and losses on
available-for-sale securities. The Company's Tier I leverage ratios were 9.66%,
10.34%, and 10.40% at September 30, 1998, December 31, 1997, and September 30,
1997, respectively.

                              RESULTS OF OPERATIONS

EARNINGS SUMMARY
         Net income was $5,124,000 for the nine months ended September 30, 1998
compared to $4,654,000 for the nine months ended September 30, 1997, which
represents a $470,000 or 10% increase over the prior year. The increase was
largely due to the net effect of increases in net interest income and
noninterest income, partially offset by an increase in noninterest expense. Net
income for the third quarter of 1998 was $1,764,000 compared to $1,575,000 in
the third quarter of 1997. This increase in third quarter earnings was
attributable to the same factors that affected the year-to-date earnings.

         Basic earnings per common share were $1.86 for the first nine months of
1998 compared to $1.70 for the first nine months of 1997, and the basic earnings
per common share were $0.62 and $0.57 for the third quarter of 1998 and 1997,
respectively. Net income for the first nine months of 1998 resulted in an
annualized return on average assets (ROA) of 1.18% compared to 1.16% in the
prior year, and an annualized return on average shareholders' equity (ROE) of
11.33% compared to 11.36% in the prior year. ROE continues to be negatively
impacted by the Company's strong equity position, however, management continues
to take steps to utilize the Company's excess capital.

NET INTEREST INCOME
         As reflected in the Selected Statistical Information table on the
following page, net interest income on a tax-equivalent basis increased by
$1,049,000 in the first nine months of 1998 when compared to the first nine
months of 1997. The increase in net interest income was largely the result of an
increase in average earning assets which were $38,407,000 larger in 1998 versus
1997. The majority of this increase was in the average balance of loans
outstanding, which increased $29,316,000. This increase was largely due to the
acquisition of PSB. Also contributing to the increase was the fact that the
Company's net interest margin declined only slightly during 1998. The five basis
point decrease in the net interest margin was due to an increase in the
Company's cost of funds resulting from the increasingly competitive market for
consumer deposits. Net interest income for the third quarter increased by
$478,000 in 1998 compared to the third quarter of 1997. This increase was also
largely attributable to loan growth resulting from the PSB acquisition.


                                       14
<PAGE>   15




Item 2. (continued)

                        SELECTED STATISTICAL INFORMATION

The following is selected statistical information for Southside Bancshares Corp.
and subsidiaries.

I.       DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST 
         RATES AND INTEREST DIFFERENTIAL

<TABLE>
<CAPTION>
                                 CONDENSED CONSOLIDATED AVERAGE BALANCE SHEET AND AVERAGE INTEREST RATES
                                                     (dollars in thousands)


                                                  NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------------------------------------------------------
                                                                      1998                                       1997
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                   AVERAGE                                  Average
                                                                     INTEREST       RATES                    Interest        Rates
                                                        AVERAGE      INCOME\       EARNED\      Average       Income\       Earned\
                                                        BALANCE      EXPENSE       PAID(3)      Balance       Expense       Paid(3)
                                                        -------      -------       -------      -------      ---------     ---------
                         ASSETS
<S>                                                   <C>            <C>           <C>         <C>              <C>          <C>
Loans, net of unearned discount(1)(2)(3)                 $336,434     $22,488        8.91%       $307,118       $20,577       8.93%
Investments in debt securities:
   Taxable(4)                                             152,492       6,897        6.03         158,854         7,233       6.07
   Exempt from Federal income tax(3)(4)                    27,989       1,695        8.08          22,775         1,435       8.40
Short-term investments                                     25,259       1,001        5.28          15,020           602       5.34
                                                         --------     -------        ----        --------       -------       ----
      Total interest-earning assets/interest                                                                                      
      income/overall yield (3)                            542,174      32,081        7.89         503,767        29,847       7.90
                                                                      -------        ----                       -------       ----
Allowance for possible loan losses                         (6,142)                                 (6,034)
Cash and due from banks                                    15,564                                  14,695
Other assets                                               26,594                                  20,647
                                                         --------                                --------
        TOTAL ASSETS                                     $578,190                                $533,075
                                                         --------                                --------
    LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                    
                                                                                                                            
Interest-bearing demand and savings deposits             $205,543       4,879        3.16%       $187,399         4,324       3.08%
Time deposits                                             233,768       9,421        5.37         225,731         9,024       5.33
Short-term borrowings                                       3,721         124        4.44           4,730           158       4.45
Other borrowings                                            8,699         372        5.70              --            --         --
Debt of employee stock ownership plan                          --          --          --           1,657           105       8.45
                                                         --------     -------                    --------       -------       ----
        Total interest-bearing liabilities/interest-                                                                   
           expense/overall rate                           451,731      14,796        4.37         419,517        13,611       4.33
                                                                      -------        ----                       -------       ----
Non-interest-bearing demand deposits                       60,715                                  54,944
Other liabilities                                           5,470                                   4,003
Shareholders' equity                                       60,274                                  54,611
                                                         --------                                --------                         
        TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY       $578,190                                $533,075
                                                         ========                                ========                          

NET INTEREST INCOME                                                   $17,285                                   $16,236
                                                                      -------                                   -------           
NET INTEREST MARGIN ON AVERAGE INTEREST-EARNING            
   ASSETS                                                                            4.25%                                    4.30%
                                                                                     ----                                     ----


</TABLE>


(1)      Interest income includes loan origination fees.
(2)      Average balance includes nonaccrual loans.
(3)      Interest yields are presented on a tax-equivalent basis.
(4)      Includes investments available-for-sale.



                                       15
<PAGE>   16


Item 2. (continued)

PROVISION FOR POSSIBLE LOAN LOSSES
         The provision for possible loan losses remained at a relatively low
level of $47,000 during the first nine months of 1998. Based on the Company's
analysis of the adequacy of the allowance for possible loan losses, management
determined it was not necessary to record significant provisions for possible
loan losses. Management will continue to assess the adequacy of the allowance
for possible loan losses on a regular basis throughout the year.

NONINTEREST INCOME
         Noninterest income increased $345,000 during the first nine months of
1998 and $213,000 during the third quarter of 1998 in comparison to the
comparable periods in the prior year. These increases were largely attributable
to the Company's secondary market mortgage operations acquired as part of the
PSB acquisition. Gains on sales of loans increased from $22,000 in 1997 to
$245,000 in 1998, with the majority of the growth occurring during the third
quarter. Noninterest income was also positively impacted by an increase in trust
department revenue.

NONINTEREST EXPENSE
         Noninterest expense for the first nine months of 1998 increased
$625,000 when compared to the first nine months of the prior year, and $422,000
during the third quarter, primarily due to increases in salaries and employee
benefits. The increase in salaries and employee benefits expense was due, in
part, to normal pay increases, expense related to the Company's Employee Stock
Ownership Plan, and the addition of personnel as part of the PSB acquisition.
Also contributing to the increase in both the year-to-date and third quarter
expenses was an increase in data processing expense, which was the result of
year 2000 testing being performed at the Company's subsidiary banks. Partially
offsetting these increases was a decrease in net occupancy and equipment
expense, which was caused by an increase in rental income and a decrease in
depreciation of furniture and equipment, as several larger furniture and
equipment purchases became fully depreciated during 1998.

INCOME TAXES
         Federal income tax expense for the first nine months of 1998 was
$1,937,000 compared to $1,680,000 in the first nine months of 1997. The
Company's effective tax rate was 27.43% for the first nine months of 1998,
compared to 26.52% for the first nine months of 1997. This increase is caused by
the fact that taxable income is increasing but the Company's tax-exempt income
from municipal securities and loans has remained relatively the same. As part of
the equity enhancement strategy, approximately half of the securities purchased
were municipal securities which should aid the Company in managing its effective
tax rate and has caused the Company's effective tax rate to decline slightly
since the second quarter of 1998.

THE YEAR 2000 ISSUE
         The Year 2000 issue relates to systems that have used a two-digit field
rather than a four-digit field to represent the year. The risk of a system
failure and data processing errors may be the result of this programming logic.
Management has implemented a company-wide initiative for preparing its systems,
applications and equipment for functionality in the Year 2000 and beyond. The
Company's Year 2000 project consists of five phases including awareness,
assessment, renovation, testing and implementation are well underway.

         The Company continues to monitor efforts to ready internal systems for
the Year 2000. Highest priority has been assigned to those systems determined to
be critical to the ongoing operations of the Company. Programming changes and
testing of critical systems, applications, and equipment are scheduled to be
substantially completed by December 31, 1998. If modifications to existing
systems and conversions to new systems proceed as scheduled, management
presently believes that the Year 2000 issue will not pose a substantial internal
operating risk to the Company.

         The Company modified its credit risk assessment to include the
consideration of incremental risk that may be posed by customer's inability, if
any, to address Year 2000 issues. Management presently believes this risk to be
manageable, and continues to monitor customer's efforts to prepare for the Year
2000. Additionally, the Company has implemented a process for assessing the
readiness of its major vendors, suppliers and business partners. There can be no
guarantee, however, that


                                       16
<PAGE>   17



Item 2. (continued)

the systems of these outside parties will be remediated on a timely basis. To
that end, there is no assurance that a failure to remediate by one of these
parties would not have a material adverse effect on the Company.

         The Company believes it will substantially complete the implementation
of its Year 2000 program prior to the commencement of the Year 2000. However,
the risk of the system failures, either internal or external, cannot be
eliminated. Therefore, the Company intends to assess the worst case scenario
caused by Year 2000 issue and address the possible effects thereof. The Company
will assess the types and nature of contingency plans that will be required to
maintain the Company's operational capacity after January 1, 2000. Contingency
planning will cover all critical areas of the Company, as well as customers,
suppliers and business partners.

         To date, the Company and its subsidiaries have incurred approximately
$150,000 in both direct and indirect costs associated with Year 2000 readiness
efforts. The Company estimates that $330,000 will approximate total expenditures
through the Year 2000. This includes internal and external costs that will be
expensed, as well as new hardware and software which will be capitalized.
Funding for costs associated with Year 2000 efforts will be derived from normal
operating cash flow. As a result, Year 2000 expenses are not expected to a have
a material effect on the Company's results of operations.

         The foregoing discussion of Year 2000 issues is based on management's
most current estimates. These estimates utilize multiple assumptions of future
events, including, but not limited to, the continues availability of certain
resources, third party efforts, and other factors. However, there can be no
guarantee that these estimates will be achieved, and actual costs and results
could differ materially from the estimates currently anticipated by the Company.

EFFECT OF NEW ACCOUNTING STANDARDS
         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, geographical 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 because the Company
operates as one business segment.

         SFAS 133, Accounting for Derivative Instruments and Hedging Activities,
which was issued in June 1998, establishes accounting and reporting standards
for derivative instruments and hedging activities. Under SFAS 133, derivatives
are recognized on the balance sheet at fair value as an asset or liability.
Changes in the fair value of derivatives are reported as a component of other
comprehensive income or recognized as earnings through the income statement
depending on the nature of the instrument. SFAS 133 is effective for all
quarters of fiscal years beginning after June 15, 1999 with earlier adoption
permitted. The Company is currently evaluating SFAS 133's effect on its
consolidated financial statements.



                                       17
<PAGE>   18


Item 2. (continued)

                    COMMON STOCK - MARKET PRICE AND DIVIDENDS

         The table below sets forth the high, low and closing bid prices of the
Company's common stock for the periods presented. The Company's common stock is
traded on the National Association of Securities Dealers Automated Quotation
System/Small-Cap Market System ("NASDAQ/SCM") under the symbol SBCO.
Accordingly, information included below represents the high and low bid prices
of the common stock reported on NASDAQ/SCM.


<TABLE>
<CAPTION>
                                                                            Book                       Dividends Paid Per
                                   High Bid      Low Bid      Close         Value        Market/Book      Common Share
                                   --------      -------     -------       -------       -----------   ------------------
                                                             
<S>                                  <C>          <C>        <C>            <C>            <C>             <C>   
3RD QUARTER - 1998                   $39.00       $33.50     $37.125        $22.88         162.26%         $ 0.22
2nd Quarter - 1998                    44.75        36.25       36.25         22.44         161.54            0.21
1st Quarter - 1998                    37.75        34.25       37.75         21.33         176.98            0.20

4th Quarter - 1997                    35.50        33.25       34.50         20.90         165.07            0.19
3rd Quarter - 1997                    40.50        33.50       33.50         20.57         162.86            0.18
2nd Quarter - 1997                    37.00        21.50       37.00         20.14         183.71            0.17
1st Quarter - 1997                    25.00        22.75       24.50         19.60         125.00            0.16

</TABLE>

PART II.   OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         In the normal course of business, the Company had certain routine
lawsuits pending at September 30, 1998. In the opinion of management, after
consultation with legal counsel, none of these lawsuits will have a material
adverse effect on the consolidated financial condition of the Company.


ITEM 6.  Exhibits and Reports on Form 8-K

         Exhibit 10(c) - Deferred Compensation Agreement, as amended

         Reports on 8-K

         The Company filed a report on Form 8-K dated October 5, 1998, relating
         to the Company's announcement of a three for one stock split, payable
         on the form of a stock dividend of two shares of common stock for each
         common share currently outstanding on November 15, 1998 to shareholders
         of record November 2, 1998.


                                       18
<PAGE>   19


                                   SIGNATURES


         Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                             SOUTHSIDE BANCSHARES CORP.





November 12, 1998                /s/  Thomas M. Teschner
-----------------               -------------------------------------------
                                Thomas M. Teschner
                                President
                                (Principal Executive Officer)




November 12, 1998                /s/  Joseph W. Pope
-----------------               -------------------------------------------
                                Joseph W. Pope
                                Senior Vice President and Chief
                                Financial Officer (Principal Financial
                                Officer, Controller, and Principal
                                Accounting Officer)




                                       19
<PAGE>   20



                                    FORM 10-Q
                                INDEX TO EXHIBITS

Exhibit                           Description
-------                           -----------                                   

10(c)                             Deferred Compensation Agreement, as amended