<PAGE>   1
      AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 10, 1998
                                                      REGISTRATION NO. 333-_____
                                                      REGISTRATION NO. 333-_____

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                 ---------------

                                    FORM S-2
             REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

                                 ---------------
<TABLE>

<S>                                                              <C>
                SOUTHSIDE BANCSHARES, INC.                                 SOUTHSIDE CAPITAL TRUST I
          (EXACT NAME OF REGISTRANT AS SPECIFIED                   (EXACT NAME OF CO-REGISTRANT AS SPECIFIED
                     IN ITS CHARTER)                                            IN ITS CHARTER)

                          TEXAS                                                    DELAWARE
      (STATE OR OTHER JURISDICTION OF INCORPORATION              (STATE OR OTHER JURISDICTION OF INCORPORATION
                     OR ORGANIZATION)                                          OR ORGANIZATION)

                           6021                                                      6199
       (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION                (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION
                       CODE NUMBER)                                              CODE NUMBER)

                        75-1848732                                                APPLIED FOR
           (I.R.S. EMPLOYER IDENTIFICATION NO.)                      (I.R.S. EMPLOYER IDENTIFICATION NO.)
                     1201 S. BECKHAM                                    C/O SOUTHSIDE BANCSHARES, INC.
                    TYLER, TEXAS 75701                                          1201 S. BECKHAM
                      (903) 531-7111                                          TYLER, TEXAS 75701
              (ADDRESS, INCLUDING ZIP CODE,                                     (903) 531-7111
                  AND TELEPHONE NUMBER,                                  (ADDRESS, INCLUDING ZIP CODE,
           INCLUDING AREA CODE, OF REGISTRANT'S                              AND TELEPHONE NUMBER,
               PRINCIPAL EXECUTIVE OFFICE)                          INCLUDING AREA CODE, OF CO-REGISTRANT'S
                                                                          PRINCIPAL EXECUTIVE OFFICE)
</TABLE>

                                 ---------------

                                   SAM DAWSON
                                    PRESIDENT
                           SOUTHSIDE BANCSHARES, INC.
                                 1201 S. BECKHAM
                               TYLER, TEXAS 75701
                                 (903) 531-7111
 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
                              OF AGENT FOR SERVICE)

                                 ---------------

                                   COPIES TO:
<TABLE>
<S>                                                                        <C>
                 RONALD J. FRAPPIER, ESQ.                                   ROBERT J. MINKUS, ESQ.
     JENKENS & GILCHRIST, A PROFESSIONAL CORPORATION                         SCHIFF HARDIN & WAITE
               1445 ROSS AVENUE, SUITE 3200                                    7300 SEARS TOWER
                   DALLAS, TEXAS 75202                                      CHICAGO, ILLINOIS 60606
                      (214) 855-4743                                            (312) 258-5500
</TABLE>

                                 ---------------

     APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.


<PAGE>   2


         If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box.[ ]
         If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.[ ]
         If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.[ ]
         If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box.[X]

                         CALCULATION OF REGISTRATION FEE


<TABLE>
<CAPTION>
==================================================================================================================================
                                                                              PROPOSED        PROPOSED
              TITLE OF EACH                                                   MAXIMUM         MAXIMUM
           CLASS OF SECURITIES                             AMOUNT TO BE    OFFERING PRICE     AGGREGATE          AMOUNT OF
            TO BE REGISTERED                                REGISTERED       PER UNIT (1)   OFFERING PRICE (1)  REGISTRATION FEE
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>                       <C>             <C>               <C>       
__% Cumulative Trust Preferred Securities
of Southside Capital Trust I .....................    2,300,000 (2) Securities  $   10.00       $23,000,000       $    6,785
----------------------------------------------------------------------------------------------------------------------------------
Junior Subordinated Deferrable Interest
Debentures of Southside Bancshares, Inc.(3) ......              --                     --                --               --
----------------------------------------------------------------------------------------------------------------------------------
Southside Bancshares, Inc. Guarantee with
respect to ___% Cumulative Trust Preferred
Securities (4) ...................................              --                     --                --               --
----------------------------------------------------------------------------------------------------------------------------------
Total (5) ........................................              --                     --                --       $    6,785
==================================================================================================================================
</TABLE>

(1)      Estimated solely to calculate the registration fee pursuant to Rule
         457.
(2)      Includes 300,000 securities that may be purchased by the Underwriter
         solely to cover overallotments, if any.
(3)      The Junior Subordinated Deferrable Interest Debentures will be
         purchased by Southside Capital Trust I with the proceeds from the sale
         of the ___% Cumulative Trust Preferred Securities. Such securities may
         later be distributed for no additional consideration to the holders of
         the ___% Cumulative Trust Preferred Securities of Southside Capital
         Trust I upon its dissolution and the distribution of its assets.
(4)      No separate consideration will be received for the Southside
         Bancshares, Inc. Guarantee.
(5)      This Registration Statement is deemed to cover the Junior Subordinated
         Deferrable Interest Debentures of Southside Bancshares, Inc., the
         rights of holders of Junior Subordinated Deferrable Interest Debentures
         of Southside Bancshares, Inc. under the Indenture, the rights of
         holders of ___% Cumulative Trust Preferred Securities of Southside
         Capital Trust I under the Trust Agreement and the rights of holders of
         the ___% Cumulative Trust Preferred Securities under the Guarantee
         entered into by Southside Bancshares, Inc., and certain undertakings 
         as described herein which, in the aggregate, fully, irrevocably and
         unconditionally guarantee all of the obligations of Southside Capital
         Trust I under the ___% Cumulative Trust Preferred Securities.

         THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.



<PAGE>   3



INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
JURISDICTION.

                   SUBJECT TO COMPLETION DATED APRIL 10, 1998
                                  $20,000,000
                            SOUTHSIDE CAPITAL TRUST I
                   ____% CUMULATIVE TRUST PREFERRED SECURITIES
                 (LIQUIDATION AMOUNT $10 PER PREFERRED SECURITY)
                         __________ PREFERRED SECURITIES
          FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY

                [LOGO OF SOUTHSIDE BANCSHARES, INC. APPEARS HERE]

                           SOUTHSIDE BANCSHARES, INC.

         The ____% Cumulative Trust Preferred Securities (the "Preferred
Securities") offered hereby represent preferred beneficial interests in
Southside Capital Trust I, a statutory business trust created under the laws of
the State of Delaware (the "Trust Issuer"). Southside Bancshares, Inc., a
Delaware corporation (the "Company"), will be the owner of all of the beneficial
interests represented by common securities of the Trust Issuer (the "Common
Securities" and, collectively with the Preferred Securities, the "Trust
Securities"). U.S. Trust Company of Texas, N.A. is the Property Trustee of the
Trust Issuer and is the Guarantee Trustee under the guarantee of the Trust
Issuer's obligations by the Company (the "Guarantee"). The Trust Issuer exists
for the sole purpose of issuing the Trust Securities and investing the proceeds
from the sale thereof in ____% Junior Subordinated Deferrable Interest
Debentures (the "Junior Subordinated Debentures") to be issued by the Company.
The Junior Subordinated Debentures will mature on June 30, 2028 (the "Stated
Maturity"). The Preferred Securities will have a preference over the Common
Securities under certain circumstances with respect to cash distributions and
amounts payable on liquidation, redemption or otherwise. See "Description of the
Preferred Securities--Subordination of the Common Securities."

         The Company has applied to list the Preferred Securities on _________
under the symbol "_____." See "Risk Factors--Absence of Prior Public Market for
the Preferred Securities; Trading Price and Tax Considerations."

                                                   (continued on following page)

                                   ----------

         SEE "RISK FACTORS" BEGINNING ON PAGE ____ FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.

                                   ----------

        THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS
        AND ARE NOT INSURED BY THE SAVINGS ASSOCIATION INSURANCE FUND OR
            THE BANK INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE
                  CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.

                                   ----------
    THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
     AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
      SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
            PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
            ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
=======================================================================================================================
                                                                    UNDERWRITING
                                     PRICE TO PUBLIC               COMMISSIONS (1)          PROCEEDS TO ISSUER (2)(3)
-----------------------------------------------------------------------------------------------------------------------
<S>                                      <C>                             <C>                         <C>   
Per Preferred Security.......            $10.00                          (2)                         $10.00
Total(4).....................           $________                        (2)                       $__________
=======================================================================================================================
</TABLE>

(1)      The Trust Issuer and the Company have agreed to indemnify Ryan, Beck &
         Co. (the "Underwriter") against certain liabilities, including
         liabilities under the Securities Act of 1933, as amended. See
         "Underwriting."
(2)      In view of the fact that the proceeds of the sale of the Preferred
         Securities will be invested in the Junior Subordinated Debentures of
         the Company, the Company has agreed to pay the Underwriter, as
         compensation for its arranging the investment of such proceeds in the
         Junior Subordinated Debentures, $___________ in the aggregate
         ($________ in the aggregate if the over-allotment option is exercised
         in full). See "Underwriting."
(3)      Before deducting expenses payable by the Company, estimated to be
         approximately $________.
(4)      The Trust Issuer and the Company have granted the Underwriter a 30-day
         option to purchase up to 300,000 additional Preferred Securities on
         the same terms and conditions set forth above solely to cover
         over-allotments, if any. If this option is exercised in full, the total
         Price to Public and Proceeds to Issuer will be $_________. See
         "Underwriting."

         The Preferred Securities are offered by the Underwriter subject to
receipt and acceptance by it, prior sale and the Underwriter's right to reject
any order in whole or in part and to withdraw, cancel or modify the offer
without notice. It is expected that delivery of the Preferred Securities will be
made in book-entry form through the book-entry facilities of The Depository
Trust Company on or about __________ __, 1998 against payment therefor in
immediately available funds.

                     [LOGO OF RYAN, BECK & CO. APPEARS HERE]

               The date of this Prospectus is _____________, 1998.


<PAGE>   4



 (continued from the previous page)

         The Preferred Securities will be represented by one or more global
securities registered in the name of a nominee of The Depository Trust Company,
as depositary ("DTC"). Beneficial interests in the global securities will be
shown on, and transfer thereof will be effected only through, records maintained
by DTC and its participants. Except as described under "Description of the
Preferred Securities," Preferred Securities in definitive form will not be
issued and owners of beneficial interests in the global securities will not be
considered holders of the Preferred Securities. Settlement for the Preferred
Securities will be made in immediately available funds. The Preferred Securities
will trade in DTC's Same-Day Funds Settlement System, and secondary market
trading activity for the Preferred Securities will therefore settle in
immediately available funds.

         Holders of the Preferred Securities will be entitled to receive
preferential cumulative cash distributions accumulating from the date of
original issuance and payable quarterly in arrears on March 31, June 30,
September 30 and December 31 of each year, commencing June 30, 1998, at the
annual rate of ____% of the Liquidation Amount (as defined herein) of $10 per
Preferred Security ("Distributions"). Subject to certain exceptions, the Company
has the right to defer payment of interest on the Junior Subordinated Debentures
at any time or from time to time for a period not exceeding 20 consecutive
quarters with respect to each deferral period (each, an "Extension Period"),
provided that no Extension Period may extend beyond the Stated Maturity of the
Junior Subordinated Debentures. Upon the termination of any such Extension
Period and the payment of all interest then accrued and unpaid (together with
interest thereon at the rate of ____%, compounded quarterly, to the extent
permitted by applicable law), the Company may elect to begin a new Extension
Period subject to the requirements set forth herein. If interest payments on the
Junior Subordinated Debentures are so deferred, Distributions on the Preferred
Securities will also be deferred, and the Company will not be permitted, subject
to certain exceptions described herein, to declare or pay any cash distributions
with respect to the capital stock of the Company or debt securities of the
Company that rank pari passu with or junior to the Junior Subordinated
Debentures.

         During any Extension Period, interest on the Junior Subordinated
Debentures will continue to accrue (and the amount of Distributions to which
holders of the Preferred Securities are entitled will accumulate) at the rate of
____% per annum, compounded quarterly, and holders of the Preferred Securities
will be required to include interest income in their gross income for United
States federal income tax purposes in advance of receipt of the cash
distributions with respect to such deferred Distributions. The Company believes
that the mere existence of its right to defer interest payments will not cause
the Preferred Securities to be issued with original issue discount for federal
income tax purposes. However, it is possible that the Internal Revenue Service
could take the position that the likelihood of deferral is not a remote
contingency within the meaning of applicable Treasury Regulations, and therefore
require that the holders of the Preferred Securities recognize a portion of the
Liquidation Amount as income. See "Description of the Junior Subordinated
Debentures--Right to Defer Interest Payment Obligation" and "Certain Federal
Income Tax Consequences--Interest Income and Original Issue Discount."

         The obligations of the Company under the Junior Subordinated
Debentures, the Indenture between the Company and U.S. Trust Company of Texas,
N.A., as Trustee (the "Indenture"), the Trust Agreement (as defined herein) and
the Guarantee, in the aggregate, constitute a full and unconditional guarantee
by the Company of the Trust Issuer's obligations under the Preferred Securities.
See "Relationship Among the Preferred Securities, Junior Subordinated Debentures
and Guarantee--Full and Unconditional Guarantee." The Guarantee of the Company
guarantees the payment of Distributions and payments on liquidation or
redemption of the Preferred Securities, but only in each case to the extent of
funds held by the Trust Issuer, as described herein. See "Description of the
Guarantee." If the Company does not make interest payments on the Junior
Subordinated Debentures held by the Trust Issuer, the Trust Issuer will have
insufficient funds to pay Distributions on the Preferred Securities. In such
event, a holder of the Preferred Securities may institute a legal proceeding
directly against the Company to enforce payment of amounts under the Junior
Subordinated Debentures equal to such Distributions to such holder. See
"Description of the Junior Subordinated Debentures--Enforcement of Certain
Rights by Holders of the Preferred Securities."

         The Preferred Securities are subject to mandatory redemption, in whole
or in part, upon repayment of the Junior Subordinated Debentures at their Stated
Maturity or their earlier redemption. Subject to regulatory approval, if then
required under applicable capital guidelines or regulatory policies, the Junior
Subordinated Debentures are redeemable prior to their Stated Maturity at the
option of the Company (i) on or after June 30, 2003, in whole at any time or in
part from time to time, or (ii) at any time, in whole (but not in part), within
180 days following the occurrence and continuation of a Tax Event, an Investment
Company Event or a Capital Treatment Event (each as defined herein) at a
redemption price (the "Redemption Price") equal to 100% of the principal amount
of the Junior Subordinated Debentures plus the accrued and unpaid interest
thereon as of the date fixed for redemption. See "Description of the Junior
Subordinated Debentures--Redemption or Exchange."

         The obligations of the Company under the Guarantee and the Junior
Subordinated Debentures will be


<PAGE>   5



unsecured and will be subordinate and junior in right of payment to all Senior
Indebtedness (as defined herein) of the Company. There is no limitation on the
amount of Senior Indebtedness which the Company may issue. At December 31, 1997,
the Company had no outstanding Senior Indebtedness. The Company may from time to
time incur indebtedness constituting Senior Indebtedness. See "Description of
the Junior Subordinated Debentures--Subordination."

         The Company, as the holder of the Common Securities, will have the
right at any time to dissolve the Trust Issuer. The ability of the Company to do
so may be subject to its prior receipt of regulatory approval. In the event of
the dissolution of the Trust Issuer, after satisfaction of liabilities to
creditors of the Trust Issuer as required by applicable law, the holders of the
Preferred Securities will be entitled to receive a Liquidation Amount of $10 per
Preferred Security plus accumulated and unpaid Distributions thereon to the date
of payment, which may be in the form of a distribution of such amount in Junior
Subordinated Debentures, subject to certain exceptions. See "Description of the
Preferred Securities--Liquidation Distribution upon Dissolution."

            ---------------------------------------------------------

         The Company will provide to the holders of the Preferred Securities
annual reports containing financial statements audited by the Company's
independent auditors. The Company will also furnish annual reports on Form 10-K
free of charge to holders of the Preferred Securities who so request in writing
addressed to the Secretary of the Company.

          -----------------------------------------------------------

         CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
PREFERRED SECURITIES OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING
TRANSACTIONS, SHORT COVERING TRANSACTIONS AND PENALTY BIDS. ANY OF THE FOREGOING
TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME WITHOUT NOTICE. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

<PAGE>   6



                   [MAP INDICATING THE BANK'S BRANCH OFFICES]



<PAGE>   7




                                     SUMMARY

         The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Unless otherwise indicated, the information in this Prospectus
assumes that the Underwriter's over-allotment option will not be exercised.

                                   THE COMPANY

GENERAL

         The Company is a Texas corporation organized in 1982 that serves as a
bank holding company for Southside Bank (the "Bank"), a Texas-chartered bank
organized in 1960. The Company and the Bank are headquartered in Tyler, Texas,
which is located approximately 90 miles east of Dallas, Texas and 90 miles west
of Shreveport, Louisiana. The Bank has the largest deposit base in the Tyler
metropolitan area, which has a population of approximately 166,000, and is the
largest independent bank headquartered in East Texas. At December 31, 1997, the
Company had total assets of $571 million, deposits of $463 million, loans of
$293 million and shareholders' equity of $40 million.

         The Bank is a community-focused financial institution that offers a
full range of financial services to individuals, businesses and nonprofit
organizations in its primary market area. These services include consumer and
commercial loans, deposit accounts, trust services, safe deposit services and
brokerage services.

         The Bank's consumer loan services include 1-4 family residential
mortgage loans and home improvement loans, automobile loans and other
installment loans. The Bank also offers its own credit card and began offering
home equity loans in January 1998 when a new Texas law first permitting such
loans took effect. Commercial loan services include short-term working capital
loans for inventory and accounts receivable, short and medium-term loans for
equipment or other business capital expansion and commercial real estate loans.
The Bank also offers construction loans primarily for owner-occupied 1-4 family
residential and commercial real estate.

         The Bank offers a variety of deposit accounts having a wide range of
interest rates and terms, including savings, money market, interest and
noninterest bearing checking accounts and certificate accounts. The Bank's trust
services include investment, management, administration and advisory services,
primarily for individuals and to a lesser extent partnerships and corporations.
At December 31, 1997 the Bank's trust department managed approximately $120
million of trust assets. Through its 20%-owned securities brokerage affiliate,
BSC Securities, L.C., the Bank offers full retail investment services to its
customers. In early 1997, the Company formed a consumer finance subsidiary,
Countywide Loans, Inc. ("Countywide"), to provide basic financial services such
as small loans, check cashing and money orders to individuals.

         The Bank considers its primary market area to be all of Smith County,
Texas, and to a lesser extent portions of adjoining counties. The principal
economic activities in the Bank's market area include the retail, distribution,
manufacturing, medical services, education and oil and gas industries. The Bank
serves this market through eight full service branch locations, including four
branches located in grocery stores. The branches are located in and around
Tyler, and the Company plans to open two additional branches in Longview in
mid-1998. The Bank also maintains three drive up facilities and Countywide
maintains one sales location. The Bank's customers may also access various
banking services through 14 automatic teller machines ("ATMs") owned by the Bank
and others, through debit cards, and through the Bank's automated telephone and
electronic banking products that allow the Bank's customers to apply for loans,
access account information and conduct various transactions from their
telephones and computers.

         The Company reported net income of $5.0 million and $4.2 million and
diluted earnings per share of $1.43 and $1.21 for the years ended December 31,
1997 and 1996, respectively. The Company instituted a cash dividend in 1970 and
has paid dividends each year since that time.

         The Company and the Bank are subject to comprehensive regulation,
examination and supervision by the


<PAGE>   8




Board of Governors of the Federal Reserve System (the "FRB"), the Texas
Department of Banking (the "TDB") and the Federal Depository Insurance
Corporation ("FDIC"), and are subject to numerous laws and regulations relating
to the extension of credit and making of loans to individuals.

         Unless the context otherwise requires, references to the Company
include the Bank and its subsidiaries, as well as Southside Delaware, Inc.
("Southside Delaware"), which serves as an intermediate holding company between
the Company and the Bank.

         The administrative offices of the Company are located at 1201 S.
Beckman, Tyler, Texas 75701, and the telephone number is 903-531-7111. The
Company's website can be found at www.southside.com.

BUSINESS STRATEGY

         The Company's goal is to be the premier financial institution in East
Texas, recognized for quality customer service and financial soundness. The Bank
weathered the Texas economic downturn in the 1980's, which contributed in part
to the customer loyalty that the Bank enjoys today.

         The Company's business strategy is to operate the Bank as a well
capitalized, profitable, independent, community-oriented financial institution.
With that focus, the Bank has developed a niche in small business and consumer
lending and other small business and consumer financial services, including the
recent addition of Countywide, a consumer finance company subsidiary of the
Bank.

         Key aspects of the Company's business strategy include (i) originating
residential real estate, commercial real estate, commercial business and
consumer loans, (ii) providing a high level of customer service, (iii)
maintaining asset quality, (iv) increasing the revenue base of financial service
subsidiaries and adding products and services to attract customers and
contribute to noninterest income, (v) increasing market share within the Bank's
existing market and expanding into new markets and (vi) controlling expenses.
Management also is committed to managing interest rate risk, enhancing
profitability and maintaining a well capitalized financial position.

         Asset Quality. The Company seeks to maintain asset quality by managing
credit risk. Approximately 74.2% of the net loan portfolio at December 31, 1997
was comprised of commercial real estate, construction, commercial business and
consumer loans. The other 25.8% of the loan portfolio at December 31, 1997 was
comprised of residential mortgage loans, which generally pose less credit risk
than other types of loans. The Bank's nonperforming assets at that date
represented .54% of total assets. At December 31, 1994, 1995 and 1996, this
ratio was .67%, .61% and .61%, respectively. The Company has maintained a
conservative investment portfolio. Approximately 75.2% of the portfolio consists
of U.S. Treasury and agency securities and mortgage-backed securities
collateralized by U.S. agency guaranteed mortgages which are directly or
indirectly backed by the full faith and credit of the U.S.
government.

         Noninterest Income. With a focus on reducing the dependence of earnings
on net interest income, the Company has expanded its sources and amounts of fee
income. During 1996 and 1997, the number of ATMs was increased from nine to 14.
In 1997, the Company expanded its fee-generating services beyond retail
brokerage and trust services to also include consumer finance services. The Bank
also offered new fee-based products such as proprietary credit and debits cards
and checking overdraft privileges. For 1997, noninterest income represented
13.9% of total revenue, compared to 11.5% for 1996.

         Enhanced Delivery System and Controlled Growth. The Bank has recently
launched technological enhancements, including an automated telephone system,
computer-based home banking, corporate cash management software and an Internet
information site.

         The Company enhanced its infrastructure in Smith County in order to
improve customer service and attract new customers. In 1996 and 1997, the Bank
added three full service grocery store branches, a seven lane "motor bank"
drive-in facility and five ATMs. Certain branch locations were expanded or
remodeled. Through branch openings and acquisitions, the Company intends to
expand into desirable market areas adjoining the Tyler metropolitan area, which
includes Smith County. A grocery store branch and a free-standing branch are
expected to open in 1998 in Longview, Texas, a city located in adjoining Gregg
County.


                                        2

<PAGE>   9




         Noninterest Expenses. Noninterest expenses are subject to ongoing
reviews of staffing levels, facilities and operations. The 1996 branch openings
and 1997 branch remodelings contributed to increased operating costs in those
years. The Company's efficiency ratio was 69.4% for 1997, slightly lower than
the ratios for the preceding four years. The Company seeks to reduce the
efficiency ratio through additional revenue contribution from the new branches
contributing additional revenue to the Bank and through continued monitoring of
costs.

         Experienced Management. The Company's executive officers each have
broad experience in the Bank's operations. The Bank has enjoyed continuity of
management, with the Chief Executive Officer serving in that capacity since the
Bank opened in 1960 and the other executive officers each having served for over
ten years.

                                THE TRUST ISSUER

         The Trust Issuer is a statutory business trust created under Delaware
law pursuant to a Certificate of Trust filed with the Delaware Secretary of
State on April 9, 1998 and a trust agreement dated April 9, 1998. The trust
agreement will be amended and restated in its entirety prior to the issuance of
the Trust Securities by the Amended and Restated Trust Agreement to be executed
by the Company, as depositor, U.S. Trust Company of Texas, N.A., as Property
Trustee, Wilmington Trust Company, as Delaware Trustee, the Administrative
Trustees named therein (collectively, the "Trust Issuer Trustees"), and the
several Holders (as defined therein) (as so amended, the "Trust Agreement"). All
of the Common Securities will be owned by the Company. The Company will acquire
Common Securities in an aggregate Liquidation Amount equal to 3% of the total
capital of the Trust Issuer. The Trust Issuer exists for the exclusive purposes
of (i) issuing and selling the Trust Securities, (ii) using the proceeds from
the sale of the Trust Securities to acquire Junior Subordinated Debentures
issued by the Company and (iii) engaging in only those other activities
necessary, advisable or incidental thereto (such as registering the transfer of
the Trust Securities). Accordingly, the Junior Subordinated Debentures will be
the sole assets of the Trust Issuer and payments under the Junior Subordinated
Debentures will be the sole revenue of the Trust Issuer. The address of the
principal executive office of the Trust Issuer is 1201 S. Beckham, Tyler, Texas
75701 and its telephone number is (903) 531-7111.

                                  THE OFFERING
<TABLE>

<S>                                                  <C>
THE TRUST ISSUER...................................   Southside Capital Trust I, a Delaware statutory business trust.
                                                      The sole assets of the Trust Issuer will be the Junior Subordinated
                                                      Debentures.

SECURITIES OFFERED.................................   _________ shares of ____% Cumulative Trust Preferred
                                                      Securities, evidencing preferred undivided beneficial interests in
                                                      the assets of the Trust Issuer.

OFFERING PRICE.....................................   $10 per Preferred Security (Liquidation Amount $10).

DISTRIBUTIONS......................................   Holders of the Preferred Securities will be entitled to receive
                                                      cumulative cash Distributions at an annual rate of ____% of the
                                                      Liquidation Amount of $10 per Preferred Security, accumulating
                                                      from the date of original issuance and payable quarterly in arrears
                                                      on March 31, June 30, September 30 and December 31 of each
                                                      year, commencing on June 30, 1998.  The distribution rate and the
                                                      distribution and other payment dates for the Preferred Securities
                                                      will correspond to the interest rate and interest and other payment
                                                      dates on the Junior Subordinated Debentures.  See "Description of
                                                      the Preferred Securities."

JUNIOR SUBORDINATED DEBENTURES.....................   The Trust Issuer will invest the proceeds from the issuance of the
                                                      Trust Securities in an equivalent amount of the Junior
                                                      Subordinated Debentures.  The Junior Subordinated Debentures
                                                      will mature on June 30, 2028. The Junior Subordinated
                                                      Debentures will rank subordinate and junior in right of payment to
                                                      all Senior Indebtedness of the Company. There is no limitation on
</TABLE>

                                        3

<PAGE>   10




<TABLE>
<S>                                                   <C>
                                                      the amount of Senior Indebtedness, (as defined in "Description   
                                                      of the Junior Subordinated Debentures--Subordination") which    
                                                      is pari passu with the Junior Subordinated Debentures, which    
                                                      the Company may issue. At December 31, 1997, the Company had    
                                                      no outstanding Senior Indebtedness. The Company may from time   
                                                      to time incur indebtedness constituting Senior Indebtedness.    
                                                      In addition, because the Company is a holding company, the      
                                                      Company's obligations under the Junior Subordinated Debentures  
                                                      will effectively be subordinated to all existing and future     
                                                      liabilities and obligations of its subsidiaries, including the  
                                                      Bank. See "Risk Factors-- Subordination of the Guarantee and    
                                                      the Junior Subordinated Debentures," "Risk Factors--Source of   
                                                      Payments to Holders of Preferred Securities" and "Description   
                                                      of the Junior Subordinated Debentures--Subordination."          
                                                      
GUARANTEE..........................................   Payments of Distributions out of funds held by the Trust Issuer,
                                                      and payments on liquidation of the Trust Issuer or the redemption
                                                      of the Preferred Securities, are guaranteed by the Company to the
                                                      extent the Trust Issuer has funds available therefor.  The
                                                      obligations of the Company under the Junior Subordinated
                                                      Debentures, the Indenture, the Trust Agreement and the
                                                      Guarantee, in the aggregate, constitute a full and unconditional
                                                      guarantee by the Company of the Trust Issuer's obligations under
                                                      the Preferred Securities.  See "Description of the Guarantee" and
                                                      "Relationship Among the Preferred Securities, Junior
                                                      Subordinated Debentures and Guarantee."  The obligations of the
                                                      Company under the Guarantee are subordinate and junior in right
                                                      of payment to all Senior Indebtedness of the Company.  See "Risk
                                                      Factors--Subordination of the Guarantee and the Junior
                                                      Subordinated Debentures" and "Description of the Guarantee."

RIGHT TO DEFER INTEREST PAYMENTS...................   So long as no Debenture Event of Default (as defined in
                                                      "Description of the Junior Subordinated Debentures--Debenture
                                                      Event of Default") has occurred and is continuing, the Company
                                                      has the right under the Indenture to defer the payment of
                                                      interest on the Junior Subordinated Debentures at any time or from
                                                      time to time for a period not exceeding 20 consecutive quarters
                                                      with respect to each Extension Period, provided that no Extension
                                                      Period may extend beyond the Stated Maturity of the Junior
                                                      Subordinated Debentures.  At the end of an Extension Period, the
                                                      Company must pay all interest then accrued and unpaid (together
                                                      with interest thereon at the annual rate of ____%, compounded
                                                      quarterly, to the extent permitted by applicable law).  During an
                                                      Extension Period, interest will continue to accrue and holders of
                                                      the Junior Subordinated Debentures (or holders of the Preferred
                                                      Securities, while outstanding) will be required to accrue interest
                                                      income for United States federal income tax purposes in advance
                                                      of receipt of payment of such deferred interest.  See "Certain
                                                      Federal Income Tax Consequences--Interest Income and Original
                                                      Issue Discount."

                                                      During any Extension Period, the Company may not, and may not  
                                                      permit any subsidiary of the Company to, (i) declare or pay    
                                                      any dividends or distributions on, or redeem, purchase,        
                                                      acquire or make a liquidation payment with respect to, any of  
                                                      the Company's capital stock (other than (a) the                
                                                      reclassification of any class of the                           
                                                      
</TABLE>

                                        4

<PAGE>   11



<TABLE>

<S>                                                   <C>    
                                                      Company's capital stock into another class of capital stock,     
                                                      (b) dividends or distributions payable in common stock of the    
                                                      Company, (c) any declaration of a dividend in connection with    
                                                      the implementation of a shareholder rights plan, the issuance    
                                                      of stock under any such plan in the future or the redemption     
                                                      or repurchase of any rights pursuant thereto, (d) payments       
                                                      under the Guarantee and (e) purchases of common stock related    
                                                      to the issuance of common stock or rights under any of the       
                                                      Company's benefit plans for its or its subsidiaries'             
                                                      directors, officers or employees), (ii) make any payment of      
                                                      principal of, or premium, if any, or interest on, or repay,      
                                                      repurchase or redeem, any debt securities of the Company that    
                                                      rank pari passu with or junior in right of payment to the        
                                                      Junior Subordinated Debentures, (iii) make any guarantee         
                                                      payments with respect to any guarantee by the Company of the     
                                                      debt securities of any subsidiary of the Company if such         
                                                      guarantee ranks pari passu with or junior in right of payment    
                                                      to the Junior Subordinated Debentures other than payments        
                                                      pursuant to the Guarantee, or (iv) redeem, purchase or acquire   
                                                      less than all of the outstanding Junior Subordinated             
                                                      Debentures or any of the Preferred Securities. There is no       
                                                      limitation on the number of times that the Company may elect     
                                                      to begin an Extension Period. See "Description of the Junior     
                                                      Subordinated Debentures--Right to Defer Interest Payment         
                                                      Obligation" and "Certain Federal Income Tax                      
                                                      Consequences--Interest Income and Original Issue Discount."      
                                                                                                                       
                                                      The Company has no current intention of exercising its right     
                                                      to defer payments of interest by extending the interest          
                                                      payment period on the Junior Subordinated Debentures. However,   
                                                      if the Company elects to exercise such right in the future,      
                                                      the market price of the Preferred Securities will likely be      
                                                      adversely affected. As a result of the existence of the          
                                                      Company's right to defer interest payments, the market price     
                                                      of the Preferred Securities may be more volatile than the        
                                                      market prices of other similar securities that do not provide    
                                                      for such optional deferrals.                                     
                                                      
REDEMPTION.........................................   The Junior Subordinated Debentures are subject to redemption
                                                      prior to their Stated Maturity at the option of the Company (i) on
                                                      or after June 30, 2003, in whole at any time or in part from time
                                                      to time, or (ii) at any time, in whole (but not in part), within 180
                                                      days following the occurrence and continuation of a Tax Event, an
                                                      Investment Company Event or a Capital Treatment Event (each as
                                                      defined herein), in each case at a redemption price equal to 100%
                                                      of the principal amount of the Junior Subordinated Debentures so
                                                      redeemed, together with any accrued and unpaid interest to the
                                                      date fixed for redemption.

                                                      If the Junior Subordinated Debentures are redeemed prior to 
                                                      their Stated Maturity, the Trust Issuer must apply the      
                                                      proceeds of such redemption to redeem a Like Amount (as     
                                                      defined herein) of the Preferred Securities and the Common  
                                                      Securities. The Preferred Securities will be redeemed upon  
                                                      repayment of the Junior Subordinated Debentures at their    
                                                      Stated Maturity. See "Description of the Preferred          
                                                      Securities--Redemption."                                    
</TABLE>
                                                      
                                        5

<PAGE>   12



<TABLE>

<S>                                                  <C>    

DISTRIBUTION OF THE JUNIOR
  SUBORDINATED DEBENTURES UPON
  LIQUIDATION OF THE TRUST ISSUER..................   The Company will have the right at any time to dissolve the Trust
                                                      Issuer and, after satisfaction of creditors of the Trust Issuer, if
                                                      any, as provided by applicable law, cause the Junior Subordinated
                                                      Debentures to be distributed to the holders of the Preferred
                                                      Securities and the Common Securities in exchange therefor upon
                                                      liquidation of the Trust Issuer.  The ability of the Company to do
                                                      so may be subject to the Company's prior receipt of regulatory
                                                      approval.

                                                      In the event of the dissolution of the Trust Issuer, after     
                                                      satisfaction of the claims of creditors of the Trust Issuer,   
                                                      if any, as provided by applicable law, the holders of the      
                                                      Preferred Securities will be entitled to receive a Liquidation 
                                                      Amount of $10 per Preferred Security plus accumulated and      
                                                      unpaid Distributions thereon to the date of payment, which may 
                                                      be in the form of a distribution of a Like Amount of the       
                                                      Junior Subordinated Debentures, subject to certain exceptions  
                                                      as described herein. See "Description of the Preferred         
                                                      Securities--Liquidation of the Trust Issuer and Distribution   
                                                      of the Junior Subordinated Debentures to Holders."             
                                                      
VOTING RIGHTS......................................   Except in limited circumstances, the holders of the Preferred
                                                      Securities will have no voting rights.  See "Description of the
                                                      Preferred Securities--Voting Rights; Amendment of Trust
                                                      Agreement."

USE OF PROCEEDS....................................   All of the proceeds from the sale of the Preferred  Securities will
                                                      be used by the Trust Issuer to purchase Junior Subordinated
                                                      Debentures.  The Company intends to use the net proceeds from
                                                      the sale of the Junior Subordinated Debentures for general
                                                      corporate purposes, including, but not limited to, capital
                                                      contributions to the Bank to support growth and for working
                                                      capital, the possible repurchase of shares of the Company's
                                                      common stock, subject to acceptable market conditions, and
                                                      acquisitions by either the Company or the Bank (although there
                                                      presently exist no agreements or understandings with respect to
                                                      any such acquisition).

RISK FACTORS.......................................   An investment in the Preferred Securities involves substantial risks
                                                      that should be considered by prospective purchasers.  In addition,
                                                      because holders of the Preferred Securities may receive Junior
                                                      Subordinated Debentures on termination of the Trust Issuer, and
                                                      because payments on the Junior Subordinated Debentures are the
                                                      sole source of funds for Distributions on and redemptions of the
                                                      Preferred Securities, prospective purchasers of the Preferred
                                                      Securities are also making an investment decision with regard to
                                                      the Junior Subordinated Debentures and should carefully review
                                                      all of the information regarding the Junior Subordinated
                                                      Debentures contained herein.  See "Risk Factors" and
                                                      "Description of the Junior Subordinated Debentures."

LISTING ...........................................   The Company has applied to list the Preferred Securities on    
                                                      _______________________ under the symbol "____."

ERISA CONSIDERATIONS...............................   For a discussion of certain restrictions on purchases of the
                                                      Preferred Securities by employee benefit plans, see "ERISA
                                                      Considerations."
</TABLE>

                                        6

<PAGE>   13




            SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA

     The Summary Consolidated Financial Data presented below have been derived
from the audited
Consolidated Financial Statements of the Company and are qualified in their
entirety by reference to the more detailed Consolidated Financial Statements and
notes thereto, included elsewhere herein.


<TABLE>
<CAPTION>
                                                                               AT DECEMBER 31,
                                                  -----------------------------------------------------------------------
                                                    1997            1996           1995            1994           1993
                                                  ---------      ---------       ---------       ---------      ---------
                                                                 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                               <C>            <C>             <C>             <C>            <C>      
SELECTED FINANCIAL CONDITION DATA:
Total assets...............................       $ 571,145      $ 482,694       $ 448,673       $ 426,221      $ 404,216
Loans, net of reserve for loan loss........         292,665        254,918         225,461         197,853        180,763
Mortgage-backed and related securities.....         141,413        114,356          99,407          88,080        116,451
Investment securities......................          71,835         57,825          76,919          82,720         69,220
Deposits...................................         462,674        425,950         388,308         385,102        352,355
Long-term obligations......................          28,547          9,096          13,686           7,997          8,850
Shareholders' equity.......................          40,031         36,604          33,352          27,524         27,241
Book value per common share................           11.84          10.71            9.77            8.05           7.97
</TABLE>



<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31,
                                                                               -----------------------
                                                           1997           1996           1995            1994           1993
                                                         --------       --------       --------        --------       --------
<S>                                                      <C>            <C>            <C>             <C>            <C>     
SELECTED OPERATING DATA:
Total interest income ............................       $ 35,167       $ 31,772       $ 29,590        $ 26,172       $ 24,097
Total interest expense ...........................         16,205         14,397         12,837          10,544          9,364
                                                         --------       --------       --------        --------       --------
Net interest income ..............................         18,962         17,375         16,753          15,628         14,733
Provision for loan losses ........................          1,005            500           (300)            250            600
                                                         --------       --------       --------        --------       --------
Net interest income after provision for loan
  losses .........................................         17,957         16,875         17,053          15,378         14,133
                                                         --------       --------       --------        --------       --------
Service charges ..................................          4,001          2,821          2,752           2,650          2,715
Net gain on sales of securities available for
  sale ...........................................            233            132            221              25            487
Other ............................................          1,432          1,180            901             921            991
                                                         --------       --------       --------        --------       --------
Total noninterest income .........................          5,666          4,133          3,874           3,596          4,193
                                                         --------       --------       --------        --------       --------
Total noninterest expenses .......................         16,928         15,366         14,682          14,253         12,955
                                                         --------       --------       --------        --------       --------
Income before taxes and cumulative effect of
  change in accounting principle .................          6,695          5,642          6,245           4,721          5,371
Income tax expense ...............................          1,689          1,437          1,713           1,202          1,442
Cumulative effect of change in accounting
  principle ......................................                                                                          86
                                                         --------       --------       --------        --------       --------
Net income .......................................       $  5,006       $  4,205       $  4,532        $  3,519       $  4,015
                                                         ========       ========       ========        ========       ========

Net income per common share:
Basic ............................................       $   1.47       $   1.23 *     $   1.33 *      $   1.03 *     $   1.18 *
                                                         ========       ========       ========        ========       ========
Diluted ..........................................       $   1.43       $   1.21 *     $   1.31 *      $   1.02 *     $   1.17 *
                                                         ========       ========       ========        ========       ========

Cash dividends declared per common share .........       $    .40       $    .40       $    .35        $    .25       $    .25
                                                         ========       ========       ========        ========       ========
</TABLE>

---------------
*   Restated for adoption of SFAS 128,
        "Earnings Per Share."


<TABLE>

<S>                                                        <C>          <C>            <C>            <C>          <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Return on average assets (ratio of net income ....                                                                      
   to average total assets) ......................             .99%          .92%         1.07%          .86%        1.05%
Return on average shareholders' equity (ratio ....                                                                      
   of net income to average shareholders'
   equity) .......................................           13.20         12.20         15.01         12.96        16.28
Net interest rate spread during the year .........            3.41          3.48          3.70          3.68         3.78
Net interest margin (net interest and dividend ...                                                                      
   income to average interest earning assets) ....            4.32          4.37          4.53          4.33         4.39
Ratio of average interest earning assets to ......                                                                      
  average interest bearing liabilities ...........          125.81        125.99        124.87        123.12       122.69
</TABLE>


                                        7

<PAGE>   14




<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31,
                                                                               -----------------------
                                                            1997           1996          1995            1994          1993
                                                         ----------     ----------    ----------      ----------    -----------
<S>                                                      <C>            <C>           <C>             <C>            <C>  
Ratio of noninterest expense to average
   total assets ..................................             3.35%          3.37%         3.48%           3.48           3.40%
Efficiency ratio (noninterest expense to net
   interest income and noninterest income) .......            69.39          71.88         71.95           74.24          70.26
Ratio of earnings to fixed charges:
   Excluding interest on deposits (1).............             5.33           7.79         12.09           10.28          25.87
   Including interest on deposits (2).............             1.41           1.39          1.49            1.45           1.57

ASSET QUALITY RATIOS:
Non-accruing loans to total loans at end
   of year .......................................              .45            .59           .55             .31            .60
Reserve for loan losses to non-accruing
   loans at end of year ..........................           250.74         211.94        264.09          500.32         258.96
Reserve for loan losses to total loans at
   end of year ...................................             1.14           1.26          1.45            1.56           1.55
Nonperforming assets to total assets at end
   of year .......................................              .54            .61           .61             .67           1.31
Ratio of net charge-offs during the year to
   average loans outstanding during the year .....              .32            .23          (.23)           (.02)           .27

CAPITAL RATIOS:
Shareholders' equity to total assets at end
   of year .......................................             7.01           7.58          7.43            6.46           6.74
Average shareholders' equity to average
   total assets ..................................             7.50           7.55          7.16            6.63           6.48
Total risk-based capital ratio ...................            12.89          13.74         13.79           13.47          13.35
Tier 1 risk-based capital ratio ..................            11.86          12.59         12.54           12.22          12.10
Tier 1 leverage capital ratio ....................             7.25           7.63          7.52            7.02           6.85

OTHER DATA:
Number of bank branch offices at end of year .....                8              8             5               5              5
Number of deposit accounts at end of year ........           39,221         35,997        34,542          33,785         33,036
</TABLE>

----------------

(1)  The ratio of earnings to fixed charges excluding interest on deposits is
     calculated by dividing earnings before provision for income taxes plus
     interest on borrowings and a portion of rentals representative of an
     implicit interest factor on such rentals by interest expense on borrowings
     and a portion of rentals representative of an implicit interest factor on
     such rentals on a pretax basis.

(2)  The ratio of earnings to fixed charges including interest on deposits is
     calculated by dividing earnings before provision for income taxes plus
     interest expense and a portion of rentals representative of an implicit
     interest factor for such rentals by interest expense and a portion of
     rentals representative of an implicit interest factor for such rentals on a
     pretax basis.



                                        8

<PAGE>   15



                                  RISK FACTORS

         An investment in the Preferred Securities involves a high degree of
risk. Prospective investors should carefully consider, together with the other
information contained and incorporated by reference in this Prospectus, the
following factors in evaluating this offering and the Company, its business and
the Trust Issuer before purchasing the Preferred Securities offered hereby.
Prospective investors should note, in particular, that this Prospectus contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), that involve
substantial risks and uncertainties. When used in this Prospectus, or in the
documents incorporated by reference herein, the words "anticipate," "believe,"
"estimate," "intend," "expect" and similar expressions identify certain of such
forward-looking statements. Actual results, performance or achievements could
differ materially from those contemplated, expressed or implied by the
forward-looking statements contained herein. The considerations listed below
represent certain important factors the Company believes could cause such
results to differ. These considerations are not intended to represent a complete
list of the general or specific risks that may affect the Company and the Trust
Issuer. It should be recognized that other risks, including general economic
factors and expansion strategies, may be significant, presently or in the
future, and the risks set forth below may affect the Company and the Trust
Issuer to a greater extent than indicated.

                      RISK FACTORS RELATING TO THE OFFERING

SUBORDINATION OF THE GUARANTEE AND THE JUNIOR SUBORDINATED DEBENTURES

         The obligations of the Company under the Guarantee and under the
Junior Subordinated Debentures will be unsecured and will rank subordinate and
junior in right of payment to all Senior Indebtedness of the Company. Holders
of the Junior Subordinated Debentures will be able to look only to the assets
of the Company (excluding the assets of the Bank and its other subsidiaries)
for payments on the Junior Subordinated Debentures. Although at December 31,
1997, the Company had no outstanding Senior Indebtedness, the Company may, from
time to time, incur Senior Indebtedness, and there is no limitation on the
amount of Senior Indebtedness, or subordinated debt which is pari passu with
the Junior Subordinated Debentures, which the Company may issue. At the current
time, only the capital stock of the Company is junior in right of payment to
the Junior Subordinated Debentures.

         Because the Company is a holding company, the right of the Company to
participate in any distribution of assets of any subsidiary, including the Bank,
upon such subsidiary's liquidation or reorganization or otherwise (and thus the
ability of holders of the Preferred Securities to benefit indirectly from such
distribution) is subject to the prior claims of creditors of that subsidiary
(including depositors of the Bank), except to the extent that the Company may
itself be recognized as a creditor of that subsidiary. If the Company is a
creditor of a subsidiary, the claims of the Company would be subject to any
prior security interest in the assets of the subsidiary and any indebtedness of
the subsidiary senior to that of the Company. Accordingly, the Junior
Subordinated Debentures and the Guarantee will be effectively subordinated to
all existing and future liabilities of the Company's subsidiaries, including the
Bank. At December 31, 1997 the Bank had liabilities of approximately $531.1
million (including approximately $462.7 million in deposits). See "Description
of the Guarantee--Status of the Guarantee" and "Description of the Junior
Subordinated Debentures--Subordination."

SOURCE OF PAYMENTS TO HOLDERS OF PREFERRED SECURITIES

         As a bank holding company, the Company conducts its operations
principally through the Bank and its other subsidiaries and affiliates and,
therefore, its principal source of cash is the receipt of dividends from the
Bank. Since the Company is without significant assets other than the capital
stock of the Bank, the ability of the Company to pay the principal of and
interest on the Junior Subordinated Debentures to the Trust Issuer (and
consequently, the Trust Issuer's ability to pay the Liquidation Amount of and
Distributions on the Preferred Securities and the Company's ability to pay its
obligations under the Guarantee) will be dependent on the ability of the Bank to
pay dividends to the Company in amounts sufficient to service the Company's
obligations. There is no restriction on the ability of the Bank to issue
additional capital stock or incur additional indebtedness. In addition, there
are legal limitations on the source and amount of dividends that a bank such as
the Bank is permitted to pay. At such date, any additional capital distributions
would have required prior regulatory approval. See "Regulation--Regulatory
Capital Requirements."


                                        9

<PAGE>   16



RIGHT TO DEFER INTEREST PAYMENT OBLIGATION; TAX CONSEQUENCES; MARKET PRICE
CONSEQUENCES

         So long as no Debenture Event of Default has occurred and is
continuing, the Company has the right under the Indenture to defer the payment
of interest on the Junior Subordinated Debentures, at any time or from time to
time, for a period not exceeding 20 consecutive quarters with respect to each
Extension Period, provided that no Extension Period may extend beyond the Stated
Maturity of the Junior Subordinated Debentures. As a consequence of any such
deferral, quarterly Distributions on the Preferred Securities by the Trust
Issuer will also be deferred (and the amount of Distributions to which holders
of the Preferred Securities are entitled will accumulate additional
Distributions thereon at the rate of ____% per annum, compounded quarterly from
the relevant payment date for such Distributions) during any such Extension
Period. During any such Extension Period, the Company may not, and may not
permit any of its subsidiaries to, (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire or make a liquidation payment
with respect to, any of the Company's capital stock (other than (a) the
reclassification of the Company's capital stock into another class of capital
stock, (b) dividends or distributions in common stock of the Company, (c) any
declaration of a dividend in connection with the implementation of a
shareholders' rights plan, or the issuance of stock under any such plan in the
future or the redemption or repurchase of any rights pursuant thereto, (d)
payments under the Guarantee and (e) purchases of common stock related to the
issuance of common stock or rights under any of the Company's benefit plans for
its or its subsidiaries directors, officers or employees), (ii) make any payment
of principal of, or interest or premium, if any, on or repay, repurchase or
redeem any debt securities of the Company that rank pari passu with or junior in
interest to the Junior Subordinated Debentures, (iii) make any guarantee
payments with respect to any guarantee by the Company of the debt securities of
any subsidiary of the Company if such guarantee ranks pari passu with or junior
in interest to the Junior Subordinated Debentures other than payments pursuant
to the Guarantee, or (iv) redeem, purchase or acquire less than all of the
outstanding Junior Subordinated Debentures or any of the Preferred Securities.
Upon the termination of any Extension Period and the payment of all interest
then accrued and unpaid on the Junior Subordinated Debentures (together with
interest thereon at the annual rate of ____%, compounded quarterly from the
relevant payment date for such interest, to the extent permitted by applicable
law), the Company may elect to begin a new Extension Period subject to the above
requirements. There is no limitation on the number of times that the Company may
elect to begin an Extension Period so long as no Debenture Event of Default has
occurred and is continuing. See "Description of the Preferred
Securities--Distributions" and "Description of the Junior Subordinated
Debentures--Right to Defer Interest Payment Obligation."

         If an Extension Period occurs, a holder of the Preferred Securities
will continue to accrue income (in the form of original issue discount) for
United States federal income tax purposes in respect of its pro rata share of
the interest accruing on the Junior Subordinated Debentures held by the Trust
Issuer. As a result, a holder of the Preferred Securities will be required to
include such income in gross income for United States federal income tax
purposes in advance of the receipt of cash. In addition, a holder of Preferred
Securities that disposes of its Preferred Securities between record dates for
payments of Distributions (and consequently does not receive a Distribution from
the Trust Issuer for the period prior to such disposition) will nevertheless be
required to include accrued but unpaid interest on the Junior Subordinated
Debentures through the date of disposition as ordinary income and to add such
amount to the adjusted tax basis of the Preferred Securities disposed of. Upon
disposition of the Preferred Securities, such holder will recognize a capital
loss to the extent the selling price (which might not fully reflect the value of
accrued but unpaid interest) is less than its adjusted tax basis (which will
include all accrued but unpaid interest). Subject to certain limited exceptions,
capital losses cannot be applied to offset ordinary income for United States
federal income tax purposes. See "Certain Federal Income Tax
Consequences--Interest Income and Original Issue Discount" and "--Sales or
Redemption of the Preferred Securities."

         The Company has no current intention of exercising its right to defer
payments of interest on the Junior Subordinated Debentures. However, if the
Company elects to exercise such right in the future, the market price of the
Preferred Securities will likely be adversely affected. A holder that disposes
of its Preferred Securities during an Extension Period, therefore, might not
receive the same return on its investment as a holder that continues to hold its
Preferred Securities. In addition, as a result of the existence of the Company's
right to defer interest payments, the market price of the Preferred Securities
may be more volatile than the market prices of other similar securities that are
not subject to such deferrals.


                                       10

<PAGE>   17



OPTIONAL REDEMPTION AFTER JUNE 30, 2003

         The Company has the right to redeem the Junior Subordinated Debentures
prior to their Stated Maturity on or after June 30, 2003 in whole or in part
from time to time. If the Junior Subordinated Debentures are redeemed prior to
their Stated Maturity, the Trust Issuer must apply the proceeds of such
redemption to redeem a Like Amount of the Preferred Securities and the Common
Securities. The exercise of such right may be subject to the Company having
received prior regulatory approval. See "Description of the Junior Subordinated
Debentures--General."

REDEMPTION DUE TO TAX EVENT, INVESTMENT COMPANY EVENT OR CAPITAL TREATMENT EVENT

         The Company has the right, but not the obligation, to redeem the Junior
Subordinated Debentures in whole (but not in part) within 180 days following the
occurrence of a Tax Event, an Investment Company Event or a Capital Treatment
Event (whether occurring before or after June 30, 2003) and, therefore, cause a
mandatory redemption of the Preferred Securities. The exercise of such right may
be subject to the Company having received prior regulatory approval. See
"Description of the Junior Subordinated Debentures--Redemption or Exchange."

         A "Tax Event" means the receipt by the Trust Issuer of an Opinion of
Counsel (as defined below) to the effect that, as a result of any amendment to,
or change (including any announced prospective change) in, the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein, or as a result of any official
administrative pronouncement or judicial decision interpreting or applying such
laws or regulations, which amendment or change is effective or such
pronouncement or decision is announced on or after the date of issuance of the
Preferred Securities under the Trust Agreement, there is more than an
insubstantial risk that (i) the Trust Issuer is, or will be within 90 days of
the date of such opinion, subject to United States federal income tax with
respect to income received or accrued on the Junior Subordinated Debentures,
(ii) interest payable by the Company on the Junior Subordinated Debentures is
not, or within 90 days of the date of such opinion will not be, deductible by
the Company, in whole or in part, for United States federal income tax purposes
or (iii) the Trust Issuer is, or will be within 90 days of the date of such
opinion, subject to more than a de minimis amount of other taxes, duties or
other governmental charges. The Trust Issuer or the Company must request and
receive an opinion with regard to such matters within a reasonable period of
time after it becomes aware of the possible occurrence of any of the events
described in clauses (i) through (iii) above. Certain legislative proposals made
in 1996 and 1997, if enacted, would have adversely affected the ability of the
Company to deduct interest paid on the Junior Subordinated Debentures. While
these proposals were not enacted, there can be no assurance that legislation
enacted after the date hereof will not adversely affect the ability of the
Company to deduct the interest payable on the Junior Subordinated Debentures.
Consequently, there can be no assurance that a Tax Event will not occur.

         "Investment Company Event" means the receipt by the Trust Issuer of an
Opinion of Counsel to the effect that, as a result of the occurrence of a change
in law or regulation or a change in interpretation or application of law or
regulation by any legislative body, court, governmental agency or regulatory
authority, the Trust Issuer is or will be considered an "investment company"
that is required to be registered under the Investment Company Act of 1940, as
amended (the "Investment Company Act"), which change occurs or becomes effective
on or after the date of original issuance of the Preferred Securities.

         "Capital Treatment Event" means the receipt by the Trust Issuer of an
Opinion of Counsel to the effect that as a result of any amendment to, or change
(including any proposed change) in, the laws (or any regulations thereunder) of
the United States or any political subdivision thereof or therein, or as a
result of any official or administrative pronouncement or action or judicial
decision interpreting or applying such laws or regulations, which amendment or
change is effective or which proposed change, pronouncement, action or decision
is announced on or after the date of original issuance of the Preferred
Securities, there is more than an insubstantial risk that the Preferred
Securities will not constitute Tier 1 Capital (or the then equivalent thereof)
applied as if the Company (or its successor) were a bank holding company for
purposes of applicable capital adequacy guidelines of the FRB (or any successor
regulatory authority with jurisdiction over bank holding companies), or any
capital adequacy guidelines as then in effect and applicable to the Company.

         "Opinion of Counsel" means an opinion in writing of independent legal
counsel experienced in such matters as are being opined upon.


                                       11

<PAGE>   18



EXCHANGE OF PREFERRED SECURITIES FOR JUNIOR SUBORDINATED DEBENTURES; REDEMPTION
AND TAX CONSEQUENCES

         The Company will have the right at any time to dissolve the Trust
Issuer and, after the satisfaction of liabilities to creditors of the Trust
Issuer as required by applicable law, cause the Junior Subordinated Debentures
to be distributed to the holders of the Preferred Securities in exchange
therefor in liquidation of the Trust Issuer. The exercise of such right may be
subject to prior regulatory approval. The Company will also have the right, in
certain circumstances, to redeem the Junior Subordinated Debentures in whole or
in part, in lieu of a distribution of the Junior Subordinated Debentures by the
Trust Issuer, in which event the Trust Issuer will redeem the Preferred
Securities to the same extent as the Junior Subordinated Debentures are redeemed
by the Company. If less than all of the Preferred Securities are to be so
redeemed, the particular Preferred Securities to be redeemed shall be selected
by the Trust Issuer by such method (including, without limitation, by lot) as
the Trust Issuer shall deem fair and appropriate. Any such distribution or
redemption prior to the Stated Maturity will be subject to prior regulatory
approval if then required under applicable capital guidelines or regulatory
policies. See "Description of the Preferred Securities--Liquidation of the Trust
Issuer and Distribution of the Junior Subordinated Debentures to Holders" and
"Description of the Junior Subordinated Debentures--Redemption or Exchange."

         Under current United States federal income tax law, a distribution of
Junior Subordinated Debentures upon the dissolution of the Trust Issuer would
not be a taxable event to holders of the Preferred Securities. If, however, the
Trust Issuer were characterized as an association taxable as a corporation at
the time of the dissolution of the Trust Issuer, the distribution of the Junior
Subordinated Debentures would constitute a taxable event to holders of Preferred
Securities. Moreover, any redemption of the Preferred Securities for cash would
be a taxable event to such holders. See "Certain Federal Income Tax
Consequences--Distribution of the Junior Subordinated Debentures to Holders of
the Preferred Securities" and "--Sales or Redemption of the Preferred
Securities."

         There can be no assurance as to the market prices for the Preferred
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for Preferred Securities upon a dissolution or liquidation of the Trust
Issuer. The Preferred Securities or the Junior Subordinated Debentures may trade
at a discount to the price that the investor paid to purchase the Preferred
Securities offered hereby.

         Because holders of Preferred Securities may receive Junior Subordinated
Debentures as a result of the liquidation of the Trust, and because payments on
the Junior Subordinated Debentures are the sole source of funds for
Distributions and redemptions of the Preferred Securities, prospective
purchasers of Preferred Securities are also making an investment decision with
regard to the Junior Subordinated Debentures and should carefully review all the
information regarding the Junior Subordinated Debentures contained herein. If
the Junior Subordinated Debentures are distributed to the holders of Preferred
Securities upon the liquidation of the Trust Issuer, the Company will use its
reasonable efforts to list the Junior Subordinated Debentures on ________ or
such stock exchanges, if any, on which the Preferred Securities are then listed.
See "Description of the Junior Subordinated Debentures."

RIGHTS UNDER THE GUARANTEE

         The Guarantee guarantees to the holders of the Preferred Securities the
following payments, to the extent not paid by the Trust Issuer: (i) any
accumulated and unpaid Distributions required to be paid on the Preferred
Securities, to the extent that the Trust Issuer has funds on hand available
therefor at such time, (ii) the redemption price with respect to any Preferred
Securities called for redemption, to the extent that the Trust Issuer has funds
on hand available therefor at such time, and (iii) upon a voluntary or
involuntary dissolution, winding-up or liquidation of the Trust Issuer (unless
the Junior Subordinated Debentures are distributed to holders of the Preferred
Securities in exchange therefor), the lesser of (a) the aggregate of the
Liquidation Amount (as defined herein) and all accumulated and unpaid
Distributions to the date of payment, to the extent that the Trust Issuer has
funds on hand available therefor at such time, and (b) the amount of assets of
the Trust Issuer remaining available for distribution to holders of the
Preferred Securities after payment of creditors of the Trust Issuer as required
by applicable law.

         If the Company were to default on its obligation to pay amounts payable
under the Junior Subordinated Debentures, the Trust Issuer would lack funds for
the payment of Distributions or amounts payable on redemption of the Preferred
Securities or otherwise, and, in such event, holders of the Preferred Securities
would not be able to rely upon the Guarantee for payment of such amounts. Any
holder of the Preferred Securities may institute a legal proceeding directly
against the Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against the Trust Issuer, the Guarantee Trustee
or any other person or entity. The holders of not less than a majority in
aggregate Liquidation Amount of the Preferred Securities have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Guarantee Trustee in respect of the Guarantee or to direct the
exercise of any trust power conferred

                                       12

<PAGE>   19



upon the Guarantee Trustee under the Guarantee. In the event a Debenture Event
of Default shall have occurred and be continuing and such event is attributable
to the failure of the Company to pay interest on or principal of the Junior
Subordinated Debentures on the applicable payment date, a holder of the
Preferred Securities may institute a legal proceeding directly against the
Company for enforcement of payment to such holder of the principal of or
interest on such Junior Subordinated Debentures having a principal amount equal
to the aggregate Liquidation Amount of the Preferred Securities of such holder
(a "Direct Action"). The exercise by the Company of its right, as described
herein, to defer the payment of interest on the Junior Subordinated Debentures
does not constitute a Debenture Event of Default. In connection with any Direct
Action, the Company will have a right of set-off under the Indenture to the
extent of any payment made by the Company to such holder of the Preferred
Securities in the Direct Action. Except as described herein, holders of the
Preferred Securities will not be able to exercise directly any other remedy
available to the holders of the Junior Subordinated Debentures or assert
directly any other rights in respect of the Junior Subordinated Debentures. See
"Description of the Junior Subordinated Debentures--Enforcement of Certain
Rights by Holders of the Preferred Securities," "Description of the Junior
Subordinated Debentures--Debenture Events of Default" and "Description of the
Guarantee." The Trust Agreement provides that each holder of the Preferred
Securities by acceptance thereof agrees to the provisions of the Guarantee and
the Indenture.

LIMITED COVENANTS

         The covenants in the Indenture are limited and there are no covenants
in the Trust Agreement. As a result, neither the Indenture nor the Trust
Agreement protects holders of Junior Subordinated Debentures or Preferred
Securities, respectively, in the event of a material adverse change in the
Company's financial condition or results of operations or limits the ability of
the Company or any subsidiary to incur or assume additional indebtedness or
other obligations. Additionally, neither the Indenture nor the Trust Agreement
contains any financial ratios or specified levels of liquidity to which the
Company must adhere. Therefore, the provisions of these governing instruments
should not be considered a significant factor in evaluating whether the Company
will be able to or will comply with its obligations under the Junior
Subordinated Debentures or the Guarantee.

LIMITED VOTING RIGHTS

         Holders of the Preferred Securities will generally have limited voting
rights relating only to the modification of the Preferred Securities and the
exercise of the Trust Issuer's rights as holder of the Junior Subordinated
Debentures and the Guarantee. Holders of the Preferred Securities will not be
entitled to vote to appoint, remove or replace the Property Trustee, the
Delaware Trustee or the Administrative Trustees, as such voting rights are
vested exclusively in the Company as the holder of the Common Securities
(except, with respect to the Property Trustee and the Delaware Trustee, upon the
occurrence of certain events described herein). The Property Trustee, the
Administrative Trustees and the Company may amend the Trust Agreement without
the consent of holders of the Preferred Securities to ensure that the Trust
Issuer will be classified for United States federal income tax purposes as a
grantor trust even if such action adversely affects the interests of such
holders. See "Description of the Preferred Securities--Voting Rights; Amendment
of the Trust Agreement" and "--Removal of the Trust Issuer Trustees."

ABSENCE OF PRIOR PUBLIC MARKET FOR THE PREFERRED SECURITIES; TRADING PRICE AND
TAX CONSIDERATIONS

         There is no current public market for the Preferred Securities. The
Company has applied to list the Preferred Securities on _______ under the symbol
" ." However, one of the requirements for listing and continued listing is the
presence of three market makers for the Preferred Securities. The Company has
been advised that the Underwriter intends to make a market in the Preferred
Securities. However, the Underwriter is not obligated to do so and, if it begins
to make a market in the Preferred Securities, such market making may be
discontinued at any time. Therefore, there is no assurance that an active
trading market will develop for the Preferred Securities or, if such market
develops, that it will be maintained or that the market price will equal or
exceed the public offering price set forth on the cover page of this Prospectus.
If an active market for the Preferred Securities fails to develop or be
sustained, the trading price of the Preferred Securities could be adversely
affected. The public offering price for the Preferred Securities has been
determined through negotiations between the Company and the Underwriter. Prices
for the Preferred Securities will be determined in the marketplace and may be
influenced by many factors, including prevailing interest rates, the liquidity
of the market for the Preferred Securities, investor perceptions of the Company
and general industry and economic conditions.

         Further, should the Company exercise its option to defer any payment of
interest on the Junior Subordinated Debentures, the Preferred Securities would
be likely to trade at prices that do not fully reflect the value of accrued but
unpaid interest with respect to the underlying Junior Subordinated Debentures.
In the event of such a deferral, a holder of

                                       13

<PAGE>   20



Preferred Securities that disposes of its Preferred Securities between record
dates for payments of Distributions (and consequently does not receive a
Distribution from the Trust Issuer for the period prior to such disposition)
will nevertheless be required to include accrued but unpaid interest on the
Junior Subordinated Debentures through the date of disposition as ordinary
income and to add such amount to the adjusted tax basis of the Preferred
Securities disposed of. Upon disposition of the Preferred Securities, such
holder will recognize a capital loss to the extent the selling price (which
might not fully reflect the value of accrued but unpaid interest) is less than
its adjusted tax basis (which will include all accrued but unpaid interest).
Subject to certain limited exceptions, capital losses cannot be applied to
offset ordinary income for United States federal income tax purposes. See
"Certain Federal Income Tax Consequences--Sales or Redemption of the Preferred
Securities."

                RISK FACTORS RELATING TO THE COMPANY AND THE BANK

POTENTIAL IMPACT OF CHANGES IN INTEREST RATES

         The Bank's profitability is dependent to a large extent on its net
interest income, which is the difference between its income on interest-earning
assets and its expense on interest-bearing liabilities. The Bank, like most
financial institutions, is affected by changes in general interest rate levels
and by other economic factors beyond its control. Interest rate risk arises in
part from mismatches (i.e., the interest rate sensitivity gap) between the
dollar amount of repricing or maturing assets and liabilities, and is measured
in terms of the ratio of the interest rate sensitivity gap to total assets. More
assets than liabilities repricing or maturing over a given time frame is
considered asset-sensitive and is reflected as a positive gap, and more
liabilities than assets repricing or maturing over a given time frame is
considered liability-sensitive and is reflected as a negative gap. A
liability-sensitive position (i.e., a negative gap) will generally enhance
earnings in a falling interest rate environment and reduce earnings in a rising
interest rate environment, while an asset-sensitive position (i.e., a positive
gap) will generally enhance earnings in a rising interest rate environment and
will reduce earnings in a falling interest rate environment. Fluctuations in
interest rates are not predictable or controllable and, therefore, there can be
no assurances of the Company's ability to continue to achieve positive net
interest income. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Interest Rate Sensitivity."

RESERVE FOR LOAN LOSSES

         Industry experience indicates that a portion of the Company's loans
will become delinquent and a portion of the loans will require partial or entire
charge-off. Regardless of the underwriting criteria utilized by the Company,
losses may be experienced as a result of various factors beyond the Company's
control, including, among other things, changes in market conditions affecting
the value of properties and problems affecting the credit of the borrower. The
Company's determination of the adequacy of its reserve for loan losses is based
on various considerations, including an analysis of the risk characteristics of
various classifications of loans, previous loan loss experience, specific loans
which would have loan loss potential, delinquency trends, estimated fair value
of the underlying collateral, current economic conditions, the views of the
Company's regulators (who have the authority to require additional reserves),
and geographic and industry loan concentration. There can be no assurance that
the reserve for loan losses will be adequate to cover loan losses or that the
Company will not experience significant losses in its loan portfolios which may
require significant increases to the reserve for loan losses in the future. See
"Business--Loan Loss Experience and Reserve for Loan Losses."

REGULATORY OVERSIGHT

         The Bank is subject to extensive regulation, supervision and
examination by the TDB as its chartering authority and by the FDIC as its
primary federal regulator and the insurer of certain of its deposits. The Bank
is a member of the Federal Home Loan Bank ("FHLB") of Dallas and is subject to
certain limited regulation by the FRB. As the holding company of the Bank, the
Company is also subject to regulation and oversight by the FRB. Such regulation
and supervision governs the activities in which an institution may engage and is
intended primarily for the protection of the FDIC insurance funds and
depositors. Regulatory authorities have been granted extensive discretion in
connection with their supervisory and enforcement activities and regulations
have been implemented which have increased capital requirements, increased
insurance premiums and resulted in increased administrative, professional and
compensation expenses. Any change in the regulatory structure or the applicable
statutes or regulations could have a material adverse impact on the Company and
the Bank and their operations. Additional legislation and regulations may be
enacted or adopted in the future which could significantly affect the powers,
authority and operations of the Company, the Bank and the Bank's competitors,
which in turn could have a material adverse effect on the Bank and its
operations. See "Regulation."


                                       14

<PAGE>   21

COMPETITION

         The banking business in the Bank's trade area, which includes Smith
County and surrounding areas in East Texas, has become increasingly competitive
over the past several years, and the level of competition facing the Company and
the Bank may increase further. The Company and the Bank experience competition
in both lending and attracting funds. Competitors include other banks and
nonbank financial institutions located in their market area. Nonbank competitors
with respect to deposits and deposit-type accounts include savings associations,
credit unions, securities firms, money market funds, life insurance companies
and the mutual funds industry. With respect to loans, the Bank encounters
competition from other banks, savings associations, finance companies, mortgage
bankers and brokers, insurance companies, small loan and credit card companies,
credit unions, pension trusts and securities firms.

         Recent legislation, court decisions and administrative actions have
expanded the areas of business activities in which bank and nonbank financial
institutions may engage. To the extent that such activities are engaged in by
others, the level of competition for the Company and the Bank is expected to
increase. Some competitors are not subject to the same degree of regulation and
supervision as the Company and the Bank.

         Some of the banks and other financial institutions with which the
Company and the Bank compete have capital resources and legal loan limits
substantially in excess of those available to the Company and Bank. Such
institutions can perform certain functions for their customers which the Company
and Bank presently do not offer directly. Although the Company may offer these
services through correspondent banks, the inability to provide such services
directly may be a competitive disadvantage.

YEAR 2000 ("Y2K") COMPLIANCE

         The Company continues to address the Y2K issue as it effects all
software, hardware and other systems associated with ensuring the Company is Y2K
compliant. The Y2K issue could impact any computer or other date sensitive
systems that store dates using a two-digit year format. These systems may
recognize the year "00" as 1900, not 2000. This could produce miscalculations,
generate erroneous data or even cause a system to fail. All software, hardware
and other systems have been identified and categorized as to their business
significance and critical nature. Third parties on which the Company is
dependent for Y2K compliance have been notified. The Company is initiating
communication with large customers to determine what steps they are undertaking
to ensure they will be Y2K compliant before January 1, 2000. Future credit
decisions when appropriate will include a detailed assessment of customers' Y2K
plans for achieving timely compliance. The Company's critical software, hardware
and other systems should be thoroughly tested and Y2K compliant before the end
of 1998. Contingency plans have been made as necessary for appropriate software,
hardware and other systems. It is anticipated the cost associated with the
Company becoming fully Y2K compliant is approximately $750,000. Approximately
80% of this cost will be new equipment and new software which will be
depreciated over a three to five year period.

         The Company presently believes that with modifications to existing
software and conversion to new software, the Y2K issue will not pose significant
operational problems for the Company's computer systems or business operations.
However, if such modifications and conversions are not made, or are not
completed timely, the Y2K issue could have a material adverse impact on the
operations of the Company. In addition, there can be no assurance that
unforeseen problems in the Company's computer systems, or the systems of third
parties on which the Company's computers rely, will not have an adverse effect
on the Company's systems or operations.

         Additionally, the failure of a commercial bank customer to prepare for
Y2K compatability could have a significant adverse effect on such customer's
operations and profitability, in turn inhibiting its ability to repay loans in
accordance with their terms. Until sufficient information is accumulated from
customers of the Bank to enable the Company to assess the degree to which
customers' operations are susceptible to potential problems relating to the Y2K
issue, the Company will be unable to quantify the potential for losses from
loans to its commercial customers arising from the Y2K issue.

GEOGRAPHIC CONCENTRATION

         The operations of the Company and the Bank are conducted primarily in
Smith County and surrounding counties in East Texas. Moreover, substantially all
of the Bank's real estate loans are secured by properties located primarily in
East Texas, and substantially all of the Bank's loans are made to borrowers who
live in and conduct business in East Texas. A weakening of the East Texas real
estate market or the local or national economy could result in an increase in
the number of borrowers who default on their loans and a reduction in the value
of the collateral securing the loans, which in turn could have a material
adverse effect on the Bank and its results of operations.


                                       15

<PAGE>   22



GROWTH OF THE BANK

         The Bank has recently opened several branch facilities and expects to
further expand its branch network by opening two additional branch facilities in
a new market in 1998. See "Business--Business Strategy." There can be no
assurance that the Bank will be able to adequately and profitably manage such
growth or entrance into a new market. The costs incurred to start up the new
branch facilities, as well as the additional costs associated with operating
these facilities, will increase the Bank's noninterest expense and may decrease
the Company's earnings in the short term, and may therefore adversely impact the
Bank's ability to pay dividends to the Company, the Company's ability to pay
interest on the Junior Subordinated Debentures and the Trust Issuer's ability to
make Distributions on the Preferred Securities.

                                       16

<PAGE>   23



                                 USE OF PROCEEDS

         All of the proceeds from the sale of the Preferred Securities will be
invested by the Trust Issuer in Junior Subordinated Debentures. The net proceeds
to the Company from the sale of the Junior Subordinated Debentures are estimated
to be approximately $___ million ($____ million if the Underwriter's
over-allotment option is exercised in full, after deduction of estimated
expenses). The Company intends to use the net proceeds from the sale of the
Junior Subordinated Debentures for general corporate purposes, including, but
not limited to, capital contributions to the Bank to support growth and for
working capital, the possible repurchase of shares of the Company's common
stock, subject to acceptable market conditions, and acquisitions by either the
Company or the Bank (although there presently exist no agreements or
understandings with respect to any such acquisition).

                       MARKET FOR THE PREFERRED SECURITIES

         The Company has applied to list the Preferred Securities on _______
under the symbol "_____." Although the Underwriter has informed the Company that
it presently intends to make a market in the Preferred Securities, the
Underwriter is not obligated to do so and, if it begins to make a market in the
Preferred Securities, any such market making may be discontinued at any time.
Accordingly, there is no assurance that an active and liquid trading market will
develop or, if developed, that such a market will be sustained. The offering
price and distribution rate have been determined by negotiations among
representatives of the Company and the Underwriter, and the offering price of
the Preferred Securities may not be indicative of the market price following the
offering. See "Underwriting" and "Risk Factors--Absence of Prior Public Market
for the Preferred Securities; Trading Price and Tax Considerations."

                              ACCOUNTING TREATMENT

         For financial reporting purposes, the Trust Issuer will be treated as a
subsidiary of the Company, and accordingly the Trust Issuer's financial
statements will be included in the consolidated financial statements of the
Company. For financial reporting purposes, the Company will record distributions
payable on the Preferred Securities as an interest expense in the consolidated
statements of income. In its future financial reports, the Company will: (i)
present the Preferred Securities on the Company's statements of financial
condition as a separate line item entitled "Guaranteed Preferred Beneficial
Interests in the Company's Junior Subordinated Debentures;" (ii) include in a
footnote to the financial statements disclosure that the sole assets of the
Trust Issuer are the Junior Subordinated Debentures specifying the principal
amount, interest rate and maturity date of Junior Subordinated Debentures held;
and (iii) if Staff Accounting Bulletin No. 53 treatment is sought, include, in a
footnote to the financial statements, disclosure that (a) the Trust Issuer is
wholly owned, (b) the sole assets of the Trust Issuer are the Junior
Subordinated Debentures, and (c) the obligations of the Company under the Junior
Subordinated Debentures, the Indenture, the Trust Agreement and the Guarantee,
in the aggregate, constitute a full and unconditional guarantee by the Company
of the Trust Issuer's obligations under the Preferred Securities.

                                       17

<PAGE>   24



                                 CAPITALIZATION

         The following table sets forth the consolidated capitalization of the
Company as of December 31, 1997, and as adjusted to give effect to the
consummation of the offering of the Preferred Securities. The following data
should be read in conjunction with the consolidated financial statements and
notes thereto of the Company included elsewhere in this Prospectus.


<TABLE>
<CAPTION>
                                                                                           DECEMBER 31, 1997
                                                                                       --------------------------
                                                                                                           AS
                                                                                        ACTUAL           ADJUSTED
                                                                                       ---------        ---------
                                                                                            (IN THOUSANDS)
<S>                                                                                    <C>              <C>      
Deposits .......................................................................       $ 462,674        $ 462,674

BORROWINGS:
   FHLB Dallas advances ........................................................          57,547           57,547
   Federal funds purchased .....................................................           3,884            3,884
   Other obligations ...........................................................           1,647            1,647
                                                                                       ---------        ---------
   Total deposits and borrowed funds ...........................................         525,752          525,752
                                                                                       ---------        ---------
   Guaranteed Preferred Beneficial Interests in the Company's
      Junior Subordinated Debentures (1) .......................................              --           20,000
                                                                                       ---------        ---------
SHAREHOLDERS' EQUITY:
   Common stock, $2.50 par, 6,000,000 shares authorized, 3,496,269 issued and
      3,379,519 shares outstanding (excluding
      shares held in treasury of 116,750) ......................................           8,740            8,740
   Additional paid-in capital ..................................................          21,290           21,290
   Retained earnings, partially restricted .....................................          10,414           10,414
   Net unrealized gains on securities available for sale, net of tax ...........           1,407            1,407
   Treasury stock, at cost .....................................................          (1,820)          (1,820)
                                                                                       ---------        ---------
      Total shareholders' equity ...............................................          40,031           40,031
                                                                                       ---------        ---------
</TABLE>


(1)    Preferred Securities of the Trust Issuer representing beneficial
       interests in $20,000,000 aggregate principal amount of the Junior
       Subordinated Debentures issued by the Company to the Trust Issuer. The
       Junior Subordinated Debentures will bear interest at the annual rate of %
       on the principal amount thereof, payable quarterly and will mature on
       June 30, 2028. The Company will own all of the Common Securities of the
       Trust Issuer.

                                       18

<PAGE>   25



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

     The following discussion and analysis provides a comparison of the
Company's financial condition as of December 31, 1997 and 1996 and results of
operations for the years ended December 31, 1997, 1996 and 1995. This discussion
should be read in conjunction with the consolidated financial statements and
related notes included elsewhere in this Prospectus. All share data has been
adjusted to give retroactive recognition to stock dividends.

FINANCIAL CONDITION

     Total assets increased $88.5 million or 18.3% to $571.1 million at December
31, 1997 from $482.7 million at December 31, 1996. The increase was primarily
attributable to a $37.8 million increase in net loans and a $42.1 million
increase in the securities portfolio. At December 31, 1997, net loans were
$292.7 million compared to $254.9 million at December 31, 1996. The securities
portfolio totaled $216.5 million at December 31, 1997 compared to $174.4 million
at December 31, 1996. The increase in loans and securities was funded primarily
by retail deposit growth and FHLB Dallas advances.

     Nonperforming assets at December 31, 1997 totaled $3.1 million,
representing .5% of total assets, compared to $2.9 million or .6% of total
assets at December 31, 1996. Nonaccruing loans decreased to $1.3 million and the
ratio of nonaccruing loans to total loans decreased to .5% at December 31, 1997
as compared to $1.5 million or .6% at December 31, 1996. Real estate owned
increased to $364,000 at December 31, 1997 from $273,000 at December 31, 1996.

     Deposits increased $36.7 million to $462.7 million at December 31, 1997
from $426.0 million at December 31, 1996. FHLB Dallas advances were $57.6
million at December 31, 1997, a $48.5 million increase from $9.1 million at
December 31, 1996. Other borrowings at December 31, 1997 and 1996 totaled $5.5
million and $6.8 million, respectively, and consisted of short-term and
overnight borrowings.

     Shareholders' equity at December 31, 1997 totaled $40.0 million compared to
$36.6 million at December 31, 1996. The increase primarily reflects the net
income recorded for the year ended December 31, 1997, partially offset by the
repurchase of 65,464 shares of the Company's outstanding Common Stock at an
average price of $17.62 per share and the declaration of cash dividends.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

     OVERVIEW. During the year ended December 31, 1997, the Company's net income
increased $.8 million or 19.0% to $5.0 million, from $4.2 million for the same
period in 1996. The increase in net income was primarily attributable to an
increase in net interest income and noninterest income which was partially
offset by an increase in noninterest expense and provision for loan losses. The
results of operations of the Company are primarily those of the Bank.

     NET INTEREST INCOME. Net interest income is the principal source of the
Company's earnings stream and represents the difference or spread between
interest and fee income generated from interest earning assets and the interest
expense paid on deposits and borrowed funds. Fluctuations in interest rates as
well as volume and mix changes in interest earning assets and interest bearing
liabilities materially impact net interest income.

     Net interest income increased for the year ended December 31, 1997 $1.6
million or 9.1% compared to the same period in 1996. Interest income for the
year ended December 31, 1997 increased $3.4 million or 10.7% to $35.2 million
compared to the same period in 1996. The increased interest income in 1997 was
attributable to the increase in average interest earning assets during the year.
Average interest earning assets, totaling $461.5 million for the year ended
December 31, 1997, increased $43.4 million or 10.4% over the same period in
1996, primarily as a result of increases in average loans. During the year ended
December 31, 1997 the mix of the Company's interest earning assets reflected an
increase in loans compared to the prior year end as loans averaged 59.5% of
total average interest earning assets compared to 58.3% during 1996. Securities
averaged 39.9% of the total and other interest earning asset categories averaged
 .6% for the year ended December 31, 1997. During 1996 the comparable mix was
40.7% in securities and 1.0% in the other interest earning asset categories. The
average yield on the average interest earning assets increased one basis point
during the year ended December 31, 1997 as compared to 1996. The increase in
interest income on loans of $2.5 million or 11.9% was the result of the increase
in average loans during 1997. Interest income on securities increased $.9
million in 1997 or 8.9% compared to 1996 primarily due to the increase in the
average securities during 1997.

       The increase in interest expense for the year ended December 31, 1997 of
$1.8 million or 12.6% was attributable to

                                       19

<PAGE>   26



an increase in average interest bearing liabilities of $35.0 million or 10.5%
along with the increase in the average rate paid on interest bearing liabilities
of eight basis points. Average time deposits increased $16.7 million or 8.8%
while the average rate paid increased two basis points along with an increase in
average interest bearing demand deposits of $5.5 million or 5.0% and an increase
in average savings deposits of $1.1 million or 7.1%. Average noninterest bearing
demand deposits increased during 1997 $8.6 million or 10.1%. The latter three
categories, which are considered the lowest cost deposits, comprised 52.4% of
total average deposits during the year ended December 31, 1997 compared to 52.8%
during 1996 and 54.3% during 1995. The increase in average total deposits is
reflective of overall bank growth and branch expansion and was the primary
source of funding the increase in average loans. Average long-term and
short-term interest bearing liabilities other than deposits increased $11.7
million or 79.6% which contributed to the higher interest expense in 1997.

       The following table sets forth the Company's deposit averages by category
for the years ended December 31, 1997, 1996 and 1995:

<TABLE>
<CAPTION>
                                                                     COMPOSITION OF DEPOSITS
                                                                     YEAR ENDED DECEMBER 31,
                                                                     -----------------------
                                                        1997                  1996                 1995
                                                        ----                  ----                 ----
                                                     AVG.     AVG.       AVG.        AVG.      AVG         AVG
                                                    BALANCE   RATE      BALANCE     RATE      BALANCE      RATE
                                                                      (DOLLARS IN THOUSANDS)
<S>                                                 <C>       <C>        <C>        <C>      <C>           <C>  
Noninterest Bearing Demand Deposits                $ 94,102     N/A    $  85,453      N/A   $ 78,338        N/A
Interest Bearing Demand Deposits                    117,496   2.78%      111,950    2.76%    111,063       2.78%
Savings Deposits                                     16,173   2.76%       15,105    2.76%     14,931       2.76%
Time Deposits                                       206,776   5.32%      190,094    5.30%    172,228       5.11%
                                                   --------            ---------            --------           

     Total Deposits                                $434,547   3.39%    $ 402,602    3.38%   $376,560       3.26%
                                                   ========            =========            ========           
</TABLE>


         PROVISION FOR LOAN LOSSES. The provision for loan losses for the year
ended December 31, 1997 was $1.0 million compared to $.5 million for the year
ended December 31, 1996. For the year ended December 31, 1997, the Bank had net
charge-offs of loans of $.9 million, an increase of 55.6% compared to the same
period in 1996. For the year ended 1996, net charge-offs on loans were $.6
million.

       The increase in net charge-offs during 1997 occurred primarily as a
result of the increase in loans over the past four years which have grown $112
million, consumer bankruptcies which caused the charge-offs for loans to
individuals to remain consistent with the prior year's increased level and three
commercial loans which comprised the majority of the increase in charge-offs for
commercial loans.

       As of December 31, 1997, the Company's review of the loan portfolio
indicated that a loan loss reserve of $3.4 million was adequate.

       NONINTEREST INCOME. Noninterest income is an important source of
earnings. The Company intends to maximize noninterest income in the future by
looking for new fee income services to provide customers, by continuing to
review service charge schedules and by competitively and profitably pricing
those services. The following schedule lists the accounts from which noninterest
income was derived, gives totals for these accounts for the year ended December
31, 1997 and the comparable year ended December 31, 1996 and indicates the
percentage changes:

<TABLE>
<CAPTION>
                                                                YEAR ENDED
                                                               DECEMBER 31,
                                                               ------------
                                                                               PERCENT
                                                     1997         1996         CHANGE
                                                    ------       ------        ------
                                                          (DOLLARS IN THOUSANDS)
<S>                                                 <C>          <C>           <C>   
Deposit services ............................       $4,001       $2,821         41.8%
Gains on securities available for sale ......          233          132         76.5%
Other .......................................        1,432        1,180         21.4%
                                                    ------       ------         ---- 

Total noninterest income ....................       $5,666       $4,133         37.1%
                                                    ======       ======         ==== 
</TABLE>

       Noninterest income consists of revenues generated from a broad range of
financial services and activities including fee based services. Total
noninterest income for the year ended December 31, 1997 increased 37.1% or $1.5
million

                                       20

<PAGE>   27



compared to 1996. Securities gains increased $.1 million or 76.5% from 1996. Of
the $233,000 in net securities gains from the available for sale ("AFS")
portfolio during 1997, there were $376,000 in realized gains and $143,000 in
realized losses. The Company sold securities out of its AFS portfolio to
accomplish Asset Liability Committee ("ALCO") and investment portfolio
objectives aimed at maximizing the total return of the securities portfolio. The
increase in deposit services income of $1.2 million or 41.8% was a result of the
introduction of a new overdraft privilege program, increased numbers of deposit
accounts and increased deposit activity. Other noninterest income increased $.3
million or 21.4% primarily as a result of increases in trust income and mortgage
servicing release fees.

       NONINTEREST EXPENSE. The following schedule lists the accounts which
comprise noninterest expense, gives totals for these accounts for the year ended
December 31, 1997 and the comparable year ended December 31, 1996 and indicates
the percentage changes:

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                            -----------------------
                                                                                           PERCENT
                                                             1997             1996         CHANGE
                                                             -----            ----         ------
                                                                (IN THOUSANDS)
<S>                                                       <C>            <C>              <C>  
Salaries and employee benefits........................    $    9,889     $     9,382           5.4% 
Net occupancy expense.................................         2,089           1,749          19.4% 
Equipment expense.....................................           414             321          29.0% 
Advertising, travel and entertainment.................         1,006             956           5.2% 
Supplies..............................................           440             436            .9% 
FDIC insurance........................................            52               2        2500.0% 
Postage...............................................           331             301          10.0% 
Other.................................................         2,707           2,219          22.0% 
                                                          ----------     -----------          

Total noninterest expense.............................    $   16,928     $    15,366          10.2% 
                                                          ==========     ===========            
</TABLE>


       Noninterest expense for the year ended December 31, 1997 increased $1.6
million or 10.2% when compared to the year ended December 31, 1996. Salaries and
employee benefits increased $.5 million or 5.4% due to several factors. Higher
direct salary expense including payroll taxes of $.8 million was offset by lower
retirement expense. The increase is reflective of personnel additions to staff
the three new branches opened in the second half of 1996, overall bank growth
and pay increases. Health insurance expense increased $28,000 or 3.2% in 1997
compared to the same period in 1996. Retirement expense decreased $.3 million or
34.1% for the year ended December 31, 1997.

       Net occupancy expense increased $.3 million or 19.4% for the year ended
December 31, 1997 compared to the same period in 1996, largely due to higher
real estate taxes, depreciation expense and associated operating costs as a
result of the three new branches opened in 1996 and the expansion of the bank
headquarters completed during 1997.

       Equipment expense increased $.1 million or 29.0% for the year ended
December 31, 1997 when compared to 1996 due to increased equipment usage at the
three new branch locations opened in 1996 and increased equipment costs
associated with equipment maintenance.

       Advertising expense increased $.1 million or 5.2% for the year ended
December 31, 1997 compared to the same period in 1996. The increase occurred due
to increases in direct advertising during 1997 as a result of the opening of the
three new branches in 1996 and new products introduced in 1997. Donations also
increased during the year ended December 31, 1997 and are included in this
total.

       FDIC insurance expense increased $50,000 or 2,500% for the year ended
December 31, 1997 compared to the year ended December 31, 1996. The Company
anticipates the percentage of change will decrease in 1998. During the year
ended December 31, 1996, the insurance expense was reduced to $500 per quarter
as a result of the BIF being fully funded. Congress passed legislation which
increased FDIC insurance expense to $1.26 per hundred dollars of deposits in
1997 to pay for a portion of the Savings and Loan bailout.

       Other expense increased $.5 million or 22.0% during the year ended
December 31, 1997 compared to 1996. The increase was due primarily to increased
professional fees paid during 1997 for additional internal auditing, data
processing programming, compliance reviews, loan loss reviews and consulting
fees paid in relation to the introduction of the overdraft privilege product.

                                       21

<PAGE>   28



       INCOME TAXES. Income tax expense was $1.7 million for the year ended
December 31, 1997 and represented a $.3 million or 17.5% increase from the year
ended December 31, 1996. The increased income tax expense was primarily a result
of higher pre-tax income.

       Management believes that the Company will generate sufficient future
taxable income to realize the entire deferred tax asset and that realization of
net deferred tax asset is more likely than not.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

    OVERVIEW. During the year ended December 31, 1996, the Company's net income
decreased $.3 million or 7.2% to $4.2 million, compared to $4.5 million for the
same period in 1995. The decrease in net income was primarily attributable to a
net increase in the reserve for loan losses provision expense, expenses
associated with the opening of three new branches and a decrease in gains
realized on the sale of securities which was partially offset by an increase in
net interest income and noninterest income.

       NET INTEREST INCOME. Net interest income increased for the year ended
December 31, 1996 $.6 million or 3.7% compared to the same period in 1995.
Interest income for the year ended December 31, 1996 increased $2.2 million or
7.4% to $31.8 million compared to the same period in 1995. The increased
interest income in 1996 was attributable to the increase in average interest
earning assets during the year. The average yield on average interest earning
assets decreased 4 basis points during the year ended December 31, 1996 as
compared to 1995. The increase in interest income on loans of $2.5 million or
13.0% was the result of the increase in average loans during 1996. Interest
income on securities increased $.1 million in 1996 or 1.1% compared to 1995
primarily due to the increase in the average securities during 1996.

       The increase in interest expense for the year ended December 31, 1996 of
$1.6 million or 12.2% was attributable to an increase in average interest
bearing liabilities of $22.9 million or 7.4% along with the increase in the
average rate paid on interest bearing liabilities of 18 basis points. Average
time deposits increased $17.9 million or 10.4% while the average rate paid
increased 19 basis points along with the increase in average interest bearing
demand deposits of $.9 million. Average long-term interest bearing liabilities
increased $3.1 million which contributed to the higher interest expense in 1996.

       PROVISION FOR LOAN LOSSES. The provision for loan losses for the years
ended December 31, 1996 and 1995 were $500,000 and ($300,000), respectively. For
the year ended December 31, 1996, the Bank had net charge-offs of loans of
$568,000 an increase of 218.3% compared to December 31, 1995. For the year ended
December 31, 1995, net recoveries on loans were $480,000. The increase in net
charge-offs for 1996 occurred primarily as a result of significant recoveries
realized during 1995. Also contributing to the increase was an increase in
charged-off loans. In 1995, due to the significant recoveries realized, the
Company recorded a negative provision for loan loss of $300,000. The $500,000
provision for loan loss in 1996 is reflective of increased charge-offs and
smaller recoveries in 1996 compared to 1995 and an increase in the loan
portfolio of $29.4 million.

       NONINTEREST INCOME. Total noninterest income for the year ended December
31, 1996 increased 6.7% or $.3 million compared to 1995. Securities gains
decreased $.1 million or 40.3% from 1995. Of the $132,000 in net securities
gains from the AFS portfolio in 1996, there were $199,000 in realized gains and
$67,000 in realized losses. The Company sold securities out of its AFS portfolio
to accomplish ALCO and investment portfolio objectives aimed at maximizing the
total return of the securities portfolio. The increase in deposit services
income of $69,000 or 2.5% was a result of increased deposit activity. Other
noninterest income increased $279,000 or 31% primarily as a result of increases
in trust income, credit life commissions and mortgage servicing release fees.

       NONINTEREST EXPENSE. Noninterest expense for the year ended December 31,
1996 increased $.7 million or 4.7% when compared to the year ended December 31,
1995. Salaries and employee benefits increased $.8 million or 9.8% due to
several factors. Higher direct salary expense including payroll taxes
represented $.7 million of the increase. The increase is reflective of personnel
additions to staff the three new branches opened during 1996 along with overall
bank growth, pay increases and an increased commitment to residential mortgage
lending. Health insurance expense increased $.2 million or 27.2% in 1996
compared to the same period in 1995. Retirement expense decreased $10,000 or
1.2% for the year ended December 31, 1996.

       Net occupancy expense increased $.1 million or 6.9% for the year ended
December 31, 1996 compared to the same period in 1995, largely due to higher
real estate taxes, depreciation expense and associated operating costs as a
result of three new branches opened in 1996 and the opening of the new motor
bank facility at Gentry Parkway.

                                       22

<PAGE>   29



       Advertising expense increased $.1 million or 7.7% for the year ended
December 31, 1996 compared to the same period in 1995. The increase occurred due
to increases in direct advertising during 1996 as a result of the opening of
three new branches in 1996 and the new motor bank facility. Donations also
increased during the year ended December 31, 1996 and are included in this
total.

       FDIC insurance decreased $.4 million or 99.5% for the year ended December
31, 1996 compared to the year ended December 31, 1995. During August 1995, the
FDIC announced a decrease in the insurance premiums from $.23 per hundred
dollars of deposits insured to $.04 per hundred dollars insured effective June
1, 1995. As a result, the Bank received a refund of $230,000 in September 1995
and the monthly expense for the remainder of the year decreased significantly.
During the year ended December 31, 1996, the insurance expense was reduced to
$500 per quarter as a result of the Bank Insurance Fund being fully funded.

       INCOME TAXES. Income tax expense was $1,437,000 for the year ended
December 31, 1996 and represented a $276,000 or 16.1% decrease from the year
ended December 31, 1995. The decreased income tax expense primarily is a result
of lower pre-tax income and an increase in tax free income in 1996.

AVERAGE BALANCE SHEET

       The following table presents average balance sheet amounts and average
yields for the years ended December 31, 1997, 1996 and 1995. Two major
components affecting the Company's earnings are the interest earning assets and
interest bearing liabilities. A summary of average interest earning assets and
interest bearing liabilities is set forth below, together with the average yield
on the interest earning assets and the average cost of the interest bearing
liabilities.


                                       23

<PAGE>   30




                       AVERAGE BALANCES AND INTEREST RATES


<TABLE>
<CAPTION>
                                                     YEAR ENDED 1997            YEAR ENDED 1996              YEAR ENDED 1995
                                                     ---------------            ---------------              ---------------
                                              AVG.                  AVG.     AVG.              AVG.    AVG.                  AVG.
                                            BALANCE     INTEREST    RATE   BALANCE  INTEREST   RATE   BALANCE   INTEREST    RATE
                                           ---------   ---------    -----  -------- --------  -----  --------   --------    -----
                                                                     (DOLLARS IN THOUSANDS)
<S>                                           <C>          <C>      <C>      <C>       <C>     <C>     <C>         <C>      <C>  
INTEREST EARNING ASSETS:
Loans(1) ...............................   $ 274,577   $  23,847    8.68%   $243,92   21,314   8.74% $209,141     18,861    9.02%
Securities:
Investment Securities (Taxable) ........      20,242       1,238    6.12%    24,398    1,476   6.05%   45,452      2,839    6.25%
Investment Securities (Tax-Exempt)(2) ..      39,819       3,049    7.66%    37,721    2,805   7.44%   29,965      2,221    7.41%
Mortgage-backed Sec ....................     121,546       7,729    6.36%   105,923    6,756   6.38%   89,151      5,673    6.36%
Marketable Equity Sec ..................       2,415         129    5.34%     2,179      119   5.46%    2,068        121    5.85%
Interest Earning Deposits ..............         602          34    5.65%       381       21   5.51%      411         25    6.08%
Federal Funds Sold .....................       2,285         129    5.65%     3,547      188   5.30%    9,576        567    5.92%
                                           ---------   ---------          ---------  -------          --------  --------    
Total Interest Earning Assets ..........     461,486      36,155    7.83%   418,074   32,679   7.82%  385,764     30,307    7.86%
                                                       ---------                     -------                    --------    
NONINTEREST EARNING ASSETS:
Cash and Due From Banks ................      23,945                         22,160                    20,899
Bank Premises and Equipment ............      14,693                         12,325                    10,717
Other Assets ...........................       8,950                          7,257                     7,574
Less:  Reserve for Loan Loss ...........      (3,355)                        (3,282)                   (3,323)
                                           ---------                      ---------                  --------
Total Assets ...........................   $ 505,719                      $ 456,534                  $421,631
                                           =========                      =========                  ========

INTEREST BEARING LIABILITIES:
 Savings Deposits ......................   $  16,173         446    2.76%    15,105      417   2.76% $ 14,931        412    2.76%
 Time Deposits .........................     206,776      11,000    5.32%   190,094   10,083   5.30%  172,228      8,793    5.11%
 Interest Bearing
  Demand Deposits ......................     117,496       3,265    2.78%   111,950    3,093   2.76%  111,063      3,085    2.78%
 Short-term Interest
  Bearing Liabilities ..................      14,222         773    5.44%     2,671      132   4.94%    1,790         94    5.25%
 Long-term Interest Bearing
  Liabilities-FHLB Dallas ..............      12,151         721    5.93%    12,010      672   5.60%    8,912        453    5.08%
                                           ---------     -------          ---------  -------         --------   --------
 Total Interest Bearing Liabilities ....     366,818      16,205    4.42%   331,830   14,397   4.34%  308,924     12,837    4.16%
                                                         -------          ---------  -------                    --------

NONINTEREST BEARING
LIABILITIES:
Demand Deposits ........................      94,102                         85,453                   78,338
Other Liabilities ......................       6,873                          4,788                    4,184
                                           ---------                      ---------                  -------
Total Liabilities ......................     467,793                        422,071                  391,446

SHAREHOLDERS' EQUITY ...................      37,926                         34,463                   30,185
                                           ---------                      ---------                  -------

TOTAL LIABILITIES AND
 SHAREHOLDERS' EQUITY ..................   $ 505,719                      $ 456,534                 $421,631
                                           =========                      =========                 ========

NET INTEREST INCOME ....................                 $19,950                     $18,282                    $ 17,470
                                                         =======                     =======                    ========

NET YIELD ON AVERAGE
 EARNING ASSETS ........................                            4.32%                      4.37%                        4.53%
                                                                   =====                     ======                        =====
</TABLE>


(1)  Loans are shown net of unearned discount. Interest on loans includes fees
     on loans which are not material in amount.

(2)  Interest income includes taxable-equivalent adjustments of $988, $907 and
     $717 as of December 31, 1997, 1996 and 1995, respectively.

Note: For the years ended December 31, 1997, 1996 and 1995, loans totaling
     $1,344,000, $1,533,000, and $1,256,000, respectively, were on nonaccrual
     status. The policy is to reverse previously accrued but unpaid interest on
     nonaccrual loans; thereafter, interest income is recorded to the extent
     received when appropriate.



                                       24

<PAGE>   31



ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE

        The following tables set forth the dollar amount of increase (decrease)
in interest income and interest expense resulting from changes in the volume of
interest earning assets and interest bearing liabilities and from changes in
yields and rates (in thousands):

<TABLE>
<CAPTION>
                                                                                      YEAR ENDED DECEMBER 31,
                                                                                       1997 COMPARED TO 1996
                                                                                       ---------------------
                                                                                                              TOTAL
                                                                                AVERAGE        AVERAGE       INCREASE
                                                                                 VOLUME          RATE       (DECREASE)
                                                                                -------        -------        -------
<S>                                                                             <C>            <C>            <C>    
INTEREST INCOME:
  Loans .................................................................       $ 2,663        $  (130)       $ 2,533
  Investment Securities (Taxable) .......................................          (254)            16           (238)
  Investment Securities (Tax-Exempt) (1) ................................           166             78            244
  Mortgage-backed Securities ............................................           994            (21)           973
  Marketable Equity Securities ..........................................            13             (3)            10
  Federal Funds Sold ....................................................           (72)            13            (59)
  Interest Earning Deposits .............................................            12              1             13
                                                                                -------        -------        -------
    Total Interest Income ...............................................         3,522            (46)         3,476
                                                                                -------        -------        -------

INTEREST EXPENSE:
  Savings Deposits ......................................................            29                            29
  Time Deposits .........................................................           887             30            917
  Interest Bearing Demand Deposits ......................................           154             18            172
  Federal Funds Purchased and Other
    Interest Bearing Liabilities ........................................           627             14            641
  FHLB Dallas Advances ..................................................             8             41             49
                                                                                -------        -------        -------
    Total Interest Expense ..............................................         1,705            103          1,808
                                                                                -------        -------        -------
  Net Interest Earnings .................................................       $ 1,817        $  (149)       $ 1,668
                                                                                =======        =======        =======
</TABLE>


<TABLE>
<CAPTION>
                                                                                      YEAR ENDED DECEMBER 31,
                                                                                       1996 COMPARED TO 1995
                                                                                       ---------------------
                                                                                                             TOTAL
                                                                                AVERAGE       AVERAGE       INCREASE
                                                                                VOLUME          RATE        (DECREASE)
                                                                                -------        -------      ----------
<S>                                                                             <C>            <C>           <C>    
INTEREST INCOME:
  Loans .................................................................       $ 3,055        $  (602)       $ 2,453
  Investment Securities (Taxable) .......................................        (1,276)           (87)        (1,363)
  Investment Securities (Tax-Exempt) (1) ................................           577              7            584
  Mortgage-backed Securities ............................................         1,070            (13)         1,083
  Marketable Equity Securities ..........................................             8            (10)            (2)
  Federal Funds Sold ....................................................          (325)           (54)          (379)
  Interest Earning Deposits .............................................            (2)            (2)            (4)
                                                                                -------        -------        -------
    Total Interest Income ...............................................         3,107           (735)         2,372
                                                                                -------        -------        -------

INTEREST EXPENSE:
  Savings Deposits ......................................................             5                             5
  Time Deposits .........................................................           938            352          1,290
  Interest Bearing Demand Deposits ......................................            25            (17)             8
  Federal Funds Purchased and Other
    Interest Bearing Liabilities ........................................            43             (5)            38
  FHLB Dallas Advances ..................................................           170             49            219
                                                                                -------        -------        -------
    Total Interest Expense ..............................................         1,181            379          1,560
                                                                                -------        -------        -------
  Net Interest Earnings .................................................       $ 1,926        $(1,114)       $   812
                                                                                =======        =======        =======
</TABLE>


(1)   Interest rates on securities which are nontaxable for federal income tax
      purposes are presented on a taxable equivalent basis.

NOTE: Volume/Rate variances (change in volume times change in rate) have been
      allocated to amounts attributable to changes in volumes and to changes in
      rates in proportion to the amounts directly attributable to those changes.

       The Company's results of operations are dependent primarily on net
interest income, which is the difference between the income earned on its loan,
securities and investment portfolios and its cost of funds, consisting of the
interest paid on deposits and borrowings. Results of operations are also
affected by the Company's noninterest income, provision for loan losses and
noninterest expenses. General economic and competitive conditions, particularly
changes in interest rates, government policies and actions of regulatory
authorities, also significantly affect the Company's results of operations.


                                       25

<PAGE>   32



Future changes in applicable law, regulations or government policies may also
have a material impact on the Company.

ASSET AND LIABILITY MANAGEMENT

       The primary objective of monitoring the Company's interest rate
sensitivity, or risk, is to provide management the tools necessary to manage the
balance sheet to minimize adverse changes in net interest income as a result of
changes in the direction and level of interest rates. FRB monetary control
efforts, the effects of deregulation and legislative changes have been
significant factors affecting the task of managing interest rate sensitivity
positions in recent years.

       Interest rate sensitivity is a function of the repricing characteristics
of the Company's portfolio of assets and liabilities. These repricing
characteristics are the time frames at which interest earning assets and
interest bearing liabilities are subject to changes in interest rates either at
repricing, replacement or maturity. Sensitivity is measured as the difference
between the volumes of assets and liabilities in the Company's current portfolio
that are subject to repricing in future time periods. The differences are
referred to as interest sensitivity gaps and are usually calculated separately
for various segments of time and on a cumulative basis. Any excess of assets or
liabilities results in an interest sensitivity gap. A positive gap denotes net
asset sensitivity and a negative gap represents net liability sensitivity. The
table on page 28 with respect to rate sensitive assets and liabilities shows
interest sensitivity gaps for four different intervals as of December 31, 1997.

       The interest rate risk inherent in assets and liabilities may be
determined by analyzing the extent to which such assets and liabilities are
"interest rate sensitive" and by measuring an institution's interest rate
sensitivity "gap." An asset or liability is said to be interest rate sensitive
within a defined time period if it matures or reprices within that period. The
difference or mismatch between the amount of interest-earning assets maturing or
repricing within a defined period and the amount of interest-bearing liabilities
maturing or repricing within the same period is defined as the interest rate
sensitivity gap. An institution is considered to have a negative gap if the
amount of interest-bearing liabilities maturing or repricing within a specified
time period exceeds the amount of interest-earning assets maturing or repricing
within the same period. If more interest earning assets than interest bearing
liabilities mature or reprice within a specified period, then the institution is
considered to have a positive gap. Accordingly, in a rising interest rate
environment in an institution with a negative gap, the cost of its rate
sensitive liabilities would theoretically rise at a faster pace than the yield
on its rate sensitive assets, thereby diminishing future net interest income. In
a falling interest rate environment, a negative gap would indicate that the cost
of rate sensitive liabilities would decline at a faster pace than the yield on
rate sensitive assets and improve net interest income. For an institution with a
positive gap, the reverse would be expected.

       In an attempt to manage its exposure to changes in interest rates,
management closely monitors the Company's exposure to interest rate risk. ALCO
meets regularly and reviews the Company's interest rate risk position and makes
recommendations for adjusting this position. In addition, the Board of Directors
of the Company reviews the Company's asset/liability position on a monthly
basis.

                                       26

<PAGE>   33



       The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. Except for the
effects of prepayments and scheduled principal amortization on mortgage related
assets, the table presents principal cash flows and related weighted average
interest rates by the contractual term to maturity. Nonaccrual loans are not
included in the loan totals. All instruments are classified as other than held
for trading.


<TABLE>
<CAPTION>
                                                       EXPECTED MATURITY DATE
                                                       YEAR ENDING DECEMBER 31,
                                                                                                           FAIR
                              1998        1999       2000       2001       2002    THEREAFTER   TOTAL      VALUE
                              ----        ----       ----       ----       ----    ----------   -----      -----           
                                                             (DOLLARS IN THOUSANDS)
<S>                         <C>        <C>        <C>        <C>        <C>        <C>        <C>         <C>      
Fixed Rate Loans.........   $ 80,763   $  49,788  $  31,377  $  21,740  $  12,446  $  42,897  $ 239,011   $ 238,073
                                9.11%       9.04%      9.01%      8.86%      8.64%      8.36%      8.90%
Adjustable Rate Loans....     32,780       2,378      3,340      1,512      1,715     13,955     55,680      55,680
                                9.84%      10.00%     10.05%      9.75%     10.06%      9.77%      9.85%
Mortgage-backed
Securities   ...........      40,397      33,827     24,405     16,730      9,131     16,923    141,413     141,439
                                6.49%       6.51%      6.49%      6.45%      6.57%      6.45%      6.49%
Investments and Other
Interest Earning Assets..     30,023       4,549      5,794      1,691        683     35,438     78,178      78,173
                                5.85%       7.55%      7.46%      7.39%      7.87%      7.72%      6.97%
Total Interest
Earning Assets...........   $183,963   $  90,542  $  64,916  $  41,673  $  23,975  $ 109,213  $ 514,282   $ 513,365
                                8.13%       8.05%      7.98%      7.87%      7.93%      8.04%      8.05%
Savings Deposits.........   $  2,154      $1,077  $          $          $          $  12,924  $  16,155   $  16,155
                                2.76%       2.76%                                       2.76%      2.76%
NOW Deposits.............      8,583       4,291                                      51,494     64,368      64,321
                                2.15%       2.15%                                       2.15%      2.15%
Money Market Deposits....      7,666       3,833                                      45,994     57,493      57,493
                                3.38%       3.38%                                       3.38%      3.38%
Certificates of Deposit..    154,699      36,146      9,972      2,887      7,437         18    211,159     211,658
                                5.25%       5.78%      6.28%      5.90%      6.00%      5.35%      5.42%
FHLB Dallas Advances.....     30,320       1,201      4,069      4,363      6,287     11,307     57,547      54,753
                                4.96%       5.68%      5.94%      6.06%      6.11%      6.06%      5.47%
Other Borrowings.........      5,531                                                              5,531       5,530
                                7.06%                                                              7.06%
Total Interest
Bearing Liabilities......   $208,953   $  46,548  $  14,041  $   7,250  $  13,724  $ 121,737  $ 412,253   $ 409,910
                                5.03%       5.18%      6.18%      6.00%      6.05%      3.04%      4.55%
</TABLE>

       Residential fixed rate loans are assumed to have annual prepayment rates
between 4% and 15% of the portfolio. Commercial and multi-family real estate
loans are assumed to prepay at an annualized rate between 4% and 15%. Consumer
loans are assumed to prepay at an annualized rate between 8% and 15%. Fixed and
adjustable rate mortgage-backed securities, including Collateralized Mortgage
Obligations ("CMOs") and Real Estate Mortgage Investment Conduits ("REMICs"),
have annual payment assumptions ranging from 20% to 40%.

       The Company assumes 80% of savings accounts, transaction accounts and
Money Market accounts at December 31, 1997, are core deposits and are,
therefore, expected to roll-off after five years. The remaining savings accounts
are assumed to roll-off over the first eighteen months. No roll-off rate is
applied to certificates of deposit. Fixed maturity deposits reprice at maturity.

       In evaluating the Company's exposure to interest rate risk, certain
limitations inherent in the method of analysis presented in the foregoing table
must be considered. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable rate mortgages,
have features which restrict changes in interest rates and prepayment and early
withdrawal levels may deviate significantly from those assumed in calculating
the table. Finally, the ability of many borrowers to service their debt may
decrease in the event of an interest rate increase. The Company considers all of
these factors in monitoring its exposure to interest rate risk.

       The following table sets forth certain information as of December 31,
1997 with respect to rate sensitive assets and

                                       27

<PAGE>   34



liabilities and interest sensitivity gap (dollars in thousands):

<TABLE>
<CAPTION>
Rate Sensitive Assets (RSA)                   1-3 MOS.    4-12 MOS.       1-5 YRS.      OVER 5 YRS.      TOTAL
                                              --------    ---------      -----------    -----------   ----------
<S>                                         <C>           <C>            <C>            <C>           <C>       
Loans(1)............................        $    81,113   $    55,330    $   118,400    $    39,848   $  294,691
Securities..........................             19,861        50,298         96,810         49,537      216,506
Other Interest
  Earning Assets....................              3,085                                                    3,085
                                            -----------                                               ----------

Total RSA...........................        $   104,059   $   105,628    $   215,210    $    89,385   $  514,282
                                            ===========   ===========    ===========    ===========   ==========

Rate Sensitive Liabilities (RSL)

Interest Bearing Deposits (3).......        $   191,631   $   101,084    $    56,442    $        18   $  349,175
Other Interest
  Bearing Liabilities...............              9,879        25,972         15,920         11,307       63,078
                                            -----------   -----------    -----------    -----------   ----------
Total RSL...........................        $   201,510   $   127,056    $    72,362    $    11,325   $  412,253
                                            ===========   ===========    ===========    ===========   ==========

Gap (2).............................            (97,451)      (21,428)       142,848         78,060      102,029
Cumulative Gap......................            (97,451)     (118,879)        23,969        102,029 
Cumulative Ratio of RSA
  to RSL............................                .52           .64           1.06           1.25         1.25
Gap/Total Earning Assets............             (18.9%)        (4.2%)         27.8%           15.2%       19.8%
</TABLE>


(1)  Amount is equal to total loans net of unearned discount less nonaccrual
     loans at December 31, 1997.

(2)  Gap equals Total RSA minus Total RSL.

(3)  All Savings, NOW and MMDA deposit accounts are included in the 1-3 Mos.
     column.

       The Asset Liability Management Committee of the Bank closely monitors the
desired gap along with various liquidity ratios to insure a satisfactory
liquidity position for the Company. Market rates have fluctuated several hundred
basis points during the last five years. During this time, NOW, MMDA and Savings
account rates have moved very little. Therefore, when considering rate
sensitivity, management does not consider NOW, Savings and 50% of MMDA to be one
day interest rate sensitive. Management puts these deposits in the over 5 year
category for purposes of internal evaluation. As a result of reclassifying these
deposits, management considers the Company's asset and liability sensitivities
to be well matched. Management continually evaluates the condition of the
economy, the pattern of market interest rates and other economic data to
determine the types of investments that should be made and at what maturities.
Using this analysis, management from time to time assumes calculated interest
sensitivity gap positions to maximize net interest income based upon anticipated
movements in the general level of interest rates. Regulatory authorities also
monitor the Bank's gap position along with other liquidity ratios. In addition,
the Bank utilizes a simulation model to determine the impact of net interest
income under several different interest rate scenarios. By utilizing this
technology, the Bank can determine changes that need to be made to the asset and
liability mixes to minimize the change in net interest income under these
various interest rate scenarios.

LIQUIDITY AND CAPITAL RESOURCES

         Liquidity management involves the ability to convert assets to cash
with a minimum of loss. The Company must be capable of meeting its obligations
to its customers at any time. This means addressing (1) the immediate cash
withdrawal requirements of depositors and other funds providers; (2) the funding
requirements of all lines and letters of credit; and (3) the short-term credit
needs of customers. Liquidity is provided by short-term investments that can be
readily liquidated with a minimum risk of loss. Cash, interest earning deposits,
federal funds sold and short-term investments with maturities or repricing
characteristics of one year or less continue to be a substantial percentage of
total assets. At December 31, 1997 these investments represented 18.7% of Total
Assets, as compared with 18.2% at December 31, 1996, and 22.7% at December 31,
1995. Liquidity is further provided through the matching, by time period, of
rate sensitive interest earning assets with rate sensitive interest bearing
liabilities. The Company has two lines of credit to fund the purchase of federal
funds. A $15.0 million and $10.0 million unsecured line of credit have been
established with Nationsbank and Texas Independent Bank, respectively.

       Total shareholders' equity at December 31, 1997, of $40 million increased
9.4% or $3,427,000 from December 31, 1996 and represented 7.0% of total assets
at December 31, 1997 compared to 7.6% at December 31, 1996.

                                       28

<PAGE>   35



       Net income for 1997 of $5.0 million was the major contributor to the
increase in shareholders' equity at December 31, 1997 along with a net increase
in unrealized gains of $445,000 on securities available for sale. In addition,
the Company issued $326,000 in common stock (18,430 shares) through the
Company's dividend reinvestment plan and sold $77,000 of treasury stock (11,700
shares). Decreases to shareholders' equity consisted of $1.3 million in
dividends paid and the purchase of $1.2 million in treasury stock (65,464
shares). The Company purchased treasury stock pursuant to a common stock
repurchase plan instituted in late 1994. Under the repurchase plan, the Board of
Directors of the Company establishes, on a quarterly basis, total dollar
limitations and price per share for stock to be repurchased. The Board of
Directors reviews this plan in conjunction with the capital needs of the Company
and may, at its discretion, modify or discontinue the plan. During the third
quarter of 1997, the Company issued a 5% stock dividend, which had no net effect
on shareholders' equity. The Company's dividend policy requires that any cash
dividend payments made by the Company not exceed consolidated earnings for that
year. Shareholders should not anticipate a continuation of the cash dividend
simply because of the implementation of a dividend reinvestment program. The
payment of dividends will depend upon future earnings, the financial condition
of the Company, and other related factors.

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

       Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of Total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.



                                       29

<PAGE>   36



       To be categorized as well capitalized, the Bank must maintain minimum
Total risk-based Tier 1 risk-based, and Tier 1 leverage ratios as set forth in
the following table.


<TABLE>
<CAPTION>
                                                                                       TO BE WELL
                                                                                   CAPITALIZED UNDER
                                                                FOR CAPITAL        PROMPT CORRECTIVE
                                           ACTUAL            ADEQUACY PURPOSES     ACTION PROVISIONS
                                           ------           ------------------     -----------------
                                    AMOUNT       RATIO       AMOUNT       RATIO     AMOUNT      RATIO
                                    ------       -----       ------       -----     ------      -----
<S>                                 <C>         <C>          <C>         <C>        <C>         <C>   
AS OF DECEMBER 31, 1997:

Total Capital
  (to Risk Weighted Assets)....     $41,965     12.89%     >=$26,038      >= 8.0%  >=$32,547   >=10.0% 

Tier 1 Capital
  (to Risk Weighted Assets)....     $38,595     11.86%     >=$13,019      >= 4.0%  >=$19,528   >= 6.0% 

Tier 1 Capital
  (to Average Assets) (1)......     $38,595     7.25%      >=$21,283      >= 4.0%  >=$26,604   >=5.0% 

AS OF DECEMBER 31, 1996:

Total Capital
  (to Risk Weighted Assets)....     $38,891     13.74%     >=$22,640      >= 8.0%  >= 28,300   >=10.0% 

Tier 1 Capital
  (to Risk Weighted Assets)....     $35,642     12.59%     >=$11,320      >= 4.0%  >=$16,980   >= 6.0% 

Tier 1 Capital
  (to Average Assets) (1)......     $35,642     7.63%      >=$14,015      >= 3.0%  >=$23,359   >= 5.0% 
</TABLE>

(1)  Refers to quarterly average assets as calculated by bank regulatory
     agencies.

     The table below summarizes key equity ratios for the Company for the years
ended December 31, 1997, 1996 and 1995.

<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31,
                                                                       -----------------------
                                                                   1997         1996           1995
                                                                   ----         ----           ----
<S>                                                                 <C>           <C>           <C>  
Percentage of Net Income to:
  Average Total Assets..................................            .99%          .92%          1.07%
  Average Shareholders' Equity..........................          13.20%        12.20%         15.01%
Percentage of Dividends Declared Per Common
  Share to Net Income Per Common Share-Basic............          27.21%        32.52%         26.32%
Percentage of Dividends Declared Per Common
  Share to Net Income Per Common Share-Diluted..........          27.97%        33.06%         26.72%
Percentage of Average Shareholders'
  Equity to Average Total Assets........................           7.50%         7.55%          7.16%
</TABLE>

YEAR 2000 COMPLIANCE

       The Company continues to address the Y2K issue as it effects all
software, hardware and other systems associated with ensuring the Company is Y2K
compliant. The Y2K issue could impact any computer or other date sensitive
systems that store dates using a two digit year format. These systems may
recognize the year "00" as 1900, not 2000. This could produce miscalculations,
generate erroneous data or even cause a system to fail. All software, hardware
and other systems have been identified and categorized as to their business
significance and critical nature. Third parties on which the Company is
dependent for Y2K compliance have been notified. The Company is initiating
communication with large customers to determine what steps they are undertaking
to ensure they will be Y2K compliant before January 1, 2000. Future credit
decisions when appropriate will include a detailed assessment of customers' Y2K
plans for achieving timely compliance. Management believes the Company's
critical software, hardware and other systems will be thoroughly tested and Y2K
compliant before the end of 1998. Contingency plans have been made as necessary
for appropriate software,

                                       30

<PAGE>   37



hardware and other systems. It is anticipated the cost associated with the
Company becoming fully Y2K compliant will be approximately $750,000.
Approximately 80% of this cost will be new equipment and new software which will
be depreciated over a three to five year period.

       The Company presently believes that with modifications to existing
software and conversion to new software, the Y2K issue will not pose significant
operational problems for the Company's computer systems or business operations.
However, if such modifications and conversions are not made, or are not
completed in a timely manner, the Y2K issue could have a material impact on the
operations of the Company. In addition, there can be no assurance that
unforeseen problems with the Company's computer systems, or the systems of third
parties on which the Company's computers rely, would not have a material adverse
effect on the Company's systems or operations.

EFFECTS OF INFLATION

         The consolidated financial statements of the Company, and their related
notes, have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the change in the
relative purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
many industrial companies, nearly all of the assets and liabilities of the
Company are monetary. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.

OTHER ACCOUNTING ISSUES

         In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"). This statement
supersedes APB 15, "Earnings Per Share" and simplifies the computation of
earnings per share ("EPS") by replacing the "primary" EPS requirements of APB 15
with a "basic" EPS computation based upon weighted-average shares outstanding.
The new standard requires a dual presentation of basic and diluted EPS. Diluted
EPS is similar to fully diluted EPS required under APB 15 for entities with
complex capital structures. The adoption of FAS 128 did not have a material
impact on the Company.

         In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("FAS 130"). This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The standard requires that 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. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. The Company
adopted FAS 130 effective for the 1998 fiscal year.

       In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"). This statement supersedes FAS
14, Financial Reporting for Segments of a Business Enterprise, but retains the
requirement to report information about major customers. The new standard
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. In the initial year of
application, comparative information for earlier years is to be restated. The
Company adopted FAS 131 effective for the 1998 fiscal year.


       In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("FAS 132"). This statement
amends FAS 87, Employers' Accounting for Pension, FAS 88, Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits and FAS 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions. The standard revises employers' disclosures about
pension and other postretirement benefit plans without changing the measurement
or recognition of those plans. It standardizes the disclosure requirements for
pension and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates certain
disclosures. The Company adopted FAS 132 effective for the 1998 fiscal year.



                                       31

<PAGE>   38
                                    BUSINESS

GENERAL

         The Company is a $571 million bank holding company located in Tyler,
Texas, which has a metropolitan area population of 166,000. Tyler is located 90
miles east of Dallas/Fort Worth and 90 miles west of Shreveport, Louisiana,
south of Interstate 20. The Bank is the largest bank headquartered in Smith
County, Texas. The Company is a Texas corporation organized in 1982 which,
through an intermediate holding company, owns all of the capital stock of the
Bank, which was organized in 1960. As a bank holding company, the Company may
own or control more than one bank and furnish services for such banks. At this
time the Company conducts no business except with respect to its subsidiaries.

         The Company has been, and intends to remain, a community-oriented
financial institution offering a variety of financial services to meet the needs
of the communities it serves. The Company attracts deposits from the general
public and uses such deposits, together with FHLB Dallas advances and other
borrowings to fund loans. See "--Lending Activities." The Company also invests
in mortgage-backed securities secured by 1-4 family residential mortgages,
municipal obligations, U.S. Government and agency obligations and other
permissible investments. The Company, through its affiliate, BSC Securities,
L.C., offers a full range of retail brokerage securities services. The Bank
opened a finance company, Countywide Loans, Inc. during 1997 in Tyler. The
finance company provides basic financial services such as lending, check cashing
and money orders.

         The Bank offers a full range of financial services to commercial,
industrial, financial and individual customers, including short-term working
capital loans for inventory and accounts receivable and short and medium-term
loans, for equipment or other business capital expansion, real estate lending,
other personal loans and safe deposit services. The Bank makes automobile and
other installment loans as well as home improvement and mortgage loans to its
customers. The Bank also offers its own credit card. The Company offers a
variety of deposit accounts having a wide range of interest rates and terms,
which generally include savings, money market and a variety of checking
accounts, as well as certificate accounts. The Company generally solicits
deposits in its primary market areas. The Bank offers ATM facilities and
services through a statewide system known as "Moneymaker." The Company also
began offering home banking during January 1998 and debit cards during 1997.

         Trust services are provided by the Bank, primarily to individuals and
to a lesser extent partnerships and corporations. Such services include
investment, management, administration and advisory services for trust accounts.
The Bank acts as trustee of living, testamentary and employee benefit trusts and
as executor or administrator of estates.

         At December 31, 1997, the Company had total assets of $571.1 million,
deposits of $462.7 million, borrowings of $63.1 million and shareholders' equity
of $40.0 million. The Company's revenues are derived primarily from interest on
loans, mortgage-backed securities and investments and noninterest income from
service charges.

         At December 31, 1997, the Company's total loan portfolio was $296.0
million, including $76.2 million of 1-4 family residential first mortgage loans,
$55.8 million of commercial and other real estate loans, $91.7 million of loans
to individuals and $62.0 million of commercial loans. In addition, on that date,
the Company had $141.4 million of mortgage-backed securities and $75.1 million
of other investment securities and FHLB Dallas stock.

         The Bank serves its market through eight branch locations, including
four branches located in grocery stores, in and around Tyler. The Company plans
to open two additional branches in Longview in mid-1988. A native Longview
banking veteran has joined the Bank to lead the Company in its expansion into
the Longview market area. The Company anticipates it will also make application
to open a free standing full-service branch with drive-up facilities in Longview
as soon as a suitable site is found. The Company's television and radio
advertising has extended into this market area for several years, providing the
Bank name recognition in the Greater Longview area.

BUSINESS STRATEGY

         The Company's goal is to be the premier financial institution in East
Texas, recognized for quality customer service and financial soundness. The Bank
weathered the Texas economic downturn in the 1980's, which contributed in part
to the customer loyalty that the Bank enjoys today.

         The Company's business strategy is to operate the Bank as a well
capitalized, profitable independent community- oriented financial institution
and, with that focus, has developed a niche in small business and consumer
lending and other small business and consumer financial services products,
including the recent addition of Countywide, a finance company subsidiary of the
Bank.

         Key aspects of the Company's business strategy include (i) originating
residential, commercial real estate, commercial business and consumer loans,
(ii) providing a high level of customer service, (iii) maintaining asset
quality, (iv)

                                       32

<PAGE>   39

increasing the revenue base of financial service subsidiaries and adding
products and services to attract customers and contribute to non-interest
income, (v) increasing market share within the Bank's existing market and
expanding into new markets and (vi) controlling expenses. While pursuing this
strategy, management is committed to managing interest rate risk, enhancing
profitability and maintaining a well capitalized financial position.

         Characteristics of the Company and results of implementing the business
strategy include the following:

         Asset Quality. The Company seeks to maintain asset quality by managing
credit risk. Approximately 74.2% of the net loan portfolio at December 31, 1997
was comprised of commercial real estate, construction, commercial business and
consumer loans. The other 25.8% of the loan portfolio at December 31, 1997 was
comprised of residential mortgage loans, which generally pose less credit risk
than other types of loans. The Bank's nonperforming assets at that date
represented .54% of total assets. At December 31, 1994, 1995 and 1996, this
ratio was .67%, .61% and .61%, respectively. The Company has maintained a
conservative investment portfolio. Approximately 75.2% of the portfolio consists
of U.S. Treasury and agency securities and mortgage-backed securities
collateralized by U.S. agency guaranteed mortgages which are directly or
indirectly backed by the full faith and credit of the U.S. government.

         Noninterest Income. With a focus on reducing the dependence of earnings
on net interest income, the Company has expanded its sources and amounts of fee
income. During 1996 and 1997, the number of ATM's was increased from nine to 14.
In 1997, the Company expanded its fee-generating services beyond retail
brokerage and trust services to also include consumer finance services. The Bank
also offered new fee-based products such as proprietary credit and debit cards
and checking overdraft privileges. For 1997, noninterest income represented
13.9% of total revenue, compared to 11.5% for 1996.

         Enhanced Delivery System and Controlled Growth. The Bank has recently
launched technological enhancements, including an automated telephone system,
home banking, corporate cash management software and an internet information
site.

         The Company enhanced its infrastructure in Smith County in order to
improve customer service and attract new customers. In 1996 and 1997, the Bank
added three full service grocery store branches, a seven lane "motor bank"
drive-in facility and five ATM's. Certain branch locations were expanded or
remodeled. Through branch opening and acquisitions, the Company intends to
expand into desirable market areas adjoining the Tyler metropolitan area, which
includes Smith County. A grocery store branch and a free-standing branch are
expected to open in mid-1998 in Longview, Texas, a city located in adjoining
Gregg County.

         Noninterest Expenses. Noninterest expenses are subject to ongoing
reviews of staffing levels, facilities and operations. The 1996 branch openings
and 1997 branch remodelings contributed to increased operating costs in those
years. The Company's efficiency ratio was 69.4% for 1997, slightly lower than
the ratios for the preceding four years. The Company seeks to reduce the
efficiency ratio through the new branches contributing additional revenue to the
Bank and through continued monitoring of costs.

         Experienced Management. The Company's executive officers each have
broad experience in the Bank's operations. The Bank has enjoyed continuity of
management, with the Chief Executive Officer serving in that capacity since the
Bank opened and the other executive officers each having served for over ten
years.


                                       33

<PAGE>   40

MARKET AREA

         Tyler's economic base is a diverse mix that includes oil and gas,
manufacturing, distribution, conventions and tourism, as well as retirement
relocation. All of these industries support a growing regional system of medical
service, retail and education centers. Tyler is home to several nationally
recognized health care systems. Five Tyler hospitals represent all major
specialties and employ over 6,500 individuals. In 1996, Target Stores, Inc.
chose a location in the greater Tyler area along Interstate 20 for its $80
million distribution center that will employ approximately 900 workers. This
facility is expected to begin operations in mid-1998.

LENDING ACTIVITIES

         The Company's main objective is to seek attractive lending
opportunities in Smith County, Texas and adjoining counties. At December 31,
1997, the vast majority of the Company's loans were collateralized by properties
located in Smith County. Total loans as of December 31, 1997 increased $37.9
million or 14.7% while the average balance was up $30.7 million or 12.6% when
compared to 1996. Real estate loans as of December 31, 1997, which reflected an
increase of $15.0 million or 11.8% from December 31, 1996. Loans to individuals
increased $12.2 million or 15.4% from December 31, 1996 and commercial loans
increased $10.7 million or 20.8%. The increase in real estate loans is due to a
stronger real estate market, lower interest rates and increased commitment by
the Company to residential mortgage lending. Commercial loans increased as a
result of commercial growth in the Company's market area. Loans to individuals
increased due to an increase in indirect automobile dealer loans and additional
penetration achieved through the Bank's branch locations. Effective January 2,
1998, the Company exited its indirect dealer loan line of business to
concentrate more on direct automobile loans. In the portfolio, loans dependent
upon private household income represent a significant concentration. Due to the
number of customers involved who work in all sectors of the local economy, the
Company believes the risk in this portion of the portfolio is adequately spread
throughout the economic community.

         The aggregate amount of loans that the Bank is permitted to make under
applicable bank regulations to any one borrower, including related entities, is
25% of unimpaired capital and surplus. The Bank's legal lending limit at
December 31, 1997 was $7.5 million.

       LOANS TO AFFILIATED PARTIES

       In the normal course of business, the Bank makes loans to certain of the
Company's, as well as its own, officers, directors, employees and their related
interests. As of December 31, 1997 and 1996, these loans totaled $8.6 million
and $9.9 million or 21.6% and 27.0% of shareholders' equity, respectively. Such
loans are made in the normal course of business at normal credit terms,
including interest rate and collateral requirements, and do not represent more
than normal credit risks contained in the rest of the loan portfolio for loans
of similar types.

       LOAN PORTFOLIO COMPOSITION AND ASSOCIATED RISK

       For purposes of this discussion, the Company's loans are divided into
three categories: real estate loans, commercial loans and loans to individuals.


                                       34

<PAGE>   41
         REAL ESTATE LOANS

         Real estate loans are divided into three categories: 1-4 Family
Residential Mortgage Lending, Construction Loans and Commercial Real Estate
Loans.

         Real estate loans represent the Company's greatest concentration of
loans. However, the amount of risk associated with this group of loans is
mitigated in part due to the type of loans involved. For example, of the $142.3
million in real estate loans, $76.2 million or 53.6% represent loans
collateralized by residential dwellings that are primarily owner occupied.
Historically, the amount of losses suffered on this type of loan has been
significantly less than those on other properties. A significant portion of the
remaining real estate loans are collateralized primarily with owner occupied
commercial real estate. The Company's loan policy requires appraisal prior to
funding any real estate loans and also outlines the requirements for appraisals
on renewals.

         The real estate market in the late 1980s in Texas, and more
specifically in East Texas, experienced a significant decline in market value.
During the 1990s, new appraisals of real estate in the Company's market area
indicate improved overall real estate values for residential and commercial
properties.

         Due to the volume of real estate loans contained in the Company's
portfolio which are collateralized by owner occupied properties, and the
appraisal and other real estate lending policies in place that indicate the
value of the collateral for these loans, management does not consider the
potential impact of these loans on the loan loss reserve to be excessive, even
though real estate loans constitute the largest percentage of loans outstanding.
Management also pursues an aggressive policy of reappraisal on any real estate
loan that becomes troubled and potential exposures are recognized and reserved
for as soon as they are identified. However, the slow pace of absorption for
certain types of properties could adversely affect the volume of nonperforming
real estate loans held by the Company.

         1-4 Family Residential Mortgage Lending. Residential loan originations
are generated by the Company's in-house originations staff, marketing efforts,
present customers, walk-in customers and referrals from real estate agents,
mortgage brokers and builders. The Company focuses its lending efforts primarily
on the origination of loans secured by first mortgages on owner-occupied, 1-4
family residences. Substantially, all of the Company's 1-4 family residential
mortgage originations are secured by properties located in Smith County, Texas.
Historically, the Company has sold a portion of its loan originations to
secondary market investors pursuant to ongoing purchase commitments.

         The Company's fixed rate 1-4 family residential mortgage loans
generally have maturities ranging from seven to 30 years. These loans are
typically fully amortizing with monthly payments sufficient to repay the total
amount of the loan. The Company also makes seven to 30 year amortizing loans
with a balloon feature, typically due in seven years or less.

         The Company reviews information concerning the income, financial
condition, employment and credit history when evaluating the creditworthiness of
the applicant.

         In November 1997, Texas voters approved a change to the Texas
Constitution allowing home equity loans. The Company began offering this newly
available form of real estate lending beginning January 1, 1998 when the law
became effective. The Company has established underwriting and pricing
guidelines for this new lending area.

         Construction Loans. The Company's construction loans are secured by
property located primarily in the Company's market area. The Company's emphasis
for construction loans is directed toward properties that will be owner
occupied. Occasionally, construction loans for projects built on speculation are
financed, but these typically have substantial secondary sources of repayment.
The Company's construction loans to individuals generally have fixed interest
rates during the construction period. Construction loans to individuals are
typically made in connection with the granting of the permanent loan on the
property.

         Commercial Real Estate Loans. In determining whether to originate
commercial real estate loans, the Company generally considers such factors as
the financial condition of the borrower and the debt service coverage of the
property. Commercial real estate loans are made at both fixed and adjustable
interest rates for terms generally up to 20 years.

         Commercial real estate loans primarily include commercial office
buildings, retail, medical and warehouse facilities, hotels and churches. The
majority of these loans, with the exception of those for hotels and churches, 
are collateralized by owner occupied properties.


                                       35

<PAGE>   42



         COMMERCIAL LOANS

         The Company's Commercial Loans are diversified to meet most business
needs. Loan types include short-term working capital loans for inventory and
accounts receivable and short and medium-term loans for equipment or other
business capital expansion. Management does not consider there to be any
material concentration of risk in any one industry type in this loan category
since no industry classification represents over 10% of loans. Commercial Loans
traditionally generate the largest volume of loan losses in the portfolio.

         In its commercial business loan underwriting, the Company assesses the
creditworthiness, ability to repay, and the value and liquidity of the
collateral being offered. Terms are generally granted commensurate with the
useful life of the collateral offered.

         LOANS TO INDIVIDUALS

         The Bank is a major consumer lender in its trade territory and has been
for many years. The majority of loans outstanding are those secured by vehicles
including the "indirect" vehicle loan portfolio, which at December 31, 1997 was
approximately $40.0 million. The indirect vehicle loans on the Company's books
were originated through dealers but underwritten directly by the Company using
the same Underwriting guide lines used for its direct vehicle loans. Direct
vehicle loans were approximately $40.0 million at December 31, 1997.
Additionally, the Company makes loans for a full range of other consumer
purposes, which may be secured or unsecured depending on the credit quality and
purpose of the loan. Other major categories for the remainder of the portfolio
include loans secured by boats and cash or equivalently secured loans.

         The largest concentration of loans to individuals, vehicle loans, were
primarily originated through the Company's indirect dealer loan program.
However, due to increasing competition that was contributing to declining profit
margins on these loans, the Company exited the indirect dealer loan program
effective January 2, 1998 to concentrate on direct loans.

         At this point, the economy in the Bank's trade territory appears
stable. One area of concern is the increase in the personal bankruptcy rate.
Management expects this trend to have some adverse effect on the Company's net
charge-offs. Most of the Company's loans to individuals are collateralized,
which management believes will limit the exposure in this area should current
bankruptcy trends continue.

         Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. The underwriting
standards employed by the Company for consumer loans include an application, a
determination of the applicant's payment history on other debts, with greatest
weight being given to payment history with the Company, and an assessment of the
borrower's ability to meet existing obligations and payments on the proposed
loan. Although creditworthiness of the applicant is a primary consideration, the
underwriting process also includes a comparison of the value of the collateral,
if any, in relation to the proposed loan amount.

         LOAN PORTFOLIO COMPOSITION

         The following table sets forth loan totals by category for the years
presented:
<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                                                       ------------
                                               1997         1996         1995         1994          1993
                                             --------     --------     --------     --------     --------
                                                                   (in thousands)
<S>                                          <C>          <C>          <C>          <C>          <C>     
Real Estate Loans:
 Construction ..........................     $ 10,299     $  7,821     $  4,558     $  6,118     $  4,739
 1-4 Family Residential ................       76,243       62,356       49,909       38,563       34,982
 Commercial Real Estate ................       55,802       57,198       54,436       53,881       46,457

Commercial Loans .......................       61,972       51,307       44,217       39,707       40,860
Loans to Individuals ...................       91,719       79,485       75,658       62,721       56,571
                                             --------     --------     --------     --------     --------
Total Loans ............................     $296,035     $258,167     $228,778     $200,990     $183,609
                                             ========     ========     ========     ========     ========
</TABLE>

         The following table represents loan maturities and sensitivity to
changes in interest rates. The amounts of total loans outstanding at December
31, 1997, which, based on remaining scheduled repayments of principal, are due
in (1) one year or less, (2) more than one year but less than five years, and
(3) more than five years, are shown in the following table. The amounts due
after one year are classified according to the sensitivity to changes in
interest rates. 

                                       36

<PAGE>   43

<TABLE>
<CAPTION>
                                                                     AFTER ONE
                                                     DUE IN ONE      BUT WITHIN      AFTER FIVE
                                                  YEAR OR LESS(1)    FIVE YEARS(1)     YEARS(1)
                                                  ---------------    -------------   ----------
                                                                     (IN THOUSANDS)
<S>                                                 <C>               <C>             <C>
Construction Loans ............................     $  9,696          $    603        $
Real Estate Loans-Other .......................       40,587            54,917           36,541
Commercial Loans ..............................       44,788            12,956            4,228
All Other Loans ...............................       41,372            49,924              423
                                                    --------          --------         --------
      Total Loans .............................     $136,443          $118,400         $ 41,192
                                                    ========          ========         ========

Loans with maturities after
 one year for which:
      Interest Rates are Fixed or Predetermined                                        $158,248
      Interest Rates are Floating or Adjustable                                        $ 22,900
</TABLE>
----------------
(1)   The volume of commercial loans due within one year reflects the Company's
      general policy of limiting such loans to a short-term maturity. Loans are
      shown net of unearned discount. Nonaccrual loans are reflected in the due
      after five years column.

         LOAN LOSS EXPERIENCE AND RESERVE FOR LOAN LOSSES

         The loan loss reserve in place at the end of each year is based on the
most current review of the loan portfolio at that time. Several methods are used
to maintain the review in the most current manner. First, the servicing officer
has the primary responsibility for updating significant changes in a customer's
financial position. Accordingly, each officer prepares status updates on any
credit deemed to be experiencing repayment difficulties which, in the officer's
opinion, would place the collection of principal or interest in doubt. Second,
an internal review officer from the Company is responsible for an ongoing review
of the Company's entire loan portfolio with specific goals set for the volume of
loans to be reviewed on an annual basis. Third, the Bank is regulated and
examined by both the FDIC and/or the TDB on an annual basis.

         At each review of a credit, a subjective analysis methodology is used
to grade the respective loan. Categories of grading vary in severity to include
loans that do not appear to have a significant probability of loss at the time
of review to grades that indicate a probability that the entire balance of the
loan will be uncollectible. If full collection of the loan balance appears
unlikely at the time of review, estimates or appraisals of the collateral
securing the debt are used to allocate the necessary reserves. A list of loans
that are graded as having more than the normal degree of risk associated with
them are maintained by the internal review officer. This list is updated on a
periodic basis, but no less than quarterly by the servicing officer in order to
properly allocate necessary reserves and keep management informed on the status
of attempts to correct the deficiencies noted in the credit.

         In addition to maintaining an ongoing review of the loan portfolio, the
internal review officer maintains a history of the loans that have been
charged-off without first being identified as problems. This history is used to
determine the amount of nonspecifically allocated reserve necessary, in addition
to the portion that is specifically allocated by loan.

         The following table summarizes the average amount of net loans
outstanding; changes in the reserve for loan losses arising from loans
charged-off and recoveries on loans previously charged-off; additions to the
reserve that have been charged to operating expense; the ratio of net loans
charged-off to average loans outstanding; and an allocation of the reserve for
loan loss.





                                       37

<PAGE>   44
                LOAN LOSS EXPERIENCE AND RESERVE FOR LOAN LOSSES

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31,   
                                                   ------------------------------------------------------------------------
                                                      1997           1996            1995            1994            1993   
                                                   ---------       ---------       ---------       ---------       ---------
                                                                             (DOLLARS IN THOUSANDS)
<S>                                                <C>             <C>             <C>             <C>             <C>      
Average Net Loans Outstanding ................     $ 274,577       $ 243,925       $ 209,141       $ 196,436       $ 170,409
                                                   =========       =========       =========       =========       =========

Balance of Reserve for Loan Loss at
  Beginning of Period ........................     $   3,249       $   3,317       $   3,137       $   2,846       $   2,711
                                                   ---------       ---------       ---------       ---------       ---------

Loan Charge-Offs:
Real Estate-Construction
Real Estate-Other ............................                                           (36)             (6)           (494)
Commercial Loans .............................          (525)(1)         (70)(1)         (61)           (129)            (95)
Loans to Individuals .........................          (704)           (768)           (502)           (395)           (284)
                                                   ---------       ---------       ---------       ---------       ---------

Total Loan Charge-Offs .......................        (1,229)           (838)           (599)           (530)           (873)
                                                   ---------       ---------       ---------       ---------       ---------

Recovery on Loans Previously Charged off:
Real Estate-Construction .....................            10
Real Estate-Other ............................            14               7             272              93               4
Commercial Loans .............................           133              78             546             326             287
Loans to Individuals .........................           188             185             261             152             117
                                                   ---------       ---------       ---------       ---------       ---------

Total Recovery of Loans Previously Charged-Off           345             270           1,079             571             408
                                                   ---------       ---------       ---------       ---------       ---------

Net Loan (Charge-Offs) Recoveries ............          (884)           (568)            480              41            (465)

Additions (Reductions) to Reserve
  Charged (Credited) to Operating Expense ....         1,005             500            (300)            250             600
                                                   ---------       ---------       ---------       ---------       ---------

Balance at End of Period .....................     $   3,370       $   3,249       $   3,317       $   3,137       $   2,846
                                                   =========       =========       =========       =========       =========

Ratio of Net Charge-Offs (Recoveries)
  to Average Loans Outstanding ...............           .32%            .23%           (.23%)          (.02%)           .27%
                                                   =========       =========       =========       =========       =========
---------------
(1) See "Consolidated Financial Statements - Note 4. Loans and Reserve for Possible Loan Losses."

Allocation of Reserve for Loan Loss:
</TABLE>

<TABLE>
<CAPTION>
                                                                                   DECEMBER 31,
                                          -----------------------------------------------------------------------------------------
                                               1997               1996               1995               1994              1993
                                          --------------     --------------     --------------     --------------    --------------
                                                    % OF               % OF               % OF               % OF              % OF
                                          AMOUNT   TOTAL     AMOUNT   TOTAL     AMOUNT    TOTAL    AMOUNT   TOTAL    AMOUNT   TOTAL 
                                          --------------     --------------     --------------     --------------    --------------
                                                                             (dollars in thousands)
<S>                                       <C>        <C>     <C>        <C>     <C>     <C>       <C>        <C>    <C>       <C>
Real Estate-Construction                  $   52     1.5%    $   39     1.2%    $   23      .7%    $   31     1.0%   $    7      .2%

Real Estate-Other                          1,087    32.3%     1,059    32.6%     1,209    36.4%     1,127    35.9%    1,172    41.2%

Commercial Loans                           1,181    35.0%     1,129    34.7%     1,059    31.9%     1,059    33.8%    1,018    35.8%

Loans to Individuals                       1,040    30.9%       948    29.2%       934    28.2%       835    26.6%      642    22.6%

Unallocated                                   10      .3%        74     2.3%        92     2.8%        85     2.7%        7      .2%
                                          --------------     --------------     --------------     --------------    --------------

Balance at End of Period                  $3,370     100%    $3,249     100%    $3,317    100%     $3,137     100%   $2,846     100%
                                          ==============     ==============     =============      ==============    ==============
</TABLE>

NONPERFORMING ASSETS

       Nonperforming assets consist of delinquent loans over 90 days past due,
nonaccrual loans, other real estate owned and restructured loans. Nonaccrual
loans are those loans that are more than 90 days delinquent and that with
respect to which collection in full of both the principal and interest is in
doubt. Additionally, some loans that are not delinquent may be placed on
nonaccrual status due to doubts about full collection of principal or interest.
When a loan is categorized as nonaccrual, the accrual of interest is
discontinued and the accrued balance is reversed for financial statement
purposes. Other Real Estate Owned ("OREO") represents real estate taken in full
or partial satisfaction of debts previously contracted. Previously included in
the appropriate categories of nonperforming assets were loans meeting the
in-substance foreclosure criteria. As a result of the adoption of Statement of
Financial Accounting Standard No. 114, "Accounting by Creditors for Impairment
of a Loan" ("FAS114"), effective January 1, 1995, the Company reclassified
in-substance foreclosed assets in these categories to loans. These loans had
balances of $807,000 for December 31, 1994 and $1.8 million for December 31,
1993. OREO consists primarily of raw land and oil and gas interests. The Company
is actively marketing all properties and none are being held for investment
purposes. Restructured loans represent loans that have been renegotiated to
provide a reduction or deferral of interest or principal because of
deterioration in the financial position of the borrowers.

                                       38

<PAGE>   45

Categorization of a loan as nonperforming is not in itself a reliable indicator
of potential loan loss. Other factors, such as the value of collateral securing
the loan and the financial condition of the borrower must be considered in
judgments as to potential loan loss.

         The following table of nonperforming assets is classified according to
bank regulatory call report guidelines:
<TABLE>
<CAPTION>

                                                                        NONPERFORMING ASSETS
                                                                             DECEMBER 31,
                                                      -------------------------------------------------------------
                                                         1997        1996         1995         1994          1993
                                                      --------    ---------     --------     --------      --------
                                                                            (DOLLARS IN THOUSANDS)
<S>                                                   <C>         <C>           <C>          <C>           <C>     
Loans 90 Days Past Due:
   Real Estate..................................      $    454    $     214     $    266     $     51      $    342
   Loans to Individuals.........................           232          170          203           52            90
   Commercial...................................            56           88          183           59            70
                                                      --------    ---------     --------     --------      --------
                                                           742          472          652          162           502
                                                      --------    ---------     --------     --------      --------
Loans on Nonaccrual:
   Real Estate..................................           108          646          486          424           711
   Loans to Individuals.........................           177          113          116          179           175
   Commercial...................................         1,059          774          654           24           213
                                                      --------    ---------     --------     --------      --------
                                                         1,344        1,533        1,256          627         1,099
                                                      --------    ---------     --------     --------      --------
Restructured Loans:
   Real Estate..................................           214          230          243          563           590
   Loans to Individuals.........................           189          108           49           51            52
   Commercial...................................            32           62           44           43           115
                                                      --------    ---------     --------     --------      --------
                                                           435          400        336          657           757
                                                      --------    ---------     --------     --------      --------

Total Nonperforming Loans.......................         2,521        2,405        2,244        1,446         2,358

Other Real Estate Owned.........................           364          273          273        1,134         2,745
Repossessed Assets..............................           206          262          240          256           203
                                                      --------    ---------     --------     --------      --------

Total Nonperforming Assets......................      $  3,091    $   2,940     $  2,757     $  2,836      $  5,306
                                                      ========    =========     ========     ========      ========

Percentage of Total Assets......................           .5%          .6%          .6%          .7%          1.3%

Percentage of Loans,
   Net of Unearned Income.......................          1.0%         1.1%         1.2%         1.4%          2.9%
</TABLE>

         Total nonperforming assets increased $151,000 between December 31, 1996
and December 31, 1997. Nonperforming assets as a percentage of assets decreased
 .1% from the previous year and as a percentage of loans decreased .1%.
Nonperforming assets represent a drain on the earning ability of the Company.
Earnings losses are due both to the loss of interest income and the costs
associated with maintaining OREO, for taxes, insurance and other operating
expenses. In addition to the nonperforming assets, at December 31, 1997, in the
opinion of management, the Company had $96,000 of loans identified as potential
problem loans. A potential problem loan is a loan where information about
possible credit problems of the borrower is known, causing management to have
serious doubts about the ability of the borrower to comply with the present loan
repayment terms which may result in a future classification of the loan in one
of the nonperforming asset categories.

         The following is a summary of the Company's recorded investment in
loans (primarily nonaccrual loans) for which impairment has been recognized in
accordance with FAS 114:

<TABLE>
<CAPTION>
                                                       VALUATION  CARRYING
                                              TOTAL    ALLOWANCE    VALUE
                                             ------    ---------  --------
                                                      (in thousands)
<S>                                          <C>        <C>        <C>   
Real Estate Loans ......................     $  108     $   27     $   81
Commercial Loans .......................      1,059        185        874
Loans to Individuals ...................        177         12        165
                                             ------     ------     ------
Balance at December 31, 1997 ...........     $1,344     $  224     $1,120
                                             ======     ======     ======
</TABLE>



                                       39
<PAGE>   46

<TABLE>
<CAPTION>
                                                       VALUATION  CARRYING
                                              TOTAL    ALLOWANCE    VALUE
                                             ------    ---------  --------
                                                      (in thousands)
<S>                                          <C>        <C>        <C>   

Real Estate Loans                            $  646     $  128     $  518
Commercial Loans                                774        199        575
Loans to Individuals                            113         18         95
                                             ------     ------     ------
Balance at December 31, 1996                 $1,533     $  345     $1,188
                                             ======     ======     ======
</TABLE>

         For the years ended December 31, 1997 and 1996, the average recorded
investment in impaired loans was approximately $1.5 million for each year.
During the year ended December 31, 1997, the amount of interest income reversed
on impaired loans placed on nonaccrual and the amount of interest income
subsequently recognized on the cash basis was not material.

         The net amount of interest recognized on loans that were nonaccruing or
restructured during the year was $110,000, $97,000 and $78,000 for the years
ended December 31, 1997, 1996 and 1995. If these loans had been accruing
interest at their original contracted rates, related income would have been
$336,000, $216,000 and $273,000 for the years ended December 31, 1997, 1996 and
1995, respectively.

         The following is a summary of the allowance for losses on OREO for the
years presented (in thousands):

<TABLE>
<CAPTION>
                                           YEAR ENDED DECEMBER 31,
                                           -----------------------
                                            1997            1996
                                           -------        -------
                                               (in thousands)
<S>                                        <C>            <C>    
Balance at beginning of year ...........   $   946        $   946
    Provision for Losses
    Losses on sales
    Gains on sales
    Disposition of OREO ................      (274)            --
                                           -------        -------
Balance at end of year .................     $ 672        $   946
                                           =======        =======
</TABLE>

                                       40

<PAGE>   47



SECURITIES ACTIVITY

         The securities portfolio of the Company plays a primary role in
management of the interest rate sensitivity of the Company and, therefore, is
managed in the context of the overall balance sheet. The securities portfolio
generates a substantial percentage of the Company's interest income and serves
as a necessary source of liquidity.

         The Company accounts for debt and equity securities as follows:

         Held to Maturity ("HTM"). Debt securities that management has the
         positive intent and ability to hold until maturity are classified as
         held to maturity and are carried at their remaining unpaid principal
         balance, net of unamortized premiums or unaccreted discounts. Premiums
         are amortized and discounts are accreted using the level interest yield
         method over the estimated remaining term of the underlying security.

         Available for Sale ("AFS"). Debt and equity securities that will be
         held for indefinite periods of time, including securities that may be
         sold in response to changes in market interest or prepayment rates,
         needs for liquidity and changes in the availability of and the yield of
         alternative investments are classified as available for sale. These
         assets are carried at market value. Market value is determined using
         published quotes as of the close of business. Unrealized gains and
         losses are excluded from earnings and reported net of tax as a separate
         component of shareholders' equity until realized.

         Prudent management of the investment securities portfolio serves to
optimize portfolio yields. Management attempts to deploy investable funds into
instruments that are expected to increase the overall return of the portfolio
given the current assessment of economic and financial conditions.

         Average securities increased $13.8 million or 8.1% during the year
ended December 31, 1997 compared to 1996. The mix of average securities between
taxable and tax-exempt securities changed to 78.4% taxable and 21.6% tax-exempt
for the year ended 1997 from 77.8% taxable and 22.2% tax-exempt for the year
ended 1996. Average other interest earning assets, consisting primarily of
Federal Funds sold, decreased $1.0 million or 26.5% during the year ended
December 31, 1997 compared to 1996. The slight decrease in Federal Funds
balances is attributable to the increase in average loans and average
securities.

         The mix of taxable securities reflected an increase in mortgage-backed
securities. Average mortgage-backed securities represented 66.0% of the total
securities portfolio for 1997 compared to 62.2% for 1996.

         The combined investment securities, mortgage-backed securities, and
marketable equity securities portfolio increased to $216.5 million at December
31, 1997, compared to $174.4 million on December 31, 1996, an increase of $42.1
million or 24.1%. Mortgage-backed securities collateralized by agency
guaranteed mortgages increased $27.1 million or 23.7% during 1997 when compared
to 1996. State and political subdivisions increased $7.4 million or 18.4% during
1997. U.S. Treasury securities increased during 1997 compared to 1996 by $14.9
million or 294.9%, U.S. Government Agency securities decreased $8.1 million or
85.0% and other stocks and bonds increased $.9 million or 16.9% in 1997 compared
to 1996. During 1995 a barbell approach was adopted by the Company with respect
to securities purchased, i.e., the majority of the securities purchased included
short duration premium mortgage-backed securities balanced with longer duration
municipal securities. This approach paralleled the same duration as would have
been obtained by purchasing intermediate duration securities. During the second
half of 1997 rates decreased and the yield curve flattened as the spread between
the two year treasury yield and thirty year treasury yield narrowed. The Company
continued to use the barbell approach adopted in 1995 during most of 1996 and
1997, however some intermediate term securities were purchased during 1997. In
order to maintain the barbell strategy, a continued change in the securities
portfolio mix was required and resulted in the changes discussed above during
1996 and 1997. The increase in U.S. Treasury securities occurred primarily in
December 1997 as short-term treasuries were purchased to pledge as collateral
for a new public funds account obtained during 1997, which accumulates large
balances during the time period December through February each year.

         The market value of the securities portfolio at December 31, 1997 was
$216.5 million, which represents a net unrealized gain on that date of $2.3
million. The net unrealized gain is comprised of $2.6 million in unrealized
gains and $.3 million of unrealized losses. Net unrealized gains and losses on
securities available for sale, which is a component of shareholders' equity on
the consolidated balance sheet, can fluctuate significantly as a result of
changes in interest rates. Because management cannot predict the future
direction of interest rates, the effect on shareholders' equity in the future
cannot be determined; however, this risk is monitored closely through the use of
shock tests on the available for sale securities portfolio using an array of
interest rate assumptions.

         In October 1995, the FASB issued an implementation guide to FAS 115 
which allowed entities to reclassify their securities among the three categories
provided in FAS 115. Transfers were permitted after October 1995, but no later
than December 31, 1995. As a result, on November 16, 1995 the Company
transferred a total of $57,584,000 from HTM to AFS at the amortized cost at date
of

                                       41

<PAGE>   48


transfer. Of this total, $37,308,000 were investment securities. The remaining
$20,276,000 transferred were mortgage-backed securities. The unrealized loss on
the securities transferred from HTM to AFS was $419,000, net of tax, at date of
transfer. The transfer was done according to the guidelines set forth in the
implementation guide to FAS115. There were no securities transferred from AFS to
HTM or sales from the HTM portfolio during the year ended December 31, 1997 or
1996.

         The following table sets forth the carrying amount of investment
securities, mortgage-backed securities and marketable equity securities at
December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                       ---------------------
                                                         1997          1996
                                                       --------     --------
                                                       (DOLLARS IN THOUSANDS)
<S>                                                    <C>          <C>     
Available for Sale:
U. S. Treasury ...................................     $ 19,956     $  5,054
U. S. Government Agencies ........................          631        8,457
Mortgage-backed Securities:
   Direct Government Agency Issues ...............       93,981       74,442
   Other Private Issues ..........................       33,770       16,132
State and Political Subdivisions .................       47,658       39,629
Other Stocks and Bonds ...........................        6,044        5,171
                                                       --------     --------
      Total ......................................     $202,040     $148,885
                                                       ========     ========
</TABLE>

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                       ---------------------
                                                        1997          1996
                                                       --------     --------
                                                       (DOLLARS IN THOUSANDS)
<S>                                                    <C>          <C>     
Held to Maturity:
U. S. Government Agencies ........................     $    804     $  1,124
Mortgage-backed Securities:
   Direct Government Agency Issues ...............       13,662       23,782
State and Political Subdivisions .................                       610
                                                       --------     --------

      Total ......................................     $ 14,466     $ 25,516
                                                       ========     ========
</TABLE>

                                       42

<PAGE>   49

         The maturities classified according to the sensitivity to changes in
interest rates of the December 31,1997 securities portfolio and the weighted
yields are presented below. Tax-exempt obligations are shown on a taxable
equivalent basis. Mortgage-backed securities are classified according to
repricing frequency and cash flows from street estimates of principal
prepayments.

<TABLE>
<CAPTION>
                                                                    MATURING OR REPRICING
                                          ----------------------------------------------------------------------------------------
                                             WITHIN 1 YR.          WITHIN 5 YRS.         WITHIN 10 YRS.          AFTER 10 YRS.
                                          ------------------     -----------------     ------------------     --------------------
                                           AMOUNT     YIELD       AMOUNT     YIELD      AMOUNT     YIELD       AMOUNT       YIELD
                                          --------    ------     --------    -----     --------    ------     ---------     ------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                         <C>        <C>         <C>        <C>         <C>        <C>            <C>     <C>  
Available For Sale:

U.S. Treasury..........................   $ 19,956     5.60%     $                      $                     $ 
U.S. Government Agencies...............        514     6.88%          117     9.12%     
Mortgage-backed Securities.............     37,716     6.67%       75,936     6.55%       13,205     6.27%          894     6.57%
State And Political Subdivisions.......      2,988     7.81%        9,982     7.86%        8,771     7.67%       25,917     7.82%
Other Stocks And Bonds.................      3,480     5.86%        1,814     6.38%          401     6.26%          349     3.05%
                                          --------               --------               --------               -------- 

     Total.............................   $ 64,654     6.35%     $ 87,849     6.70%     $ 22,377     6.82%     $ 27,160     7.72%
</TABLE>
                                         

<TABLE>
<CAPTION>
                                                                    MATURING OR REPRICING
                                          ----------------------------------------------------------------------------------------
                                             WITHIN 1 YR.          WITHIN 5 YRS.         WITHIN 10 YRS.          AFTER 10 YRS.
                                          ------------------     -----------------     ------------------     --------------------
                                           AMOUNT     YIELD       AMOUNT     YIELD      AMOUNT     YIELD       AMOUNT       YIELD
                                          --------    ------     --------    -----     --------    ------     ---------     ------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                         <C>        <C>         <C>        <C>         <C>        <C>            <C>     <C>  

Held to Maturity:

U.S. Government Agencies...............   $                      $    804     5.42%    $                      $
Mortgage-backed Securities.............      5,505      5.54%       8,157     6.08%
                                          --------               --------              --------               ---------

Total..................................   $  5,505      5.54%    $  8,961     6.02%    $                      $
                                          ========               ========              ========               =========
</TABLE>

DEPOSITS AND BORROWED FUNDS

         Deposits provide the Company with its primary source of funds. The
increase of $36.7 million or 8.6% in total deposits during 1997 provided the
Company with funds for the growth in loans and securities. Time deposits
increased $12.3 million or 6.2% during 1997 compared to 1996. Noninterest
bearing demand deposits increased during 1997 $14.6 million or 14.8%. interest
bearing demand deposits increased during 1997 $8.9 million or 7.9% and savings
deposits increased $.9 million or 6.2%. The latter three categories, which are
considered the lowest cost deposits, comprised 54.4% of total deposits at
December 31, 1997 compared to 53.3% at December 31, 1996. The increase in total
deposits is reflective of overall bank growth and branch expansion and was the
primary source of funding the increase in loans.



                                       43

<PAGE>   50

         The following table sets forth the Company's deposits by category for
the years ended December 31, 1997 and 1996.

<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                                       -----------------------
                                                         1997         1996
                                                       --------     --------
                                                             (IN THOUSANDS)

<S>                                                    <C>          <C>     
Noninterest Bearing Demand Deposits ..............     $113,499     $ 98,901
Interest Bearing Demand Deposits .................      121,861      112,957
Savings Deposits .................................       16,155       15,213
Time Deposits ....................................      211,159      198,879
                                                       --------     --------

            Total Deposits .......................     $462,674     $425,950
                                                       ========     ========
</TABLE>

         Short-term obligations, consisting primarily of FHLB Dallas advances
and Federal Funds purchased, increased $27.7 million or 405.2% during 1997 when
compared to 1996. This increase reflects a strategically planned increase in
balance sheet leverage to achieve certain ALCO objectives.

         Long-term obligations consisting of FHLB Dallas advances increased in
1997 to $28.5 million or 213.8% compared to $9.1 million in 1996. The advances
were obtained from FHLB Dallas to partially fund long-term loans. FHLB Dallas
advances are collateralized by FHLB Dallas stock, nonspecified real estate loans
and securities.

         During the year ended December 31, 1997 total certificates of deposit
of $100,000 or more increased $6.4 million or 11.5% from December 31, 1996. This
increase was due to overall bank growth and an increase in public funds, which
are funds from public entities.

         The table below sets forth the maturity distribution of certificates of
deposit of $100,000 or more issued by the Company at December 31, 1997 and 1996.

<TABLE>
<CAPTION>

                                                DECEMBER 31, 1997                    DECEMBER 31, 1996
                                       ---------------------------------   ----------------------------------
                                          TIME        OTHER                   TIME        OTHER
                                       CERTIFICATES    TIME                CERTIFICATES    TIME
                                       OF DEPOSIT    DEPOSITS    TOTAL      OF DEPOSIT   DEPOSITS     TOTAL
                                       ------------  --------    -----     ------------  --------     -----
                                                  (in thousands)                    (in thousands)
 
<S>                                     <C>         <C>         <C>           <C>         <C>         <C>    
Three months or less ..............     $14,971     $ 6,140     $21,111       $15,767     $ 4,482     $20,249
Over three to six months ..........       9,810       6,000      15,810         9,170       4,000      13,170
Over six to twelve months .........      11,038                  11,038         9,270                   9,270
Over twelve months ................      14,193                  14,193        13,069                  13,069
                                        -------     -------     -------       -------     -------     -------

          Total ...................     $50,012     $12,140     $62,152       $47,276     $ 8,482     $55,758
                                        =======     =======     =======       =======     =======     =======
</TABLE>


                                       44

<PAGE>   51

THE BANKING INDUSTRY IN TEXAS

         The banking industry is affected by general economic conditions such as
interest rates, inflation, recession, unemployment and other factors beyond the
Company's control. During the mid to late 1980s, declining oil prices had an
indirect effect on the Company's business, and the deteriorating real estate
market caused a significant portion of the increase in the Company's
nonperforming assets during that period. During the early 1990s a mild recovery
took place in East Texas and much of the nation. This recovery continued into
1996 and 1997 and at this time the economic activity in the State and East Texas
appears to be stable to improving with some growth areas resulting. One area of
concern continues to be the personal bankruptcy rate. Management expects this
trend to have some adverse effect on the Company's net charge-offs. Management
of the Company, however, cannot predict whether current economic conditions will
improve, remain the same or decline.

COMPETITION

         The activities engaged in by the Company are highly competitive.
Financial institutions such as savings and loan associations, credit unions,
consumer finance companies, insurance companies, brokerage companies and other
financial institutions with varying degrees of regulatory restrictions compete
vigorously for a share of the financial services market. Brokerage companies
continue to become more competitive in the financial services arena and pose an
ever increasing challenge to banks. Legislative changes also greatly affect the
level of competition the Company faces. Currently, the Company must compete
against some institutions located in Tyler, Texas and elsewhere which have
capital resources and legal loan limits substantially in excess of those
available to the Company. The Company expects the competition it faces to
continue to increase.

EMPLOYEES

         At December 31, 1997, the Company employed approximately 275 full time
equivalent persons. None of the employees are represented by any unions or
similar groups, and the Company has not experienced any type of strike or labor
dispute. The Company considers its relationship with its employees to be good.

LITIGATION

         The Company is party to legal proceedings arising in the normal conduct
of business. Management of the Company believes that such litigation is not
material to the financial position or results of the operations of the Company.

PROPERTIES

         The Company completed expansion and remodeling of the Bank headquarters
at Beckham Avenue during the second half of 1997. Remodeling of the annex
building, to accommodate the Company's new centralized phone center, immediately
across the parking lot from the bank headquarters, is expected to be completed
during 1998.

         Due to growth, in 1997 the Company acquired the Gentry Parkway branch
facility which was previously being leased and added a second ATM. After
remodeling is complete, this branch will provide expanded facilities adequate to
service this growing market area.

         The Bank owns the following properties:

         o        A two story building in Tyler, Texas, at 1201 South Beckham
                  Avenue, a parking lot across the street and the property
                  adjacent to the main bank building, known as the Southside
                  Bank Annex. These properties house the executive offices of
                  the Company.

         o        Property and a building directly adjacent to the building
                  housing the Southside Bank Annex. The building is referred to
                  as the Operations Annex, where various back office lending and
                  accounts payable operations are located.

         o        Land and building located at 1010 East First Street in Tyler
                  where Motor Bank facilities are located.

         o        4.05 acres of land located at the intersection of South
                  Broadway and Grande Boulevard in Tyler. The entire tract is
                  occupied by the Bank's South Broadway branch, which currently
                  provides a full line of banking services.

         o        Property on South Broadway near the South Broadway branch
                  where Motor Bank facilities are located.


                                       45

<PAGE>   52

         o        Thirteen ATM facilities located throughout Tyler and Smith
                  County.

         o        Building located in the downtown square of Tyler which houses
                  the Bank's Downtown branch, providing a full line of banking
                  services.

         o        Gentry Parkway branch and motor bank facility.

         In addition, the Bank leases space for its four grocery store branches.
Management believes its facilities are adequate for its current needs.


                           SUPERVISION AND REGULATION

         Banking is a complex, highly regulated industry. The primary goals of
the bank regulatory scheme are to maintain a safe and sound banking system and
to facilitate the conduct of sound monetary policy. In furtherance of these
goals, Congress has created several largely autonomous regulatory agencies and
enacted numerous laws that govern banks, bank holding companies and the banking
industry. The descriptions of and references to the statutes and regulations
below are brief summaries and do not purport to be complete. The descriptions
are qualified in their entirety by reference to the specific statutes and
regulations discussed.

THE COMPANY

         As bank holding companies under the Bank Holding Company Act of 1956,
as amended (the "BHC Act"), the Company and Southside Delaware are registered
with and subject to regulation by the FRB. The Company and Southside Delaware
are required to file annual and other reports with, and furnish information to,
the FRB, which makes periodic inspections of the Company and Southside Delaware.

         The BHC Act provides that a bank holding company must obtain the prior
approval of the FRB for the acquisition of more than 5% of the voting stock or
substantially all the assets of any bank or bank holding company. In addition,
the BHC Act restricts the extension of credit to any bank holding company by its
subsidiary bank. The BHC Act also provides that, with certain exceptions, a bank
holding company may not (i) engage in any activities other than those of banking
or managing or controlling banks and other authorized subsidiaries or (ii) own
or control more than 5% of the voting shares of any company that is not a bank.
The FRB has deemed certain limited activities to be closely related to banking
and therefore permissible for a bank holding company to engage in.

         In approving acquisitions by bank holding companies of banks and
companies engaged in banking-related activities, the FRB considers whether the
performance of any such activity by an affiliate of the holding company can
reasonably be expected to produce benefits to the public, such as greater
convenience, increased competition or gains in efficiency, that outweigh such
possible adverse effects as undue concentration of resources, decreased or
unfair competition, conflicts of interest or unsound banking practices. The FRB
has cease-and-desist powers over bank holding companies and their nonbanking
subsidiaries where their actions would constitute a serious threat to the
safety, soundness or stability of a subsidiary bank. Federal regulatory agencies
also have authority to regulate debt obligations (other than commercial paper)
issued by bank holding companies. This authority includes the power to impose
interest ceilings and reserve requirements on such debt obligations. A bank
holding company and its subsidiaries are also prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services.

         Federal banking law generally provides that a bank holding company may
acquire or establish banks in any state of the United States, subject to certain
aging and deposit concentration limits. In addition, Texas banking laws permit a
bank holding company which owns stock of a bank located outside the State of
Texas (an "Out-of-State Bank Holding Company") to acquire a bank or bank holding
company located in Texas. Such acquisition may occur only if the Texas bank to
be directly or indirectly controlled by the Out-of-State Bank Holding Company
has existed and continuously operated as a bank for a period of at least five
years. In any event, however, a bank holding company may not own or control
banks in Texas the deposits of which would exceed 20% of the total deposits of
all federally-insured deposits in Texas.

         The FRB has promulgated capital adequacy regulations to which all bank
holding companies that have assets in excess of $150 million are subject. The
FRB's capital adequacy regulations are based upon a risk based capital
determination, whereby a bank holding company's capital adequacy is determined
in light of the risk, both on- and off-balance sheet, contained in the company's
assets. Different categories of assets are assigned risk weightings and, based
thereon, are counted at a percentage (from 0% to 100%) of their book value. The
regulations divide capital between Tier 1 capital (core capital) and Tier 2
capital. For a bank

                                       46

<PAGE>   53

holding company, Tier 1 capital consists primarily of common stock,
noncumulative perpetual preferred stock, related surplus, minority interests in
consolidated subsidiaries and a limited amount of qualifying cumulative
preferred securities such as the Preferred Securities. Goodwill and certain
other intangibles are excluded from Tier 1 capital. Tier 2 capital consists of
varying percentages of the reserve for loan losses, all other types of preferred
stock not included in Tier 1 capital, hybrid capital instruments and term
subordinated debt. Investments in and loans to unconsolidated banking and
finance subsidiaries that constitute capital of those subsidiaries are excluded
from capital. The sum of Tier 1 and Tier 2 capital constitutes qualifying total
capital. The Tier 1 component must comprise at least 50% of qualifying total
capital.

         Every bank holding company has to achieve and maintain a minimum Tier 1
Capital Ratio of at least 4% and a minimum Total Capital Ratio of at least 8%.
In addition, bank holding companies are generally required to achieve and
maintain a Leverage Capital Ratio of at least 4%. Generally, under the prompt
corrective action provisions of the FDIC Improvement Act of 1991 ("FDICIA"),
(described below), an institution is considered well capitalized if it has a
Leverage Capital Ratio of at least 5%, a Core Capital Ratio of at least 6% and a
Total Capital Ratio of at least 10%, and is deemed to be adequately capitalized
if it has a Leverage Capital Ratio of at least 4%, a Core Capital Ratio of at
least 4% and a Total Capital Ratio of at least 8%

         As a bank holding company that does not, as an entity, currently engage
in separate business activities of a material nature, the Company's ability to
pay cash dividends depends upon the cash dividends it receives from the Bank
through Southside Delaware. The Company's only sources of income are (i)
dividends paid by the Bank and (ii) the tax savings, if any, that result from
the filing of consolidated income tax returns for the Company, Southside
Delaware and the Bank. The Company must pay all of its operating expenses from
funds received by it from the Bank. Therefore, shareholders may receive
dividends from the Company only to the extent that funds are available after
payment of the Company's operating expenses. In addition, in November 1985 the
FRB adopted a policy statement concerning payment of cash dividends, which
generally prohibits bank holding companies from paying dividends except out of
operating earnings. In addition, the Company is subject to certain restrictions
on the payment of dividends as a result of the requirement that it maintain an
adequate level of capital as described above.

THE BANK

         The Bank is subject to various requirements and restrictions under the
laws of the United States and the State of Texas, and to regulation, supervision
and regular examination by the TDB and the FDIC. The TDB and the FDIC have the
power to enforce compliance with applicable banking statutes and regulations.
Such requirements and restrictions include requirements to maintain reserves
against deposits, restrictions on the nature and amount of loans that may be
made and the interest that may be charged thereon and restrictions relating to
investments and other activities of the Bank.

         TRANSACTIONS WITH AFFILIATES. With respect to the federal legislation
applicable to the Bank, the Federal Reserve Act, as amended by the Competitive
Equality Banking Act of 1987, prohibits the Bank from engaging in specified
transactions (including, for example, loans) with certain affiliates unless the
terms and conditions of such transactions are substantially the same or at least
as favorable to the Bank as those prevailing at the time for comparable
transactions with or involving other nonaffiliated entities. In the absence of
such comparable transactions, any transaction between the Bank and its
affiliates must be on terms and under circumstances, including credit standards,
that in good faith would be offered or would apply to nonaffiliated companies.
In addition, certain transactions, referred to as "covered transactions,"
between the Bank and its affiliates may not exceed 10% of the Bank's capital and
surplus per affiliate and an aggregate of 20% of its capital and surplus for
covered transactions with all affiliates. Certain transactions with affiliates,
such as loans, also must be secured by collateral of specific types and amounts.
Finally, the Bank is prohibited from purchasing low quality assets from an
affiliate. Every company under common control with the Bank, including the
Company and Southside Delaware, are deemed to be affiliates of the Bank.

         LOANS TO INSIDERS. Federal law also constrains the types and amounts of
loans that the Bank may make to its executive officers, directors and principal
shareholders. Among other things, such loans must be approved by the Bank's
board of directors in advance and must be on terms and conditions as favorable
to the Bank as those available to an unrelated person.

         REGULATION OF LENDING ACTIVITIES. Loans made by the Bank are also
subject to numerous federal and state laws and regulations, including the
Truth-In-Lending Act, Federal Consumer Credit Protection Act, the Texas Consumer
Credit Code, the Texas Consumer Protection Code, the Equal Credit Opportunity
Act, the Real Estate Settlement Procedures Act and adjustable rate mortgage
disclosure requirements. Remedies to the borrower and penalties to the Bank are
provided for failure of the Bank to comply with such laws and regulations. The
scope and requirements of such laws and regulations have expanded significantly
in recent years.

         BRANCH BANKING. Pursuant to the Texas Finance Code, all banks located
in Texas are authorized to branch statewide. Accordingly, a bank located
anywhere in Texas has the ability, subject to regulatory approval, to establish
branch facilities near any


                                       47

<PAGE>   54

of the Bank's facilities and within its market areas. If other banks were to
establish branch facilities near the Bank or any of its facilities, it is
uncertain whether such branch facilities would have a materially adverse effect
on the business of the Bank.

         In addition, in 1994 Congress adopted the Reigle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Reigle Act"). That statute
provides for nationwide interstate banking and branching. However, during 1995,
the Texas legislature elected to opt out of the branching provisions under the
Reigle Act until 1999, which effectively prohibits out of state banks from
opening branches in Texas until at least 1999. Similarly, banks located in Texas
are generally prohibited from opening branches outside of Texas. The Texas
legislature will revisit that issue during the 1999 session. Therefore,
interstate branching will continue to be prohibited in Texas until at least
1999.

         GOVERNMENTAL MONETARY POLICIES. The commercial banking business is
affected not only by general economic conditions but also by the monetary
policies of the FRB. Changes in the discount rate on member bank borrowings,
control of borrowings, open market operations, the imposition of and changes in
reserve requirements against member banks, deposits and assets of foreign
branches, the imposition of and changes in reserve requirements against certain
borrowings by banks and their affiliates and the placing of limits on interest
rates which member banks may pay on time and savings deposits are some of the
instruments of monetary policy available to the FRB. Those monetary policies
influence to a significant extent the overall growth of bank loans, investments
and deposits and the interest rates charged on loans or paid on time and savings
deposits. The nature of future monetary policies and the effect of such policies
on the future business and earnings of the Bank, therefore, cannot be predicted
accurately.

         DIVIDENDS. All dividends paid by the Bank are paid to the Company, the
sole indirect shareholder of the Bank, through Southside Delaware. The general
dividend policy of the Bank is to pay dividends at levels consistent with
maintaining liquidity and preserving applicable capital ratios and servicing
obligations of the Company. The dividend policy of the Bank is subject to the
discretion of the board of directors of the Bank and will depend upon such
factors as future earnings, financial conditions, cash needs, capital adequacy,
compliance with applicable statutory and regulatory requirements and general
business conditions.

         The ability of the Bank, as a Texas banking association, to pay
dividends is restricted under applicable law and regulations. The Bank generally
may not pay a dividend reducing its capital and surplus without the prior
approval of the Texas Banking Commissioner. All dividends must be paid out of
net profits then on hand, after deducting expenses, including losses and
provisions for loan losses. Additionally, the FDIC has the right to prohibit the
payment of dividends by a bank where such payment is deemed to be an unsafe and
unsound banking practice. The Bank is also subject to certain restrictions on
the payment of dividends as a result of the requirements that it maintain an
adequate level of capital in accordance with guidelines promulgated from time to
time by the FDIC.

         The exact amount of future dividends on the stock of the Bank will be a
function of the profitability of the Bank in general and applicable tax rates in
effect from year to year. The Bank's ability to pay dividends in the future will
directly depend on its future profitability, which cannot be accurately
estimated or assured.

         CAPITAL ADEQUACY. In 1983, Congress enacted the International Lending
Supervision Act, which, among other things, directed the FDIC to establish
minimum levels of capital for banks and to require banks to achieve and maintain
adequate capital. Pursuant to this authority, the FDIC has promulgated capital
adequacy regulations to which all state nonmember banks, such as the Bank, are
subject. These requirements are substantially similar to the FRB requirements
promulgated with respect to bank holding companies. See "Regulation--The Company
and Southside Delaware."

         FIRREA. The Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA") includes various provisions that affect or may affect the
Bank. Among other matters, FIRREA generally permits bank holding companies to
acquire healthy thrifts as well as failed or failing thrifts. FIRREA removed
certain cross-marketing prohibitions previously applicable to thrift and bank
subsidiaries of a common holding company. Furthermore, a multibank holding
company may now be required to indemnify the federal deposit insurance fund
against losses it incurs with respect to such company's affiliated banks, which
in effect makes a bank holding company's equity investments in healthy bank
subsidiaries available to the FDIC to assist such company's failing or failed
bank subsidiaries.

         In addition, pursuant to FIRREA, any depository institution that has
been chartered less than two years, is not in compliance with the minimum
capital requirements of its primary federal banking regulator or is otherwise in
a troubled condition must notify its primary federal banking regulator of the
proposed addition of any person to the board of directors or the employment of
any person as a senior executive officer of the institution at least 30 days
before such addition or employment becomes effective. During such 30-day period,
the applicable federal banking regulatory agency may disapprove of the addition
or employment of such director or officer. The Bank is not subject to any such
requirements.


                                       48

<PAGE>   55

         FIRREA also expanded and increased civil and criminal penalties
available for use by the appropriate regulatory agency against certain
"institution-affiliated parties" primarily including (i) management, employees
and agents of a financial institution, as well as (ii) independent contractors
such as attorneys and accountants and others who participate in the conduct of
the financial institution's affairs and who cause or are likely to cause more
than minimum financial loss to or a significant adverse affect on the
institution, who knowingly or recklessly violate a law or regulation, breach a
fiduciary duty or engage in unsafe or unsound practices. Such practices can
include the failure of an institution to timely file required reports or the
submission of inaccurate reports. Furthermore, FIRREA authorizes the appropriate
banking agency to issue cease and desist orders that may, among other things,
require affirmative action to correct any harm resulting from a violation or
practice, including restitution, reimbursement, indemnifications or guarantees
against loss. A financial institution may also be ordered to restrict its
growth, dispose of certain assets or take other action as determined by the
ordering agency to be appropriate.

         FDICIA. FDICIA made a number of reforms addressing the safety and
soundness of the deposit insurance system, supervision of domestic and foreign
depository institutions, and improvement of accounting standards. This statute
also limited deposit insurance coverage, implemented changes in consumer
protection laws and provided for least-cost resolution and prompt regulatory
action with regard to troubled institutions.

         FDICIA requires every bank with total assets in excess of $500 million
to have an annual independent audit made of the bank's financial statements by a
certified public accountant to verify that the financial statements of the bank
are presented in accordance with generally accepted accounting principles and
comply with such other disclosure requirements as prescribed by the FDIC.

         FDICIA also places certain restrictions on activities of banks
depending on their level of capital. FDICIA divides banks into five different
categories, depending on their level of capital. Under regulations recently
adopted by the FDIC, a bank is deemed to be "well capitalized" if it has a total
Risk-Based Capital Ratio of 10% or more, a Core Capital Ratio of 6% or more and
a Leverage Ratio of 5% or more, and if the bank is not subject to an order or
capital directive to meet and maintain a certain capital level. Under such
regulations, a bank is deemed to be "adequately capitalized" if it has a total
Risk-Based Capital Ratio of 8% or more, a Core Capital Ratio of 4% or more and a
Leverage Ratio of 4% or more (unless it receives the highest composite rating at
its most recent examination and is not experiencing or anticipating significant
growth, in which instance it must maintain a Leverage Ratio of 3% or more).
Under such regulations, a bank is deemed to be "undercapitalized" if it has a
total Risk-Based Capital Ratio of less than 8%, a Core Capital Ratio of less
than 4% or a Leverage Ratio of less than 4%. Under such regulations, a bank is
deemed to be "significantly undercapitalized" if it has a Risk-Based Capital
Ratio of less than 6%, a Core Capital Ratio of less than 3% and a Leverage Ratio
of less than 3%. Under such regulations, a bank is deemed to be "critically
undercapitalized" if it has a Leverage Ratio of less than or equal to 2%. In
addition, the FDIC has the ability to downgrade a bank's classification (but not
to "critically undercapitalized") based on other considerations even if the bank
meets the capital guidelines.

         In addition, if a state nonmember bank is classified as
undercapitalized, the bank is required to submit a capital restoration plan to
the FDIC. Pursuant to FDICIA, an undercapitalized bank is prohibited from
increasing its assets, engaging in a new line of business, acquiring any
interest in any company or insured depository institution, or opening or
acquiring a new branch office, except under certain circumstances, including the
acceptance by the FDIC of a capital restoration plan for the bank.

         Furthermore, if a state nonmember bank is classified as
undercapitalized, the FDIC may take certain actions to correct the capital
position of the bank. If a bank is classified as significantly undercapitalized,
the FDIC is required to take one or more prompt corrective actions. These
actions include, among other things, requiring: sales of new securities to
bolster capital, improvements in management, limits on interest rates paid,
prohibitions on transactions with affiliates, termination of certain risky
activities and restrictions on compensation paid to executive officers. If a
bank is classified as critically undercapitalized, FDICIA requires the bank to
be placed into conservatorship or receivership within 90 days, unless the FDIC
determines that other action would better achieve the purposes of FDICIA
regarding prompt corrective action with respect to undercapitalized banks.

         The capital classification of a bank affects the frequency of
examinations of the bank and impacts the ability of the bank to engage in
certain activities and affects the deposit insurance premiums paid by the bank.
Under FDICIA, the FDIC is required to conduct a full-scope, on-site examination
of every bank at least once every twelve months. An exception to this rule
provides that banks that (i) have assets of less than $100 million, (ii) are
categorized as "well capitalized," (iii) are found to be well managed with a
composite rating of "outstanding" and (iv) have not been subject to a change in
control during the last twelve months, need only be examined by the FDIC once
every eighteen months.

         Under FDICIA, banks may be restricted in their ability to accept
brokered deposits, depending on their capital classification. "Well capitalized"
banks are permitted to accept brokered deposits, but all banks that are not well
capitalized are not permitted to accept such deposits. The FDIC may, on a
case-by-case basis, permit banks that are adequately capitalized to accept
brokered deposits if the FDIC determines that acceptance of such deposits would
not constitute an unsafe or unsound banking practice with respect to the bank.

                                       49

<PAGE>   56


         In addition, under FDICIA, the FDIC is authorized to assess insurance
premiums on a bank's deposits at a variable rate depending on the probability
that the deposit insurance fund will incur a loss with respect to the bank.
Under prior law, the deposit insurance assessment was a flat rate, regardless of
the likelihood of loss. In this regard, the FDIC has issued regulations for a
transitional risk-based deposit assessment that determines the deposit insurance
assessment rates on the basis of the bank's capital classification and
supervisory evaluations. Each of these categories has three subcategories,
resulting in nine assessment risk classifications. The three subcategories with
respect to capital are "well capitalized," "adequately capitalized" and "less
than adequately capitalized (which would include "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized" banks). The
three subcategories with respect to supervisory concerns are "healthy,"
"supervisory concern" and "substantial supervisory concern." A bank is deemed
"healthy" if it is financially sound with only a few minor weaknesses. A bank is
deemed subject to "supervisory concern" if it has weaknesses that, if not
corrected, could result in significant deterioration of the bank and increased
risk to the Bank Insurance Fund of the FDIC (the "BIF"). A bank is deemed
subject to "substantial supervisory concern" if it poses a substantial
probability of loss to BIF.

         The federal banking agencies have established guidelines, effective
August 9, 1995, which prescribe standards for depository institutions relating
to internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth and
management compensation. The agencies may require an institution which fails to
meet the standards set forth in the guidelines to submit a compliance plan. The
agencies are also currently proposing standards for asset quality and earnings.
The Company cannot predict what effect such guidelines will have on the Bank.

         DEPOSIT INSURANCE. The Bank's deposits are insured up to $100,000 per
insured account by BIF. As an institution whose deposits are insured by BIF, the
Bank is currently required to pay annual deposit insurance premiums to BIF in
the amount of $1.26 per hundred dollars of deposits. The Bank's deposit
insurance assessments may increase depending upon the risk category and
subcategory, if any, to which the Bank is assigned by the FDIC. Any increase in
insurance assessments could have an adverse effect on the Bank's earnings.

         Management of the Company and the Bank cannot predict what other
legislation might be enacted or what other regulations might be adopted or the
effects thereof.

         THE FOREGOING IS AN ATTEMPT TO SUMMARIZE SOME OF THE RELEVANT LAWS,
RULES AND REGULATIONS GOVERNING BANKS AND BANK HOLDING COMPANIES BUT DOES NOT
PURPORT TO BE A COMPLETE SUMMARY OF ALL APPLICABLE LAWS, RULES AND REGULATIONS
GOVERNING BANKS AND BANK HOLDING COMPANIES.

    
                                   50

<PAGE>   57

                                   MANAGEMENT

       The following table sets forth the names and ages of the directors of the
 Company and the executive officers of the Company and the Bank, as well as the
positions of officers held by such person.


<TABLE>
<CAPTION>

    NAME                 AGE                 POSITIONS HELD
-------------------      ---       --------------------------------------------------------------
<S>                      <C>       <C>                                                        
B.G. Hartley             68        Chairman of the Board of the Company and Chairman of the
                                   Board and Chief Executive Officer of the Bank
Robbie N. Edmonson       66        Vice Chairman of the Board of the Company and Vice
                                   Chairman of the Board and Chief Administrative Officer of the
                                   Bank
Sam Dawson               51        President, Secretary and Director of the Company and
                                   President and Chief Operations Officer of the Bank
James F. Deakins         64        Senior Vice President - Loan Review of the Company
Lee R. Gibson            41        Executive Vice President and Chief Accounting Officer of the
                                   Company and Executive Vice President of the Bank
Titus E. Jones           53        Executive Vice President, Commercial Lending, and Director of the Bank
Jeryl Story              46        Senior Executive Vice President - Loan Administration of the
                                   Bank
Lonny R. Uzzell          44        Executive Vice President, Marketing, of the Bank
H. Andy Wall             58        Executive Vice President, Commercial Lending, and Director of the Bank
Fred E. Bosworth         80        Director of the Company
Herbert C. Buie          67        Director of the Company
Rollins Caldwell         76        Director of the Company
W.D. (Joe) Norton        61        Director of the Company
William Sheehy           57        Director of the Company
Murph Wilson             86        Director of the Company
</TABLE>

         Officers of the Company and the Bank are elected annually by the board
of directors of the Company and the Bank, respectively. The business experience
of each executive officer of the Company and the Bank and each director of the
Company is set forth below.

         B.G. HARTLEY - Mr. Hartley has been Chairman of the Board of the
Company since 1983. He is also Chairman of the Board and Chief Executive Officer
of the Bank, having served as the Bank's Chief Executive Officer since its
opening in 1960. He is a member of the Board of Directors of the American
Bankers Association and East Texas Medical Center Regional Healthcare Systems,
and he is Chairman of the Board of Directors of the Texas Taxpayers and Research
Association and Texas Bankers General Agency, Inc. He is also a Trustee of the
R. W. Fair Foundation, and a Trustee and a member of the Executive Committee of
Texas College.

         ROBBIE N. EDMONSON - Mr. Edmonson is Vice Chairman of the Board of the
Company, serving since 1998. Prior to serving as Vice Chairman, Mr. Edmonson
served as President of the Company since 1983. He joined the Bank as Vice
President in 1968, and currently is Vice Chairman of the Board of Directors and
Chief Administrative Officer of the Bank.


                                       51
<PAGE>   58

         SAM DAWSON - Mr. Dawson is President and Secretary of the Company,
serving since 1998. Prior to serving as President, Mr. Dawson served as
Executive Vice President and Secretary of the Company since 1990. He joined the
Bank in 1974 and currently serves as its President and Chief Operations Officer.
He is a Director of East Texas Medical Center Hospital, Cancer Institute and
ETMC Rehabilitation Hospital. He is also a Director of the Tyler Area Chamber of
Commerce.

         JAMES F. DEAKINS - Mr. Deakins has served as Senior Vice President,
Loan Review of the Company since 1988. He joined the Bank in 1987 as a Vice
President in commercial lending.

         LEE R. GIBSON - Mr. Gibson serves as Executive Vice President and Chief
Accounting Officer of the Company and Executive Vice President of the Bank. He
became an officer of the Company in 1985 and of the Bank during 1984.

         TITUS E. JONES - Mr. Jones has served as Executive Vice President,
Commercial Lending and Director of the Bank since 1987. He joined the Bank in
1965.

         JERYL STORY - Mr. Story was elected Senior Executive Vice President,
Loan Administration of the Bank during 1996. He joined the Bank in 1979.

         LONNY R. UZZELL - Mr. Uzzell was elected Executive Vice President,
Marketing of the Bank during 1996. He joined the Bank in 1981.

         H. ANDY WALL - Mr. Wall has served as Executive Vice President,
Commercial Lending and Director of the Bank since 1984. He joined the Bank in
1968 and became an officer in 1969.

         FRED E. BOSWORTH - Mr. Bosworth is a Director of the Company. Before
retiring in 1997, he had been Chairman of the Board of Bosworth & Associates,
Inc., an independent insurance agency, since 1982. He has been associated with
the insurance industry in various capacities since 1935.

         HERBERT C. BUIE - Mr. Buie is a Director of the Company. He is
President of Tyler Packing Company, Inc., a meat processing firm. He was
initially employed by Tyler Packing in 1947, and acquired the corporation
several years later. He has served on the Board of Directors of the Church of
God, School of Theology, since 1979 and also serves on the Board of Directors of
the University of Texas Health Center and the Developmental Board of Directors
of the University of Texas-Tyler. He also serves on the Boards of Directors of
the East Texas Regional Food Bank and the Texas Chest Foundation.

         ROLLINS CALDWELL - Mr. Caldwell is a Director of the Company. He is a
private investor who served as President of Caldwell Welding Supply Company for
37 years. He currently is involved in equipment and real estate leasing.

         W. D. (JOE) NORTON - Mr. Norton is a Director of the Company. He is the
owner of W. D. Norton, Inc., dba Overhead Door. He also owns Norton Equipment
Company. Mr. Norton served as President and principal shareholder of Norton
Companies of Texas, Inc., for 25 years. He is a Director of the Tyler Area
Chamber of Commerce.

         WILLIAM SHEEHY - Mr. Sheehy is a Director of the Company. He has been a
partner in the law firm of Wilson, Sheehy, Knowles, Robertson and Cornelius
since 1971, and a practicing attorney since 1964. Mr. Sheehy serves as the
Bank's outside general counsel.

         MURPH WILSON - Mr. Wilson is a Director of the Company. He has been a
partner in the law firm of Wilson, Sheehy, Knowles, Robertson and Cornelius
since 1953, and a practicing attorney since 1938. He is a charter member of the
Board of Directors of the Sabine River Authority. He has also served as Chairman
of the Board of Directors of the Bank.

                                       52

<PAGE>   59

                     DESCRIPTION OF THE PREFERRED SECURITIES

GENERAL

         The following is a summary of certain terms and provisions of the
Preferred Securities. This summary does not purport to be complete and is
subject to, and qualified in its entirety by reference to, the Trust Agreement.
The form of the Trust Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.

DISTRIBUTIONS

         The Preferred Securities represent preferred undivided beneficial
interests in the assets of the Trust Issuer. Distributions on the Preferred
Securities will be payable at the annual rate of ____% of the stated Liquidation
Amount of $10, payable quarterly in arrears on March 31, June 30, September 30
and December 31 of each year, to the holders of the Preferred Securities on the
relevant record dates. The record date for the Preferred Securities will be, for
as long as the Preferred Securities remain in book-entry form, one Business Day
(as defined below) prior to the relevant Distribution payment date and, in the
event the Preferred Securities are not in book-entry form, the 15th day of the
month in which the relevant Distribution payment date occurs. Distributions will
accumulate from the date of the initial issuance of the Preferred Securities and
are cumulative. The first Distribution payment date for the Preferred Securities
will be June 30, 1998. The amount of Distributions payable for any period will
be computed on the basis of a 360-day year of twelve 30-day months. In the event
that any date on which Distributions are payable on the Preferred Securities is
not a Business Day, then payment of the Distributions payable on such date will
be made on the next succeeding day that is a Business Day (and without any
additional Distributions or other payment in respect of any such delay), except
that, if such Business Day is in the next succeeding calendar year, such payment
shall be made on the immediately preceding Business Day, in each case with the
same force and effect as if made on the date such payment was originally payable
(each date on which Distributions are payable in accordance with the foregoing,
a "Distribution Date"). A "Business Day" shall mean any day other than a
Saturday or a Sunday, or a day on which federal or state banking institutions in
the Borough of Manhattan, the City of New York, or the State of Delaware are
authorized or required by law, executive order or regulation to close or a day
on which the Corporate Trust Office of the Property Trustee or the Debenture
Trustee is closed for business.

         So long as no Debenture Event of Default has occurred and is
continuing, the Company has the right under the Indenture to defer the payment
of interest on the Junior Subordinated Debentures at any time or from time to
time for a period not exceeding 20 consecutive quarters with respect to each
Extension Period, provided that no Extension Period may extend beyond the Stated
Maturity of the Junior Subordinated Debentures. As a consequence of any such
deferral of interest, quarterly Distributions on the Preferred Securities by the
Trust Issuer will also be deferred during any such Extension Period.
Distributions to which holders of the Preferred Securities are entitled will
accumulate additional Distributions thereon at the rate per annum of ____%
thereof, compounded quarterly from the relevant payment date for such
Distributions. The term "Distributions" as used herein, shall include any such
additional Distributions. During any such Extension Period, the Company may not,
and may not permit any subsidiary of the Company to, (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Company's capital stock other
than payments pursuant to the Guarantee (other than (a) the reclassification of
any class of the Company's capital stock into another class of capital stock,
(b) dividends or distributions in common stock of the Company, (c) any
declaration of a dividend in connection with the implementation of a
shareholders' rights plan, or the issuance of stock under any such plan in the
future or the redemption or repurchase of any rights pursuant thereto, (d)
payments under the Guarantee and (e) purchases of common stock related to the
issuance of common stock or rights under any of the Company's benefit plans for
its or its subsidiaries' directors, officers or employees), (ii) make any
payment of principal, interest or premium, if any, on or repay, repurchase or
redeem any debt securities of the Company that rank pari passu with or junior in
interest to the Junior Subordinated Debentures, (iii) make any guarantee
payments with respect to any guarantee by the Company of the debt securities of
any subsidiary of the Company if such guarantee ranks pari passu with or junior
in interest to the Junior Subordinated Debentures, other than payments pursuant
to the Guarantee or (iv) redeem, purchase or acquire less than all of the
outstanding Debentures or any of the Preferred Securities. Upon the termination
of any such Extension Period and the payment of all interest then accrued and
unpaid (together with interest thereon at the rate of ____%, compounded
quarterly, to the extent permitted by applicable law), the Company may elect to
begin a new Extension Period. There is no limitation on the number of times that
the Company may elect to begin an Extension Period. See "Description of the
Junior Subordinated Debentures--Right to Defer Interest Payment Obligation" and
"Certain Federal Income Tax Consequences--Interest Income and Original Issue
Discount."

         The revenue of the Trust Issuer available for distribution to holders
of its Preferred Securities will be limited to payments under the Junior
Subordinated Debentures in which the Trust Issuer will invest the proceeds from
the issuance and sale of its Trust Securities. See "Description of the Junior
Subordinated Debentures." If the Company does not make interest payments on the
Junior Subordinated Debentures, the Trust Issuer will not have funds available
to pay Distributions on the Preferred Securities. The payment of Distributions
(if and to the extent the Trust Issuer has funds legally available for the
payment of such Distributions and cash sufficient to make such payments) is
guaranteed by the Company on a limited basis as set forth herein under
"Description of the Guarantee."


                                       53

<PAGE>   60

       The Company has no current intention of exercising its right to defer
payments of interest on the Junior Subordinated Debentures.

SUBORDINATION OF THE COMMON SECURITIES

         Payment of Distributions on and the Redemption Price of the Preferred
Securities and Common Securities, as applicable, shall be made pro rata based on
the Liquidation Amount of the Preferred Securities and the Common Securities;
provided, however, that if on any Distribution Date or Redemption Date a
Debenture Event of Default shall have occurred and be continuing, no payment of
any Distribution on, or Redemption Price of, any of the Common Securities, and
no other payment on account of the redemption, liquidation or other acquisition
of such Common Securities, shall be made unless payment in full in cash of all
accumulated and unpaid Distributions on all of the outstanding Preferred
Securities for all Distribution periods terminating on or prior thereto, or, in
the case of payment of the Redemption Price, the full amount of such Redemption
Price on all of the outstanding Preferred Securities then called for redemption,
shall have been made or provided for, and all funds available to the Trust
Issuer shall first be applied to the payment in full in cash of all
Distributions on, or the Redemption Price of, the Preferred Securities then due
and payable.

         In the case of any Event of Default under the Trust Agreement resulting
from a Debenture Event of Default, the Company as holder of the Common
Securities will be deemed to have waived any right to act with respect to any
such Event of Default under the Trust Agreement until the effect of all such
Events of Default with respect to the Preferred Securities shall have been
cured, waived or otherwise eliminated. Until any such Events of Default under
the Trust Agreement shall have been so cured, waived or otherwise eliminated,
the Property Trustee shall act solely on behalf of the holders of the Preferred
Securities and not on behalf of the Company as holder of the Common Securities,
and only the holders of the Preferred Securities will have the right to direct
the Property Trustee to act on their behalf.

REDEMPTION

         The Preferred Securities are subject to mandatory redemption, in whole
or in part, upon repayment of the Junior Subordinated Debentures at their Stated
Maturity or earlier redemption as provided in the Indenture. The proceeds from
such redemption shall be applied by the Trust Issuer to redeem a Like Amount (as
defined below) of the Trust Securities upon not less than 30 nor more than 60
days notice prior to the date fixed for redemption, at a redemption price, with
respect to the Preferred Securities, equal to the aggregate Liquidation Amount
of such Preferred Securities plus accumulated and unpaid Distributions thereon
(the "Redemption Price") to the date of redemption (the "Redemption Date"). If
less than all of the Junior Subordinated Debentures are to be redeemed on a
Redemption Date, then the proceeds from such redemption shall be allocated to
the pro rata redemption of the Preferred Securities and the Common Securities.
The particular Preferred Securities to be redeemed shall be selected by the
Trust Issuer by such method (including, without limitation, by lot) as the Trust
Issuer shall deem fair and appropriate. For a description of the Stated Maturity
and redemption provisions of the Junior Subordinated Debentures, see
"Description of the Junior Subordinated Debentures--General" and "--Redemption
or Exchange."

         The Company has the option, subject to regulatory approval if then
required, to redeem the Junior Subordinated Debentures prior to maturity on or
after June 30, 2003, in whole at any time or in part from time to time, and
thereby cause a mandatory redemption of a Like Amount of the Trust Securities.
See "Description of the Junior Subordinated Debentures--Redemption or Exchange."
Any time that a Tax Event, an Investment Company Event or a Capital Treatment
Event shall occur and be continuing, the Company has the right to redeem the
Junior Subordinated Debentures in whole (but not in part) and thereby cause a
mandatory redemption of the Trust Securities in whole (but not in part). See
"Description of the Junior Subordinated Debentures--Redemption or Exchange."

         "Like Amount" means (i) with respect to a redemption of the Preferred
Securities, Preferred Securities having a Liquidation Amount equal to that
portion of the principal amount of the Junior Subordinated Debentures to be
contemporaneously redeemed in accordance with the Indenture, allocated to the
Common Securities and to the Preferred Securities pro rata based upon the
relative Liquidation Amounts of such Trust Securities and the proceeds of which
will be used to pay the Redemption Price of such Preferred Securities and (ii)
with respect to a distribution of the Junior Subordinated Debentures to holders
of the Preferred Securities in exchange therefor in connection with a
dissolution or liquidation of the Trust Issuer, Junior Subordinated Debentures
having a principal amount equal to the Liquidation Amount of the Preferred
Securities of the holder to whom such Junior Subordinated Debentures would be
distributed.


                                       54

<PAGE>   61

REDEMPTION PROCEDURES

         Preferred Securities redeemed on any Redemption Date shall be redeemed
at the Redemption Price with the applicable proceeds from the contemporaneous
redemption of a Like Amount of the Junior Subordinated Debentures. Redemptions
of the Preferred Securities shall be made and the Redemption Price shall be paid
on each Redemption Date only to the extent that the Trust Issuer has funds on
hand available for the payment of such Redemption Price. See also "Description
of the Preferred Securities--Subordination of the Common Securities."

         If the Trust Issuer gives a notice of redemption in respect of the
Preferred Securities, then, by 10:00 a.m., New York City time, on the Redemption
Date, to the extent funds are available, the Trust Issuer will deposit
irrevocably with DTC funds sufficient to pay the applicable Redemption Price and
will give DTC irrevocable instructions and authority to pay the Redemption Price
to the holders of such Preferred Securities. See "Book-Entry, Delivery and
Form." If the Preferred Securities are no longer in book-entry form, the
Property Trustee, to the extent funds are available, will irrevocably deposit
with the paying agent for the Preferred Securities funds sufficient to pay the
applicable redemption price and will give such paying agent irrevocable
instructions and authority to pay the Redemption Price to the holders thereof
upon surrender of their certificates evidencing such Preferred Securities.
Notwithstanding the foregoing, Distributions payable on or prior to the
Redemption Date for the Preferred Securities called for redemption shall be
payable to the holders of the Preferred Securities on the relevant record dates
for the related Distribution Dates. If notice of redemption shall have been
given and funds deposited as required, then, upon the date of such deposit, all
rights of the holders of the Preferred Securities so called for redemption will
cease, except the right of the holders of such Preferred Securities to receive
the Redemption Price, but without interest on such Redemption Price, and such
Preferred Securities will cease to be outstanding.

         In the event that any date fixed for redemption of the Preferred
Securities is not a Business Day, then payment of the Redemption Price payable
on such date will be made on the next succeeding day which is a Business Day
(and without any interest or other payment in respect of any such delay), except
that, if such Business Day falls in the next calendar year, such payment will be
made on the immediately preceding Business Day. In the event that payment of the
Redemption Price in respect of the Preferred Securities called for redemption is
improperly withheld or refused and not paid either by the Trust Issuer or by the
Company pursuant to the Guarantee as described under "Description of the
Guarantee," Distributions on such Preferred Securities will continue to accrue
at the then applicable rate, from the Redemption Date originally established by
the Trust Issuer for such Preferred Securities to the date such Redemption Price
is actually paid, in which case the actual payment date will be the date fixed
for redemption for purposes of calculating the Redemption Price.

         Subject to applicable law (including, without limitation, United States
federal securities law), the Company or its subsidiaries may at any time and
from time to time purchase outstanding Preferred Securities by private
agreement.

         Payment of the Redemption Price on the Preferred Securities and any
distribution of the Junior Subordinated Debentures to holders of the Preferred
Securities shall be made to the applicable recordholders thereof as they appear
on the register for the Preferred Securities on the relevant record date, which
date shall be one Business Day prior to the relevant Redemption Date or
Liquidation Date, as applicable; provided, however, in the event the Preferred
Securities do not remain in book entry form, the relevant record date shall be a
date at least 15 days prior to the Redemption Date or liquidation date, as
applicable.

         If less than all of the Preferred Securities and Common Securities
issued by the Trust Issuer are to be redeemed on a Redemption Date, then the
aggregate Liquidation Amount of the Preferred Securities and Common Securities
to be redeemed shall be allocated pro rata to the Preferred Securities and the
Common Securities based upon the relative Liquidation Amounts of such classes.
The particular Preferred Securities to be redeemed shall be selected not more
than 60 days prior to the Redemption Date by the Property Trustee from the
outstanding Preferred Securities not previously called for redemption, or if the
Preferred Securities are then held in the form of a global preferred security,
in accordance with DTC's customary procedures. The Property Trustee shall
promptly notify the trust registrar in writing of the Preferred Securities
selected for redemption and, in the case of any Preferred Securities selected
for partial redemption, the Liquidation Amount thereof to be redeemed. For all
purposes of the Trust Agreement, unless the context otherwise requires, all
provisions relating to the redemption of the Preferred Securities shall relate,
in the case of the Preferred Securities redeemed or to be redeemed only in part,
to the portion of the aggregate Liquidation Amount of the Preferred Securities
which has been or is to be redeemed.

         Notice of any redemption will be mailed at least 30 days but not more
than 60 days before the Redemption Date to each holder of the Preferred
Securities to be redeemed at its registered address. Unless the Company defaults
in payment of the Redemption Price on the Junior Subordinated Debentures, on and
after the Redemption Date interest will cease to accrue on the Junior
Subordinated Debentures or portions thereof (and Distributions will cease to
accumulate on the Preferred Securities or portions thereof) called for
redemption.

                                       55

<PAGE>   62

LIQUIDATION OF THE TRUST ISSUER AND DISTRIBUTION OF THE JUNIOR SUBORDINATED
DEBENTURES TO HOLDERS

         The Company has the right, subject to regulatory approval if then
required, at any time to liquidate the Trust Issuer and, after satisfaction of
the liabilities of creditors of the Trust Issuer as provided by applicable law,
cause the Junior Subordinated Debentures to be distributed to the holders of the
Preferred Securities and Common Securities in exchange therefor upon liquidation
of the Trust Issuer.

         After the liquidation date fixed for any distribution of the Junior
Subordinated Debentures for Preferred Securities (i) such Preferred Securities
will no longer be deemed to be outstanding, (ii) DTC or its nominee, as the
registered holder of Preferred Securities, will receive a registered global
certificate or certificates representing the Junior Subordinated Debentures to
be delivered upon such distribution with respect to Preferred Securities held by
DTC or its nominee, and (iii) any certificates representing the Preferred
Securities not held by DTC or its nominee will be deemed to represent Junior
Subordinated Debentures having a principal amount equal to the stated
Liquidation Amount of such Preferred Securities, and bearing accrued and unpaid
interest in an amount equal to the accumulated and unpaid Distributions on such
series of the Preferred Securities until such certificates are presented to the
Administrative Trustees or their agent for transfer or reissuance.

         Under current United States federal income tax law and interpretations,
a distribution of the Junior Subordinated Debentures will not be a taxable event
to holders of the Preferred Securities. Should there be a change in law, a
change in legal interpretation, a Tax Event or other circumstances, however, the
distribution could be a taxable event to holders of the Preferred Securities.
See "Certain Federal Income Tax Consequences--Distribution of the Junior
Subordinated Debentures to Holders of the Preferred Securities." If the Company
elects neither to redeem the Junior Subordinated Debentures prior to maturity,
nor to liquidate the Trust Issuer and distribute the Junior Subordinated
Debentures to holders of the Trust Securities in exchange therefor, the Trust
Securities will remain outstanding until the Stated Maturity of the Junior
Subordinated Debentures.

         If the Company elects to liquidate the Trust Issuer and thereby causes
the Junior Subordinated Debentures to be distributed to holders of the Trust
Securities in exchange therefor upon liquidation of the Trust Issuer, the
Company will continue to have the right to redeem the Junior Subordinated
Debentures in certain circumstances as described under "Description of the
Junior Subordinated Debentures--Redemption or Exchange."

LIQUIDATION DISTRIBUTION UPON DISSOLUTION

         Pursuant to the Trust Agreement, the Trust Issuer shall automatically
dissolve upon expiration of its term and shall dissolve on the first to occur of
(i) certain events of bankruptcy, dissolution or liquidation of the Company,
subject in certain instances to any such event remaining in effect for a period
of 90 consecutive days; (ii) the distribution of a Like Amount of the Junior
Subordinated Debentures to the holders of the Trust Securities, subject to
regulatory approval if then required, if the Company, as depositor, has given
written direction to the Property Trustee to dissolve the Trust Issuer (which
direction is optional and wholly within the discretion of the Company as
depositor); (iii) redemption of all of the Preferred Securities as described
under "Description of the Preferred Securities--Redemption;" and (iv) the entry
of an order for the dissolution of the Trust Issuer by a court of competent
jurisdiction.

         If an early dissolution occurs as described in clause (i), (ii) or (iv)
of the preceding paragraph, the Trust Issuer shall be liquidated by the Trust
Issuer Trustees as expeditiously as the Trust Issuer Trustees determine to be
possible by distributing, after satisfaction of liabilities to creditors of the
Trust Issuer, if any, as provided by applicable law, to the holders of the Trust
Securities a Like Amount of the Junior Subordinated Debentures, unless such
distribution is determined by the Trust Issuer not to be practical, in which
event such holders will be entitled to receive out of the assets of the Trust
Issuer available for distribution to holders, after satisfaction of liabilities
to creditors of the Trust Issuer, if any, as provided by applicable law, an
amount equal to, in the case of holders of the Preferred Securities, the
aggregate of the Liquidation Amount plus accrued and unpaid Distributions
thereon to the date of payment (such amount being the "Liquidation
Distribution"). If such Liquidation Distribution can be paid only in part
because the Trust Issuer has insufficient assets available to pay in full the
aggregate Liquidation Distribution, then the amounts payable directly by the
Trust Issuer on the Preferred Securities shall be paid on a pro rata basis. The
holder of the Common Securities will be entitled to receive distributions upon
any such liquidation pro rata with the holders of the Preferred Securities,
except that if a Debenture Event of Default has occurred and is continuing, the
Preferred Securities shall have a priority over the Common Securities with
respect to any such distributions.


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<PAGE>   63

EVENTS OF DEFAULT; NOTICE

         Any one of the following events constitutes an "Event of Default" under
the Trust Agreement (an "Event of Default") with respect to the Preferred
Securities issued thereunder (whatever the reason for such Event of Default and
whether it shall be voluntary or involuntary or be effected by operation of law
or pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body):

              (i) the occurrence of an event of default under the Indenture (see
         "Description of the Junior Subordinated Debentures--Debenture Events of
         Default"); or

              (ii) default in the payment of any Distribution when it becomes
         due and payable, and continuation of such default for a period of 30
         days; or

              (iii) default in the payment of any Redemption Price of any Trust
         Security when it becomes due and payable; or

              (iv) default in the performance, or breach, in any material
         respect, of any covenant or warranty of the Trust Issuer Trustees in
         the Trust Agreement (other than a covenant or warranty a default in the
         performance of which or the breach of which is dealt with in clause
         (ii) or (iii) above), and continuation of such default or breach for a
         period of 60 days after there has been given, by registered or
         certified mail, to the defaulting Trust Issuer Trustee or Trustees by 
         the holders of at least 25% in aggregate Liquidation Amount of the
         outstanding Preferred Securities, a written notice specifying such
         default or breach and requiring it to be remedied and stating that such
         notice is a "Notice of Default" under the Trust Agreement; or

              (v) the occurrence of certain events of bankruptcy or insolvency
         with respect to the Property Trustee and the failure by the Company to
         appoint a successor Property Trustee within 60 days thereof.

         Within 90 days after the occurrence of any Event of Default actually
known to the Property Trustee, the Property Trustee shall transmit notice of
such Event of Default to the holders of the Preferred Securities, the
Administrative Trustees and the Company, as depositor, unless such Event of
Default shall have been cured or waived. The Company, as depositor, and the
Administrative Trustees are required to file annually with the Property Trustee
a certificate as to whether or not they are in compliance with all of the
conditions and covenants applicable to them under the Trust Agreement.

         If a Debenture Event of Default has occurred and is continuing, the
Preferred Securities shall have a preference over the Common Securities as
described above. See "Description of the Preferred Securities--Subordination of
the Common Securities" and "--Liquidation Distribution Upon Dissolution." The
existence of a Debenture Event of Default does not entitle the holders of the
Preferred Securities to accelerate the maturity thereof.

REMOVAL OF THE TRUST ISSUER TRUSTEES

         Unless a Debenture Event of Default shall have occurred and be
continuing, any Trust Issuer Trustee may be removed at any time by the holder of
the Common Securities. If a Debenture Event of Default has occurred and is
continuing, the Property Trustee and the Delaware Trustee may be removed at such
time by the holders of a majority in Liquidation Amount of the outstanding
Preferred Securities. In no event will the holders of the Preferred Securities
have the right to vote to appoint, remove or replace the Administrative
Trustees, which voting rights are vested exclusively in the Company as the
holder of the Common Securities. No resignation or removal of any Trust Issuer
Trustee and no appointment of a successor trustee shall be effective until the
acceptance of appointment by the successor trustee in accordance with the
provisions of the Trust Agreement.

CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE

         Unless an Event of Default shall have occurred and be continuing, at
any time or from time to time, for the purpose of meeting the legal requirements
of the Trust Indenture Act of 1939, as amended, (the "Trust Indenture Act") if
applicable, or of any jurisdiction in which any part of the Trust Property (as
defined in the Trust Agreement) may at the time be located, the Company, as the
holder of the Common Securities, shall have power to appoint one or more persons
either to act as a co-trustee, jointly with the Property Trustee, of all or any
part of such Trust Property, or to act as separate trustee of any such property,
in either case with such powers as may be provided in the instrument of
appointment, and to vest in such person or persons in such capacity any
property, title, right or power deemed necessary or desirable, subject to the
provisions of the Trust Agreement. In the event a Debenture Event of Default has
occurred and is continuing, the Property Trustee alone shall have power to make
such appointment.


                                       57

<PAGE>   64

MERGER OR CONSOLIDATION OF THE TRUST ISSUER TRUSTEES

         Any entity into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any entity resulting from any merger,
conversion or consolidation to which such Trust Issuer Trustee shall be a party
or any entity succeeding to all or substantially all of the corporate trust
business of such Trust Issuer Trustee, shall be the successor of such Trust
Issuer Trustee under the Trust Agreement, provided such entity shall be
otherwise qualified and eligible.

MERGERS, CONSOLIDATIONS OR REPLACEMENTS OF THE TRUST ISSUER

         The Trust Issuer may not merge or consolidate with or into, be replaced
by, or convey, transfer or lease its properties and assets substantially as an
entirety to any entity or other Person, except as described below or as
otherwise described in the Trust Agreement. The Trust Issuer may, at the request
of the Company, with the consent of the Administrative Trustees and without the
consent of the holders of the Preferred Securities, the Property Trustee or the
Delaware Trustee, merge or consolidate with or into, be replaced by, or convey,
transfer or lease its properties and assets substantially as an entirety to, a
trust organized as such under the laws of any state; provided that (i) such
successor entity either (a) expressly assumes all of the obligations of the
Trust Issuer with respect to the Preferred Securities or (b) substitutes for the
Preferred Securities other securities having substantially the same terms as the
Preferred Securities (the "Successor Securities") so long as the Successor
Securities rank the same as the Preferred Securities in priority with respect to
distributions and payments upon liquidation, redemption and otherwise, (ii) the
Company expressly appoints a trustee of such successor entity possessing the
same powers and duties as the Property Trustee as the holder of the Junior
Subordinated Debentures, (iii) the Successor Securities are registered or
listed, or any Successor Securities will be registered or listed upon
notification of issuance, on any national securities exchange or other
organization on which the Preferred Securities are then registered or listed, if
any, (iv) such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not cause the Preferred Securities (including any
Successor Securities) to be downgraded by any nationally recognized statistical
rating organization, (v) such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the rights, preferences
and privileges of the holders of the Preferred Securities (including any
Successor Securities) in any material respect, (vi) such successor entity has a
purpose substantially identical to that of the Trust Issuer, (vii) prior to such
merger, consolidation, amalgamation, replacement, conveyance, transfer or lease,
the Company has received an opinion from independent counsel to the Trust Issuer
experienced in such matters to the effect that (a) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not adversely
affect the rights, preferences and privileges of the holders of the Preferred
Securities (including any Successor Securities) in any material respect and (b)
following such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease, neither the Trust Issuer nor such successor entity will be
required to register as an investment company under the Investment Company Act
and (viii) the Company or any permitted successor or assignee owns all of the
common securities or its equivalent of such successor entity and guarantees the
obligations of such successor entity under the Successor Securities at least to
the extent provided by the Guarantee. Notwithstanding the foregoing, the Trust
Issuer shall not, except with the consent of holders of 100% in Liquidation
Amount of the Preferred Securities, consolidate, amalgamate, merge with or into
or be replaced by or convey, transfer or lease its properties and assets
substantially as an entirety to any other entity or permit any other entity to
consolidate, amalgamate, merge with or into, or replace it if such
consolidation, amalgamation, merger, replacement, conveyance, transfer or lease
would cause the Trust Issuer or the successor entity to be classified as other
than a grantor trust for United States federal income tax purposes.

VOTING RIGHTS; AMENDMENT OF THE TRUST AGREEMENT

         Except as provided below and under "Description of the
Guarantee--Amendments and Assignment" and as otherwise required by law and the
Trust Agreement, the holders of the Preferred Securities will have no voting
rights.

         The Trust Agreement may be amended from time to time by the holder of
the Common Securities, the Property Trustee and the Administrative Trustees,
without the consent of the holders of the Preferred Securities, (i) with respect
to acceptance of appointment of a successor trustee, (ii) to cure any ambiguity,
correct or supplement any provisions in the Trust Agreement that may be
inconsistent with any other provision or to make any other provisions with
respect to matters or questions arising under the Trust Agreement, which shall
not be inconsistent with the other provisions of the Trust Agreement or (iii) to
modify, eliminate or add to any provisions of the Trust Agreement to such extent
as shall be necessary to ensure that the Trust Issuer will be classified for
United States federal income tax purposes as a grantor trust at all times that
the Preferred Securities are outstanding or to ensure that the Trust Issuer will
not be required to register as an "investment company" under the Investment
Company Act; provided, however, that in the case of clause (ii), such action
shall not adversely affect in any material respect the interests of any holder
of the Preferred Securities, and any such amendments of the Trust Agreement
shall become effective when notice thereof is given to the holders of the
Preferred Securities. The Trust Agreement may be amended by the Trust Issuer
Trustees and the holder of the Common Securities with (i) the consent of holders
representing not less than a majority (based upon Liquidation Amounts) of the


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<PAGE>   65

outstanding Preferred Securities and (ii) receipt by the Trust Issuer Trustees
of an opinion of counsel to the effect that such amendment or the exercise of
any power granted to the Trust Issuer Trustees in accordance with such amendment
will not affect the Trust Issuer's status as a grantor trust for United States
federal income tax purposes or the Trust Issuer's exemption from status as an
"investment company" under the Investment Company Act, provided that without the
consent of each holder of the Preferred Securities, the Trust Agreement may not
be amended to (a) change the amount or timing of any Distribution on the
Preferred Securities or otherwise adversely affect the amount of any
Distribution required to be made in respect of the Preferred Securities as of a
specified date or (b) restrict the right of a holder of the Preferred Securities
to institute suit for the enforcement of any such payment on or after such date.

         So long as the Junior Subordinated Debentures are held by the Property
Trustee, the Trust Issuer Trustees shall not (i) direct the time, method and
place of conducting any proceeding for any remedy available to the Debenture
Trustee or executing any trust or power conferred on the Property Trustee with
respect to the Junior Subordinated Debentures, (ii) waive any past default that
is waivable under the Indenture, (iii) exercise any right to rescind or annul a
declaration that the principal of all the Junior Subordinated Debentures shall
be due and payable or (iv) consent to any amendment, modification or termination
of the Indenture or the Junior Subordinated Debentures, where such consent shall
be required, without, in each case, obtaining the prior approval of the holders
of a majority in aggregate Liquidation Amount of all outstanding Preferred
Securities; provided, however, that where a consent under the Indenture would
require the consent of each holder of the Junior Subordinated Debentures
affected thereby, no such consent shall be given by the Property Trustee without
the prior consent of each holder of the Preferred Securities. The Trust Issuer
Trustees shall not revoke any action previously authorized or approved by a vote
of the holders of the Preferred Securities except by subsequent vote of the
holders of the Preferred Securities. The Property Trustee shall notify each
holder of the Preferred Securities of any notice of default with respect to the
Junior Subordinated Debentures. In addition to obtaining the foregoing approvals
of the holders of the Preferred Securities, prior to taking any of the foregoing
actions, the Trust Issuer Trustees shall obtain an opinion of counsel
experienced in such matters to the effect that the Trust Issuer will not be
classified as an association taxable as a corporation for United States federal
income tax purposes on account of such action and such action would not cause
the Trust Issuer to be classified as other than a grantor trust for United
States federal income tax purposes.

         Any required approval of holders of the Preferred Securities may be
given at a meeting of holders of the Preferred Securities convened for such
purpose or pursuant to written consent. The Property Trustee will cause a notice
of any meeting at which holders of the Preferred Securities are entitled to
vote, or of any matter upon which action by written consent of such holders is
to be taken, to be given to each holder of record of the Preferred Securities in
the manner set forth in the Trust Agreement.

         No vote or consent of the holders of the Preferred Securities will be
required for the Trust Issuer to redeem and cancel the Preferred Securities in
accordance with the Trust Agreement.

         Notwithstanding that holders of the Preferred Securities are entitled
to vote or consent under any of the circumstances described above, any of the
Preferred Securities that are owned by the Company, the Trust Issuer Trustees or
any affiliate of the Company or the Trust Issuer Trustees shall, for purposes of
such vote or consent, be treated as if they were not outstanding.

LIQUIDATION VALUE

         The amount payable on the Preferred Securities in the event of any
liquidation of the Trust Issuer is $10 per Preferred Security plus accumulated
and unpaid Distributions, which may be in the form of a distribution of such
amount in Junior Subordinated Debentures, subject to certain exceptions. See
"Description of the Preferred Securities--Liquidation Distribution Upon
Dissolution."

EXPENSES AND TAXES

         In the Indenture, the Company, as borrower, has agreed to pay all debts
and other obligations (other than with respect to the Preferred Securities) and
all costs and expenses of the Trust Issuer (including costs and expenses
relating to the organization of the Trust Issuer, the fees and expenses of the
Trust Issuer Trustees and the costs and expenses relating to the operation of
the Trust Issuer) and to pay any and all taxes and all costs and expenses with
respect thereto (other than United States withholding taxes) to which the Trust
Issuer might become subject. The foregoing obligations of the Company under the
Indenture are for the benefit of, and shall be enforceable by, any person to
whom any such debts, obligations, costs, expenses and taxes are owed (a
"Creditor") whether or not such Creditor has received notice thereof. Any such
Creditor may enforce such obligations of the Company directly against the
Company, and the Company has irrevocably waived any right or remedy to require
that any such Creditor take any action against the Trust Issuer or any other
person before proceeding against the Company. The Company has also agreed in the
Indenture to execute such additional agreements as may be necessary or desirable
to give full effect to the foregoing.


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<PAGE>   66


BOOK ENTRY, DELIVERY AND FORM

         The Preferred Securities will be issued in the form of one or more
fully registered global securities which will be deposited with or on behalf of
DTC and registered in the name of DTC's nominee. Unless and until it is
exchangeable in whole or in part for the Preferred Securities in definitive
form, a global security may not be transferred except as a whole by DTC to a
nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC or by DTC
or any such nominee to a successor of DTC or a nominee of such successor.

         Ownership of beneficial interests in a global security will be limited
to persons that have accounts with DTC or its nominee (a "Participant") or
persons that may hold interests through Participants. The Company expects that,
upon the issuance of a global security, DTC will credit, on its book-entry
registration and transfer system, the Participants' accounts with their
respective Liquidation Amounts of the Preferred Securities represented by such
global security. Ownership of beneficial interests in such global security will
be shown on, and the transfer of such ownership interests will be effected only
through, records maintained by DTC (with respect to interests of Participants)
and on the records of Participants (with respect to interests of Persons who
hold Preferred Securities through Participants). Beneficial owners will not
receive written confirmation from DTC of their purchase, but are expected to
receive written confirmations from the Participants through which the beneficial
owner enters into the transaction. Transfers of ownership interests will be
accomplished by entries on the books of Participants acting on behalf of the
beneficial owners.

         So long as DTC, or its nominee, is the registered owner of a global
security, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Preferred Securities represented by such global security
for all purposes under the Indenture. Except as provided below, owners of
beneficial interests in a global security will not be entitled to receive
physical delivery of the Preferred Securities in definitive form and will not be
considered the owners or holders thereof under the Indenture. Accordingly, each
person owning a beneficial interest in such a global security must rely on the
procedures of DTC and, if such person is not a Participant, on the procedures of
the Participant through which such person holds its interest, to exercise any
rights of a holder of Preferred Securities under the Indenture. The Company
understands that, under DTC's existing practices, in the event that the Company
requests any action of holders, or an owner of a beneficial interest in such a
global security desires to take any action which a holder is entitled to take
under the Indenture, DTC would authorize the Participants holding the relevant
beneficial interests to take such action, and such Participants would authorize
beneficial owners holding their interests through such Participants to take such
action or would otherwise act upon the instructions of beneficial owners holding
their interests through them. Redemption notices will also be sent to DTC. If
less than all of the Preferred Securities are being redeemed, the Company
understands that it is DTC's existing practice to determine by lot the amount of
the interest of each Participant to be redeemed.

         Distributions on the Preferred Securities registered in the name of DTC
or its nominee will be made to DTC or its nominee, as the case may be, as the
registered owner of the global security representing such Preferred Securities.
None of the Company, the Trust Issuer Trustees, any Paying Agent (as defined
herein) or any other agent of the Company or the Trust Issuer Trustees will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the global
security for such Preferred Securities or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
Disbursements of Distributions to Participants shall be the responsibility of
DTC. DTC's practice is to credit Participants' accounts on the relevant payable
date in accordance with their respective holdings shown on DTC's records unless
DTC has reason to believe that it will not receive payment on the payable date.
Payments by Participants to beneficial owners will be governed by standing
instructions and customary practices, as is the case with securities held for
the accounts of customers in bearer form or registered in "street name," and
will be the responsibility of such Participant and not of DTC, the Company, the
Trust Issuer Trustees, the Paying Agent or any other agent of the Company,
subject to any statutory or regulatory requirements as may be in effect from
time to time.

         DTC may discontinue providing its services as securities depositary
with respect to the Preferred Securities at any time by giving reasonable notice
to the Company or the Trust Issuer Trustees. If DTC notifies the Company that it
is unwilling to continue as such, or if it is unable to continue or ceases to be
a clearing agency registered under the Exchange Act and a successor depositary
is not appointed by the Company within 90 days after receiving such notice or
becoming aware that DTC is no longer so registered, the Company will issue the
Preferred Securities in definitive form upon registration of transfer of, or in
exchange for, such global security. In addition, the Company may at any time and
in its sole discretion determine not to have the Preferred Securities
represented by one or more global securities and, in such event, will issue
Preferred Securities in definitive form in exchange for all of the global
securities representing such Preferred Securities.

         DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the


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<PAGE>   67
 Exchange Act. DTC holds securities that its Participants deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Participants in DTC
include organizations ("Direct Participants"). DTC is owned by a number of its
Direct Participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc., and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to others, such as securities brokers and
dealers, banks and trust companies that clear transactions through or maintain a
custodial relationship with a Direct Participant, either directly or indirectly
("Indirect Participants"). The rules applicable to DTC and its Participants are
on file with the Commission.

SAME-DAY SETTLEMENT AND PAYMENT

         Settlement for the Preferred Securities will be made by the Underwriter
in immediately available funds.

         Secondary trading in preferred securities of corporate issuers is
generally settled in clearinghouse or next-day funds. In contrast, the Preferred
Securities will trade in DTC's Same-Day Funds Settlement System, and secondary
market trading activity in the Preferred Securities will therefore be required
by DTC to settle in immediately available funds. No assurance can be given as to
the effect, if any, of settlement in immediately available funds on trading
activity in the Preferred Securities.

PAYMENT AND PAYING AGENCY

         Payments in respect of the Preferred Securities will be made to DTC,
which will credit the relevant accounts at DTC on the applicable Distribution
Dates or, if the Preferred Securities are not held by DTC, such payments will be
made by check mailed to the address of the holder entitled thereto as such
address appears on the securities register for the Trust Securities. The paying
agent (the "Paying Agent") will initially be the Property Trustee and any
co-paying agent chosen by the Property Trustee and acceptable to the
Administrative Trustees. The Paying Agent will be permitted to resign as Paying
Agent upon 30 days' written notice to the Property Trustee and the Company. If
the Property Trustee is no longer the Paying Agent, the Property Trustee will
appoint a successor (which must be a bank or trust company reasonably acceptable
to the Administrative Trustees and the Company) to act as Paying Agent.

REGISTRAR AND TRANSFER AGENT

         The Property Trustee will act as the registrar and the transfer agent
for the Preferred Securities. Registration of transfers of Preferred Securities
will be effected without charge by or on behalf of the Trust Issuer, except for
the payment of any tax or other governmental charges that may be imposed in
connection with any transfer or exchange. In the event of any redemption, the
Trust Issuer will not be required to (i) issue, register the transfer of, or
exchange any Preferred Securities during a period beginning at the opening of
business 15 days before the date of mailing of a notice of redemption of any
Preferred Securities called for redemption and ending at the close of business
on the day of such mailing; or (ii) register the transfer or exchange of any
Preferred Securities so selected for redemption, in whole or in part, except the
unredeemed portion of any such Preferred Securities being redeemed in part.

INFORMATION CONCERNING THE PROPERTY TRUSTEE

         The Property Trustee, other than upon the occurrence and during the
continuance of an Event of Default, undertakes to perform only such duties as
are specifically set forth in the Trust Agreement and, after such Event of
Default, must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his or her own affairs. Subject to this
provision, the Property Trustee is under no obligation to exercise any of the
powers vested in it by the Trust Agreement at the request of any holder of
Preferred Securities unless it is offered reasonable indemnity against the
costs, expenses and liabilities that might be incurred thereby. If no Event of
Default has occurred and is continuing and the Property Trustee is required to
decide between alternative causes of action, construe ambiguous provisions in
the Trust Agreement or is unsure of the application of any provision of the
Trust Agreement, and the matter is not one on which holders of Preferred
Securities are entitled under the Trust Agreement to vote, then the Property
Trustee will take such action as it deems advisable and in the best interests of
the holders of the Preferred Securities and will have no liability except for
its own bad faith, negligence or willful misconduct.

MISCELLANEOUS

         The Trust Issuer Trustees are authorized and directed to conduct the
affairs of and to operate the Trust Issuer in such a way that the Trust Issuer
will not be deemed to be an "investment company" required to be registered under
the Investment Company Act or classified as an association taxable as a
corporation for United States federal income tax purposes or as other than a
grantor

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<PAGE>   68


trust and so that the Junior Subordinated Debentures will be treated as
indebtedness of the Company for United States federal income tax purposes. The
Company and the Administrative Trustees are authorized to take any action, not
inconsistent with applicable law, the certificate of trust of the Trust Issuer
or the Trust Agreement, that the Company and the Administrative Trustees
determine in their discretion to be necessary or desirable for such purposes.

         Holders of the Preferred Securities have no preemptive or similar
rights.

         The Trust Issuer may not borrow money or issue debt or mortgage or
pledge any of its assets.

         The Trust Agreement and the Preferred Securities will be governed by,
and construed in accordance with, the laws of the State of Delaware.

                DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES

         The Junior Subordinated Debentures are to be issued under the Indenture
between the Company and U.S. Trust Company of Texas, N.A., as the "Debenture
Trustee." The Indenture will be qualified as an Indenture under the Trust
Indenture Act. This summary of certain terms and provisions of the Junior
Subordinated Debentures and the Indenture does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the Indenture and
to the Trust Indenture Act. The form of the Indenture has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part.

GENERAL

         Concurrently with the issuance of the Preferred Securities, the Trust
Issuer will invest the proceeds thereof, together with the consideration paid by
the Company for the Common Securities, in the Junior Subordinated Debentures.
The Junior Subordinated Debentures will bear interest, accruing from the date of
original issuance, in respect of the principal amount thereof, at the annual
rate of ____%, payable quarterly in arrears on March 31, June 30, September 30
and December 31 of each year (each, an "Interest Payment Date"), commencing June
30, 1998, to the person in whose name each Junior Subordinated Debenture is
registered, subject to certain exceptions, at the close of business on the
relevant record date. The record dates for the Junior Subordinated Debentures
will be, for so long as they are held by the Trust Issuer or in global form, the
Business Day next preceding such Interest Payment Date and, in the case of
Junior Subordinated Debentures not held by the Trust Issuer or in global form,
the 15th day (whether or not a Business Day) prior to each Interest Payment
Date. It is anticipated that, until the liquidation, if any, of the Trust
Issuer, the Junior Subordinated Debentures will be held in the name of the
Property Trustee in trust for the benefit of the holders of the Trust
Securities. The amount of interest payable for any period will be computed on
the basis of a 360-day year of twelve 30-day months. In the event that any date
on which interest is payable on the Junior Subordinated Debentures is not a
Business Day, then payment of the interest payable on such date will be made on
the next succeeding day that is a Business Day (and without any interest or
other payment in respect of any such delay), except that, if such Business Day
is in the next succeeding calendar year, such payment shall be made on the
immediately preceding Business Day, in each case with the same force and effect
as if made on the date such payment was originally payable. Accrued interest
that is not paid on the applicable Interest Payment Date will bear additional
interest on the amount thereof (to the extent permitted by law) at the rate per
annum of ____% thereof, compounded quarterly from the relevant Interest Payment
Date. The term "interest" as used herein shall include quarterly interest
payments, interest on quarterly interest payments not paid on the applicable
Interest Payment Date and Additional Interest (as defined below), as applicable.

         The Junior Subordinated Debentures will mature on June 30, 2028. The
Junior Subordinated Debentures will be unsecured and will rank junior and be
subordinate in right of payment to all Senior Indebtedness of the Company. See
"--Subordination." Because the Company is a holding company, the right of the
Company to participate in any distribution of assets of any subsidiary,
including the Bank, upon such subsidiary's liquidation or reorganization or
otherwise (and thus the ability of the holders of the Preferred Securities to
benefit indirectly from such distributions), is subject to the prior claims of
creditors of that subsidiary, except to the extent that the Company may itself
be recognized as a creditor of that subsidiary. Accordingly, the Junior
Subordinated Debentures (and therefore the Preferred Securities) will be
effectively subordinated to all existing and future liabilities of the Company's
subsidiaries, and holders of the Junior Subordinated Debentures should look only
to the assets of the Company for payments on the Junior Subordinated Debentures.
The Indenture does not limit the incurrence or issuance of other secured or
unsecured debt of the Company, including Senior Indebtedness, whether under the
Indenture or any existing or other indenture that the Company may enter into in
the future or otherwise.


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<PAGE>   69

RIGHT TO DEFER INTEREST PAYMENT OBLIGATION

         So long as no Debenture Event of Default has occurred and is
continuing, the Company has the right under the Indenture at any time or from
time to time during the term of the Junior Subordinated Debentures to defer the
payment of interest on the Junior Subordinated Debentures for a period not
exceeding 20 consecutive quarters with respect to each Extension Period,
provided that no Extension Period may extend beyond the Stated Maturity of the
Junior Subordinated Debentures. At the end of each Extension Period, the Company
must pay all interest then accrued and unpaid on the Junior Subordinated
Debentures (together with interest on such unpaid interest at the annual rate of
____%, compounded quarterly from the relevant Interest Payment Date, to the
extent permitted by applicable law. During an Extension Period, interest would
continue to accrue and holders of the Junior Subordinated Debentures would be
required to accrue interest income for United States federal income tax
purposes. See "Certain Federal Income Tax Consequences--Interest Income and
Original Issue Discount."

         During any such Extension Period, the Company may not, and may not
permit any subsidiary of the Company to, (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire or make a liquidation payment
with respect to, any of the Company's capital stock (other than (a) the
reclassification of any class of the Company's capital stock into another class
of capital stock, (b) dividends or distributions in common stock of the Company,
(c) any declaration of a dividend in connection with the implementation of a
shareholders' rights plan, the issuance of stock under any such plan in the
future or the redemption or repurchase of any rights pursuant thereto, (d)
payments under the Guarantee and (e) purchases of common stock related to the
issuance of common stock or rights under any of the Company's benefit plans for
its directors, officers or employees), (ii) make any payment of principal,
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of the Company that rank pari passu with or junior in interest to the
Junior Subordinated Debentures, (iii) make any guarantee payments with respect
to any guarantee by the Company of the debt securities of any subsidiary of the
Company if such guarantee ranks pari passu with or junior in interest to the
Junior Subordinated Debentures other then payments pursuant to the Guarantee, or
(iv) redeem, purchase or acquire less than all the outstanding Junior
Subordinated Debentures or any of the Preferred Securities. Upon the termination
of any such Extension Period and the payment of all interest then accrued and
unpaid (together with interest thereon at the rate of ____%, compounded
quarterly, to the extent permitted by applicable law), the Company may elect to
begin a new Extension Period subject to the above requirements. No interest
shall be due and payable during an Extension Period, except at the end thereof.
The Company must give the Property Trustee, the Administrative Trustees and the
Debenture Trustee notice of its election of such Extension Period at least one
Business Day prior to the earlier of (i) the date interest on the Junior
Subordinated Debentures would have been payable except for the election to begin
such Extension Period, (ii) the date the Administrative Trustees are required to
give notice of the record date, or the date such Distributions are payable, to
the AMEX or other applicable self-regulatory organization or to holders of the
Preferred Securities as of the record date or (iii) the date such Distributions
are payable, but in any event not less than one Business Day prior to such
record date. The Debenture Trustee shall give notice of the Company's election
to begin a new Extension Period to the holders of the Preferred Securities.
There is no limitation on the number of times that the Company may elect to
begin an Extension Period.

ADDITIONAL INTEREST

         If the Trust Issuer or the Property Trustee is required to pay any
additional taxes, duties or other governmental charges as a result of a Tax
Event, the Company will pay such additional amounts (the "Additional Interest")
on the Junior Subordinated Debentures as shall be required so that the
Distributions payable by the Trust Issuer shall not be reduced as a result of
any such additional taxes, duties or other governmental charges.

REDEMPTION OR EXCHANGE

         The Company will have the right to redeem the Junior Subordinated
Debentures prior to maturity (i) on or after June 30, 2003, in whole at any time
or in part from time to time, or (ii) at any time in whole (but not in part),
within 180 days following the occurrence of a Tax Event, an Investment Company
Event or a Capital Treatment Event, in each case at a redemption price equal to
100% of the principal amount thereof plus the accrued and unpaid interest on the
Junior Subordinated Debentures so redeemed to the date fixed for redemption. See
"Risk Factors--Redemption Due to Tax Event, Investment Company Event or Capital
Treatment Event." The proceeds of any such redemption will be used by the Trust
Issuer to redeem a Like Amount of Trust Securities. The Junior Subordinated
Debentures will not be subject to any sinking fund. Any such redemption prior to
the Stated Maturity will be subject to prior regulatory approvals if then
required.

       Notice of any redemption will be mailed at least 30 days but not more
than 60 days before the redemption date to each Holder of the Junior
Subordinated Debentures to be redeemed at its registered address. Unless the
Company defaults in payment of the redemption price, on and after the redemption
date interest will cease to accrue on the Junior Subordinated Debentures or
portions thereof called for redemption.


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<PAGE>   70

REGISTRATION, DENOMINATION AND TRANSFER

         The Junior Subordinated Debentures will initially be registered in the
name of the Trust Issuer. If the Junior Subordinated Debentures are distributed
to holders of Preferred Securities, it is anticipated that the depository
arrangements for the Junior Subordinated Debentures will be substantially
identical to those in effect for the Preferred Securities. See "Description of
Preferred Securities--Book Entry, Delivery and Form."

         Although DTC has agreed to the procedures described above, it is under
no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
the Company within 90 days of receipt of notice from DTC to such effect, the
Company will cause the Junior Subordinated Debentures to be issued in definitive
form.

         Payments on Junior Subordinated Debentures represented by a global
security will be made to DTC or its nominee, as the case may be, nominee, as the
registered holder of the Junior Subordinated Debentures, as described under
"Description of Preferred Securities--Book Entry, Delivery and Form." If Junior
Subordinated Debentures are issued in definitive form, principal and interest
will be payable, the transfer of the Junior Subordinated Debentures will be
registrable, and Junior Subordinated Debentures will be exchangeable for Junior
Subordinated Debentures of other authorized denominations of a like aggregate
principal amount, at the corporate trust office of the Debenture Trustee or at
the offices of any Paying Agent or transfer agent appointed by the Company,
provided that payment of interest may be made at the option of the Company by
check mailed to the address of the persons entitled thereto. However, a holder
of $1 million or more in aggregate principal amount of Junior Subordinated
Debentures may receive payments of interest (other than interest payable at the
Stated Maturity) by wire transfer of immediately available funds upon written
request to the Debenture Trustee not later than 15 calendar days prior to the
date on which the interest is payable.

         Junior Subordinated Debentures will be exchangeable for other Junior
Subordinated Debentures of like tenor, of any authorized denominations and of a
like aggregate principal amount.

         Junior Subordinated Debentures may be presented for exchange as
provided above, and may be presented for registration of transfer (with the form
of transfer endorsed thereon, or a satisfactory written instrument of transfer,
duly executed), at the office of the securities registrar appointed under the
Indenture or at the office of any transfer agent designated by the Company for
such purpose without service charge and upon payment of any taxes and other
governmental charges as described in the Indenture. The Company will appoint the
Debenture Trustee as securities registrar under the Indenture. The Company may
at any time designate additional transfer agents with respect to the Junior
Subordinated Debentures.

         In the event of any redemption, neither the Company nor the Debenture
Trustee shall be required to (i) issue, register the transfer of or exchange
Junior Subordinated Debentures during a period beginning at the opening of
business 15 days prior to the date of mailing of a notice of redemption of the
Junior Subordinated Debentures to be redeemed and ending at the close of
business on the day of mailing of the relevant notice of redemption or (ii)
transfer or exchange any Junior Subordinated Debentures so selected for
redemption, except, in the case of any Junior Subordinated Debentures being
redeemed in part, any portion thereof not to be redeemed.

         Any monies deposited with the Debenture Trustee or any paying agent, or
then held by the Company in trust, for the payment of the principal of or
interest (and premium, if any) on any Junior Subordinated Debenture and
remaining unclaimed for two years after such principal (and premium, if any) or
interest has become due and payable shall, at the request of the Company, be
repaid to the Company and the holder of such Junior Subordinated Debenture shall
thereafter look, as a general unsecured creditor, only to the Company for
payment thereof.

RESTRICTIONS ON CERTAIN PAYMENTS

         The Company will also covenant, as to the Junior Subordinated
Debentures, that it will not, and will not permit any subsidiary of the Company
to, (i) declare or pay any dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of the Company's
capital stock (other than (a) the reclassification of any class of the Company's
capital stock into another class of capital stock, (b) dividends or
distributions in common stock of the Company, (c) any declaration of a dividend
in connection with the implementation of a shareholders' rights plan, the
issuance of stock under any such plan in the future or the redemption or
repurchase of any rights pursuant thereto, (d) payments under the Guarantee and
(e) purchases of common stock related to the issuance of common stock or rights
under any of the Company's benefit plans for its directors, officers or
employees), (ii) make any payment of principal, interest or premium, if any, on
or repay or repurchase or redeem any debt securities of the Company that rank
pari passu with or junior in interest to the Junior Subordinated Debentures
other than payments pursuant to the Guarantee or (iii) redeem, purchase or
acquire less than all of the outstanding Junior


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<PAGE>   71


Subordinated Debentures or any of the Preferred Securities if at such time (i)
there shall have occurred a Debenture Event of Default with respect to the
Junior Subordinated Debentures, (ii) if the Junior Subordinated Debentures are
held by the Trust Issuer, the Company shall be in default with respect to its
payment of any obligations under the Guarantee relating to the Preferred
Securities or (iii) the Company shall have given notice of its election of an
Extension Period as provided in the Indenture with respect to the Junior
Subordinated Debentures and shall not have rescinded such notice, or such
Extension Period, or any extension thereof, shall be continuing.

MODIFICATION OF INDENTURE

         From time to time the Company and the Debenture Trustee may, without
the consent of the holders of the Junior Subordinated Debentures, amend, waive
or supplement the Indenture for specified purposes, including, among other
things, curing ambiguities, defects or inconsistencies, provided that any such
action does not materially adversely affect the interest of the holders of the
Junior Subordinated Debentures or the ability to qualify, or maintain the
qualification of, the Indenture under the Trust Indenture Act. The Indenture
contains provisions permitting the Company and the Debenture Trustee, with the
consent of the holders of not less than a majority in principal amount of the
Junior Subordinated Debentures affected, to modify the Indenture in a manner
affecting the rights of the holders of the Junior Subordinated Debentures,
provided that no such modification may, without the consent of the holder of
each outstanding Subordinated Debenture so affected, (i) extend the Stated
Maturity of the Junior Subordinated Debentures, reduce the principal amount
thereof or reduce the rate or extend the time of payment of interest thereon or
(ii) reduce the percentage of principal amount of the Junior Subordinated
Debentures, the holders of which are required to consent to any such
modification of the Indenture.

DEBENTURE EVENTS OF DEFAULT

         The Indenture provides that any one or more of the following described
events with respect to the Junior Subordinated Debentures that has occurred and
is continuing constitutes a "Debenture Event of Default":

              (i)     failure for 30 days to pay interest (including Additional 
         Interest, if any) on the Junior Subordinated Debentures when due
         (subject to the deferral of certain interest payments in the case of
         an Extension Period); or

              (ii)    failure to pay any principal on the Junior Subordinated
         Debentures when due, whether at maturity, upon declaration of
         acceleration of maturity upon redemption or otherwise; or

             (iii)    failure to observe or perform certain other covenants
         contained in the Indenture for 90 days after written notice to the
         Company from the Debenture Trustee or the holders of at least 25% in
         aggregate outstanding principal amount of the outstanding Junior
         Subordinated Debentures; or

             (iv)     certain events involving bankruptcy, insolvency or
         reorganization of the Company, subject in certain instances to any such
         event remaining in effect for a period of 60 consecutive days.

         The holders of a majority in aggregate outstanding principal amount of
the Junior Subordinated Debentures have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Debenture
Trustee. The Debenture Trustee or the holders of not less than 25% in aggregate
outstanding principal amount of the Junior Subordinated Debentures may declare
the principal due and payable immediately upon a Debenture Event of Default,
and, should the Debenture Trustee or such holders of Junior Subordinated
Debentures fail to make such declaration, the holders of at least 25% in
aggregate Liquidation Amount of the Preferred Securities shall have such right.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures may annul such declaration and waive the default
if the default (other than the non-payment of the principal of the Junior
Subordinated Debentures which has become due solely by such acceleration) has
been cured and a sum sufficient to pay all matured installments of interest and
principal due otherwise than by acceleration has been deposited with the
Debenture Trustee. Should the holders of the Junior Subordinated Debentures fail
to annul such declaration and waive such default, the holders of a majority in
aggregate Liquidation Amount of the Preferred Securities shall have such right.

         The holders of a majority in aggregate outstanding principal amount of
the Junior Subordinated Debentures affected thereby may, on behalf of the
holders of all the Junior Subordinated Debentures, waive any past default,
except a default in the payment of principal or interest (unless such default
has been cured and a sum sufficient to pay all matured installments of interest
and principal due otherwise than by acceleration has been deposited with the
Debenture Trustee) or a default in respect of a covenant or provision which
under the Indenture cannot be modified or amended without the consent of the
holder of each outstanding Junior Subordinated Debenture. Should the holders of
the Junior Subordinated Debentures fail to annul such declaration and waive such
default, the holders of a majority in aggregate Liquidation Amount of the
Preferred Securities shall have such right. The Company


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<PAGE>   72

is required to file annually with the Debenture Trustee a certificate as to
whether or not the Company is in compliance with all the conditions and
covenants applicable to it under the Indenture.

ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF THE PREFERRED SECURITIES

         If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay interest or principal
on the Junior Subordinated Debentures on the date such interest or principal is
otherwise payable, a holder of the Preferred Securities may institute a Direct
Action against the Company for enforcement of payment to such holder of the
principal of or interest on the Junior Subordinated Debentures having a
principal amount equal to the aggregate Liquidation Amount of the Preferred
Securities of such holder. The Company may not amend the Indenture to remove the
foregoing right to bring a Direct Action without the prior written consent of
the holders of all of the Preferred Securities. If the right to bring a Direct
Action is removed, the Trust Issuer may become subject to the reporting
obligations under the Exchange Act. The Company shall have the right under the
Indenture to set-off any payment made to such holder of the Preferred Securities
by the Company in connection with a Direct Action.

         The holders of the Preferred Securities will not be able to exercise
directly any remedies other than those set forth in the preceding paragraph
available to the holders of the Junior Subordinated Debentures unless there
shall have been an Event of Default under the Trust Agreement. See "Description
of the Preferred Securities--Events of Default; Notice."

MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS

         Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee is a party, or any corporation
succeeding to all or substantially all the corporate trust business of the
Trustee, is the automatic successor of the Trustee, provided that such
corporation is qualified and eligible. In case any Junior Subordinated
Debentures have been authenticated but not delivered by the Trustee then in
office, any successor by merger, conversion or consolidation to such
authenticating Trustee may adopt such authentication and deliver the Debentures
so authenticated with the same effect as if such successor Trustee had itself
authenticated such Debentures.

         The general provisions of the Indenture do not afford holders of the
Junior Subordinated Debentures protection in the event of a highly leveraged or
other transaction involving the Company that may adversely affect holders of the
Junior Subordinated Debentures.

SATISFACTION AND DISCHARGE

         The Indenture provides that when, among other things, all of the Junior
Subordinated Debentures not previously delivered to the Debenture Trustee for
cancellation (i) have become due and payable or (ii) will become due and payable
at their Stated Maturity within one year, and the Company deposits or causes to
be deposited with the Debenture Trustee funds, in trust, in an amount sufficient
to pay and discharge the entire indebtedness on the Junior Subordinated
Debentures not previously delivered to the Debenture Trustee for cancellation,
including interest (including any Additional Interest) to the date of the
deposit or to the Stated Maturity, as applicable, then the Indenture will cease
to be of further effect (except as to the Company's obligations to pay all other
sums due pursuant to the Indenture and to provide the officers' certificates and
opinions of counsel described therein) and the Company will be deemed to have
satisfied and discharged the Indenture.

SUBORDINATION

         In the Indenture, the Company has covenanted and agreed that the Junior
Subordinated Debentures issued thereunder will be subordinate and junior in
right of payment to all Senior Indebtedness to the extent provided in the
Indenture. If the Company defaults in the payment of any principal, premium,
interest or any other payment due on any Senior Indebtedness, or if the maturity
of any Senior Indebtedness has been accelerated because of a default, then no
payment shall be made with respect to the principal of or interest on the Junior
Subordinated Debentures unless and until such default has been cured or waived
or has ceased to exist or such Senior Indebtedness has been paid. Upon any
payment or distribution of assets to creditors upon the liquidation,
dissolution, winding-up, reorganization, assignment for the benefit of
creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of the Company, the holders of Senior Indebtedness will
first be entitled to receive payment in full of principal of and interest, if
any, on such Senior Indebtedness before the holders of the Junior Subordinated
Debentures, or the Property Trustee on behalf of the holders, will be entitled
to receive or retain any payment in respect of the principal of or interest, if
any, on the Junior Subordinated Debentures. Moreover, in such event any payment
or distribution on account of the Junior Subordinated Debentures, whether in
cash, securities or other property,


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<PAGE>   73

that would otherwise (but for the subordination provisions) be payable or
deliverable in respect of the Junior Subordinated Debentures will be paid or
delivered directly to the holders of Senior Indebtedness in accordance with the
priorities then existing among such holders until all Senior Indebtedness has
been paid in full. By reason of such subordination, in the event of the
insolvency of the Company, holders of Senior Indebtedness may receive more,
ratably, and holders of the Junior Subordinated Debentures may receive less,
ratably, than the other creditors of the Company.

         As used herein, "Senior Indebtedness" means "Senior Debt" and
"Subordinated Debt."

         In the event of the acceleration of the maturity of any of the Junior
Subordinated Debentures, the holders of all Senior Indebtedness outstanding at
the time of such acceleration may first be entitled to receive payment in full
of all amounts due thereon (including any amounts due upon acceleration) before
the holders of the Junior Subordinated Debentures will be entitled to receive or
retain any payment in respect of the principal of or interest, if any, on the
Junior Subordinated Debentures.

         "Debt" means with respect to the Company, whether recourse is to all or
a portion of the assets of the Company and whether or not contingent: (i) every
obligation of the Company for money borrowed; (ii) every obligation of the
Company evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of the Company with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of the Company; (iv) every obligation of the Company issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business); (v) every capital lease obligation of the Company; (vi) all
indebtedness of the Company whether incurred on or prior to the date of the
Indenture or thereafter incurred, for claims in respect of derivative products,
including interest rate, foreign exchange rate and commodity forward contracts,
options and swaps and similar arrangements; and (vii) every obligation of the
type referred to in clauses (i) through (vi) of another entity and all dividends
of another entity the payment of which, in either case, the Company has
guaranteed or is responsible or liable, directly or indirectly, as obligor or
otherwise.

         "Senior Debt" means the principal of (and premium, if any) and
interest, if any (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company whether or
not such claim for post-petition interest is allowed in such proceeding), on
Debt, whether incurred on or prior to the date of the Indenture or thereafter
incurred, unless, in the instrument creating or evidencing the same or pursuant
to which the same is outstanding, it is provided that such obligations are not
superior in right of payment to the Junior Subordinated Debentures or to other
Debt which is pari passu with, or subordinated to, the Junior Subordinated
Debentures; provided, however, that Senior Debt shall not be deemed to include:
(i) any Debt of the Company which when incurred and without respect to any
election under Section 1111(b) of the United States Bankruptcy Code of 1978, as
amended, was without recourse to the Company, (ii) any Debt of the Company to
any of its subsidiaries, and (iii) any Debt to any employee of the Company.

         "Subordinated Debt" means the principal of (and premium, if any) and
interest, if any (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company whether or
not such claim for post-petition interest is allowed in such proceeding), on
Debt, whether incurred on or prior to the date of the Indenture or thereafter
incurred, which is by its terms expressly provided to be junior and subordinate
to other Debt of the Company (other than the Debentures), except that
Subordinated Debt shall not include debentures sold by the Company to the Trust.

         The Indenture places no limitation on the amount of Senior Indebtedness
that may be incurred by the Company. The Company may from time to time incur
indebtedness constituting Senior Indebtedness.

GOVERNING LAW

         The Indenture and the Junior Subordinated Debentures will be governed
by and construed in accordance with the laws of the State of New York, without
regard to conflicts of laws principles thereof.

INFORMATION CONCERNING THE DEBENTURE TRUSTEE

         The Debenture Trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Debenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of the Junior Subordinated Debentures, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The Debenture Trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Debenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.


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<PAGE>   74


DISTRIBUTION OF THE JUNIOR SUBORDINATED DEBENTURES

         As described under "Description of the Preferred
Securities--Liquidation of the Trust Issuer and Distribution of the Junior
Subordinated Debentures to Holders," under certain circumstances involving the
termination of the Trust Issuer, Junior Subordinated Debentures may be
distributed to the holders of the Preferred Securities in exchange therefor upon
liquidation of the Trust Issuer, after satisfaction of liabilities to creditors
of the Trust Issuer as provided by applicable law. Any such distribution will be
subject to receipt of prior regulatory approval if then required. If the Junior
Subordinated Debentures are distributed to the holders of Preferred Securities
upon the liquidation of the Trust Issuer, the Company will use its best efforts
to list the Junior Subordinated Debentures on ______ or such stock exchanges, if
any, on which the Preferred Securities are then listed. There can be no
assurance as to the market price of any Junior Subordinated Debentures that may
be distributed to the holders of the Preferred Securities.

PAYMENT AND PAYING AGENTS

         Payment of principal of and interest on the Junior Subordinated
Debentures will be made at the offices of the Debenture Trustee or at the
offices of such Paying Agent or Paying Agents as the Company may designate from
time to time, except that at the option of the Company payment of any interest
may be made (i) except in the case of global Junior Subordinated Debentures, by
check mailed to the address of the person entitled thereto as such address shall
appear in the Securities Register (as defined in the Indenture) or (ii) by
transfer to an account maintained by the person entitled thereto as specified in
the Securities Register, provided that proper transfer instructions have been
received by the Regular Record Date (as defined in the Indenture). Payment of
interest on the Junior Subordinated Debentures will be made to the person in
whose name the Junior Subordinated Debenture is registered at the close of
business on the Regular Record Date for such interest, except in the case of
Defaulted Interest (as defined in the Indenture). The Company may at any time
designate additional Paying Agents or rescind the designation of any Paying
Agent; however, the Company will at all times be required to maintain a Paying
Agent in each Place of Payment (as defined in the Indenture) for the Junior
Subordinated Debentures.

         Any moneys deposited with the Debenture Trustee or any Paying Agent, or
then held by the Company in trust, for the payment of the principal of or
interest on the Junior Subordinated Debentures and remaining unclaimed for two
years after such principal or interest has become due and payable shall be
repaid to the Company upon written request of the Company on May 31 of each year
or (if then held in trust by the Company) will be discharged from such trust and
the holders of the Junior Subordinated Debentures shall thereafter look, as
general unsecured creditors, only to the Company for payment thereof.

REGISTRAR AND TRANSFER AGENT

         The Debenture Trustee will act as the registrar and the transfer agent
for the Junior Subordinated Debentures. Junior Subordinated Debentures may be
presented for registration of transfer (with the form of transfer endorsed
thereon, or a satisfactory written instrument of transfer, duly executed) at the
office of the registrar. The Company may at any time rescind the designation of
any such transfer agent or approve a change in the location through which any
such transfer agent acts; provided that the Company maintains a transfer agent
in the Place of Payment. The Company may at any time designate additional
transfer agents with respect to the Junior Subordinated Debentures. In the event
of any redemption, neither the Company nor the Debenture Trustee will be
required to (i) issue, register the transfer of or exchange Junior Subordinated
Debentures during a period beginning at the opening of business 15 days prior to
the day of selection for redemption of Junior Subordinated Debentures and ending
at the close of business on the day of mailing of the relevant notice of
redemption, or (ii) transfer or exchange any Junior Subordinated Debentures so
selected for redemption, except, in the case of any Junior Subordinated
Debentures being redeemed in part, any portion thereof not to be redeemed.

                          DESCRIPTION OF THE GUARANTEE

         This summary of certain provisions of the Guarantee does not purport to
be complete and is subject to, and qualified in its entirety by reference to,
all of the provisions of the Guarantee. Wherever particular defined terms of the
Guarantee are referred to, but not defined herein, such defined terms are
incorporated herein by reference. The form of the Guarantee has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part.

GENERAL

         The Company will irrevocably agree to pay in full on a subordinated
basis, to the extent set forth herein, the Guarantee Payments (as defined below)
to the holders of the Preferred Securities, as and when due, regardless of any
defense, right of set-off or counterclaim that the Trust Issuer may have or
assert other than the defense of payment. The following payments with respect


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<PAGE>   75


to the Preferred Securities, to the extent not paid by or on behalf of the Trust
Issuer (the "Guarantee Payments"), will be subject to the Guarantee: (i) any
accumulated and unpaid Distributions required to be paid on the Preferred
Securities, to the extent that the Trust Issuer has funds on hand available
therefor at such time, (ii) the Redemption Price with respect to any Preferred
Securities called for redemption, to the extent that the Trust Issuer has funds
on hand available therefor at such time, or (iii) upon a voluntary or
involuntary dissolution, winding up or termination of the Trust Issuer (unless
the Junior Subordinated Debentures are distributed to holders of the Preferred
Securities in exchange therefor), the lesser of (a) the Liquidation
Distribution, to the extent that the Trust Issuer has funds available therefor
at such time, and (b) the amount of assets of the Trust Issuer remaining
available for distribution to holders of the Preferred Securities after
satisfaction of liabilities to creditors of the Trust Issuer as required by
applicable law. The Company's obligation to make a Guarantee Payment may be
satisfied by direct payment of the required amounts by the Company to the
holders of the Preferred Securities or by causing the Trust Issuer to pay such
amounts to such holders.

         The Guarantee will be an irrevocable guarantee on a subordinated basis
of the Trust Issuer's obligations under the Preferred Securities, but will apply
only to the extent that the Trust Issuer has funds sufficient to make such
payments, and is not a guarantee of collection.

         If the Company does not make interest payments on the Junior
Subordinated Debentures held by the Trust Issuer, the Trust Issuer will not be
able to pay Distributions on the Preferred Securities and will not have funds
legally available therefor. The Guarantee will rank subordinate and junior in
right of payment to all Senior Indebtedness of the Company. See "Description of
the Guarantee--Status of the Guarantee." Because the Company is a holding
company, the right of the Company to participate in any distribution of assets
of any subsidiary upon such subsidiary's liquidation or reorganization or
otherwise is subject to the prior claims of creditors of that subsidiary, except
to the extent the Company may itself be recognized as a creditor of that
subsidiary. Accordingly, the Company's obligations under the Guarantee will be
effectively subordinated to all existing and future liabilities of the Company's
subsidiaries, and claimants should look only to the assets of the Company for
payments thereunder. The Guarantee does not limit the incurrence or issuance of
other secured or unsecured debt of the Company, including Senior Indebtedness,
whether under the Indenture, any other indenture that the Company may enter into
in the future, or otherwise. The Company may from time to time to incur
indebtedness constituting Senior Indebtedness.

         The Company, through the Guarantee, Trust Agreement, Junior
Subordinated Debentures and Indenture, fully, irrevocably and unconditionally
guaranteed all of the Trust Issuer's obligations under the Preferred Securities.
No single document standing alone or operating in conjunction with fewer than
all of the other documents constitutes such guarantee. It is only the combined
operation of these documents that has the effect of providing a full,
irrevocable and unconditional guarantee of the Trust Issuer's obligations under
the Preferred Securities. See "Relationship Among the Preferred Securities,
Junior Subordinated Debentures and Guarantee."

STATUS OF THE GUARANTEE

         The Guarantee will constitute an unsecured obligation of the Company
and will rank subordinate and junior in right of payment to all Senior
Indebtedness of the Company in the same manner as the Junior Subordinated
Debentures.

         The Guarantee will constitute a guarantee of payment and not of
collection (i.e., the guaranteed party may institute a legal proceeding directly
against the Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity). The
Guarantee will be held for the benefit of the holders of the Preferred
Securities. The Guarantee will not be discharged except by payment of the
Guarantee Payments in full to the extent not paid by the Trust Issuer or upon
distribution to the holders of the Preferred Securities of the Junior
Subordinated Debentures.

AMENDMENTS AND ASSIGNMENT

         Except with respect to any changes that do not materially adversely
affect the rights of holders of the Preferred Securities (in which case no vote
will be required), the Guarantee may not be amended without the prior approval
of the holders of not less than a majority of the aggregate Liquidation Amount
of the outstanding Preferred Securities. The manner of obtaining any such
approval will be as set forth under "Description of the Preferred
Securities--Voting Rights; Amendment of the Trust Agreement." All guarantees and
agreements contained in the Guarantee shall bind the successors, assigns,
receivers, trustees and representatives of the Company and shall inure to the
benefit of the holders of the Preferred Securities then outstanding.


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<PAGE>   76

EVENTS OF DEFAULT

         An event of default under the Guarantee will occur upon the failure of
the Company to perform any of its payment or other obligations thereunder if
such failure remains unremedied for any applicable cure period. The holders of
not less than a majority in aggregate Liquidation Amount of the Preferred
Securities have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Guarantee Trustee in respect of such
Guarantee or to direct the exercise of any trust or power conferred upon the
Guarantee Trustee under the Guarantee.

         The Company, as guarantor, is required to file annually with the
Guarantee Trustee a certificate as to whether or not the Company is in
compliance with all the conditions and covenants applicable to it under the
Guarantee.

INFORMATION CONCERNING THE GUARANTEE TRUSTEE

         The Guarantee Trustee, other than during the occurrence and continuance
of a default by the Company in the performance of the Guarantee, undertakes to
perform only such duties as are specifically set forth in the Guarantee and,
after default with respect to the Guarantee, must exercise the same degree of
care and skill as a prudent person would exercise or use in the conduct of his
or her own affairs. Subject to this provision, the Guarantee Trustee is under no
obligation to exercise any of the powers vested in it by the Guarantee at the
request of any holder of the Preferred Securities unless it is offered
reasonable indemnity by such holder against the costs, expenses and liabilities
that might be incurred thereby. The Guarantee Trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Guarantee Trustee reasonably believes repayment
or adequate indemnity is not reasonably assured to it.

TERMINATION OF THE GUARANTEE

         The Guarantee will terminate and be of no further force and effect upon
(a) full payment of the Redemption Price of the Preferred Securities, (b) full
payment of the amounts payable upon liquidation of the Trust Issuer or (c)
distribution of the Junior Subordinated Debentures to the holders of the
Preferred Securities in exchange therefor. The Guarantee will continue to be
effective or will be reinstated, as the case may be, if at any time any holder
of the Preferred Securities must restore payment of any sums paid under the
Preferred Securities or the Guarantee.

GOVERNING LAW

         The Guarantee will be governed by and construed in accordance with the
laws of the State of New York, without regard to conflicts of laws principles
thereof.


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<PAGE>   77

                  RELATIONSHIP AMONG THE PREFERRED SECURITIES,
                  JUNIOR SUBORDINATED DEBENTURES AND GUARANTEE

FULL AND UNCONDITIONAL GUARANTEE

         Payments of Distributions and other amounts due on the Preferred
Securities (to the extent the Trust Issuer has funds available for the payment
of such Distributions) are irrevocably guaranteed by the Company as and to the
extent set forth under "Description of the Guarantee." The Company's obligations
under the Junior Subordinated Debentures, Indenture, Trust Agreement and
Guarantee provide, in the aggregate, a full, irrevocable and unconditional
guarantee of payments of distributions and other amounts due on the Preferred
Securities. No single document standing alone or operating in conjunction with
fewer than all of the other documents constitutes such a guarantee. It is only
the combined operation of these documents that has the effect of providing a
full, irrevocable and unconditional guarantee of the Trust Issuer's obligations
under the Preferred Securities. If and to the extent that the Company does not
make payments on the Junior Subordinated Debentures, the Trust Issuer will not
pay Distributions or other amounts due on its Preferred Securities. The
Guarantee does not cover payment of Distributions when the Trust Issuer does not
have sufficient funds to pay such Distributions. In such event, the remedy of a
holder of the Preferred Securities is to institute a Direct Action against the
Company for enforcement of payment of amounts equal to such Distributions to
such holder. The obligations of the Company under the Guarantee are subordinate
and junior in right of payment to all Senior Indebtedness.

SUFFICIENCY OF PAYMENTS

         As long as payments of interest and other payments are made when due on
the Junior Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Preferred Securities, primarily
because: (i) the aggregate principal amount of the Junior Subordinated
Debentures will be equal to the sum of the aggregate stated Liquidation Amount
of the Preferred Securities and Common Securities; (ii) the interest rate and
interest and other payment dates on the Junior Subordinated Debentures will
match the Distribution rate and Distribution and other payment dates for the
Preferred Securities; (iii) the Company shall pay for all and any costs,
expenses and liabilities of the Trust Issuer except the Trust Issuer's
obligations to holders of its Preferred Securities; and (iv) the Trust Agreement
further provides that the Trust Issuer will not engage in any activity that is
not consistent with the limited purposes of the Trust Issuer.

         Notwithstanding anything to the contrary in the Indenture, the Company
has the right to set off any payment it is otherwise required to make thereunder
with and to the extent the Company has theretofore made, or is concurrently on
the date of such payment making, a payment under the Guarantee.

ENFORCEMENT RIGHTS OF HOLDERS OF THE PREFERRED SECURITIES

         A holder of Preferred Securities may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Guarantee Trustee, the Trust
Issuer or any other person or entity.

         A default or event of default under any Senior Indebtedness of the
Company would not constitute a Debenture Event of Default. However, in the event
of payment defaults under, or acceleration of, Indebtedness of the Company, the
subordination provisions of the Indenture provide that no payments may be made
in respect of the Junior Subordinated Debentures until such Senior Indebtedness
has been paid in full or any payment default thereunder has been cured or
waived. Failure to make required payments on the Junior Subordinated Debentures
would constitute a Debenture Event of Default under the Indenture.

LIMITED PURPOSE OF THE TRUST ISSUER

         The Preferred Securities evidence a preferred undivided beneficial
interest in the Trust Issuer, and the Trust Issuer exists for the sole purpose
of issuing its Preferred Securities and Common Securities and investing the
proceeds thereof in Junior Subordinated Debentures. A principal difference
between the rights of a holder of a Preferred Security and a holder of a Junior
Subordinated Debenture is that a holder of a Junior Subordinated Debenture is
entitled to receive from the Company the principal amount of and interest
accrued on Junior Subordinated Debentures held, while a holder of the Preferred
Securities is entitled to receive Distributions from the Trust Issuer (or from
the Company under the Guarantee) if, and to the extent, the Trust Issuer has
funds available for the payment of such Distributions.


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<PAGE>   78


RIGHTS UPON DISSOLUTION

         Upon any voluntary or involuntary dissolution of the Trust Issuer
involving the liquidation of the Junior Subordinated Debentures, after
satisfaction of liabilities to creditors of the Trust Issuer, if any, as
provided by applicable law, the holders of the Preferred Securities will be
entitled to receive, out of assets held by the Trust Issuer, the Liquidation
Distribution in cash. See "Description of the Preferred Securities--Liquidation
Distribution Upon Dissolution." Upon any voluntary or involuntary liquidation or
bankruptcy of the Company, the Property Trustee, as holder of the Junior
Subordinated Debentures, would be a subordinated creditor of the Company,
subordinated in right of payment to all Senior Indebtedness as set forth in the
Indenture, but entitled to receive payment in full of principal and interest,
before any shareholders of the Company receive payments or distributions. Since
the Company is the guarantor under the Guarantee and has agreed to pay for all
costs, expenses and liabilities of the Trust Issuer (other than the Trust
Issuer's obligations to the holders of the Preferred Securities), the positions
of a holder of the Preferred Securities and a holder of the Junior Subordinated
Debentures relative to other creditors and to shareholders of the Company in the
event of liquidation or bankruptcy of the Company are expected to be
substantially the same.


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<PAGE>   79

                     CERTAIN FEDERAL INCOME TAX CONSEQUENCES

         In the opinion of Jenkens & Gilchrist, a Professional Corporation,
special tax counsel to the Company ("Tax Counsel"), the following summary
accurately describes the material United States federal income tax consequences
that may be relevant to the purchase, ownership and disposition of Preferred
Securities. This summary is based on the Internal Revenue Code of 1986, as
amended (the "Code"), the Treasury regulations promulgated thereunder and
administrative and judicial interpretations thereof, as of the date hereof, all
of which are subject to change, possibly on a retroactive basis. Unless
otherwise stated, this summary deals only with Preferred Securities held as
capital assets by United States Persons (defined below) who purchase the
Preferred Securities upon original issuance at their original offering price. As
used herein, a "United States Person" means a person that is (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
created or organized in or under the laws of the United States or any political
subdivision thereof, (iii) an estate or trust formed pursuant to Section
7701(a)(30) of the Code or (iv) a person whose worldwide income or gain is
subject to United States federal income taxation on a net income basis. The tax
treatment of holders may vary depending on their particular situation. This
summary does not address all the tax consequences that may be relevant to a
particular holder or to holders who may be subject to special tax treatment,
such as banks, real estate investment trusts, regulated investment companies,
insurance companies, dealers in securities or currencies, tax-exempt investors,
persons holding Preferred Securities as part of a straddle, a "synthetic
security," or as part of a hedging or conversion transaction, or, except to the
extent described below in "--United States Alien Holders", foreign taxpayers. In
addition, this summary does not include any description of any alternative
minimum tax consequences or the tax laws of any state, local or foreign
government that may be applicable to a holder of Preferred Securities.

         The authorities on which this summary is based are subject to various
interpretations and the opinions of Tax Counsel are not binding on the Internal
Revenue Service ("Service") or the courts, either of which could take a contrary
position. Moreover, no rulings have been or will be sought from the Service with
respect to the transactions described herein. Accordingly, there can be no
assurance that the Service will not challenge the opinions expressed herein or
that a court would not sustain such a challenge. Nevertheless, Tax Counsel has
advised that it is of the view that, if challenged, the opinions expressed
herein would be sustained by a court with jurisdiction in a properly presented
case.

CLASSIFICATION OF TRUST ISSUER AND THE JUNIOR SUBORDINATED DEBENTURES

         In the opinion of Tax Counsel, for United States federal income tax
purposes under current law and assuming compliance with the terms of the Trust
Agreement, (i) the Trust Issuer will be classified as a grantor trust and not as
an association taxable as a corporation for United States federal income tax
purposes, and (ii) the Junior Subordinated Debentures will be classified as
indebtedness of the Company. Accordingly, for United States federal income tax
purposes, each beneficial owner of the Preferred Securities (a "Securityholder")
will be treated as owning an undivided beneficial interest in the Junior
Subordinated Debentures held by the Trust Issuer. As a result, each
Securityholder will be required to include in its gross income its pro rata
share of the interest income or original issue discount that is paid or accrued
on the Junior Subordinated Debentures. See "--Interest Income and Original Issue
Discount" herein. This opinion is based in part upon certain factual assumptions
and upon certain representations made by the Company, which representations Tax
Counsel has relied upon and assumed to be true, correct and complete. If such
representations are inaccurate, this opinion could be adversely affected.

INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT

         Under applicable Treasury regulations, currently Section 1.1275-2(h)
(the "Regulations"), if the terms and conditions of a debt instrument make the
likelihood that the stated interest will not be timely paid a "remote"
contingency, such contingency will be ignored in determining whether the debt
instrument is issued with original issue discount ("OID"). The Company believes
that, under the Regulations, the Junior Subordinated Debentures will not be
considered to have been issued with OID. In such a case, stated interest on the
Junior Subordinated Debentures generally will be included in income by a
Securityholder at the time such interest income is paid or accrued in accordance
with such Securityholder's regular method of tax accounting.

         If, however, the Company exercises its right to defer payments of
interest on the Junior Subordinated Debentures, the Junior Subordinated
Debentures will be treated under the Regulations as issued with OID at such
time, and all stated interest on the Junior Subordinated Debentures will
thereafter be treated as OID as long as the Junior Subordinated Debentures
remain outstanding. In such event, all Securityholders would thereafter be
required to include the stated interest on the Junior Subordinated Debentures in
income on a daily economic accrual basis, regardless of their method of tax
accounting and in advance of receipt of the cash attributable to such interest
income. In particular, Securityholders would be required to include OID in gross
income during an Extension Period even though the Company would not make actual
cash payments during such Extension Period. Under the OID economic accrual
rules, a Securityholder would accrue an amount of interest income each year that
approximates the stated interest payments called for under the Junior
Subordinated Debentures, and actual cash payments of interest on the Junior
Subordinated Debentures would not be reported separately as taxable income.


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<PAGE>   80


         The Regulations have not yet been addressed in any rulings or other
interpretations by the Service, and the Service could take the position that the
likelihood of deferral of interest payments is not remote. If the Service were
to assert successfully that the stated interest on the Junior Subordinated
Debentures was OID regardless of whether the Company exercises its right to
defer payments of interest on such debentures, all Securityholders would be
required to include such stated interest in income on a daily economic accrual
basis as described above. Because income on the Preferred Securities will
constitute interest income for United States federal income tax purposes,
corporate holders of Preferred Securities will not be entitled to claim a
dividends-received deduction in respect of such income.

DISTRIBUTION OF THE JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF THE PREFERRED 
SECURITIES

         Under current United States federal income tax law and provided that
the Trust Issuer is not treated as an association taxable as a corporation, a
distribution by the Trust Issuer of the Junior Subordinated Debentures as
described under the caption "Description of the Preferred
Securities--Liquidation of the Trust Issuer and Distribution of the Junior
Subordinated Debentures to Holders" will be nontaxable to the Securityholders
and will result in a Securityholder receiving its pro rata share of the Junior
Subordinated Debentures previously held indirectly through the Trust Issuer,
with a holding period and aggregate tax basis equal to the holding period and
aggregate tax basis such Securityholder had in its Preferred Securities before
such distribution. A Securityholder will account for interest in respect of the
Junior Subordinated Debentures received from the Trust Issuer in the manner
described above under "Certain Federal Income Tax Consequences--Interest Income
and Original Issue Discount," including any accrual of OID (if any) attributed
to the Junior Subordinated Debentures upon the distribution.

SALES OR REDEMPTION OF THE PREFERRED SECURITIES

         Gain or loss will be recognized by a Securityholder on the sale of
Preferred Securities (including a redemption for cash or other consideration) in
an amount equal to the difference between the amount realized on the sale (or
redemption) and the Securityholder's adjusted tax basis in the Preferred
Securities sold or so redeemed. A Securityholder's adjusted tax basis in the
Preferred Securities generally will be its initial purchase price increased by
OID (if any) previously includible in such holder's gross income to the date of
disposition and decreased by payments received (other than payments of stated
interest that are not treated as OID) on the Preferred Securities. Gain or loss
recognized by a Securityholder on Preferred Securities held for more than one
year will generally be taxable as long-term capital gain or loss. Preferred
Securities constituting a capital asset which are acquired by an individual and
held for more than 18 months are accorded a maximum United States federal
capital gains tax rate of 20% (or a rate of 10%, if the individual taxpayer is
in the 15% tax bracket). Effective in 2001, the 20% rate drops to 18% (and the
10% rate drops to 8%) for capital assets acquired after the year 2000 and held
more than five years; however, the requirement that the capital asset be
acquired after the year 2000 does not apply to the 8% rate. Preferred Securities
held by an individual for more than one year, but not more than 18 months, are
accorded a maximum United States federal capital gains tax rate of 28%. For
corporate holders, capital gain will be subject to tax at the ordinary income
tax rates applicable to corporations.

         If the Company were to exercise its option to defer payments of
interest on the Junior Subordinated Debentures, the Preferred Securities might
trade at a price that does not fully reflect the value of accrued but unpaid
interest with respect to the underlying Junior Subordinated Debentures. A
Securityholder that disposes of its Preferred Securities between record dates
for payments of Distributions (and consequently does not receive a Distribution
from the Trust Issuer for the period prior to such disposition) will
nevertheless be required to include in income as ordinary income accrued but
unpaid interest on the Junior Subordinated Debentures through the date of
disposition and to add such amount to its adjusted tax basis in its Preferred
Securities disposed of. Such Securityholder will recognize a capital loss on the
disposition of its Preferred Securities to the extent the selling price (which
might not fully reflect the value of accrued but unpaid interest) is less than
the Securityholder's adjusted tax basis in the Preferred Securities (which would
include accrued but unpaid interest). Subject to certain limited exceptions,
capital losses cannot be applied to offset ordinary income for United States
federal income tax purposes.

UNITED STATES ALIEN HOLDERS

         For purposes of this discussion, a "United States Alien Holder" is any
corporation, individual, partnership, estate or trust that is, as to the United
States, a foreign corporation, a non-resident alien individual, a foreign
partnership, a foreign estate or a foreign trust. A "United States Alien Holder"
does not include, however, any person whose income or gain in respect of the
Preferred Securities is effectively connected with the conduct of a United
States trade or business.

         Under current United States federal income tax law payments by the
Trust Issuer or any of its paying agents to any Securityholder who or which is a
United States Alien Holder will not be subject to United States federal
withholding tax, provided

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<PAGE>   81

that (a) the Securityholder does not actually or constructively (as determined
under certain attribution rules prescribed by the Code) own 10% or more of the
total combined voting power of all classes of stock of the Company entitled to
vote, (b) the Securityholder is not a controlled foreign corporation that is
related to the Company through stock ownership, (c) the Securityholder is not a
bank receiving interest described in section 881(c)(3)(A) of the Code, and (d)
either (A) the Securityholder certifies to the Trust Issuer or its agent, under
penalties of perjury, that it is not a United States holder and provides its
name and address or (B) a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business (a "Financial Institution"), and holds the Preferred
Securities in such capacity, certifies to the Trust Issuer or its agent, under
penalties of perjury, that such statement has been received from the
Securityholder by it or by a Financial Institution holding such security for the
Securityholder and furnishes the Trust Issuer or its agent with a copy thereof.
Recently issued Treasury regulations provide alternative methods for satisfying
the identification and certification requirements described in the preceding
sentence. These regulations generally are effective for payments made after
December 31, 1998, subject to certain transition rules. United States Alien
Holders are urged to consult their tax advisors about these new regulations.

         A United States Alien Holder of Preferred Securities generally will not
be subject to United States federal withholding tax on any gain realized upon
the sale or other disposition of Preferred Securities. In the case of a United
States Alien Holder who is an individual, however, gain realized on the
disposition of Preferred Securities may be subject to United States federal
income tax if (i) such individual is present in the United States for a period
or periods aggregating 183 days or more during the taxable year of the
disposition and (ii) either (A) such individual has a "tax home" in the United
States or (B) the disposition is attributable to an office or other fixed place
of business maintained by such individual in the United States.

INFORMATION REPORTING TO SECURITYHOLDERS

         The amount of interest paid or OID accrued on the Preferred Securities
will be reported to Securityholders and the Service on Forms 1099, which forms
should be mailed to such holders by January 31 following each calendar year.

BACKUP WITHHOLDING

         Payments made on, and proceeds from the sale of, Preferred Securities
may be subject to a "backup" withholding tax of 31% unless the Securityholder
complies with certain certification requirements. Any amounts withheld under the
backup withholding rules will be allowed as a credit against the
Securityholder's United States federal income tax, provided the required
information is provided to the Internal Revenue Service on a timely basis.

         THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR
GENERAL INFORMATION PURPOSES ONLY AND MAY NOT BE APPLICABLE DEPENDING ON A
PROSPECTIVE INVESTOR'S PARTICULAR SITUATION. PROSPECTIVE INVESTORS SHOULD
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF
THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED SECURITIES OR THE
DISTRIBUTION TO THEM OF THE JUNIOR SUBORDINATED DEBENTURES, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER TAX LAWS.


                              ERISA CONSIDERATIONS

         The Company and certain affiliates of the Company may each be
considered a "party in interest" within the meaning of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or a "disqualified person"
within the meaning of Section 4975 of the Code with respect to certain employee
benefit plans (a "Plan") that are subject to ERISA. The purchase of the
Preferred Securities by a Plan that is subject to the fiduciary responsibility
provisions of ERISA or the prohibited transaction provisions of Section
4975(e)(1) of the Code and with respect to which the Company, or any affiliate
of the Company, is a service provider (or otherwise is a party in interest or a
disqualified person) may constitute or result in a prohibited transaction under
ERISA or Section 4975 of the Code, unless the Preferred Securities are acquired
pursuant to and in accordance with an applicable exemption. Any pension or other
employee benefit plan proposing to acquire any Preferred Securities should
consult with its counsel.


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<PAGE>   82

                                  UNDERWRITING

         Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") dated ________________, 1998, among the Company, the
Trust Issuer and the Underwriter, the Trust Issuer has agreed to sell to the
Underwriter, and the Underwriter has agreed to purchase from the Trust Issuer,
$20,000,000 aggregate Liquidation Amount of Preferred Securities at the public
offering price set forth on the cover page of this Prospectus.

         The Underwriting Agreement provides that the obligations of the
Underwriter are subject to certain conditions precedent and that the Underwriter
will purchase all of the Preferred Securities offered hereby if any of such
Preferred Securities are purchased.

         The Company has been advised by the Underwriter that the Underwriter
proposes to offer the Preferred Securities to the public and other dealers at
the public offering price set forth on the cover page of this Prospectus and
will share with certain dealers from its commission a concession not in excess
of $_____________. The Underwriter may allow, and such dealers may reallow, a
concession not in excess of $______________ to certain other dealers. After the
public offering, the offering price and other selling terms may be changed by
the Underwriter.

         The Company has granted to the Underwriter an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to an
additional $3,000,000 aggregate Liquidation Amount of Preferred Securities at
the public offering price plus accrued Distributions, if any, from __________,
1998. To the extent that the Underwriter exercises such option, the Company will
be obligated, pursuant to the option, to sell such Preferred Securities to the
Underwriter. The Underwriter may exercise such option only to cover
over-allotments made in connection with the sale of the Preferred Securities
offered hereby. If purchased, the Underwriter will offer such additional
Preferred Securities on the same terms as those on which the $___________
aggregate Liquidation Amount of the Preferred Securities are being offered.

         In view of the fact that the proceeds from the sale of the Preferred
Securities will be used to purchase the Junior Subordinated Debentures issued by
the Company, the Underwriting Agreement provides that the Company will pay as
compensation for the Underwriter's arranging the investment therein of such
proceeds an amount of $_____________ per Preferred Security (or $________
($_________ if the over-allotment option is exercised in full) in the
aggregate). The Company has also agreed to reimburse the Underwriter for its
reasonable out-of-pocket expenses, including legal fees and expenses relating to
the Offering of the Preferred Securities.

         In connection with the offering of the Preferred Securities, the
Underwriter and any selling group members and their respective affiliates may
engage in transactions effected in accordance with Rule 104 of the SEC's
Regulation M that are intended to stabilize, maintain or otherwise affect the
market price of the Preferred Securities. Such transactions may include
over-allotment transactions in which the Underwriter creates a short position
for its own account by selling more Preferred Securities than it is committed to
purchase from the Trust Issuer. In such a case, to cover all or part of the
short position, the Underwriter may exercise the over-allotment option described
above or may purchase Preferred Securities in the open market following
completion of the initial offering of the Preferred Securities. The Underwriter
also may engage in stabilizing transactions in which it bids for, and purchases,
the Preferred Securities at a level above that which might otherwise prevail in
the open market for the purpose of preventing or retarding a decline in the
market price of the Preferred Securities. The Underwriter also may reclaim any
selling concessions allowed to an Underwriter or dealer if the Underwriter
repurchases Preferred Securities distributed by the Underwriter or dealer. Any
of the foregoing transactions may result in the maintenance of a price for the
Preferred Securities at a level above that which might otherwise prevail in the
open market. Neither the Company nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above, if any, may have on the price of the Preferred Securities. The
Underwriter is not required to engage in any of the foregoing transactions and,
if commenced, such transactions may be discontinued at any time without notice.

         Because the National Association of Securities Dealers, Inc. ("NASD")
is expected to view the Preferred Securities as interests in a direct
participation program, the offering of the Preferred Securities is being made in
compliance with the applicable provisions of Rule 2810 of the NASD's Conduct
Rules.

         The Preferred Securities are a new issue of securities with no
established trading market. The Company and the Trust Issuer have been advised
by the Underwriter that it intends to make a market in the Preferred Securities.
However, the Underwriter is not obligated to do so and such market making may be
interrupted or discontinued at any time without notice at the sole discretion of
the Underwriter. The Company has applied to list the Preferred Securities on
______ under the symbol " ." However, one of the requirements for listing and
continuing listing is the presence of three market makers for the Preferred
Securities, and the presence of three market makers cannot be assured.
Accordingly, no assurance can be given as to the development or liquidity of any
market for the Preferred Securities.


                                       76

<PAGE>   83

       The Company and the Trust Issuer have agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities Act.

                             VALIDITY OF SECURITIES

         Certain matters of Delaware law relating to the validity of the
Preferred Securities, the enforceability of the Trust Agreement and the creation
of the Trust Issuer will be passed upon by Richards, Layton & Finger, special
Delaware counsel to the Company and the Trust Issuer. The validity of the
Guarantee and the Junior Subordinated Debentures will be passed upon for the
Company by Jenkens & Gilchrist. Certain legal matters will be passed upon for
the Underwriter by Schiff Hardin & Waite. Certain matters relating to the United
States federal income tax considerations will be passed upon for the Company by
Jenkens & Gilchrist.

                                     EXPERTS

         The consolidated balance sheets as of December 31, 1997 and 1996 and
the consolidated statements of income, shareholders equity and cash flows for
each of the three years in the period ended December 31, 1997, included in this
Prospectus, have been included herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing.

                              AVAILABLE INFORMATION

         The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located at
7 World Trade Center, 13th Floor, Suite 1300, New York, New York 10048 and Suite
1400, Citicorp Center, 14th Floor, 500 West Madison Street, Chicago, Illinois
60661. Copies of such material can also be obtained at prescribed rates by
writing to the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Such material may also be accessed electronically
by means of the Commission's home page on the Internet at http://www.sec.gov.

         The Company and the Trust Issuer have filed with the Commission a
Registration Statement on Form S-2 (together with all amendments thereto, the
"Registration Statement"), of which this Prospectus is a part, under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Preferred Securities, the Junior Subordinated Debentures and the Guarantee. This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain portions of which have been omitted as permitted by the rules
and regulations of the Commission. In addition, certain documents filed by the
Company with the Commission have been incorporated in this Prospectus by
reference. See "Incorporation of Certain Documents by Reference." For further
information with respect to the Company, the Trust Issuer, the Preferred
Securities and the Junior Subordinated Debentures, reference is made to the
Registration Statement, including the exhibits thereto and the documents
incorporated therein by reference. Any statements contained herein concerning
the provisions of any document filed as an exhibit to the Registration Statement
or otherwise filed with the Commission or incorporated by reference herein are
not necessarily complete, and, in each instance, reference is made to the copy
of such document so filed for a more complete description of the matter
involved. Each such statement is qualified in its entirety by such reference.
The Registration Statement may be inspected without charge at the principal
office of the Commission in Washington, D.C., and copies of all or part of it
may be obtained from the Commission upon payment of the prescribed fees.

         No separate financial statements of the Trust Issuer have been included
herein. The Company does not consider that such financial statements would be
material to holders of Preferred Securities because (i) all of the voting
securities of the Trust Issuer will be owned by the Company, a reporting company
under the Exchange Act, (ii) the Trust Issuer has no independent operations but
exists for the sole purpose of issuing securities representing undivided
beneficial interests in the assets of the Trust Issuer and investing the
proceeds thereof in Junior Subordinated Debentures issued by the Company, and
(iii) the obligations of the Company described herein to provide certain
indemnities in respect of and be responsible for certain costs, expenses, debts
and liabilities of the Trust Issuer under the Indenture and pursuant to the
Trust Agreement, Guarantee and Junior Subordinated Debentures, in the aggregate,
constitute a full and unconditional guarantee of payments due on the Preferred
Securities. See "Description of the Junior Subordinated Debentures" and
"Description of the Guarantee" and "Relationship Among the Preferred Securities,
Junior Subordinated Debentures and Guarantee."

         The Trust Issuer is not currently subject to the information reporting
requirements of the Exchange Act and the Company does not expect that the Trust
Issuer will file reports, proxy statements or other information under the
Exchange Act with the Commission.


                                       77

<PAGE>   84

                 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

         The following document of the Company is incorporated by reference
herein (Commission File No. 00012247): The Company's Annual Report on Form 10-K
for the year ended December 31, 1997 filed with the Commission on March 30,
1998.

         Any statement contained in this Prospectus or in a document
incorporated or deemed to be incorporated by reference herein will be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded will not
be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.

         This Prospectus incorporates documents by reference which are not
presented herein or delivered herewith. Copies of any such documents, other than
exhibits thereto, are available without charge to any person, including any
beneficial owner, to whom this Prospectus is delivered upon written or oral
request to Southside Bancshares, Inc., 1201 S. Beckham Avenue, Tyler, Texas
75701, (903) 531-7111; Attention: Lee Gibson, Executive Vice President.


                                       78

<PAGE>   85


                   SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


SOUTHSIDE BANCSHARES, INC.
<TABLE>
<S>                                                                                            <C>
    Report of Independent Certified Public Accountants .....................................      F-2
    Consolidated Statements of Financial Condition at December 31, 1997 and 1996 ...........      F-3
    Consolidated Statements of Income for the three years ended 
       December 31, 1997, 1996 and 1995 ....................................................      F-4
    Consolidated Statements of Changes in Shareholders' Equity for the
       three years ended December 31, 1997, 1996 and 1995 ..................................      F-5
    Consolidated Statements of Cash Flows for the years ended
        December 31, 1997, 1996 and 1995 ...................................................      F-6
    Notes to Consolidated Financial Statements .............................................      F-8
</TABLE>

                                       F-1
<PAGE>   86



                        Report of Independent Accountants



To the Shareholders and Board of Directors
Southside Bancshares, Inc.

We have audited the accompanying consolidated balance sheets of Southside
Bancshares, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash flow
for each of the three years in the period ended December 31, 1997.  These
financial statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these 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 that our audits provide a reasonable basis
for our opinion.

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



 /s/ COOPERS & LYBRAND L.L.P.



 Coopers & Lybrand L.L.P.
 Dallas, Texas
 March 13, 1998



                                     F-2
<PAGE>   87
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                   December 31,   December 31,
                                                                                       1997           1996
                                                                                   ------------   ------------
<S>                                                                                 <C>            <C>      
                                                          ASSETS
Cash and due from banks .......................................................     $  36,593      $  31,653
Investment securities:
   Available for sale .........................................................        71,031         56,091
   Held to maturity ...........................................................           804          1,734
                                                                                    ---------      ---------
     Total Investment securities ..............................................        71,835         57,825
Mortgage-backed and related securities:
   Available for sale .........................................................       127,751         90,574
   Held to maturity ...........................................................        13,662         23,782
                                                                                    ---------      ---------
     Total Mortgage-backed securities .........................................       141,413        114,356
Marketable equity securities:
   Available for sale .........................................................         3,258          2,220
Loans:
   Loans,  net of unearned discount ...........................................       296,035        258,167
   Less:  Reserve for loan losses .............................................        (3,370)        (3,249)
                                                                                    ---------      ---------
     Net Loans ................................................................       292,665        254,918
Premises and equipment, net ...................................................        17,627         13,695
Other real estate owned, net ..................................................           364            273
Interest receivable ...........................................................         3,918          3,300
Deferred tax asset ............................................................           460            464
Other assets ..................................................................         3,012          3,990
                                                                                    ---------      ---------

     TOTAL ASSETS .............................................................     $ 571,145      $ 482,694
                                                                                    =========      =========

                                           LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
   Noninterest bearing ........................................................     $ 113,499      $  98,901
   Interest bearing ...........................................................       349,175        327,049
                                                                                    ---------      ---------
     Total Deposits ...........................................................       462,674        425,950
Short-term obligations:
   Federal funds purchased ....................................................         3,884          4,800
   FHLB Dallas Advances .......................................................        29,000
   Other obligations ..........................................................         1,647          2,035
Long-term obligations:
   FHLB Dallas Advances .......................................................        28,547          9,096
Other liabilities .............................................................         5,362          4,209
                                                                                    ---------      ---------
     TOTAL LIABILITIES ........................................................       531,114        446,090
                                                                                    ---------      ---------

Shareholders' equity:
   Common stock:  ($2.50 par, 6,000,000 shares authorized,
    3,496,269 and 3,316,127 shares issued) ....................................         8,740          8,290
   Paid-in capital ............................................................        21,290         18,501
   Retained earnings ..........................................................        10,414          9,628
   Treasury stock (116,750 and 62,986 shares at cost) .........................        (1,820)          (777)
   Net unrealized gains on securities available for sale, net of taxes ........         1,407            962
                                                                                    ---------      ---------
      TOTAL SHAREHOLDERS' EQUITY ..............................................        40,031         36,604
                                                                                    ---------      ---------

      TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..............................     $ 571,145      $ 482,694
                                                                                    =========      =========
</TABLE>


The accompanying notes are an integral part of
these consolidated financial statements.



                                     F-3
<PAGE>   88
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                 Years Ended December 31,
                                                                            ------------------------------------
                                                                               1997         1996           1995
                                                                            --------      --------      --------
<S>                                                                         <C>           <C>           <C>     
Interest income
   Loans ..............................................................     $ 23,847      $ 21,314      $ 18,861
   Investment securities ..............................................        3,299         3,374         4,343
   Mortgage-backed and related securities .............................        7,729         6,756         5,673
   Marketable equity securities .......................................          129           119           121
   Other interest earning assets ......................................          163           209           592
                                                                            --------      --------      --------
         Total interest income ........................................       35,167        31,772        29,590
                                                                            --------      --------      --------
Interest expense
   Time and savings deposits ..........................................       14,711        13,593        12,290
   Short-term obligations .............................................          773           132            94
   Long-term obligations ..............................................          721           672           453
                                                                            --------      --------      --------
         Total interest expense .......................................       16,205        14,397        12,837
                                                                            --------      --------      --------
Net interest income ...................................................       18,962        17,375        16,753
Provision for loan losses .............................................        1,005           500          (300)
                                                                            --------      --------      --------
Net interest income after provision for loan losses ...................       17,957        16,875        17,053
                                                                            --------      --------      --------
Noninterest income
   Deposit services ...................................................        4,001         2,821         2,752
   Gain on sales of securities available for sale .....................          233           132           221
   Other ..............................................................        1,432         1,180           901
                                                                            --------      --------      --------
         Total noninterest income .....................................        5,666         4,133         3,874
                                                                            --------      --------      --------
Noninterest expense
   Salaries and employee benefits .....................................        9,889         9,382         8,545
   Net occupancy expense ..............................................        2,089         1,749         1,636
   Equipment expense ..................................................          414           321           302
   Advertising, travel & entertainment ................................        1,006           956           888
   Supplies ...........................................................          440           436           388
   FDIC insurance .....................................................           52             2           434
   Postage ............................................................          331           301           303
   Other ..............................................................        2,707         2,219         2,186
                                                                            --------      --------      --------
         Total noninterest expense ....................................       16,928        15,366        14,682
                                                                            --------      --------      --------
Income before federal tax expense .....................................        6,695         5,642         6,245
                                                                            --------      --------      --------
Provision (benefit) for federal tax expense
   Current ............................................................        1,914         1,648         1,429
   Deferred ...........................................................         (225)         (211)          284
                                                                            --------      --------      --------
         Total income taxes ...........................................        1,689         1,437         1,713
                                                                            --------      --------      --------

Net Income ............................................................     $  5,006      $  4,205      $  4,532
                                                                            ========      ========      ========


Earnings Per Common Share-Basic
   Net Income .........................................................     $   1.47      $   1.23      $   1.33
Earnings Per Common Share-Diluted
   Net Income .........................................................     $   1.43      $   1.21      $   1.31
</TABLE>


The accompanying notes are an integral part of 
these consolidated financial statements.



                                     F-4
<PAGE>   89
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                                        Net
                                                                                                    Unrealized        Total
                                                 Common      Paid in       Retained    Treasury        Gains      Shareholders'
                                                  Stock      Capital       Earnings     Stock         (Losses)       Equity  
                                                 --------    --------      --------    --------      ---------    -----------
<S>                                              <C>         <C>           <C>         <C>           <C>          <C>        
Balance at December 31, 1994 ................    $  7,433    $  14,529     $  7,480    $   (219)     $  (1,699)   $    27,524
Net Income ..................................                                 4,532                                     4,532
Cash dividend ($.35 per share) ..............                                (1,047)                                   (1,047)
5% Stock dividend ...........................         368        1,474       (1,842)
Common stock issued (20,800 shares) .........          52          206                                                    258
Purchase of 26,339 shares of
 treasury stock .............................                                              (267)                         (267)
Net increase in unrealized gains on
 securities available for sale (net of tax) .                                                            2,352          2,352
                                                 --------    ---------     --------    --------      ---------    -----------

Balance at December 31, 1995 ................       7,853       16,209        9,123        (486)           653         33,352
Net Income ..................................                                 4,205                                     4,205
Cash dividend ($.40 per share) ..............                                (1,258)                                   (1,258)
5% Stock dividend ...........................         388        2,017       (2,405)
Common stock issued (19,557 shares) .........          49          259                                                    308
Purchase of 27,648 shares of
 treasury stock .............................                                              (425)                         (425)
Sale of 14,083 shares of
 treasury stock .............................                                   (37)        134                            97
Net increase in unrealized gains on
 securities available for sale (net of tax) .                                                              309            309
FAS 109 - Incentive Stock Options ...........                       16                                                     16
                                                 --------    ---------     --------    --------      ---------    -----------

Balance at December 31, 1996 ................       8,290       18,501        9,628        (777)           962         36,604
Net Income ..................................                                 5,006                                     5,006
Cash dividend ($.40 per share) ..............                                (1,316)                                   (1,316)
5% Stock dividend ...........................         404        2,466       (2,870)
Common stock issued (18,430 shares) .........          46          280                                                    326
Purchase of 65,464 shares of
 treasury stock .............................                                            (1,154)                       (1,154)
Sale of 11,700 shares of
 treasury stock .............................                                   (34)        111                            77
Net increase in unrealized gains on
 securities available for sale (net of tax) .                                                              445            445
FAS 109 - Incentive Stock Options ...........                       43                                                     43
                                                 --------    ---------     --------    --------      ---------    -----------
Balance at December 31, 1997 ................    $  8,740    $  21,290     $ 10,414    $ (1,820)     $   1,407    $    40,031
                                                 ========    =========     ========    ========      =========    ===========
</TABLE>



The accompanying notes are an integral part of 
these consolidated financial statements.


                                     F-5
<PAGE>   90
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)

<TABLE>
<CAPTION>
                                                                                             Years Ended December 31,
                                                                                     ---------------------------------------
                                                                                       1997            1996           1995
                                                                                     ---------      ---------     ----------
<S>                                                                                  <C>            <C>           <C>       
OPERATING ACTIVITIES:
  Net income ...................................................................     $   5,006      $   4,205     $    4,532
  Adjustments to reconcile net cash provided by operations:
    Depreciation and amortization ..............................................         2,804          2,250          1,563
    Accretion of discount and loan fees ........................................          (780)          (737)          (846)
    Provision for loan losses ..................................................         1,005            500           (300)
    Deferred loan origination cost .............................................                                         (72)
    Gain on sales of securities available for sale .............................          (233)          (132)          (221)
    Gain on sales of premises and equipment ....................................           (12)            (6)           (10)
    Gain on sales of other real estate owned ...................................                                         (20)
    Increase in interest receivable ............................................          (618)          (205)          (514)
    (Increase) decrease in other assets ........................................           923           (964)           563
    (Increase) decrease in deferred tax asset ..................................          (182)          (194)           284
    Increase in interest payable ...............................................           598            103            217
    Increase (decrease) in other payables ......................................           167         (2,586)         2,912
                                                                                     ---------      ---------     ----------
        Net cash provided by operating activities ..............................         8,678          2,234          8,088

INVESTING ACTIVITIES:
    Proceeds from sales of investment securities available for sale ............        31,037         19,928         33,457
    Proceeds from sales of mortgage-backed securities available for sale .......        37,247         18,991         16,555
    Proceeds from maturities of investment securities available for sale .......        16,366         33,920         20,582
    Proceeds from maturities of mortgage-backed securities available for sale ..        33,389         18,529          5,994
    Proceeds from maturities of investment securities held to maturity .........           936            941         17,510
    Proceeds from maturities of mortgage-backed securities held to maturity ....        10,214         10,398          6,403
    Purchases of investment securities available for sale ......................       (61,370)       (35,098)       (63,663)
    Purchases of mortgage-backed securities available for sale .................      (108,788)       (63,353)       (38,299)
    Purchases of marketable equity securities available for sale ...............        (1,038)          (108)          (107)
    Net decrease in federal funds sold .........................................                                      11,100
    Net increase in loans ......................................................       (39,900)       (31,144)       (27,486)
    Purchases of premises and equipment ........................................        (5,153)        (3,070)        (2,822)
    Proceeds from sales of premises and equipment ..............................            17             25             42
    Proceeds from sales of repossessed assets ..................................         1,015          1,165          1,002
    Proceeds from sales of other real estate owned .............................            98                           145
                                                                                     ---------      ---------     ----------
        Net cash used in investing activities ..................................       (85,930)       (28,876)       (19,587)
</TABLE>


The accompanying notes are an integral part of 
these consolidated financial statements.



                                     F-6
<PAGE>   91
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (continued)
(in thousands)


<TABLE>
<CAPTION>
                                                                                     Years Ended December 31,
                                                                                ------------------------------------
                                                                                 1997            1996         1995 
                                                                                --------      --------      -------- 
<S>                                                                             <C>           <C>           <C>      
FINANCING ACTIVITIES:
  Net increase (decrease) in demand and savings accounts ..................     $ 24,443      $ 16,332      $ (6,388)
  Net increase in certificates of deposit .................................       12,281        21,310         9,594
  Proceeds from advances ..................................................       58,900                       6,500
  Repayment of advances ...................................................      (10,449)       (4,590)         (811)
  Net increase (decrease) in federal funds purchased ......................         (916)          200         4,600
  Proceeds from the issuance of common stock ..............................          326           308           258
  Purchase of treasury stock ..............................................       (1,154)         (425)         (267)
  Proceeds from sale of treasury stock ....................................           77            97
  Dividends paid ..........................................................       (1,316)       (1,258)       (1,047)
                                                                                --------      --------      -------- 
        Net cash provided by financing activities .........................       82,192        31,974        12,439
                                                                                --------      --------      -------- 

  Net increase in cash and cash equivalents ...............................        4,940         5,332           940
  Cash and cash equivalents at beginning of year ..........................       31,653        26,321        25,381
                                                                                --------      --------      -------- 
  Cash and cash equivalents at end of year ................................     $ 36,593      $ 31,653      $ 26,321
                                                                                ========      ========      ========


SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION:

  Interest paid ...........................................................     $ 15,701      $ 14,294      $ 12,620
  Income taxes paid .......................................................     $  1,990      $  1,623      $  1,440


SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:

  Acquisition of OREO and other repossessed assets through foreclosure ....     $  1,148      $  1,187      $    986
  Transfer of securities to available for sale ............................                                 $ 57,584
  FAS114 reclassification .................................................                                 $    807
</TABLE>


The accompanying notes are an integral part of 
these consolidated financial statements.



                                     F-7
<PAGE>   92
NOTES TO FINANCIAL STATEMENTS       Southside Bancshares, Inc. and Subsidiaries

1.   SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

     The significant accounting and reporting policies of Southside Bancshares,
     Inc. (the "Company"), and its wholly owned subsidiaries, Southside Delaware
     Financial Corporation, Southside Bank (the "Bank") and the nonbank
     subsidiary, are summarized below.

     Organization and Basis of Presentation. The consolidated financial
     statements include the accounts of the Company, Southside Delaware
     Financial Corporation, Southside Bank and the nonbank subsidiary, which did
     not conduct any business in 1997. Southside Bank offers a full range of
     financial services to commercial, industrial, financial and individual
     customers. All significant intercompany accounts and transactions are
     eliminated in consolidation. The preparation of these consolidated
     financial statements in conformity with generally accepted accounting
     principles requires the use of management's estimates. These estimates are
     subjective in nature and involve matters of judgment. Actual amounts could
     differ from these estimates.

     Cash Equivalents. Cash equivalents for purposes of reporting cash flow,
     include cash and amounts due from banks.

     Loans. All loans are stated at principal outstanding net of unearned
     income. Interest income on installment loans is recognized primarily using
     the level yield method. Interest income on other loans is credited to
     income based primarily on the principal outstanding at contract rates of
     interest. Loans receivable that management has the intent and ability to
     hold for the foreseeable future or until maturity or pay-off are reported
     at their outstanding principal adjusted for any charge-offs, the allowance
     for loan losses, and any deferred fees or costs on originated loans and
     unamortized premiums or discounts on purchased loans. A loan is considered
     impaired, based on current information and events, if it is probable that
     the Company will be unable to collect the scheduled payments of principal
     or interest when due according to the contractual terms of the loan
     agreement. Substantially all of the Company's impaired loans are
     collateral-dependent, and as such, are measured for impairment based on the
     fair value of the collateral.

     Loan Fees. The Company treats loan fees, net of direct costs, as an
     adjustment to the yield of the related loan over its term.

     Reserve for Loan Losses. A reserve for loan losses is provided through
     charges to income in the form of a provision for loan losses. Loans which
     management believes are uncollectible are charged against this account with
     subsequent recoveries, if any, credited to the account. The amount of the
     current allowance for loan losses is determined by management's evaluation
     of the quality and inherent risks in the loan portfolio, economic
     conditions and other factors which warrant current recognition.

     Nonaccrual Loans. A loan is placed on nonaccrual when principal or interest
     is contractually past due 90 days or more unless, in the determination of
     management, the principal and interest on the loan are well collateralized
     and in the process of collection. In addition, a loan is placed on
     nonaccrual when, in the opinion of management, the future collectibility of
     interest and principal is in serious doubt. When classified as nonaccrual,
     accrued interest receivable on the loan is reversed and the future accrual
     of interest is suspended. Payments of contractual interest are recognized
     as income only to the extent that full recovery of the principal balance of
     the loan is reasonably certain.


                                     F-8
<PAGE>   93
     Other Real Estate Owned. Other Real Estate Owned includes real estate
     acquired in full or partial settlement of loan obligations. Other Real
     Estate Owned is carried at the lower of (1) the recorded amount of the loan
     for which the foreclosed property previously served as collateral or (2)
     the fair market value of the property. Prior to foreclosure, the recorded
     amount of the loan is written down, if necessary, to the appraised fair
     market value of the real estate to be acquired, less selling costs, by
     charging the allowance for loan losses. Any subsequent reduction in fair
     market value is charged to results of operations through the Allowance for
     Losses on Other Real Estate account. Costs of maintaining and operating
     foreclosed properties are expensed as incurred. Expenditures to complete or
     improve foreclosed properties are capitalized only if expected to be
     recovered; otherwise, they are expensed.

     Securities. The Company uses the specific identification method to
     determine the basis for computing realized gain or loss. The Company
     accounts for debt and equity securities as follows:

         Held to Maturity (HTM). Debt securities that management has the
         positive intent and ability to hold until maturity are classified as
         held to maturity and are carried at their remaining unpaid principal
         balance, net of unamortized premiums or unaccreted discounts. Premiums
         are amortized and discounts are accreted using the level interest yield
         method over the estimated remaining term of the underlying security.

         Available for Sale (AFS). Debt and equity securities that will be held
         for indefinite periods of time, including securities that may be sold
         in response to changes in market interest or prepayment rates, needs
         for liquidity and changes in the availability of and the yield of
         alternative investments are classified as available for sale. These
         assets are carried at market value. Market value is determined using
         published quotes as of the close of business. Unrealized gains and
         losses are excluded from earnings and reported net of tax as a separate
         component of shareholders' equity until realized.

     Premises and Equipment. Bank premises and equipment are stated at cost, net
     of accumulated depreciation. Depreciation is computed on a straight line
     basis over the estimated useful lives of the related assets. Useful lives
     are estimated to be 20 to 40 years for premises and 3 to 10 years for
     equipment. Maintenance and repairs are charged to income as incurred while
     major improvements and replacements are capitalized.

     Income Taxes. The Company files a consolidated Federal income tax return.
     Deferred tax assets and liabilities are recognized for the 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 expected to apply to taxable income in the years in which those
     temporary differences are expected to be recovered or settled. The effect
     on deferred tax assets and liabilities of changes in tax rates is
     recognized in income in the period the change occurs.

     Earnings Per Share. The Company adopted the provisions of Statement of
     Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128).
     This statement supersedes APB 15, "Earnings Per Share" and simplifies the
     computation of earnings per share (EPS) by replacing the "primary" EPS
     requirements of APB 15 with a "basic" EPS computation based upon
     weighted-average shares outstanding. The new standard requires a dual
     presentation of basic and diluted EPS. Diluted EPS is similar to fully
     diluted EPS required under APB 15 for entities with complex capital
     structures. The adoption of FAS 128 did not have a material impact on the
     Company. All previous periods have been restated to reflect the adoption of
     FAS 128. Earnings per share have been adjusted to give retroactive
     recognition to stock dividends.

     Earnings per share on a basic and diluted basis as required by Statement of
     Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share"
     is calculated as follows (in thousands, except per share amounts):



                                     F-9
<PAGE>   94
<TABLE>
<CAPTION>
                                                                                   Years Ended December 31,
                                                                               -------------------------------
                                                                                  1997       1996      1995
                                                                               ----------- --------- ---------
<S>                                                                            <C>         <C>       <C>      
  Basic net earnings per share
    Net income .......................................................         $     5,006 $   4,205 $   4,532
    Weighted average shares outstanding ..............................               3,394     3,409     3,401
                                                                               ----------- --------- ---------
                                                                               $      1.47 $    1.23 $    1.33
                                                                               =========== ========= =========

  Diluted net earnings per share
    Net income .......................................................         $     5,006 $   4,205 $   4,532
    Weighted average shares outstanding plus
       assumed conversions ...........................................               3,490     3,487     3,450
                                                                               ----------- --------- ---------
                                                                               $      1.43 $    1.21 $    1.31
                                                                               =========== ========= =========

  Calculation of weighted average shares outstanding plus
    assumed conversions
    Weighted average share outstanding ...............................               3,394     3,409     3,401
    Effect of dilutive securities options ............................                  96        78        49
                                                                               ----------- --------- ---------
                                                                                     3,490     3,487     3,450
                                                                               =========== ========= =========
</TABLE>

     Stock Options. The Financial Accounting Standards Board published Statement
     of Financial Accounting Standards No. 123, "Accounting for Stock-Based
     Compensation" (FAS123) on January 1, 1996 which encourages, but does not
     require, companies to recognize compensation expense for grants of stock,
     stock options and other equity instruments to employees based on new fair
     value accounting rules. Companies that choose not to adopt the new rules
     will continue to apply existing rules, but will be required to disclose pro
     forma net income and earnings per share under the new method. The Company
     elected to provide the pro forma disclosures for 1995, 1996 and 1997.

     Recent Accounting Pronouncements. In June 1997, the Financial Accounting
     Standards Board issued Statement of Financial Accounting Standards No. 130,
     "Reporting Comprehensive Income" (FAS 130). This statement, which the
     Company will be required to adopt in 1998, establishes standards for
     reporting and display of comprehensive income and its components in a full
     set of general-purpose financial statements. The new standard requires that
     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.
     Reclassification of financial statements for earlier periods provided for
     comparative purposes is required. The Company will adopt FAS 130 beginning
     January 1, 1998.

     In June 1997, the Financial Accounting Standards Board issued Statement of
     Financial Accounting Standards No. 131, "Disclosures about Segments of an
     Enterprise and Related Information" (FAS 131). This statement, which the
     Company will be required to adopt in 1998, supersedes FAS 14, Financial
     Reporting for Segments of a Business Enterprise, but retains the
     requirement to report information about major customers. The new standard
     requires that a public business enterprise report financial and descriptive
     information about its reportable operating segments. In the initial year of
     application, comparative information for earlier years is to be restated.
     The Company will adopt FAS 131 in the year ending December 31, 1998.




                                     F-10
<PAGE>   95
     In February 1998, the Financial Accounting Standards Board issued Statement
     of Financial Accounting Standards No. 132, "Employers' Disclosures about
     Pensions and Other Postretirement Benefits" (FAS 132). This statement,
     which the Company will be required to adopt in 1998, amends FAS 87,
     Employers' Accounting for Pension, FAS 88, Employers' Accounting for
     Settlements and Curtailments of Defined Benefit Pension Plans and for
     Termination Benefits and FAS 106, Employers' Accounting for Postretirement
     Benefits Other Than Pensions. The new standard revises employers'
     disclosures about pension and other postretirement benefit plans without
     changing the measurement or recognition of those plans. It standardizes the
     disclosure requirements for pension and other postretirement benefits to
     the extent practicable, requires additional information on changes in the
     benefit obligations and fair values of plan assets that will facilitate
     financial analysis, and eliminates certain disclosures. The Company will
     adopt FAS 132 beginning January 1, 1998.

     General. Certain prior period amounts have been reclassified to conform to
     current year presentation.

2.   CASH AND DUE FROM BANKS

The Company is required to maintain cash reserve balances with the Federal
Reserve Bank. The reserve balances were $2,816,000 and $3,788,000 as of December
31, 1997 and 1996, respectively.

3.   INVESTMENT, MORTGAGE-BACKED AND MARKETABLE EQUITY SECURITIES

The amortized cost and estimated market value of investment, mortgage-backed and
marketable equity securities as of December 31, 1997 and 1996 were (in
thousands):

<TABLE>
<CAPTION>
                                                         AVAILABLE FOR SALE                
                                          ------------------------------------------------
            December 31,                                 Gross        Gross     Estimated
            ------------                  Amortized   Unrealized    Unrealized    Market
                1997                         Cost        Gains        Losses       Value       
                ----                        ------      -------      --------     -------
<S>                                       <C>          <C>          <C>          <C>      
  U.S. Treasury .....................     $ 19,958     $      6     $      8     $ 19,956
  U.S. Government Agencies ..........          629            2                       631
  Mortgage-backed Securities:
    Direct Govt. Agency Issues ......       93,829          339          187       93,981
    Other Private Issues ............       33,333          439            2       33,770
  State and Political
    Subdivisions ....................       45,938        1,728            8       47,658
  Other Stocks and Bonds ............        6,041            3                     6,044
                                          --------     --------     --------     --------
    Total ...........................     $199,728     $  2,517     $    205     $202,040
                                          ========     ========     ========     ========
</TABLE>

<TABLE>
<CAPTION>
                                                        HELD TO MATURITY             
                                         --------------------------------------------
            December 31,                               Gross       Gross     Estimated
            ------------                 Amortized   Unrealized  Unrealized   Market
               1997                        Cost         Gains      Losses      Value
               ----                        -----       -------    --------    -------
<S>                                      <C>         <C>         <C>         <C>
  U.S. Government Agencies ..........     $   804     $           $     5     $   799
  Mortgage-backed Securities:
    Direct Govt. Agency Issues ......      13,662         129         103      13,688
                                          -------     -------     -------     -------

    Total ...........................     $14,466     $   129     $   108     $14,487
                                          =======     =======     =======     =======
</TABLE>



                                     F-11
<PAGE>   96
<TABLE>
<CAPTION>
                                                           AVAILABLE FOR SALE         
                                        -------------------------------------------------------
         December 31,                                     Gross          Gross       Estimated
         ------------                   Amortized      Unrealized      Unrealized      Market
            1996                          Cost            Gains          Losses         Value       
            ----                        --------         -------        --------       -------
<S>                                     <C>            <C>            <C>           <C>           
U.S. Treasury .....................     $    5,026     $       28     $              $    5,054
U.S. Government Agencies ..........          8,492             10             45          8,457
Mortgage-backed Securities:
  Direct Govt. Agency Issues ......         74,005            479             42         74,442
  Other Private Issues ............         15,808            328              4         16,132
State and Political
  Subdivisions ....................         38,555          1,095             21         39,629
Other Stocks and Bonds ............          5,163              8                         5,171
                                        ----------     ----------     ----------     ----------

  Total ...........................     $  147,049     $    1,948     $      112     $  148,885
                                        ==========     ==========     ==========     ==========
</TABLE>

<TABLE>
<CAPTION>
                                                               HELD TO MATURITY             
                                           -------------------------------------------------------
            December 31,                                     Gross         Gross        Estimated
            ------------                   Amortized      Unrealized     Unrealized       Market
               1996                          Cost            Gains         Losses          Value
               ----                         ------          -------       --------        -------
<S>                                        <C>            <C>           <C>             <C>       
U.S. Government Agencies .............     $    1,124     $              $       14     $    1,110
Mortgage-backed Securities:
  Direct Govt. Agency Issues .........         23,782            212            141         23,853
State and Political
  Subdivisions .......................            610              1                           611
                                           ----------     ----------     ----------     ----------

  Total ..............................     $   25,516     $      213     $      155     $   25,574
                                           ==========     ==========     ==========     ==========
</TABLE>


Interest income recognized on securities for the years presented (in thousands):

<TABLE>
<CAPTION>
                                                                            Years Ended  December 31,        
                                                                         ------------------------------
                                                                           1997       1996       1995
                                                                         --------   --------   --------
<S>                                                                      <C>        <C>        <C>     
  U.S. Treasury ......................................................   $    461   $    397   $    713
  U.S. Government Agencies ...........................................        578        858      2,039
  Mortgage-backed Securities .........................................      7,729      6,756      5,673
  State and Political Subdivisions ...................................      2,067      2,000      1,581
  Other Stocks and Bonds .............................................        322        238        131
                                                                         --------   --------   --------
  Total interest income on securities ................................   $ 11,157   $ 10,249   $ 10,137
                                                                         ========   ========   ========
</TABLE>

In October 1995, the Financial Accounting Standards Board issued an
implementation guide to FAS115 which allowed entities to reclassify their
securities among the three categories provided in FAS115. Transfers were
permitted after October 1995, but no later than December 31, 1995. As a result,
on November 16, 1995 the Company transferred a total of $57,584,000 from HTM to
AFS at the amortized cost at date of transfer. Of this total, $37,308,000 were
investment securities. The remaining $20,276,000 transferred were
mortgage-backed securities. The unrealized loss on the securities transferred
from HTM to AFS was $419,000, net of tax, at date of transfer. The transfer was
done according to the guidelines set forth in the implementation guide to
FAS115. There were no securities transferred from AFS to HTM or sales from the
HTM portfolio during the year ended December 31, 1997 or 1996.



                                     F-12
<PAGE>   97
Of the $233,000 in net securities gains from the AFS portfolio in 1997, there
were $376,000 in realized gains and $143,000 in realized losses. Of the $132,000
in net securities gains from the AFS portfolio in 1996, there were $199,000 in
realized gains and $67,000 in realized losses. The $221,000 in net securities
gains from the AFS portfolio in 1995 were comprised of $450,000 in realized
gains and $229,000 in realized losses.

The scheduled maturities of AFS and HTM securities as of December 31, 1997 are
presented below. Mortgage-backed securities are presented in total by category.

<TABLE>
<CAPTION>
                                                                                   Amortized     Aggregate
                                                                                      Cost       Fair Value
                                                                                   ---------     ----------
                                                                                        (in thousands)
<S>                                                                                  <C>        <C>   
Held to maturity securities:
   Due in one year or less .....................................................     $            $
   Due after one year through five years .......................................          804          799
                                                                                     --------     --------
                                                                                          804          799
Mortgage-backed securities .....................................................       13,662       13,688
                                                                                     --------     --------
      Total ....................................................................     $ 14,466     $ 14,487
                                                                                     ========     ========

Available for sale securities:
   Due in one year or less .....................................................     $ 26,930     $ 26,938
   Due after one year through five years .......................................       11,680       11,913
   Due after five years through ten years ......................................        8,869        9,172
   Due after ten years .........................................................       25,087       26,266
                                                                                     --------     --------
                                                                                       72,566       74,289
Mortgage-backed securities .....................................................      127,162      127,751
                                                                                     --------     --------
      Total ....................................................................     $199,728     $202,040
                                                                                     ========     ========
</TABLE>

Investment securities with book values of $32,844,000 and $17,474,000 were
pledged as of December 31, 1997 and 1996, respectively, to collateralize public
and trust deposits or for other purposes as required by law.



                                     F-13
<PAGE>   98
4.  LOANS AND RESERVE FOR POSSIBLE LOAN LOSSES

Loans in the accompanying consolidated balance sheets are classified as follows
(in thousands):

<TABLE>
<CAPTION>
                                                                         December 31,  December 31,
                                                                             1997          1996 
                                                                         ------------  ------------
<S>                                                                        <C>          <C>     
Real Estate Loans:
   Construction ......................................................     $ 10,299     $  7,821
   1-4 family residential ............................................       76,243       62,356
   Other .............................................................       55,802       57,198
Commercial loans .....................................................       62,161       51,514
Loans to individuals .................................................       96,432       85,758
                                                                           --------     --------
Total loans ..........................................................      300,937      264,647
   Less:  Unearned income ............................................        4,902        6,480
          Reserve for loan losses ....................................        3,370        3,249
                                                                           --------     --------
Net loans ............................................................     $292,665     $254,918
                                                                           ========     ========
</TABLE>

The following is a summary of the Reserve for Loan Losses for the years ended
December 31, 1997, 1996 and 1995 (in thousands):

<TABLE>
<CAPTION>
                                                                                Years Ended December 31,
                                                                           ----------------------------------
                                                                             1997          1996        1995
                                                                           -------     ---------     --------
<S>                                                                        <C>          <C>          <C>    
Balance at beginning of year .........................................     $ 3,249      $ 3,317      $ 3,137
  Provision for loan losses ..........................................       1,005          500         (300)
    Loans charged off ................................................      (1,229)        (838)        (599)
    Recoveries of loans charged off ..................................         345          270        1,079
                                                                           -------      -------      -------
      Net loan (losses) recoveries ...................................        (884)        (568)         480
                                                                           -------      -------      -------
Balance at end of year ...............................................     $ 3,370      $ 3,249      $ 3,317
                                                                           =======      =======      =======
</TABLE>

Nonaccrual loans at December 31, 1997 and 1996 were $1,344,000 and $1,533,000,
respectively.  Loans with terms modified in troubled debt restructuring at
December 31, 1997 and 1996 were $435,000 and $400,000, respectively.

The following is a summary of the Company's recorded investment in loans
(primarily nonaccrual loans) for which impairment has been recognized in
accordance with FAS114 (in thousands):

<TABLE>
<CAPTION>
                                                                                Valuation    Carrying
                                                                         Total   Allowance     Value
                                                                        ------- -----------  ---------
<S>                                                                     <C>        <C>        <C>   
Real Estate Loans .................................................     $  108     $   27     $   81
Commercial Loans ..................................................      1,059        185        874
Loans to Individuals ..............................................        177         12        165
                                                                        ------     ------     ------

Balance at December 31, 1997 ......................................     $1,344     $  224     $1,120
                                                                        ======     ======     ======
</TABLE>

<TABLE>
<CAPTION>
                                                                                Valuation    Carrying
                                                                         Total   Allowance     Value
                                                                        ------- -----------  ---------
<S>                                                                     <C>        <C>        <C>   
Real Estate Loans .................................................     $  646     $  128     $  518
Commercial Loans ..................................................        774        199        575
Loans to Individuals ..............................................        113         18         95
                                                                        ------     ------     ------

Balance at December 31, 1996 ......................................     $1,533     $  345     $1,188 
                                                                        ======     ======     ======
</TABLE>



                                     F-14
<PAGE>   99

For the years ended December 31, 1997 and 1996, the average recorded investment
in impaired loans was approximately $1,450,000 and $1,468,000, respectively.
During the year ended December 31, 1997, the amount of interest income reversed
on impaired loans placed on nonaccrual and the amount of interest income
subsequently recognized on the cash basis was not material.

The amount of interest recognized on nonaccrual or restructured loans was
$110,000, $97,000 and $78,000 for the years ended December 31, 1997, 1996 and
1995, respectively.  If these loans had been accruing interest at their
original contracted rates, related income would have been $336,000, $216,000
and $273,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.

5.  BANK PREMISES AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                                  December 31,   December 31,
                                                                                       1997          1996
                                                                                  ------------   ------------
                                                                                        (in thousands)
<S>                                                                                  <C>           <C>    
Bank premises ..................................................................     $18,713       $14,681
Furniture and equipment ........................................................       9,559         8,542
                                                                                     -------       -------
                                                                                      28,272        23,223
Less accumulated depreciation ..................................................      10,645         9,528
                                                                                     -------       -------
            Total ..............................................................     $17,627       $13,695
                                                                                     =======       =======
</TABLE>

Depreciation expense was $1,215,000, $1,025,000 and $997,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.

Future minimum rental commitments under noncancelable leases are (in thousands):

<TABLE>
                       <S>                   <C>
                       1998                  $    121,914
                       1999                       122,839
                       2000                       128,840
                       2001                       115,638
                       2002                        49,668
                       Thereafter                  25,332
                                             ------------
                                             $    564,231
                                             ============
</TABLE>

6.  OTHER REAL ESTATE OWNED

The following is a summary of the Allowance for Losses on Other Real Estate
Owned for the periods presented (in thousands):

<TABLE>
<CAPTION>
                                                                            Years Ended December 31,
                                                                            ------------------------
                                                                               1997           1996
                                                                            ---------      ---------
<S>                                                                         <C>            <C>        
Balance at beginning of year ..........................................     $     946      $     946
    Provision for Losses ..............................................                         
    Losses on sales ...................................................                         
    Gains on sales ....................................................                         
    Disposition of OREO ...............................................          (274)      
                                                                            ---------      ---------
Balance at end of year ................................................     $     672      $     946
                                                                            =========      =========
</TABLE>


For the years ended December 31, 1997, 1996 and 1995, income from OREO
properties exceeded the provision and other expenses by $23,000, $35,000 and
$34,000, respectively.



                                     F-15
<PAGE>   100

7.  TIME DEPOSITS

<TABLE>
<CAPTION>
                                                                      December 31,  December 31,
                                                                          1997         1996
                                                                      ------------  ------------
                                                                           (in thousands)
<S>                                                                     <C>          <C>     
Savings deposits ..................................................     $ 16,155     $ 15,213
Money Market demand deposits ......................................       57,493       51,872
NOW demand deposits ...............................................       64,368       61,085
Certificates and other time deposits
 of $100,000 or more ..............................................       62,152       55,758
Certificates and other time
 deposits under $100,000 ..........................................      149,007      143,121
                                                                        --------     --------

            Total .................................................     $349,175     $327,049
                                                                        ========     ========
</TABLE>

For the years ended December 31, 1997, 1996 and 1995, interest expense on time
certificates of deposit of $100,000 or more aggregated $2,922,000, $2,518,000
and $2,083,000, respectively.

At December 31, 1997, the scheduled maturities of CDs are as follows (in 
thousands):

<TABLE>
                     <S>                          <C>
                     1998                         $    154,699
                     1999                               36,146
                     2000                                9,972
                     2001                                2,887
                     2002 and thereafter                 7,455
                                                  ------------
                                                  $    211,159
                                                  ============
</TABLE>

The aggregate amount of demand deposits that has been reclassified as loans
were $.5 million and $.4 million for December 31, 1997 and 1996, respectively.



                                     F-16
<PAGE>   101
8.  SHORT-TERM BORROWINGS (dollars in thousands)

Information related to short-term borrowings for the three years ended December
31 is provided in the table below.

<TABLE>
<CAPTION>
                                                                              Years Ended December 31,
                                                                        ----------------------------------
                                                                          1997        1996          1995
                                                                        -------     -------       --------
<S>                                                                     <C>          <C>          <C>    
Federal funds purchased
  Balance at end of period ........................................     $ 3,884      $ 4,800      $ 4,600
  Average amount outstanding during the period (1) ................       2,695        1,367          611
  Maximum amount outstanding during the period ....................      12,384        7,700        5,350
  Weighted average interest rate during the period (2) ............         5.7%         5.1%         6.1%
  Interest rate at end of period ..................................         7.8%         6.9%         6.0%

Securities sold under agreements to repurchase
  Balance at end of period ........................................     $            $            $
  Average amount outstanding during the period (1) ................       3,649          191
  Maximum amount outstanding during the period ....................      13,027        1,980
  Weighted average interest rate during the period (2) ............         5.2%         5.2%
  Interest rate at end of period ..................................

Treasury tax and loan funds
  Balance at end of period ........................................     $ 1,647      $ 2,035      $ 1,352
  Average amount outstanding during the period (1) ................       1,080        1,113        1,180
  Maximum amount outstanding during the period ....................       2,850        2,731        2,907
  Weighted average interest rate during the period (2) ............         5.2%         4.6%         4.8%
  Interest rate at end of period ..................................         5.3%         5.2%         5.2%

Federal Home Loan Bank ("FHLB") Dallas Advances
  Balance at end of period ........................................     $29,000      $            $
  Average amount outstanding during the period (1) ................       6,798
  Maximum amount outstanding during the period ....................      29,000
  Weighted average interest rate during the period (2) ............         5.5%
  Interest rate at end of period ..................................         4.9%
</TABLE>

(1)      The average amount outstanding during the period was computed by
         dividing the total month-end outstanding principal balances by the
         number of months in the period.

(2)      The weighted average interest rate during the period was computed by
         dividing the actual interest expense (annualized) by average
         short-term debt outstanding.



                                     F-17
<PAGE>   102
9.  LONG TERM OBLIGATIONS (dollars in thousands)

<TABLE>
<CAPTION>
                                                                            Years Ended December 31,
                                                                        --------------------------------
                                                                          1997        1996         1995
                                                                        -------     --------      ------
<S>                                                                     <C>          <C>          <C>    
FHLB Dallas Advances
  Balance at end of period ........................................     $28,547      $ 9,096      $13,686
  Average amount outstanding during the period (1) ................      12,151       12,010        8,912
  Maximum amount outstanding during the period ....................      28,547       13,686       13,766
  Weighted average interest rate during the period (2) ............         5.9%         5.6%         5.1%
  Interest rate at end of period ..................................         6.0%         5.8%         5.5%
</TABLE>

(1)      The average amount outstanding during the period was computed by
         dividing the total month-end outstanding principal balances by the
         number of months in the period.

(2)      The weighted average interest rate during the period was computed by
         dividing the actual interest expense (annualized) by average long-term
         debt outstanding.

FHLB Dallas Long-term advances based on scheduled repayments at December 31 are:

<TABLE>
<CAPTION>
                                         Under       Due          Due       Over         1997
                                         1 Year    1-5 Years   6-10 Years  10 Years      Total
                                        -------    ---------   ----------  ---------    -------
<S>                                     <C>        <C>         <C>         <C>         <C>    
Fixed rate ........................     $ 1,320     $15,920     $10,654     $   653     $28,547
                                        -------     -------     -------     -------     -------

  Total Long-term Obligations .....     $ 1,320     $15,920     $10,654     $   653     $28,547
                                        =======     =======     =======     =======     =======
</TABLE>

FHLB Dallas advances are collateralized by FHLB Dallas stock, nonspecified real
estate loans and mortgage-backed securities.

10.  EMPLOYEE BENEFITS

Southside Bank has a deferred compensation agreement with eight of its
executive officers, which generally provides for payment of an aggregate amount
of $3.4 million over a maximum period of fifteen years after retirement or
death.  Deferred compensation expense was $43,000, $96,000 and $97,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.

The Company provides accident and health insurance for substantially all
employees through an insurance program funded by the Company.  Health insurance
benefits are offered to retired employees who pay a premium based on cost as
determined by a third party administrator.  Substantially all of the Company's
employees may become eligible for those benefits if they reach normal
retirement age after fifteen years of employment with the Company.  The cost of
health care benefits was $792,000, $760,000 and $628,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.  There was one retiree
participating in the health insurance plan as of December 31, 1997 and 1996.



                                     F-18
<PAGE>   103
The Company has an Employee Stock Ownership Plan which covers substantially all
employees.  Contributions to the plan are at the sole discretion of the Board
of Directors.  There were no contributions to the plan for the year ended
December 31, 1997.  Contributions to the plan for the years ended December 31,
1996 and 1995 were $75,000 and $150,000, respectively.  At December 31, 1997
and 1996, 93,851 and 94,615 shares of common stock were owned by the Employee
Stock Ownership Plan, respectively.  The number of shares have been adjusted as
a result of stock dividends.  These shares are treated as externally held
shares for dividend and earnings per share calculations.

The Company has an Officers Long-term Disability Income Plan, (the "Disability
Plan"), which covers officers of the Company and Southside Bank in the event
they become disabled as defined under its terms.  Individuals are automatically
covered under the plan if they (a) have been elected as an officer, (b) have
been an employee of the Company and Southside Bank for three years and (c)
receive earnings of $50,000 or more on an annual basis.  The Disability Plan
provides, among other things, under its terms that should a covered individual
become totally disabled he would receive 66-2/3%, not to exceed $10,000 per
month, of their current salary.  The benefits paid out of this plan are limited
by the benefits paid to the individual under the terms of other Company
sponsored benefit plans.

The Company and Southside Bank have a defined benefit pension plan pursuant to
which participants are entitled to benefits based on final average monthly
compensation and years of credited service determined in accordance with plan
provisions.  All employees of the Company and Southside Bank who have worked
1000 hours or more in their first twelve months of employment or during any
plan year thereafter are eligible to participate.  Employees are vested upon
the earlier of five years credited service or the employee attaining 60 years
of age.  Benefits are payable monthly commencing on the later of age 65 or the
participants date of retirement.  Eligible participants may retire at reduced
benefit levels after reaching age 55.  The Company contributes amounts to the
pension fund sufficient to satisfy funding requirements of the Employee
Retirement Income Security Act.  Plan assets included 59,992 shares of
Southside Bancshares, Inc. stock purchased at fair market value as of December
31, 1997 and 1996.  The number of shares have been adjusted as a result of
stock dividends.

<TABLE>
<CAPTION>
                                                                      December 31,   December 31,
                                                                          1997          1996  
                                                                      ------------   ------------
                                                                            (in thousands)
<S>                                                                     <C>           <C>     
Actuarial present value of benefit obligations:
  Accumulated benefit obligation, including vested benefits
  of $8,000 and $6,944 respectively ...............................     $  9,042      $  7,758
                                                                        ========      ========

Projected benefit obligation for service rendered to date .........     $(11,853)     $(10,086)
Plan assets at fair value, primarily stocks, bonds and CD's .......       10,233         9,049
                                                                        --------      --------

Plan assets (under) projected benefit obligation ..................       (1,620)       (1,037)
Unrecognized net loss .............................................        1,143           829
Unrecognized net asset being amortized over 16.55 years ...........         (278)         (324)
                                                                        --------      --------

  Net pension liability included in other liabilities .............     $   (755)     $   (532)
                                                                        ========      ========
</TABLE>

The weighted average discount rate and rate of increase in future compensation
levels used in determining actuarial present value of the projected benefit
obligation was 7.25% and 4.50% and 7.75% and 4.50% at December 31, 1997 and
1996, respectively.  The assumed long-term rate of return on plan assets was
9.0% at December 31, 1997 and 1996.



                                     F-19
<PAGE>   104
Net periodic pension cost for the years ended December 31, 1997, 1996 and 1995
included the following components (in thousands):

<TABLE>
<CAPTION>
                                                                         Years Ended December 31,
                                                                    -----------------------------------
                                                                      1997         1996          1995
                                                                    --------     -------       --------
<S>                                                                 <C>          <C>          <C>    
Service cost - benefits earned during the period ..............     $   510      $   547       $   436
Interest cost on projected benefit obligation .................         778          691           623
Actual return on plan assets ..................................      (1,415)        (992)       (1,212)
Net amortization and deferral .................................         563          326           652
                                                                    -------      -------       -------
Net periodic pension cost .....................................     $   436      $   572       $   499
                                                                    =======      =======       =======
</TABLE>

The Company has a nonfunded supplemental retirement plan (restoration plan) for
its employees whose benefits under the principal retirement plan are reduced
because of compensation deferral elections or limitations under federal tax
laws.  The expense for this plan for the years ended December 31, 1997, 1996
and 1995 was $45,000, $52,000 and $59,000, respectively.

Net periodic postretirement benefit cost for the years ended December 31, 1997,
1996 and 1995 includes the following components (in thousands):


<TABLE>
<CAPTION>
                                                                   Years Ended December 31,
                                                                   ------------------------
                                                                   1997      1996    1995
                                                                   ----      ----    -----
<S>                                                                 <C>      <C>      <C>
Service cost ..................................................     $        $ 1      $ 6
Interest cost .................................................      37       38       41
Net amortization and deferral on
  unrecognized transition obligation ..........................       3        3        3
Net amortization and deferral on
   unrecognized net loss ......................................       3       10        9
                                                                    ---      ---      ---
Net periodic postretirement benefit cost ......................     $43      $52      $59
                                                                    ===      ===      ===
</TABLE>

Accrued postretirement benefit cost at December 31, 1997 and 1996 is composed
of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                                Years Ended 
                                                                                                December 31,
                                                                                      --------------------------------
                                                                                          1997                1996
                                                                                      ------------       ------------- 
<S>                                                                                   <C>                <C>           
Accumulated benefit obligation, including vested benefits
  of $491 and $584, respectively ............................................         $       (510)      $        (584)
Unrecognized net transition obligation ......................................                   26                  29
Unrecognized actuarial loss .................................................                  130                 181
Additional minimum liability ................................................                 (156)               (210)
                                                                                      ------------       ------------- 
Accrued postretirement benefit cost .........................................         $       (510)      $        (584)
                                                                                      ============       ============= 

Assumed discount rate .......................................................                 7.25%               7.75%
                                                                                      ============       ============= 
Compensation increase rate ..................................................                 4.50%               4.50%
                                                                                      ============       ============= 
</TABLE>



                                     F-20
<PAGE>   105
Incentive Stock Options

In April 1993, the company adopted the Southside Bancshares, Inc. 1993
Incentive Stock Option Plan ("the Plan"), a stock-based incentive compensation
plan.  The Company applies APB Opinion 25 and related Interpretations in
accounting for the Plan.  In 1995, the FASB issued FASB Statement No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123"), which, if fully adopted
by the Company, would change the methods the Company applies in recognizing the
cost of the Plan.  Adoption of the cost recognition provisions of SFAS 123 is
optional and the Company has decided not to elect these provisions of SFAS 123.
However, pro forma disclosures as if the Company adopted the cost recognition
provisions of SFAS 123 in 1995 are required by SFAS 123 and are presented
below.

Under the Plan, the Company is authorized to issue shares of Common Stock
pursuant to "Awards" granted in the form of incentive stock options (intended
to qualify under Section 422 of the Internal Revenue Code of 1986, as amended).
Awards may be granted to selected employees and directors of the Company or any
subsidiary.

The Plan provides that the exercise price of any stock option may not be less
than the fair market value of the Common Stock on the date of grant.  The
Company granted incentive stock options in 1995, 1996 and 1997.  The stock
options granted in 1995, 1996 and 1997 have contractual terms of 10 years.  All
options vest on a graded schedule, 20% per year for 5 years, beginning on the
first anniversary date of the grant date.  In accordance with APB 25, the
Company has not recognized any compensation cost for these stock options
granted in 1995, 1996 and 1997.

A summary of the status of the Company's stock options as of December 31, 1997,
1996 and 1995 and the changes during the year ended on those dates is presented
below (For presentation purposes, all options are adjusted for all stock
dividends declared through December 31, 1997):

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
                                                           INCENTIVE STOCK OPTIONS
-------------------------------------------------------------------------------------------------------------
                                       1997                        1996                      1995
-------------------------------------------------------------------------------------------------------------
                              # SHARES      WEIGHTED      # SHARES     WEIGHTED     # SHARES       WEIGHTED
                                 OF         AVERAGE          OF        AVERAGE        OF            AVERAGE
                             UNDERLYING     EXERCISE      UNDERLYING   EXERCISE    UNDERLYING       EXERCISE
                              OPTIONS        PRICES        OPTIONS      PRICES      OPTIONS          PRICES
-------------------------------------------------------------------------------------------------------------
<S>                          <C>           <C>         <C>           <C>           <C>             <C>
Outstanding at beginning 
  of the year                 220,611        $10.02       158,964       $7.94        94,137          $6.27
-------------------------------------------------------------------------------------------------------------
Granted                        75,602        $16.90        77,175      $13.61        64,827         $10.37
-------------------------------------------------------------------------------------------------------------
Exercised                      11,700         $6.58        14,083       $6.91             0            N/A
-------------------------------------------------------------------------------------------------------------
Forfeited                       1,635        $13.10         1,445       $6.42             0            N/A
-------------------------------------------------------------------------------------------------------------
Expired                             0           N/A             0         N/A             0            N/A
-------------------------------------------------------------------------------------------------------------
Outstanding at end of
  year                        282,878        $12.01       220,611      $10.02       158,964          $7.94
-------------------------------------------------------------------------------------------------------------
Exercisable  at end  of
year                           88,865         $8.74        53,930       $7.26        37,656          $6.27
-------------------------------------------------------------------------------------------------------------
Weighted-average FV of
  options granted during
  the year                      $5.12                       $3.55                     $2.49
-------------------------------------------------------------------------------------------------------------
</TABLE>

The fair value of each stock option granted is estimated on the date of grant
using the minimum value method of option pricing with the following
weighted-average assumptions for grants in 1995, 1996 and 1997, respectively:
dividend yield of 3.9%, 2.9%, and 2.4%; risk-free interest rates of 5.99%,
5.41%, and 6.52%; the expected lives of 6 years; the expected volatility is
26.56%.



                                     F-21
<PAGE>   106
The following table summarizes information about stock options outstanding at
December 31, 1997:

<TABLE>
<CAPTION>
                                      Options Outstanding                         Options Exercisable   
                         ------------------------------------------------    ------------------------------
                             NUMBER      WEIGHTED AVG.                           NUMBER
        RANGE OF          OUTSTANDING      REMAINING        WEIGHTED AVG      EXERCISABLE    WEIGHTED AVG.
    EXERCISE PRICES       AT 12/31/97     CONTR. LIFE      EXERCISE PRICE     AT 12/31/97    EXERCISE PRICE
   <S>                      <C>               <C>              <C>               <C>            <C>
    $ 6.27 to $11.00        131,151           7.00             $ 8.30             88,865        $  8.74
    $11.01 to $16.90        151,727           8.80             $15.23                  0        $     0
    ----------------        -------           ----             ------          ---------        -------
    $ 6.27 to $16.90        282,878           8.00             $12.01             88,865        $  8.74
</TABLE>

Pro Forma Net Income and Net Income Per Common Share

Had the compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS 123, the Company's net income and net income
per common share for 1995, 1996, and 1997 would approximate the pro forma
amounts below (in thousands, net of taxes):

<TABLE>
<CAPTION>
                                         As           Pro          As         Pro           As         Pro
                                      Reported       Forma      Reported     Forma       Reported     Forma
                                      12/31/97     12/31/97     12/31/96    12/31/96     12/31/95   12/31/95
                                     ----------   ----------   ----------  ----------   ---------- ---------- 
<S>                                   <C>           <C>          <C>         <C>          <C>       <C>
SFAS 123 Charge . . . . . . . .       $    0        $   93      $    0      $   62        $    0    $    9
 
Net Income  . . . . . . . . . .       $5,006        $4,913      $4,205      $4,143        $4,532    $4,523

Net Income per Common
  Share-Basic . . . . . . . . .       $ 1.47        $ 1.45      $ 1.23      $ 1.22        $ 1.33    $ 1.33

Net Income per Common
  Share-Diluted . . . . . . . .       $ 1.43        $ 1.41      $ 1.21      $ 1.19        $ 1.31    $ 1.31
</TABLE>

The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts.  SFAS 123 does not apply to awards prior to 1995,
and the Company anticipates making awards in the future under its stock-based
compensation plan.



                                     F-22
<PAGE>   107
11.  SHAREHOLDERS' EQUITY

Cash dividends declared and paid were $.40 per share, $.40 per share and $.35
per share for the years ended December 31, 1997, 1996 and 1995, respectively.
Future dividends will depend on the Company's earnings, financial condition and
other factors which the Board of Directors of the Company considers to be
relevant.  The Company's dividend policy requires that any dividend payments
made by the Company not exceed consolidated earnings for that year.  Retained
earnings not available for the payment of dividends at December 31, 1997 was
$10,414,000.

The Bank is 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
Bank's financial statements.  Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices.  The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of Total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
average assets (as defined).  Management believes, as of December 31, 1997,
that the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 1997, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action.  To be categorized as well
capitalized the Bank must maintain minimum Total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table.  There are no conditions
or events since that notification that management believes have changed the
institution's category.

<TABLE>
<CAPTION>
                                                                                                       To Be Well
                                                                                                    Capitalized Under
                                                                       For Capital                  Prompt Corrective
                                           Actual                   Adequacy Purposes                Action Provisions  
                                    ------------------      ------------------------------    ------------------------------
                                     Amount     Ratio            Amount           Ratio           Amount            Ratio
                                    -------    -------      --------------     -----------    --------------    ------------
<S>                                 <C>         <C>         <C>                <C>            <C>               <C>  
As of December 31, 1997:

Total Capital
  (to Risk Weighted Assets) ...     $41,965     12.89%      > or = $26,038     > or = 8.0%    > or = $32,547    > or = 10.0%
Tier 1 Capital
  (to Risk Weighted Assets) ...     $38,595     11.86%      > or = $13,019     > or = 4.0%    > or = $19,528    > or =  6.0%
Tier 1 Capital
  (to Average Assets) (1) .....     $38,595      7.25%      > or = $21,283     > or = 4.0%    > or = $26,604    > or =  5.0%

As of December 31, 1996:

Total Capital
  (to Risk Weighted Assets) ...     $38,891     13.74%      > or = $22,640     > or = 8.0%    > or = $28,300    > or = 10.0%
Tier 1 Capital
  (to Risk Weighted Assets) ...     $35,642     12.59%      > or = $11,320     > or = 4.0%    > or = $16,980    > or =  6.0%
Tier 1 Capital
  (to Average Assets) (1) .....     $35,642      7.63%      > or = $14,015     > or = 3.0%    > or = $23,359    > or =  5.0%
</TABLE>

(1)  Refers to quarterly average assets as calculated by bank regulatory
     agencies.



                                     F-23
<PAGE>   108
Payment of dividends by the Bank is limited under regulation.  The amount that
can be paid in any calendar year without prior approval of the Bank's
regulatory agencies cannot exceed the lesser of net profits (as defined) for
that year plus the net profits for the preceding two calendar years, or
retained earnings.

The table below summarizes key equity ratios for the Company for the years
ended December 31, 1997, 1996 and 1995.

<TABLE>
<CAPTION>
                                                                                  Years Ended December 31,  
                                                                           -------------------------------------
                                                                            1997           1996             1995  
                                                                           ------         ------           ------
<S>                                                                          <C>            <C>             <C>  
Percentage of Net Income to:
  Average Total Assets  . . . . . . . . . . . . . . . . . . . . .            .99%           .92%            1.07%
  Average Shareholders' Equity  . . . . . . . . . . . . . . . . .          13.20%         12.20%           15.01%
Percentage of Dividends Declared Per Common
  Share to Net Income Per Common Share-Basic  . . . . . . . . . .          27.21%         32.52%           26.32%
Percentage of Dividends Declared Per Common
  Share to Net Income Per Common Share-Diluted  . . . . . . . . .          27.97%         33.06%           26.72%
Percentage of Average Shareholders'
  Equity to Average Total Assets  . . . . . . . . . . . . . . . .           7.50%          7.55%            7.16%
</TABLE>

12.  DIVIDEND REINVESTMENT AND COMMON STOCK REPURCHASE PLAN

The Company has a Dividend Reinvestment Plan funded by stock authorized, but
not yet issued.  Proceeds from the sale of the common stock will be used for
general corporate purposes and could be directed to the Company's subsidiaries.
For the year ended December 31, 1997, 18,430 shares were sold under this plan
at an average price of $17.69 per share, reflective of other trades at the time
of each sale.

The Company instituted a Common Stock Repurchase Plan in late 1994. Under the
repurchase plan, the Board of Directors establishes, on a quarterly basis,
total dollar limitations and price per share for stock to be repurchased.  The
Board reviews this plan in conjunction with the capital needs of the Company
and Southside Bank and may, at it's discretion, modify or discontinue the plan.
During 1997, 65,464 shares of treasury stock were purchased under this plan at
a cost of $1,154,000.

13.  INCOME TAXES

The provisions for federal income taxes included in the accompanying statements
consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                             Years Ended December 31,
                                                                        ---------------------------------
                                                                          1997         1996         1995
                                                                        -------      -------      -------
<S>                                                                     <C>          <C>          <C>    
Current tax provision .............................................     $ 1,914      $ 1,648      $ 1,429
Deferred tax provision (benefit) ..................................        (225)        (211)         284
                                                                        -------      -------      -------
Provision for tax expense charged to operations ...................       1,689        1,437        1,713
Shareholders' Equity - Unrealized gains on
    securities available for sale .................................         229          159        1,212
                                                                        -------      -------      -------
Comprehensive provision for income tax ............................     $ 1,918      $ 1,596      $ 2,925
                                                                        =======      =======      =======
</TABLE>




                                     F-24
<PAGE>   109
Deferred income taxes result from temporary differences in the recognition of
revenues and expenses for tax and book purposes.  These differences and the tax
effect of each of the major categories are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                           Years Ended December 31,
                                                                        ----------------------------
                                                                         1997       1996       1995
                                                                        ------     -----      ------
<S>                                                                     <C>        <C>        <C>  
Provision for loan losses .........................................     $(323)     $(170)     $ 102
Provision for OREO losses .........................................        83                   117
Depreciation ......................................................        29         57         31
Retirement and other benefit plans ................................       (60)      (123)       (41)
FHLB Dallas Stock dividends .......................................        40         37         37
Loan origination costs ............................................        11          2         25
Other .............................................................        (5)       (14)        13
                                                                        -----      -----      -----

Deferred tax provision (benefit) ..................................     $(225)     $(211)     $ 284
                                                                        =====      =====      =====
</TABLE>

The components of the net deferred tax asset as of December 31, 1997 and 1996
are summarized below (in thousands):

<TABLE>
<CAPTION>
                                                                                   Assets     Liabilities 
                                                                                   ------     -----------
<S>                                                                               <C>          <C>
Allowance for Losses on OREO ................................................     $   318      $
Reserve for Loan Losses .....................................................         737
Retirement and Other Benefit Plans ..........................................         640
Unrealized gains on securities available for sale ...........................                     (725)
Loan Origination Costs ......................................................                     (154)
Premises and Equipment ......................................................                     (209)
FHLB Dallas Stock Dividends .................................................                     (145)
Other .......................................................................                       (2)
                                                                                  -------      -------
   Gross deferred tax assets (liabilities) ..................................       1,695       (1,235)
                                                                                  -------      -------

      Net deferred tax asset at December 31, 1997 ...........................     $   460
                                                                                  =======
</TABLE>

<TABLE>
<CAPTION>
                                                                                    Assets     Liabilities 
                                                                                   -------    ------------
<S>                                                                               <C>          <C>
Allowance for Losses on OREO ................................................     $   401      $
Reserve for Loan Losses .....................................................         415
Retirement and Other Benefit Plans ..........................................         576
Unrealized gains on securities available for sale ...........................                     (496)
Loan Origination Costs ......................................................                     (143)
Premises and Equipment ......................................................                     (183)
FHLB Dallas Stock Dividends .................................................                     (105)
Other .......................................................................                       (1)
                                                                                  -------      -------
   Gross deferred tax assets (liabilities) ..................................       1,392         (928)
                                                                                  -------      -------

      Net deferred tax asset at December 31, 1996 ...........................     $   464
                                                                                  =======
</TABLE>



                                     F-25
<PAGE>   110
A reconciliation of tax at statutory rates and total tax expense is as follows
(dollars in thousands):

<TABLE>
                                                                              Years Ended December 31,             
                                                     --------------------------------------------------------------------
                                                             1997                   1996                   1995
                                                     --------------------    --------------------    --------------------
                                                                  Percent                 Percent                 Percent
                                                                    of                      of                      of
                                                                  Pre-Tax                 Pre-Tax                 Pre-Tax
                                                     Amount       Income     Amount       Income     Amount       Income
                                                     ------       ------     ------       ------     ------       ------
<S>                                                 <C>           <C>       <C>           <C>       <C>           <C>  
Calculated Tax Expense ........................     $ 2,276        34.0%    $ 1,918        34.0%    $ 2,123        34.0%

Increase (Decrease) in Taxes from:

Tax Exempt Interest ...........................        (706)      (10.5)%      (650)      (11.5)%      (518)       (8.3)%

Other Net .....................................         119         1.7%        169         3.0%        108         1.7%
                                                    -------      ------     -------      ------     -------      ------

Provision for Tax Expense Charged to
   Operations .................................       1,689        25.2%      1,437        25.5%      1,713        27.4%

Shareholders' Equity - Unrealized gains
   on securities available for sale ...........         229         3.4%        159         2.8%      1,212        19.4%
                                                    -------      ------     -------      ------     -------      ------

Comprehensive Provision for Income Tax ........     $ 1,918        28.6%    $ 1,596        28.3%    $ 2,925        46.8%
                                                    =======      ======     =======      ======     =======      ======
</TABLE>

14.  CONTINGENCIES

The Company, or its subsidiaries, is involved with various litigation which
resulted in the normal course of business.  Management of the  Company, after
consulting with its legal counsel, believes that any liability resulting from
litigation will not have a material effect on the financial position and
results of operations of the Company or its subsidiaries.

15.  FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

In the normal course of business the Company is a party to certain financial
instruments, with off-balance-sheet risk, to meet the financing needs of its
customers.  These off-balance-sheet instruments include commitments to extend
credit and standby letters of credit.  These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
reflected in the financial statements.  The contract or notional amounts of
these instruments reflect the extent of involvement and exposure to credit loss
the Company has in these particular classes of financial instruments.

Commitments to extend credit are agreements to lend to a customer provided that
the terms established in the contract are met.  Commitments generally have
fixed expiration dates and may require payment of fees.  Since some commitments
are expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements.  Standby letters of
credit are conditional commitments issued to guarantee the performance of a
customer to a third party.  These guarantees are primarily issued to support
public and private borrowing arrangements.  The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
commitments to customers.

The Company had outstanding unused commitments to extend credit and outstanding
credit card arrangements of $28,313,000 and $27,172,000 at December 31, 1997 and
1996, respectively.  The Company had outstanding standby letters of credit of
$277,000 and $202,000 at December 31, 1997 and 1996, respectively.



                                     F-26
<PAGE>   111
In the normal course of business the Company buys and sells securities.  At
December 31, 1997 and 1996, the Company had commitments to purchase $624,000
and $322,000 in securities, respectively.

The Company applies the same credit policies in making commitments and standby
letters of credit as it does for on- balance-sheet instruments.  The Company
evaluates each customer's credit worthiness on a case-by-case basis.  The
amount of collateral obtained, if deemed necessary, upon extension of credit is
based on management's credit evaluation of the borrower.  Collateral held
varies but may include real estate, accounts receivable, inventory, property,
plant, and equipment.

16.  SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK

The economy of the Company's market area, East Texas, is directly tied to the
oil and gas Industry.  Oil prices have had an indirect effect on the Company's
business.  Although the Company has a diversified loan portfolio, a significant
portion of its loans are collateralized by real estate.  Repayment of these
loans is in part dependent upon the economic conditions in the market area.
Part of the risk associated with real estate loans has been mitigated since
53.6% of this group represents loans collateralized by residential dwellings
that are primarily owner occupied.  Losses on this type of loan have
historically been less than those on speculative properties.  Many of the
remaining real estate loans are collateralized primarily with owner occupied
commercial real estate.

The Mortgage-backed Securities held by the Company consist solely of Government
agency pass-through securities which are either directly or indirectly backed
by the full faith and credit of the United States Government.

17.  RELATED PARTY TRANSACTIONS

Loan activity of executive officers, directors, and their affiliates for the
years ended December 31, 1997 and 1996 were (in thousands):

<TABLE>
<CAPTION>
                                                                           1997         1996  
                                                                       ----------    --------- 
<S>                                                                    <C>            <C>             
Beginning Balance of Loans  . . . . . . . . . . . . . . . . . . . .    $    6,999    $   7,127
  Additional Loans  . . . . . . . . . . . . . . . . . . . . . . . .         2,507        2,331
  Payments  . . . . . . . . . . . . . . . . . . . . . . . . . . . .        (3,346)      (2,459)
                                                                       ----------    --------- 

Ending Balance of Loans . . . . . . . . . . . . . . . . . . . . . .    $    6,160    $   6,999
                                                                       ==========    ========= 
</TABLE>

Other indebtedness of officers and employees as of December 31, 1997 and 1996
was $2,478,000 and $2,901,000, respectively.

The Company incurred legal costs of $148,000, $141,000 and $152,000 during the
years ended December 31, 1997, 1996 and 1995, respectively, from a law firm of
which an outside director of the Company is a partner.  The Company paid
approximately $55,000, $57,000 and $75,000 in insurance premiums during the
years ended December 31, 1997, 1996 and 1995, respectively, to companies of
which two outside directors are officers.  The Company paid approximately
$50,000, $106,000 and $49,000 in architectural fees during the  years ended
December 31, 1997, 1996, and 1995, respectively, to a company of which an
outside director is an officer.


                                     F-27
<PAGE>   112
18.  DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet,
for which it is practicable to estimate that value.  In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other estimation techniques.  Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows.  Such techniques and assumptions, as they apply
to individual categories of the Company's financial instruments, are as
follows:

        Cash and due from banks:  The carrying amounts for cash and due from
        banks is a reasonable estimate of those assets' fair value.

        Investment, mortgage-backed and marketable equity securities:  Fair
        values for these securities are based on quoted market prices, where
        available.  If quoted market prices are not available, fair values are
        based on quoted market prices for similar securities.

        Loans receivable:  For adjustable rate loans that reprice frequently
        and with no significant change in credit risk, the carrying amounts are
        a reasonable estimate of those assets' fair value.  The fair value of
        other types 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.  Nonperforming loans are estimated using discounted cash
        flow analyses or underlying value of the collateral where applicable.

        Accrued interest receivable: The carrying amount of accrued interest
        approximates its fair value.

        Deposit liabilities:  The fair value of demand deposits, savings
        accounts, and certain money market deposits is the amount on demand at
        the reporting date, that is, the carrying value.  Fair values for fixed
        rate certificates of deposits are estimated using a discounted cash
        flow calculation that applies interest rates currently being offered
        for deposits of similar remaining maturities.

        Federal funds purchased and securities sold under agreement to
        repurchase:  Federal funds purchased and securities sold under
        agreement to repurchase generally have an original term to maturity of
        one day and thus are considered short-term borrowings.  Consequently,
        their carrying value is a reasonable estimate of fair value.

        Commitments to extend credit:  The carrying amounts of commitments to
        extend credit and standby letters of credit are a reasonable estimate
        of those assets' fair value.

        FHLB Dallas Advances:  The fair value of these notes is estimated by
        discounting the future cash flows using rates at which notes would be
        made to borrowers with similar credit ratings and for the same remaining
        maturities.



                                     F-28
<PAGE>   113
The following table presents the Company's assets, liabilities, and
unrecognized financial instruments at both their respective carrying amounts
and fair value.  The Company's nonfinancial assets and liabilities are
presented in both columns at their carrying amount (in thousands).

<TABLE>
<CAPTION>
                                                      At December 31, 1997        At December 31, 1996
                                                     -----------------------   ------------------------
                                                     Carrying                  Carrying
                                                      Amount     Fair Value     Amount      Fair Value   
                                                     --------   ------------   ---------   ------------
<S>                                                  <C>          <C>          <C>          <C>     
Financial assets:
   Cash and due from banks .....................     $ 36,593     $ 36,593     $ 31,653     $ 31,653
Investment securities:
     Available for sale ........................       71,031       71,031       56,091       56,091
     Held to maturity ..........................          804          799        1,734        1,720
Mortgage-backed and related securities:
     Available for sale ........................      127,751      127,751       90,574       90,574
     Held to maturity ..........................       13,662       13,688       23,782       23,853
Marketable equity securities:
     Available for sale ........................        3,258        3,258        2,220        2,220
Loans, net .....................................      292,665      295,097      254,918      259,648
Interest receivable ............................        3,918        3,918        3,300        3,300

Financial liabilities:
   Retail deposits .............................     $462,674     $463,157     $425,950     $426,570
   Federal funds purchased .....................        3,884        3,884        4,800        4,800
   FHLB Dallas advances ........................       57,547       54,753        9,096        8,572

Off-balance sheet liabilities:
   Commitments to extend credit ................       24,036       24,036       23,285       23,285
   Standby letters of credit ...................          277          277          202          202
   Credit card arrangements ....................        4,277        4,277        3,887        3,887
</TABLE>

As discussed earlier, the fair value estimate of financial instruments for
which quoted market prices are unavailable is dependent upon the assumptions
used.  Consequently, those estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments.  Accordingly, the aggregate fair value amounts
presented in the above fair value table do not necessarily represent the
underlying value of the Company.

The Company did not own any derivative financial instruments as defined by
FAS119 and adoption of the statement did not affect the Company's financial
statements.



                                     F-29
<PAGE>   114
19.  PARENT COMPANY FINANCIAL INFORMATION

Condensed financial information for Southside Bancshares, Inc. (parent company
only) was as follows (dollars in thousands):

<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
                                                                         December 31,  December 31,
                          ASSETS                                             1997         1996
                                                                          --------      --------
<S>                                                                       <C>           <C>     
Cash and due from banks .............................................     $    222      $    347
Investment in bank subsidiaries at equity in
  underlying net assets .............................................       39,804        36,292
Investment in nonbank subsidiary at equity in
  underlying net assets .............................................           15            15
Other assets ........................................................            2             2
                                                                          --------      --------

        TOTAL ASSETS ................................................     $ 40,043      $ 36,656
                                                                          ========      ========

                         LIABILITIES

Other liabilities ...................................................     $     12      $     52
                                                                          --------      --------

        TOTAL LIABILITIES ...........................................           12            52
                                                                          --------      --------

                         SHAREHOLDERS' EQUITY

Common Stock ($2.50 par, 6,000,000 shares authorized:
  3,496,269 and 3,316,127 and  shares issued) .......................        8,740         8,290
Paid-in Capital .....................................................       21,290        18,501
Retained earnings ...................................................       10,414         9,628
Treasury Stock (116,750 and 62,986 shares) ..........................       (1,820)         (777)
Net unrealized gains on securities available for sale ...............        1,407           962
                                                                          --------      --------

        TOTAL SHAREHOLDERS' EQUITY ..................................       40,031        36,604
                                                                          --------      --------

        TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................     $ 40,043      $ 36,656
                                                                          ========      ========
</TABLE>



                                     F-30
<PAGE>   115
CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                          Years Ended December 31, 
                                                                        ----------------------------
                                                                          1997       1996       1995
                                                                        ------     ------     ------
<S>                                                                     <C>        <C>        <C>   
INCOME

Dividends from subsidiary .........................................     $2,066     $1,458     $1,197
                                                                        ------     ------     ------

     TOTAL INCOME .................................................      2,066      1,458      1,197
                                                                        ------     ------     ------

EXPENSE

Salaries and employee benefits ....................................                    75        150
Taxes other than income ...........................................         41         40         39
Other .............................................................         70         43         84
                                                                        ------     ------     ------

     TOTAL EXPENSE ................................................        111        158        273
                                                                        ------     ------     ------

Income before federal income tax expense ..........................      1,955      1,300        924
Benefit for federal income tax expense ............................         37         54         93
                                                                        ------     ------     ------
Income before equity in undistributed
   earnings of subsidiaries .......................................      1,992      1,354      1,017
Equity in undistributed earnings of subsidiaries ..................      3,014      2,851      3,515
                                                                        ------     ------     ------

     NET INCOME ...................................................     $5,006     $4,205     $4,532
                                                                        ======     ======     ======
</TABLE>

CONDENSED STATEMENTS OF CASH FLOW

<TABLE>
<CAPTION>
                                                                              Years Ended December 31,
                                                                        ---------------------------------
                                                                          1997         1996         1995
                                                                        -------      -------      -------
<S>                                                                     <C>          <C>          <C>
OPERATING ACTIVITIES:
  Net Income ......................................................     $ 5,006      $ 4,205      $ 4,532
  Adjustments to reconcile net income
  to cash provided by operations:
    Equity in undistributed earnings of subsidiaries ..............      (3,014)      (2,851)      (3,515)
    (Increase) decrease in taxes receivable .......................                        7           (2)
    Increase (decrease) in other liabilities ......................         (40)          (3)          49
                                                                        -------      -------      -------
         Net cash provided by operating activities ................       1,952        1,358        1,064

INVESTING ACTIVITIES:
  Investments in subsidiaries .....................................         (10)
                                                                        -------      -------      -------
         Net cash used in investing activities ....................         (10)

FINANCING ACTIVITIES:
  Purchase of treasury stock ......................................      (1,154)        (425)        (267)
  Proceeds from sale of treasury stock ............................          77           97
  Proceeds from issuance of Common Stock ..........................         326          308          258
  Dividends paid ..................................................      (1,316)      (1,258)      (1,047)
                                                                        -------      -------      -------

         Net cash used in financing activities ....................      (2,067)      (1,278)      (1,056)

  Net increase (decrease) in cash and cash equivalents ............        (125)          80            8
  Cash and cash equivalents at beginning of year ..................         347          267          259
                                                                        -------      -------      -------

  Cash and cash equivalents at end of year ........................     $   222      $   347      $   267
                                                                        =======      =======      =======
</TABLE>



                                     F-31
<PAGE>   116
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such information and representations must
not be relied upon as having been authorized by the Company, the Trust Issuer or
the Underwriter. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any time subsequent to the date
hereof. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any securities other than the registered securities to which
it relates. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy such securities in any circumstances in which
such offer or solicitation is unlawful.


                                Table of Contents
<TABLE>
<CAPTION>
                                                                                          Page
                                                                                          ----
<S>                                                                                        <C>
Summary ..............................................................................       1
The Company ..........................................................................       1
The Trust Issuer .....................................................................       3
The Offering .........................................................................       3
Summary Consolidated Financial Information and Other Data ............................       7
Risk Factors .........................................................................       9
Use of Proceeds ......................................................................      17
Market for the Preferred Securities ..................................................      17
Accounting Treatment .................................................................      17
Capitalization .......................................................................      18
Management's Discussion and Analysis of Financial Condition and Results of
    Operations .......................................................................      19
Business .............................................................................      32
Supervision and Regulation ...........................................................      46
Management ...........................................................................      51
Description of the Preferred Securities ..............................................      53
Description of the Junior Subordinated Debentures ....................................      62
Description of the Guarantee .........................................................      68
Relationship Among the Preferred Securities, Junior Subordinated Debentures
    and Guarantee ....................................................................      71
Certain Federal Income Tax Consequences ..............................................      73
ERISA Considerations .................................................................      75
Underwriting .........................................................................      76
Validity of Securities ...............................................................      77
Experts ..............................................................................      77
Available Information ................................................................      77
Incorporation of Certain Documents by Reference ......................................      78
Index to Consolidated Financial Statements ...........................................     F-1

</TABLE>

                                     [Logo]

                                  $20,000,000


                           SOUTHSIDE CAPITAL TRUST I

                        ____% Trust Preferred Securities

                              (Liquidation Amount
                          $10 per Preferred Security)
                      Guaranteed, as Described Herein, by

                           SOUTHSIDE BANCSHARES, INC.








                                  ------------
                                   PROSPECTUS
                                  ------------







                                RYAN, BECK & CO.










                             _______________, 1998



<PAGE>   117


                                     PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS


ITEM 14.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

          The expenses in connection with the offering of the securities to
which this Registration Statement relates which will be borne by Southside
Bancshares, Inc., are as set forth below. With the exception of the Securities
and Exchange Commission ("SEC") and National Association of Securities Dealers,
Inc. ("NASD") filing fees, all amounts shown are estimates.

<TABLE>

<CAPTION>

                                                           AMOUNT
                                                           ------
<S>                                                        <C>
SEC registration fee ..............................        $6,785
NASD filing fee ...................................         2,500
_____ listing fee .................................             *
Trustee fees and expenses .........................             *
Legal fees and expenses ...........................             *
Accounting fees and expenses.......................             *
Printing and mailing expenses......................             *
Blue Sky fees and expenses ........................             *
Miscellaneous .....................................             *
                                                           ------
         TOTAL ....................................       $     *
                                                           ======

</TABLE>

---------------

*  To be provided by amendment.


ITEM 15.  INDEMNIFICATION OF DIRECTORS AND OFFICERS.



          The Articles of Incorporation of Southside Bancshares, Inc. provides
that its officers and directors will be indemnified by Southside Bancshares,
Inc. to the fullest extent permitted by law. The Texas Business Corporations Act
("TBCA") permits, and in some cases requires, corporations to indemnify
officers, directors, agents and employees who are or have been a party to or are
threatened to be made a party to litigation against judgements, fines,
settlements and reasonable expenses under certain circumstances. Under the TBCA,
reasonable expenses incurred by a director or officer may be paid or reimbursed
by the Company in advance of a final disposition of the proceeding after the
Company receives a written affirmation by the director or officer of his or her
good faith belief that he or she has met the standard of conduct necessary for
indemnification and a written undertaking by or on behalf of the director or
officer to repay the amount if it is ultimately determined that the director or
officer is not entitled to indemnification by the Company. The TBCA requires the
Company to indemnify an officer or director against reasonable expenses incurred
in connection with the proceeding in which he or she is named defendant or
respondent because he or she is or was a director or officer if he or she is
wholly successful in defense of the proceeding.

          Southside Bancshares, Inc. has purchased director and officer
liability insurance that insures directors and officers of Southside Bancshares,
Inc. and Southside Bank against liabilities in connection with the performance
of their duties.

          Under the Trust Agreement of Southside Capital Trust I (the "Trust
Issuer"), Southside Bancshares, Inc. will agree to indemnify each of the
Trustees of the Trust Issuer or any predecessor trustee for the Trust Issuer,
and to hold harmless against, any loss, damage, claim, liability or expense
incurred without negligence or bad faith on its part, arising out of or in
connection with the acceptance or administration of the Trust Agreement
including the costs and expenses of defending itself against any claim or
liability in connection with the exercise or performance of any of its powers or
duties under the Trust Agreement.


                                      II-1
<PAGE>   118


ITEM 16.  EXHIBITS.

<TABLE>
<CAPTION>
REGULATION S-K
   EXHIBIT
   NUMBER                                       DOCUMENT
--------------   ----------------------------------------------------------------------
   <S>           <C>                                    
   1             Form of Underwriting Agreement.*

   3.1           Articles of Incorporation of Southside Bancshares, Inc. (filed as 
                 Exhibit 3 to the Registrant's Form 10-K for the year ended December 31,
                 1992, and incorporated herein).

   3.2           Articles of Amendment of Southside Bancshares, Inc. (filed as Exhibit
                 3(a)(ii) to the Registrant's Form 10-K for the year ended December 31,
                 1994, and incorporated herein).

   3.3           Bylaws of Southside Bancshares, Inc. (filed as Exhibit 3(b) to the
                 Registrant's Form 10-K for the year ended December 31, 1994, and 
                 incorporated herein).

   4.1           Form of Indenture with respect to Southside Bancshares, Inc.'s ___% 
                 Junior Subordinated Debentures.*
           
   4.2           Form of ___% Junior Subordinated Debenture (included as an exhibit to 
                 the Form of Indenture filed as Exhibit 4.1).*
        
   4.3           Certificate of Trust of Southside Capital Trust I (included as an 
                 exhibit to the Form of Amended and Restated Trust Agreement filed as 
                 Exhibit 4.5).*
   
   4.4           Form of Trust Agreement of Southside Capital Trust I (included as an 
                 exhibit to the Form of Amended and Restated Trust Agreement filed as 
                 Exhibit 4.5).*
              
   4.5           Form of Amended and Restated Trust Agreement of Southside Capital 
                 Trust I.*
           
   4.6           Form of Certificate for ___% Trust Preferred Security of Southside 
                 Capital Trust I (included as an exhibit to Exhibit 4.4).*
             
   4.7           Form of Guarantee Agreement for Southside Capital Trust I.* 
   
   4.8           Form of Agreement as to Expenses and Liabilities (included as an 
                 exhibit to Exhibit 4.5)*
   
   5.1           Opinion of Jenkens & Gilchrist, a Professional Corporation, as to the 
                 validity of the Guarantee and the issuance of the ___% Junior 
                 Subordinated Debentures to be issued by Southside Capital Trust I.*
          
   5.2           Opinion of Richards, Layton & Finger, special Delaware counsel, as to 
                 the enforceability of the Trust Agreement and Trust Preferred Securities 
                 to be issued by Southside Capital Trust I.*
   
   8.1           Tax Opinion of Jenkens & Gilchrist, a Professional Corporation.*
   
   10.1          Deferred Compensation Plan for B.G. Hartley effective February 13, 
                 1984, as amended June 28, 1990 and December 15, 1994 (filed as 
                 Exhibit 10(a)(i) to the Registrant's Form 10-K for the year ended 
                 December 31, 1994, and incorporated herein). 
   
   10.2          Deferred Compensation Plan for Robbie N. Edmonson effective February 
                 13, 1984, as amended June 28, 1990 and March 16, 1995 (filed as 
                 Exhibit 10(a)(ii) to the Registrant's Form 10-K for the year ended 
                 December 31, 1995, and incorporated herein). 
   
   10.3          Officers Long-term Disability Income Plan effective June 25, 1990 
                 (filed as Exhibit 10(b) to the Registrant's Form 10-K for the year 
                 ended June 30, 1990, and incorporated herein). 
          
   10.4          Retirement Plan Restoration Plan for the subsidiaries of SoBank, Inc.
                 (now named Southside Bancshares, Inc.)(filed as Exhibit 10(c) to the 
                 Registrant's Form 10-K for the year ended December 31, 1992, and 
                 incorporated herein). 
   
   10.5          Incentive Stock Option Plan effective April 1, 1993 of SoBank, Inc. 
                 (now named Southside Bancshares, Inc.) (filed as Exhibit 10(d) to the 
                 Registrant's Form 10-K for the year ended December 31, 1994, and 
                 incorporated herein). 

</TABLE>


                                      II-2
<PAGE>   119

<TABLE>
<CAPTION>
REGULATION S-K
   EXHIBIT
   NUMBER                                       DOCUMENT
--------------   ----------------------------------------------------------------------
   <S>           <C>                                    
   10.6          Form of Deferred Compensation Agreements dated June 30, 1994 with 
                 each of Titus Jones and Andy Wall as amended November 13, 1995. 
                 (filed as Exhibit 10(e) to the Registrant's Form 10-K for the year 
                 ended December 31, 1995 and incorporated herein). 
                 
   10.7          Form of Deferred Compensation Agreements dated June 30, 1994 with 
                 each of Sam Dawson, Lee Gibson and Jeryl Story as amended October 15, 
                 1997 and Form of Deferred Compensation Agreement dated October 15, 
                 1997 with Lonny Uzzell. (filed as Exhibit 10(f) to the Registrant's 
                 Form 10-K for the year ended December 31, 1997, and incorporated herein).
           
   12            Statements re: calculation of ratios. 
                 
   23.1          Consent of Coopers & Lybrand, L.L.P. 
                 
   23.2          Consent of Jenkens & Gilchrist, a Professional Corporation (set forth
                 in Exhibit 5.1 to this Registration Statement).*
                 
   23.3          Consent of Richards, Layton & Finger (included in Exhibit 5.2 to this 
                 Registration Statement).* 
                 
   24            Power of Attorney (set forth on the signature page in Part II of 
                 this Registration Statement). 
                 
   25.1          Form T-1: Statement of Eligibility of U.S. Trust Company of Texas, 
                 N.A. to act as trustee under the Indenture.* 
                 
   25.2          Form T-1: Statement of Eligibility of Wilminton Trust Company 
                 to act as trustee under the Amended and Restated Trust Agreement.* 
                 
   25.3          Form T-1: Statement of Eligibility of U.S. Trust Company of Texas, 
                 N.A. to act as trustee under the Guarantee Agreement for Southside
                 Capital Trust I.*
                 
   27            Financial Data Schedule.
</TABLE>

------------------

    * To be filed by amendment

ITEM 17.          UNDERTAKINGS.

         Each of the undersigned Registrants hereby undertakes:

         (a)  Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrants pursuant to Item 15 of this Registration Statement,
or otherwise, the Registrants have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrants of expenses incurred or paid by a director, officer or
controlling person of the Registrants in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrants will, unless
in the opinion of their counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by them is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.

         (b)(1)  For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrants pursuant to Rule 424 (b) (1) or (4)
or 497 (h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

           (2)  For the purpose of determining any liability under the 
Securities Act of 1933, each post-effective amendment that 


                                      II-3
<PAGE>   120

contains a form of prospectus shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.




                                      II-4

<PAGE>   121




                                   SIGNATURES


         Pursuant to the requirements of the Securities Act of 1933, Southside
Bancshares, Inc. certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Tyler, State of Texas, on April 9, 1998.


                                       SOUTHSIDE BANCSHARES, INC.


                                       By: /s/ SAM DAWSON
                                          -------------------------------------
                                       Sam Dawson, President




<PAGE>   122




         Each individual whose signature appears below hereby designates and
appoints B.G. Hartley and Lee R. Gibson, and each of them, either one of whom
may act without joinder of the other, as his true and lawful attorney-in-fact
and agents (the "Attorneys-in-Fact") with full power of substitution and
resubstitution, for such person and in such person's name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, which amendments may make such
changes in this Registration Statement as either Attorney-in-Fact deems
appropriate, and any registration statement relating to the same offering filed
pursuant to Rule 462(b) under the Securities Act of 1933 and requests to
accelerate the effectiveness of such registration statements, and to file each
such amendment with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto such
Attorneys-in-Fact and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as such person might or could do
in person, hereby ratifying and confirming all that such Attorneys-in-Fact or
either of them, or their substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.

         Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

                              SIGNATURE TITLE DATE

<TABLE>



<S>                                     <C>                                              <C> 
/s/ B.G. HARTLEY                        Chairman of the Board of Directors               April 9, 1998
--------------------------------
B.G. Hartley

/s/ ROBBIE N. EDMONSON                  Vice Chairman of the Board of Directors          April 9, 1998
--------------------------------
Robbie N. Edmonson

/s/ SAM DAWSON                          President, Secretary and Director                April 9, 1998
--------------------------------
Sam Dawson

/s/ FRED E. BOSWORTH                    Director                                         April 9, 1998
--------------------------------
Fred E. Bosworth

/s/ HERBERT C. BUIE                     Director                                         April 9, 1998
--------------------------------
Herbert C. Buie

/s/ ROLLINS CALDWELL                    Director                                         April 9, 1998
--------------------------------
Rollins Caldwell

/s/ W.D. (JOE) NORTON                   Director                                         April 9, 1998
--------------------------------
W.D. (Joe) Norton

/s/ WILLIAM SHEEHY                      Director                                         April 9, 1998
--------------------------------
William Sheehy

                                        Director                                         _____________, 1998
--------------------------------
Murph Wilson

</TABLE>

<PAGE>   123


         Pursuant to the requirements of the Securities Act of 1933, Southside
Capital Trust I certifies that it has reasonable grounds to believe it meets all
of the requirements for filing on Form S-2 and has duly caused this Registration
Statement to be filed on its behalf by the undersigned, thereunto duly
authorized, in the City of Tyler, State of Texas on April 9, 1998.


                                       SOUTHSIDE CAPITAL TRUST I

                                       By:      SOUTHSIDE BANCSHARES, INC.


                                       By: /s/ SAM DAWSON
                                          ------------------------------------
                                                Sam Dawson, President



<PAGE>   124

                                INDEX TO EXHIBITS


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                        DOCUMENT
------   ----------------------------------------------------------------------
<S>      <C>                                    
1        Form of Underwriting Agreement.*

3.1      Articles of Incorporation of Southside Bancshares, Inc. (filed as 
         Exhibit 3 to the Registrant's Form 10-K for the year ended 
         December 31, 1992, and incorporated herein).

3.2      Articles of Amendment of Southside Bancshares, Inc. (filed as Exhibit
         3(a)(ii) to the Registrant's Form 10-K for the year ended 
         December 31, 1994, and incorporated herein).

3.3      Bylaws of Southside Bancshares, Inc. (filed as Exhibit 3(b) to 
         the Registrant's Form 10-K for the year ended December 31, 1994, 
         and incorporated herein).

4.1      Form of Indenture with respect to Southside Bancshares, Inc.'s ___% 
         Junior Subordinated Debentures.* 

4.2      Form of ___% Junior Subordinated Debenture (included as an exhibit to 
         the Form of Indenture filed as Exhibit 4.1).*

4.3      Certificate of Trust of Southside Capital Trust I (included as an 
         exhibit to the Form of Amended and Restated Trust Agreement filed as 
         Exhibit 4.5).* 

4.4      Trust Agreement of Southside Capital Trust I (included as an exhibit 
         to the Form of Amended and Restated Trust Agreement filed as 
         Exhibit 4.5).* 

4.5      Form of Amended and Restated Trust Agreement of Southside Capital 
         Trust I.* 

4.6      Form of Certificate for ___% Trust Preferred Security of Southside 
         Capital Trust I (included as an exhibit to Exhibit 4.4).*

4.7      Form of Guarantee Agreement for Southside Capital Trust I.*

4.8      Form of Agreement as to Expenses and Liabilities (included as an 
         exhibit to Exhibit 4.5).*

5.1      Opinion of Jenkens & Gilchrist, a Professional Corporation, as to the 
         validity of the Guarantee and the issuance of the ___% Junior 
         Subordinated Debentures to be issued by Southside Capital Trust I.*

5.2      Opinion of ____________, special Delaware counsel, as to the 
         enforceability of the Trust Agreement and Trust Preferred Securities 
         to be issued by Southside Capital Trust I.* 

8.1      Tax Opinion of Jenkens & Gilchrist, a Professional Corporation.*

10.1     Deferred Compensation Plan for B.G. Hartley effective February 13, 
         1984, as amended June 28, 1990 and December 15, 1994 (filed as 
         Exhibit 10(a)(i) to the Registrant's Form 10-K for the year ended 
         December 31, 1994, and incorporated herein). 

10.2     Deferred Compensation Plan for Robbie N. Edmonson effective February 
         13, 1984, as amended June 28, 1990 and March 16, 1995 (filed as 
         Exhibit 10(a)(ii) to the Registrant's Form 10-K for the year ended 
         December 31, 1995, and incorporated herein). 

10.3     Officers Long-term Disability Income Plan effective June 25, 1990 
         (filed as Exhibit 10(b) to the Registrant's Form 10-K for the year 
         ended June 30, 1990, and incorporated herein). 

10.4     Retirement Plan Restoration Plan for the subsidiaries of SoBank, Inc.
         (now named Southside Bancshares, Inc.)(filed as Exhibit 10(c) to the 
         Registrant's Form 10-K for the year ended December 31, 1992, and 
         incorporated herein). 

10.5     Incentive Stock Option Plan effective April 1, 1993 of SoBank, Inc. 
         (now named Southside Bancshares, Inc.) (filed as Exhibit 10(d) to the 
         Registrant's Form 10-K for the year ended December 31, 1994, and 
         incorporated herein). 

</TABLE>


<PAGE>   125


<TABLE>

<CAPTION>

EXHIBIT
NUMBER                       DOCUMENT
------   ----------------------------------------------------------------------
<S>      <C>                                    
10.6     Form of Deferred Compensation Agreements dated June 30, 1994 with 
         each of Titus Jones and Andy Wall as amended November 13, 1995. 
         (filed as Exhibit 10(e) to the Registrant's Form 10-K for the year 
         ended December 31, 1995 and incorporated herein). 

10.7     Form of Deferred Compensation Agreements dated June 30, 1994 with 
         each of Sam Dawson, Lee Gibson and Jeryl Story as amended October 15, 
         1997 and Form of Deferred Compensation Agreement dated October 15, 
         1997 with Lonny Uzzell. (filed as Exhibit 10(f) to the Registant's Form
         10-K for the year ended December 31, 1997, and incorporated herein).

12       Statements re: calculation of ratios. 

23.1     Consent of Coopers & Lybrand, L.L.P. 

23.2     Consent of Jenkens & Gilchrist, a Professional Corporation (set forth
         in Exhibit 5.1 to this Registration Statement).*

23.3     Consent of _______________ (included in Exhibit 5.2 to this 
         Registration Statement).*

24       Power of Attorney (set forth on the signature page in Part II of 
         this Registration Statement). 

25.1     Form T-1: Statement of Eligibility of U.S. Trust Company of Texas, 
         N.A. to act as trustee under the Indenture.*

25.2     Form T-1: Statement of Eligibility of Wilmington Trust Company to act 
         as trustee under the Amended and Restated Trust Agreement.* 

25.3     Form T-1: Statement of Eligibility of U.S. Trust Company of Texas, 
         N.A. to act as trustee under the Guarantee Agreement for Southside
         Capital Trust I.*

27       Financial Data Schedule.

----------------
*        To be filed by amendment. 
</TABLE>