SOUTHSIDE BANCSHARES INC, 424A, 1998-04-29

SOUTHSIDE BANCSHARES INC
424A, 1998-04-29
STATE COMMERCIAL BANKS

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<PAGE> 1

Filed Pursuant to Rule 424(a)
Registration No's 333-49889
333-49889-01
SUBJECT TO COMPLETION, DATED APRIL 29, 1998

$20,000,000

SOUTHSIDE CAPITAL TRUST I

% CUMULATIVE TRUST PREFERRED SECURITIES

(LIQUIDATION AMOUNT $10 PER PREFERRED SECURITY)

2,000,000 PREFERRED SECURITIES
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY

[SOUTHSIDE LOGO]

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 the Nasdaq
National Market under the symbol "SBSIP." 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 11 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>
============================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC COMMISSIONS(1) ISSUER(2)(3)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Preferred Security.......... $10.00 (2) $10.00
- ------------------------------------------------------------------------------------------------------------
Total(4)........................ $20,000,000 (2) $20,000,000
============================================================================================================
</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 $23,000,000. 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.

[RYAN, BECK & CO. LOGO]
The Date of this Prospectus is , 1998.

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 the registration or qualification under the securities laws of any such
jurisdiction.
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(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, to the extent permitted by applicable
law, 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 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

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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 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 receipt of
regulatory approval. 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."

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[MAP OF SOUTHSIDE BANK BRANCH LOCATIONS IN TEXAS]
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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 $105 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 branches in 1998 in Longview,
Texas, a city located approximately 35 miles east of Tyler in adjoining Gregg
County. A native Longview banking veteran has joined the Bank to lead the
Company in its expansion into the Longview market area. 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. 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 automated teller machines ("ATMs") owned by the Bank and ATMs owned
by 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.

<PAGE> 6

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

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 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 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 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,
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.

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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 its
new branches 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

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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 . . . . . . . . . . . . 2,000,000 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
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of the Company. There is no limitation on the amount of Senior
Indebtedness or other indebtedness 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
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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."
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DISTRIBUTION OF THE JUNIOR
SUBORDINATED DEBENTURES UPON
DISSOLUTION 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. See "Description of the Preferred
Securities-- Liquidation Distribution upon Dissolution."

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 the Nasdaq
National Market under the symbol "SBSIP."

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

6
<PAGE> 11

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 ............. 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 (1):
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>

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

(1) Restated for adoption of SFAS 128, "Earnings Per Share," for the years
ended December 31, 1993 through 1996.

<TABLE>
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS:
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> 12

<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:
Nonaccruing loans to total loans at end
of year ................................... .45% .59% .55% .31% .60%
Reserve for loan losses to nonaccruing
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 income before taxes and cumulative effect of
change in accounting principle plus interest on borrowings plus 33% of
rental expense.

(2) The ratio of earnings to fixed charges including interest on deposits is
calculated by dividing income before taxes and cumulative effect of
change in accounting principle plus total interest expense plus 33% of
rental expense.

8
<PAGE> 13

SUMMARY OF RECENT DEVELOPMENTS

The following tables present selected financial and other data of the
Company at the dates and for the periods indicated. The historical operations
and balance sheet data at and for the three months ended March 31, 1998 and
1997 have been derived from unaudited consolidated financial statements and
include all adjustments, consisting only of normal recurring accruals, which
the Company considers necessary for a fair presentation of the Company's
results of operations for these periods. Operating results for the three
months ended March 31, 1998 are not necessarily indicative of the results that
may be expected for any other interim period or the entire year ending December
31, 1998. The selected consolidated financial and other data should be read in
conjunction with, and are qualified in their entirety by reference to, the
information in the Consolidated Financial Statements and notes thereto,
included elsewhere herein.

<TABLE>
<CAPTION>
AT AT
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SELECTED FINANCIAL DATA:
Total assets ............................................................ $582,049 $571,145
Loans, net of reserve for loan loss ..................................... 293,159 292,665
Mortgage-backed and related securities .................................. 151,015 141,413
Investment securities ................................................... 72,772 71,835
Deposits ................................................................ 463,695 462,674
FHLB advances ........................................................... 63,205 57,547
Shareholders' equity .................................................... 41,226 40,031
Nonperforming assets .................................................... 2,372 3,091
</TABLE>

<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SELECTED OPERATING DATA:
Total interest income ................................................... $9,553 $8,267
Total interest expense .................................................. 4,704 3,731
------ ------
Net interest income ..................................................... 4,849 4,536
Provision for loan losses ............................................... 300 175
------ ------
Net interest income after provision for loan losses ..................... 4,549 4,361
------ ------
Total noninterest income ................................................ 1,643 1,191
Total noninterest expenses .............................................. 4,631 4,077
------ ------
Income before taxes ..................................................... 1,561 1,475
Income tax expense ...................................................... 375 371
------ ------
Net income .............................................................. $1,186 $1,104
====== ======

PER COMMON SHARE:
Basic earnings .......................................................... $ .35 $ .32
Diluted earnings ........................................................ $ .34 $ .31
Cash dividend declared .................................................. $ .10 $ .10
Book value .............................................................. $12.24 $10.67
</TABLE>

9
<PAGE> 14

<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
------- -------
<S> <C> <C>
SELECTED FINANCIAL RATIOS(1):
Return on average assets ............................................... .84% .94%
Return on average shareholders' equity ................................. 11.67 12.14
Net interest rate spread during the quarter ............................ 3.03 3.52
Net interest margin .................................................... 3.97 4.41
Ratio of average interest earning assets to average interest bearing
liabilities ......................................................... 125.81 125.84
Ratio of noninterest expense to average total assets ................... 3.30 3.45
Efficiency ratio ....................................................... 72.29 72.61

ASSET QUALITY RATIOS:
Nonaccruing loans to total loans at end of quarter ..................... .19 .53
Reserve for loan losses to nonaccruing loans at end of quarter ......... 598.24 236.91
Reserve for loan losses to total loans at end of quarter ............... 1.15 1.26
Nonperforming assets to total assets at end of quarter ................. .41 .56
Ratio of net charge-offs during the quarter to average loans outstanding
during the quarter .................................................. .09% .04%

CAPITAL RATIOS:
Shareholders' equity to total assets at end of quarter ................. 7.08% 7.34%
Average shareholders' equity to average total assets ................... 7.24 7.70
Total risk-based capital ratio ......................................... 12.87 13.74
Tier 1 risk-based capital ratio ........................................ 11.84 12.59
Tier 1 leverage capital ratio .......................................... 6.92 7.56
</TABLE>

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

(1) Ratios are annualized where appropriate.

The Company reported net income for the quarter ended March 31, 1998 of
$1.2 million as compared to $1.1 million for the same quarter in 1997. The
increase in net income was primarily attributable to an increase in net
interest income before provision for loan losses of $.3 million or 6.9% and an
increase in noninterest income of $452,000 or 38.0%. The increase in net
interest income was primarily due to the increase in average earning assets
during the quarter. The increase in noninterest income was primarily a result
of the introduction of a new overdraft privilege program in mid-1997, increased
numbers of deposit accounts and increased deposit activity. These increases
were partially offset by an increase in the provision for loan losses of
$125,000 or 71.4%, as well as an increase in noninterest expense of $554,000 or
13.6%.

Basic and diluted earnings per share were $.35 and $.34, respectively,
for the quarter ended March 31, 1998, compared to $.32 and $.31 per share,
respectively, for the same quarter of 1997.

At March 31, 1998, the Company's assets totaled $582.0 million compared
to $571.1 million at December 31, 1997, an increase of $10.9 million or 1.9%.
The Company's net loans increased $.5 million or .2% from $292.7 million at
December 31, 1997 to $293.2 million at March 31, 1998. Investments and
mortgage-backed securities increased $10.5 million or 4.9% from $213.2 million
at December 31, 1997 to $223.8 million at March 31, 1998. Deposits and
advances from the Federal Home Loan Bank of Dallas increased from $462.7
million and $57.5 million, respectively, at December 31, 1997 to $463.7 million
and $63.2 million, respectively, at March 31, 1998. Shareholders' equity
totaled $41.2 million or 7.1% of assets at March 31, 1998 as compared to $40.0
million or 7.0% of assets at December 31, 1997, an increase of $1.2 million or
3.0%. The decrease in the capital ratios from the quarter ended March 31,
1997, compared to the quarter ended March 31, 1998, was a result of additional
balance sheet leverage during the quarter ended March 31, 1998, which has
positively impacted net interest income.

10
<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."

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

11
<PAGE> 16
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 and on the dates that
interest accrues on the Junior Subordinated Debentures) 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, interest or premium, if any, on or repay, repurchase or
redeem any debt securities of the Company that rank pari passu with or junior
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 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.

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."

12
<PAGE> 17
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 into legislation, 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.

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. 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."

13
<PAGE> 18
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 the Nasdaq National Market 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 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

14
<PAGE> 19
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

The Preferred Securities are a new issue of securities with no
established trading market. The Company has applied to list the Preferred
Securities on the Nasdaq National Market under the symbol "SBSIP." However,
the Preferred Securities must have three market makers to qualify for an
initial listing on the Nasdaq National Market and two market makers to qualify
for continued listing. 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. Furthermore, the Company and the Trust Issuer
have not been advised by any firm other than the Underwriter that it intends to
make a market in the Preferred Securities, and even if they are so advised, any
such firm will not be obligated to make a market in the Preferred Securities
and may interrupt or discontinue its market making in the Preferred Securities
at any time without notice at its sole discretion. 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 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

15
<PAGE> 20
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."

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.

16
<PAGE> 21
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. 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 compatibility 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.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance."

GEOGRAPHIC CONCENTRATION

The operations of the Company and the Bank are conducted primarily in
Smith County and surrounding counties in East Texas. Moreover, the vast
majority 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.

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.

17
<PAGE> 22
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 Preferred Securities are a new issue of securities with no
established trading market. The Company has applied to list the Preferred
Securities on the Nasdaq National Market under the symbol "SBSIP." However,
the Preferred Securities must have three market makers to qualify for an
initial listing on the Nasdaq National Market and two market makers to qualify
for continued listing. 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. Furthermore, the Company and the Trust Issuer
have not been advised by any firm other than the Underwriter that it intends to
make a market in the Preferred Securities, and even if they are so advised, any
such firm will not be obligated to make a market in the Preferred Securities
and may interrupt or discontinue its market making in the Preferred Securities
at any time without notice at its sole discretion. 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.

18
<PAGE> 23
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.

19
<PAGE> 24
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.

20
<PAGE> 25
The increase in interest expense for the year ended December 31, 1997 of
$1.8 million or 12.6% was attributable to 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 sales of securities ................ 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 compared

21
<PAGE> 26
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:

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's
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 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 recapitalization of the Savings Association
Insurance Fund.

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.

22
<PAGE> 27
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 an
increase in the provision for loan losses, expenses associated with the opening
of three new branches and a decrease in gains realized on the sale of
securities, which were 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 was $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.

23
<PAGE> 28
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.

24
<PAGE> 29
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.

AVERAGE BALANCES AND INTEREST RATES

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1997 1996
-------------------------------------- ----------------------------------
AVG. AVG. AVG. AVG.
BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- ---------- ---------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans(1) .......................... $ 274,577 $ 23,847 8.68% $ 243,925 $ 21,314 8.74%
Investment Securities (Taxable) ... 20,242 1,238 6.12 24,398 1,476 6.05
Investment Securities
(Tax-Exempt)(2) ................ 39,819 3,049 7.66 37,721 2,805 7.44
Mortgage-backed Securities ........ 121,546 7,729 6.36 105,923 6,756 6.38
Marketable Equity Securities ...... 2,415 129 5.34 2,179 119 5.46
Interest Earning Deposits ......... 602 34 5.65 381 21 5.51
Federal Funds Sold ................ 2,285 129 5.65 3,547 188 5.30
---------- ---------- ---------- ----------
Total Interest Earning Assets ..... 461,486 36,155 7.83% 418,074 32,679 7.82%
---------- ----------

NONINTEREST EARNING ASSETS:
Cash and Due From Banks ........... 23,945 22,160
Bank Premises and Equipment ....... 14,693 12,325
Other Assets ...................... 8,950 7,257
Less: Reserve for Loan Loss ...... (3,355) (3,282)
---------- ----------
Total Assets ...................... $ 505,719 $ 456,534
========== ==========

INTEREST BEARING LIABILITIES:
Savings Deposits ................. $ 16,173 446 2.76% $ 15,105 417 2.76%
Time Deposits .................... 206,776 11,000 5.32 190,094 10,083 5.30
Interest Bearing
Demand Deposits ................. 117,496 3,265 2.78 111,950 3,093 2.76
Short-term Interest
Bearing Liabilities ............. 14,222 773 5.44 2,671 132 4.94
Long-term Interest Bearing
Liabilities-FHLB Dallas ......... 12,151 721 5.93 12,010 672 5.60
---------- ---------- ---------- ----------
Total Interest Bearing Liabilities 366,818 16,205 4.42% 331,830 14,397 4.34%
---------- ----------

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

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

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

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

NET YIELD ON AVERAGE
EARNING ASSETS ................... 4.32% 4.37%
========== =========

<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995
----------------------------------
AVG. AVG.
BALANCE INTEREST RATE
---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans(1) .......................... $ 209,141 $ 18,861 9.02%
Investment Securities (Taxable) ... 45,452 2,839 6.25
Investment Securities
(Tax-Exempt)(2) ................ 29,965 2,221 7.41
Mortgage-backed Securities ........ 89,151 5,673 6.36
Marketable Equity Securities ...... 2,068 121 5.85
Interest Earning Deposits ......... 411 25 6.08
Federal Funds Sold ................ 9,576 567 5.92
---------- ----------
Total Interest Earning Assets ..... 385,764 30,307 7.86%
----------

NONINTEREST EARNING ASSETS:
Cash and Due From Banks ........... 20,899
Bank Premises and Equipment ....... 10,717
Other Assets ...................... 7,574
Less: Reserve for Loan Loss ...... (3,323
----------
Total Assets ...................... $ 421,631)
==========

INTEREST BEARING LIABILITIES:
Savings Deposits ................. $ 14,931 412 2.76%
Time Deposits .................... 172,228 8,793 5.11
Interest Bearing
Demand Deposits ................. 111,063 3,085 2.78
Short-term Interest
Bearing Liabilities ............. 1,790 94 5.25
Long-term Interest Bearing
Liabilities-FHLB Dallas ......... 8,912 453 5.08
---------- ----------
Total Interest Bearing Liabilities 308,924 12,837 4.16%
----------

NONINTEREST BEARING
LIABILITIES:
Demand Deposits ................... 78,338
Other Liabilities ................. 4,184
---------
Total Liabilities ................. 391,446

SHAREHOLDERS' EQUITY .............. 30,185
---------

TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ............. $ 421,631
=========

NET INTEREST INCOME ............... $ 17,470
==========

NET YIELD ON AVERAGE
EARNING ASSETS ................... 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.

25
<PAGE> 30
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
---------------------------------
AVERAGE AVERAGE
VOLUME RATE TOTAL
------- -------- --------
<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
---------------------------------
AVERAGE AVERAGE
VOLUME RATE TOTAL
------- -------- ---------
<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

26
<PAGE> 31
and actions of regulatory authorities, also significantly affect the Company's
results of operations. 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.

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, for an
institution with a negative gap, the cost of its rate sensitive liabilities in
a rising interest rate environment 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, thereby improving future net
interest income. For an institution with a positive gap, the reverse would be
expected.

The following table sets forth certain information as of December 31,
1997 with respect to rate sensitive assets and liabilities and interest rate
sensitivity gap (dollars in thousands):

<TABLE>
<CAPTION>
3 MOS. OVER 3 MOS. OVER 1 YR.
Rate Sensitive Assets (RSA) OR LESS TO ONE YEAR TO 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 (2) .. $ 58,216 $ 114,886 $ 65,642 $ 110,431 $ 349,175
Other Interest
Bearing Liabilities .......... 9,879 25,972 15,920 11,307 63,078
--------- --------- --------- --------- ---------
Total RSL ...................... $ 68,095 $ 140,858 $ 81,562 $ 121,738 $ 412,253
========= ========= ========= ========= =========

Gap (3) ........................ 35,964 (35,230) 133,648 (32,353) 102,029
Cumulative Gap ................. 35,964 734 134,382 102,029
Cumulative Ratio of RSA
to RSL ....................... 1.53 1.00 1.46 1.25 1.25

Gap/Total Earning Assets ....... 6.99% (6.85%) 25.99% (6.29%) 19.84%

Cumulative Gap/Total
Earning Assets .............. 6.99% .14% 26.13% 19.84% 19.84%
</TABLE>

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

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

(2) The Company assumes 80% of savings accounts, NOW accounts and money market
accounts at December 31, 1997, are core deposits and are, therefore,
expected to roll-off after five years. The remaining 20% of these 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.

(3) Gap equals Total RSA minus Total RSL.

27
<PAGE> 32
In addition to interest rate sensitivity gap analysis, the Company also
uses an industry standard computer program to analyze its interest rate risk
exposure. The program attempts to simulate the Company's asset and liability
base and project future operating results under a variety of interest rate and
spread assumptions. Through this management tool, management can also, among
other things, project the effects of changing its asset and liability mix and
modifying its balance sheet, and identify appropriate investment opportunities.
The result of these simulations are evaluated within the context of the
Company's interest rate risk policy.

The Company closely monitors its interest rate risk exposure. The Asset
Liability Management Committee meets regularly to review the Company's interest
rate risk position and make recommendations for adjusting this position. In
addition, the Company's Board of Directors reviews the Company's interest rate
risk position on a monthly basis. Regulatory authorities also monitor the
Company's interest rate risk position through quarterly reports filed by the
Company with such authorities.

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, NOW accounts and money
market accounts at December 31, 1997, are core deposits and are, therefore,
expected to roll-off after five years. The remaining 20% of these 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.

28
<PAGE> 33
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.

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 $40.0 million
increased 9.4% or $3.4 million from December 31, 1996 and represented 7.0% of
total assets at December 31, 1997 compared to 7.6% at December 31, 1996.

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 Company 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 Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Company'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 Company 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 Company meets all capital adequacy requirements to which it is
subject.

29
<PAGE> 34
To be categorized as well capitalized, the Company 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% > 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 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

30
<PAGE> 35
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> 36

BUSINESS

GENERAL

The Company is a Texas corporation organized in 1982 that serves as a
bank holding company for 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 $105 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
Countywide, a consumer finance subsidiary, 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 branches in 1998 in Longview,
Texas, a city located approximately 35 miles east of Tyler in adjoining Gregg
County. A native Longview banking veteran has joined the Bank to lead the
Company in its expansion into the Longview market area. 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. 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 ATMs owned by the Bank and ATMs owned by 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 and the Bank are subject to comprehensive regulation,
examination and supervision by the FRB, the TDB and the FDIC, and are subject
to numerous laws and regulations relating to the extension of credit and making
of loans to individuals.

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

32
<PAGE> 37

BUSINESS STRATEGY

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 subsidiary of
the Bank.

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 debit
cards and checking overdraft privileges. For 1997, noninterest income
represented 13.9% of total revenue, compared to 11.5% for 1996.

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.

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.

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

33
<PAGE> 38

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. Substantially all of the
Bank's loans are made to borrowers who live in and conduct business in East
Texas. 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. The Bank's largest loan relationship at
December 31, 1997 was approximately $5.0 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.

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. At December 31, 1997, the
vast majority of the Company's real estate loans were collateralized by
properties located in Smith County. 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

34
<PAGE> 39

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.

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 consumer 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 automobile dealers but underwritten
directly by the Company using the same underwriting guidelines used for its
direct vehicle loans. However, due to market forces that were contributing to
declining profit margins on indirect vehicle loans, the Company exited the
indirect vehicle loan program effective January 2, 1998 to concentrate on
direct vehicle loans. Direct vehicle loans accounted for 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.

35
<PAGE> 40

At this point, the economy in the Bank's trade territory appears stable.
One area of concern is the nationwide 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.

<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

36
<PAGE> 41

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.

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%
========= ========= ========= ========= =========
</TABLE>

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

(1) See "Consolidated Financial Statements--Note 4. Loans and Reserve for
Possible Loan Losses."

37
<PAGE> 42

Allocation of Reserve for Loan Loss:

<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" ("FAS 114"), 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.
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.

38
<PAGE> 43

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 $ 2,83 $ 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.

39
<PAGE> 44

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>

<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>

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:

<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>

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

40
<PAGE> 45

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 Financial Accounting Standards Board ("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 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 FAS 115. There were no securities transferred from AFS to HTM or
sales from the HTM portfolio during the year ended December 31, 1997 or 1996.

41
<PAGE> 46

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>

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>

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>

42
<PAGE> 47

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.

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% to $34.5 million
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 time deposits 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 time deposits 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>

43
<PAGE> 48

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 nationwide increase in 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.

44
<PAGE> 49

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

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

45
<PAGE> 50

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 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.

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<PAGE> 51

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 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

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<PAGE> 52

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.

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.

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<PAGE> 53

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.

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 ("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.

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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 persons.

<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.

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<PAGE> 55

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.

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 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.

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<PAGE> 56

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, 15 days prior to the relevant Distribution payment date.
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 and on the dates that interest
accrues on the Junior Subordinated Debentures. 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 (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

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and cash sufficient to make such payments) is guaranteed by the Company on a
subordinated limited basis as set forth herein under "Description of the
Guarantee."

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 repayment or redemption shall be applied by the Trust Issuer to redeem a
Like Amount (as defined below) of the Trust Securities 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"). 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.

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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 Property Trustee 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 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; provided, however, in the
event the Preferred Securities do not remain in book entry form, the relevant
record date shall be the date 15 days prior to the Redemption Date.

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 by such
method (including, without limitation, by lot) as the Property Trustee shall
deem fair and appropriate, 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.

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LIQUIDATION DISTRIBUTION UPON DISSOLUTION

The Company has the right, subject to regulatory approval if then
required, at any time to dissolve 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. In addition, the Trust Issuer shall
automatically dissolve upon expiration of its term on June 30, 2028 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) redemption of all
of the Preferred Securities as described under "Description of the Preferred
Securities--Redemption;" and (iii) the entry of an order for the dissolution of
the Trust Issuer by a court of competent jurisdiction.

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. 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.

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."

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 a Debenture 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

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(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 holder of the Common Securities,
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.

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, 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, replacement, conveyance, transfer or
lease does

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not cause the Preferred Securities (including any Successor Securities) to be
downgraded by any nationally recognized statistical rating organization, (v)
such merger, consolidation, 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,
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, 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, 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,
merge or consolidate 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 merge or consolidate with or into the
Trust Issuer, if such merger or consolidation, 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 (i) with the consent of
holders representing not less than a majority (based upon Liquidation Amounts)
of the outstanding Preferred Securities and (ii) upon 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 shall obtain an
opinion of counsel experienced in such matters to the effect that the Trust
Issuer will continue to be classified as a grantor trust and not be classified
as an association taxable as a corporation for United States federal income tax
purposes on account of such action.

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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.

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

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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 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

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notice to the Property Trustee and the Administrative Trustees. 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 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

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(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.

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 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 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.

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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) (a) the date interest on the
Junior Subordinated Debentures would have been payable except for the election
to begin such Extension Period (if the Property Trustee is not then the only
registered holder of the Debentures), (b) the date such Distributions are
payable (if the Property Trustee is then the only registered holder of
Debentures); or (ii) the date the Administrative Trustees are required to give
notice of the record date for payments of interest on the Junior Subordinated
Debentures, or the date Distributions are payable, to the Nasdaq National
Market or other applicable self-regulatory organization or to holders of the
Preferred Securities or Junior Subordinated Debentures as of the record date,
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, assessments 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 either 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 (unless a shorter period is specified
in the Junior Subordinated Debentures to be redeemed) 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.

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, 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 or by wire transfer
of immediately available funds.

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.

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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 or its subsidiaries'
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, (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 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 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, qualifying, or maintaining 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.

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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 any 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 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."

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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, to provide the
officers' certificates and opinions of counsel described therein and to
compensate and reimburse the Trustee, and the requirement that funds be repaid
to the Company) 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, 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

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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.

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 the Nasdaq National Market 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

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(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. 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. 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 Company will designate a registrar or registrars (the "Debenture
Registrar") to 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. 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 Registrar 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. 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
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

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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 guarantees 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 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.

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.

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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.

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.

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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.

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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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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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 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

72
<PAGE> 77

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.

73
<PAGE> 78

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 $20,000,000
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.

74
<PAGE> 79

even if they are so advised, any such firm will not be obligated to make a
market in the Preferred Securities and may interrupt or discontinue its market
making in the Preferred Securities at any time without notice at its sole
discretion. Accordingly, no assurance can be given as to the development or
liquidity of any market for the Preferred Securities.

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, P.A., 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, a Professional Corporation. 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, a Professional
Corporation.

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

75
<PAGE> 80

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.

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, Tyler, Texas 75701,
(903) 531-7111; Attention: Lee Gibson, Executive Vice President.

76
<PAGE> 81

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 Balance Sheets 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> 82

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.

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

F-2

<PAGE> 83

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> 84

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR 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> 85

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)

<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> 86

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR 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> 87

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
(CONTINUED)

<TABLE>
<CAPTION>
YEAR 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
FAS 114 reclassification................................................... $ 807
</TABLE>

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

F-7

<PAGE> 88

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS

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
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.

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.

F-8

<PAGE> 89

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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.

F-9

<PAGE> 90
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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):

<TABLE>
<CAPTION>
YEAR 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 Company adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123") on January 1,
1996. FAS 123 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> 91
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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
-------------------------------------------------------------------------
GROSS GROSS ESTIMATED
DECEMBER 31, 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
------------------------------------------------------------------------
GROSS GROSS ESTIMATED
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED MARKET
1997 COST GAINS LOSSES VALUE
---- ---------------- ----------------- --------------- ----------------
<S> <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> 92
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
AVAILABLE FOR SALE
-------------------------------------------------------------------------
GROSS GROSS ESTIMATED
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED MARKET
1996 COST GAINS LOSSES VALUE
---- ---------------- ----------------- ---------------- ----------------
<S> <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
--------------------------------------------------------------------------
GROSS GROSS ESTIMATED
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED MARKET
1996 COST GAINS LOSSES VALUE
---- ---------------- ----------------- ---------------- -----------------
<S> <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>
YEAR 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 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 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 FAS
115. 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> 93
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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.......................................................... $ 804 $ 799
-------------- ---------------
Due after one year through five years............................................ 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> 94
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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>
YEAR 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 FAS 114 (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> 95
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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:

<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>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996
----------------- ----------------
<S> <C> <C>
Balance at beginning of year............................................... $ 946 $ 946
Provision for Losses...................................................
Losses on sales........................................................
Gains on sales.........................................................
Other.................................................................. (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> 96
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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> 97
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. SHORT-TERM BORROWINGS

Information related to short-term borrowings for the three years ended December
31 is provided in the table below (dollars in thousands):

<TABLE>
<CAPTION>
YEAR 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> 98
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. LONG TERM OBLIGATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<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.

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

F-18

<PAGE> 99
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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> 100
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
YEAR 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>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
-------------- ------------- -------------
<S> <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>
YEAR 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>

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

F-20

<PAGE> 101
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

"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
------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
# SHARES OF AVERAGE # SHARES OF AVERAGE # SHARES 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 six years; the expected volatility is
26.56%.

F-21

<PAGE> 102
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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.

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.

F-22

<PAGE> 103
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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.

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.

F-23

<PAGE> 104
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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>

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>
YEAR 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> 105
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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>
YEAR 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> 106
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

A reconciliation of tax at statutory rates and total tax expense is as follows
(dollars in thousands):

<TABLE>
<CAPTION>
YEAR 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.

F-26

<PAGE> 107
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The Company had outstanding unused commitments to extend credit 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.

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> 108
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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 advances is estimated by
discounting the future cash flows using rates at which advances would be made
to borrowers with similar credit ratings and for the same remaining maturities.

F-28

<PAGE> 109
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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 notes payable.................. 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 and
outstanding credit arrangements 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 FAS
119 and adoption of the statement did not affect the Company's financial
statements.

F-29

<PAGE> 110
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

19. PARENT COMPANY FINANCIAL INFORMATION

Condensed financial information for Southside Bancshares, Inc. (parent company
only) was as follows (dollars in thousands):

CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
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> 111
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEAR 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>
YEAR 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> 112

======================================================

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
Summary Consolidated Financial
Information and Other Data........... 7
Summary of Recent Developments......... 9
Risk Factors........................... 11
Use of Proceeds........................ 18
Market for the Preferred Securities.... 18
Accounting Treatment................... 18
Capitalization......................... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 20
Business............................... 32
Supervision and Regulation............. 45
Management............................. 50
Description of the Preferred
Securities........................... 52
Description of the Junior Subordinated
Debentures........................... 60
Description of the Guarantee........... 67
Relationship Among the Preferred
Securities, Junior Subordinated
Debentures and Guarantee............. 69
Certain Federal Income Tax
Consequences......................... 71
ERISA Considerations................... 73
Underwriting........................... 74
Validity of Securities................. 75
Experts................................ 75
Available Information.................. 75
Incorporation of Certain Documents by
Reference............................ 76
Index to Consolidated Financial
Statements........................... F-1
</TABLE>

======================================================
======================================================

$20,000,000

SOUTHSIDE CAPITAL TRUST I

% CUMULATIVE TRUST PREFERRED SECURITIES

(LIQUIDATION AMOUNT
$10 PER PREFERRED SECURITY)
GUARANTEED, AS DESCRIBED HEREIN, BY

[SOUTHSIDE LOGO]
------------------------

PROSPECTUS
------------------------

[RYAN, BECK & CO. LOGO]
, 1998

======================================================