JACKSONVILLE BANCORP INC
10-K405, 1998-12-28
SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED
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<PAGE>   1

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-K

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

                 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998

                                      OR

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

          For the transition period from             to
                                         -----------    -------------

                           JACKSONVILLE BANCORP, INC.
                       -----------------------------------
             (Exact name of registrant as specified in its charter)

                 TEXAS                                          75-2632781
     ------------------------------                         ------------------
      (State or other jurisdiction                           (I.R.S. Employer
   of incorporation or organization)                      Identification Number)

      COMMERCE AND NECHES STREETS
         JACKSONVILLE, TEXAS                                     75766
     -----------------------------                        ---------------------
               (Address)                                        (Zip Code)

      Registrant's telephone number, including area code:  (903) 586-9861

          Securities registered pursuant to Section 12(b) of the Act:
                                 NOT APPLICABLE

           Securities registered pursuant to Section 12(g) of the Act



                    COMMON STOCK (PAR VALUE $.01 PER SHARE)
                    ---------------------------------------
                                 Title of Class



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

                             Yes  X    No
                                 ---      ---
                                      
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of


<PAGE>   2

Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

As of December 11, 1998, the aggregate value of the 2,064,259 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
188,139 shares held by all directors and officers of the Registrant as a group
and 115,149 shares held by Jacksonville Bancorp, Inc. Employee Stock Ownership
Plan, was approximately $32,254,047. This figure is based on the closing price
of $15 5/8 per share of the Registrant's Common Stock on December 11, 1998.

Number of shares of Common Stock outstanding as of December 11, 1998: 2,367,547.

                      DOCUMENTS INCORPORATED BY REFERENCE

         List hereunder the following documents incorporated by reference and
the Part of the Form 10-K into which the document is incorporated.

(1) Portions of the Annual Report to Stockholders for the year ended September
30, 1998 are incorporated into Part II, Items 5 through 8 of this Form 10-K.

(2) Portions of the definitive proxy statement for the Annual Meeting of
Stockholders are incorporated into Part III, Items 10 through 13 of this Form
10-K.


<PAGE>   3




PART I

ITEM 1.          BUSINESS.

GENERAL

         Jacksonville Bancorp, Inc.'s (the "Company") primary asset is
Jacksonville Savings Bank, SSB ("Jacksonville" or the "Bank"). The business of
Jacksonville consists primarily of attracting deposits from the general public
and using those and other available sources of funds to originate loans secure
by single-family residences located in Cherokee County and surrounding counties
in East Texas. To a lesser extent, Jacksonville also originates construction
loans, land loans, consumer loans, and home equity loans, and commercial real
estate loans. While 43.9% or $4.3 million of Jacksonville's commercial real
estate lending is for loans secured by real estate acquired in satisfaction of
debts previously contracted or by improvements thereon, Jacksonville also makes
a limited number of other commercial real estate loans. In 1994 Jacksonville
established a consumer loan department to promote development of this type of
lending. After approval of equity lending beginning January 1, 1998,
Jacksonville also established an equity loan department. In addition,
Jacksonville invests in United States government and federal agency securities
and government-guaranteed mortgage-backed securities.

         On July 2, 1997, Jacksonville Savings and Loan Association converted
from Texas chartered savings and loan association to Texas chartered savings
bank, changing its name to Jacksonville Savings Bank, SSB. The change did not
affect operations of the Bank but did provide the Bank with additional
flexibility. In addition the change of charter reduced governmental supervision
costs, because the Office of Thrift Supervision would no longer regulate the
institution along with the Texas Savings and Loan Department and the Federal
Deposit Insurance Corporation. The Bank is now regulated by the Federal Deposit
Insurance Corporation and the Texas Savings and Loan Department. The Company
continues to be regulated by the OTS as a savings and loan holding company.

         On July 16, 1997, after receiving appropriate regulatory approvals,
Jacksonville IHC, a Delaware chartered company ("IHC") acquired all the issued
and outstanding stock of Jacksonville Savings Bank, SSB previously held by the
Company. IHC is, and was at the time of the acquisition, a wholly-owned
subsidiary of the Company. The purpose of the transaction was to minimize
certain Texas state taxation expenses imposed on holding companies with Texas
source income. In addition to holding all the issued and outstanding shares of
Jacksonville, IHC's only other business activity was to loan funds to the
Jacksonville's Employee Stock Ownership Plan.

MARKET AREA

         Jacksonville's market area consists of Cherokee County and surrounding
counties in East Texas. The labor force of Cherokee County has evolved from
agriculture to manufacturing and service industries. The components of the
area's economic base have consisted of manufacturing, mining, agriculture,
retail and tourism. Jacksonville is the largest city in Cherokee County and its
principal activity is manufacturing. There are 75 manufacturing concerns in
Jacksonville. Industries represented are plastic manufacturing and plastic
injected molding, oil (reflecting the heritage of East Texas as the center of
the Texas oil country), timber, cattle and bedding plant. Slowdowns in the
petroleum industry had a material negative impact on the area's economy in the
early 1980s which was compounded by defense-related cutbacks. However, the
area's economy has improved in recent years due to further entrance of business
in the market area and especially in Tyler and Longview. In addition, the area's
economic base has diversified into such fields as health services, research and
technology.

         Major companies in Jacksonville's market area include Alligence
HealthCare, Inc., Astro Air, Zimmerman & Sons, Trane Corporation,
Kelly-Springfield, Carrier Air Conditioning, Tyler Pipe Industries, Marathon Le
Tourneau, Eastman Kodak, Powell Plant Farm, Texas Department of Corrections,
Western Lithography and Wal-Mart (a distribution center). The market area is
also served by the University of Texas Hospital, Mother Frances Hospital, and
Medical Center Hospital. These hospitals are also a major source of employment
for the market area. Colleges and universities include the University of Texas
at Tyler, Stephen F. Austin University, Tyler Junior College, Texas College,


<PAGE>   4

Lon Morris College, Jacksonville College, and Trinity Valley Junior College.
According to reports from the Bureau of Labor Statistics, as of September 30,
1998, the unemployment rate in Cherokee County and surrounding counties in East
Texas was estimated to be 5.5% as compared to 4.2% in 1997 and the estimated
unemployment rates for the United States during these periods were 5.0% and 4.7%
respectively.

LENDING ACTIVITIES

         At September 30, 1998, Jacksonville's net loan portfolio totaled $191.2
million representing approximately 72.6% of Jacksonville's $263.2 million of
total assets at that date. The principal lending activity of Jacksonville is the
origination of single-family residential loans. At September 30, 1998,
approximately 99% of Jacksonville's single-family residential loan portfolio
consisted of conventional loans with the remaining single-family residential
loans either insured by the Federal Housing Administration ("FHA") or partially
guaranteed by the Department of Veterans Affairs ("VA"). At September 30, 1998,
Jacksonville's single-family residential loan portfolio totaled $150.0 million,
representing approximately 74.7% of Jacksonville's total loans, before net
items, at that date. Jacksonville held $9.8 million in commercial real estate
loans at that date, representing 4.9% of total loans, before net items. Of the
commercial real estate loans, $4.3 million, or 43.9%, were secured by real
estate acquired in satisfaction of debts previously contracted or by
improvements on such properties. In addition to these loans secured by real
estate acquired in satisfaction of debts previously contracted, Jacksonville
originated $983,000 in new commercial loans during fiscal 1998. The only other
significant areas of lending activity by Jacksonville are construction loans,
land loans, and consumer loans which, as of September 30, 1998, represented
$15.5 million, or 7.7%, $3.8 million, or 1.9% and $20.7 million, or 10.3% of
total loans. Home equity loans in the amount of $7.8 million are included in the
single family portfolio.

         As a Texas-chartered savings bank, Jacksonville has general authority
to originate and purchase loans secured by real estate located throughout the
United States. Notwithstanding this nationwide lending authority, approximately
99% of all of the mortgage loans in Jacksonville's portfolio are secured by
properties located in Cherokee County and surrounding counties in East Texas,
reflecting Jacksonville's emphasis on local lending.

         At September 30, 1998, Jacksonville's limit on loans-to-one borrower
was $5.5 million, and its five largest loans or groups of loans-to-one borrower,
including related entities, aggregated $1.4 million, $1.4 million, $1.3 million,
$916,000, and $866,000. The first loan for $1.4 million was a commercial real
estate loan to finance the construction of a national chain motel. The second
loan for $1.4 million was a loan to develop a residential subdivision. The $1.3
million loan was to a private school, while the $916,000 loan was to a church.
The $866,000 loan was for an office building. All of these loans are secured
primarily by residential and nonresidential real estate located in Cherokee
County and surrounding counties in East Texas.




                                       2
<PAGE>   5

         LOAN PORTFOLIO COMPOSITION. The following table sets forth the
composition of Jacksonville's loan portfolio by type of loan at the dates
indicated.

<TABLE>
<CAPTION>
                                                               SEPTEMBER 30,
                                 -------------------------------------------------------------------------------
                                              1998                     1997                         1996
                                 --------------------------   -------------------------   ------------------------
                                    AMOUNT             %            AMOUNT            %         AMOUNT         %
                                 --------------   ------------   ------------    ---------   -----------   ---------
                                                             (Dollars in Thousands)
<S>                                   <C>              <C>          <C>              <C>       <C>            <C>
MORTGAGE LOANS:

  Single-family residential(1)        $149,961         74.7%        $141,107         78.0%     $132,599       81.4%
  Multi-family residential               1,091          0.5            1,144           .7         1,268         .8
  Commercial                             9,764          4.9            9,492          5.2         8,604        5.3
  Construction                          15,486          7.7           10,799          5.9         6,996        4.3
  Land                                   3,771          1.9            3,446          1.9         4,395        2.7
                                     ---------         -----           -----          ---       -------       ----
     Total mortgage loans             $180,073         89.7%        $165,988         91.7      $153,862       94.5%
                                     ---------         -----          -------         ----       -------       ----

BUSINESS AND CONSUMER LOANS:

  Commercial business                 $     55           - %        $     76           - %     $    219         .1%
  Consumer loans:
    Secured by deposits                  2,023          1.0            2,127          1.2         2,290        1.4
    Secured by vehicles                 10,577          5.3            6,537          3.6         2,961        1.8
    Personal real estate loans           5,171          2.6            4,274          2.4         2,686        1.6
    Other                                2,884          1.4            1,983          1.1           922         .6
                                        ------         ----            -----          ---       -------      -----
    Total consumer loans                20,655         10.3           14,921          8.3         8,859        5.4
                                        ------         ----           ------          ---       -------      -----
    Total business and consumer loans   20,710         10.3         $ 14,997          8.3      $  9,078        5.5
                                        ------         ----           ------          ---       -------      -----

    Total loans                       $200,783        100.0%         180,985        100.0%      162,940      100.0%
                                      --------        ======         -------        =====       -------      =====

Less:
  Undisbursed portion of loans in
   process                            $  7,846                     $  5,025                   $  2,956
  Unearned discounts                        46                           62                         89
  Net deferred loan origination fees       568                          662                        761
  Unrealized losses on loans held for
    sale                                    -                            -                          -
  Allowance for loan losses              1,170                        1,192                      1,100
                                      --------                        -----                    -------

     Net loans                        $191,153                    $ 174,044                   $158,034
                                       =======                      =======                    =======
</TABLE>






                                       3
<PAGE>   6


<TABLE>
<CAPTION>
                                                               SEPTEMBER 30,
                                                ---------------------------------------------------
                                                          1995                        1994
                                                -----------------------    ------------------------
                                                   AMOUNT          %          AMOUNT           %
                                                -------------  --------    -------------   --------
                                                                 (Dollars in Thousands)
<S>                                             <C>               <C>       <C>               <C>
MORTGAGE LOANS:

  Single-family residential(1)                  $117,853          84.1%     $109,221(2)       86.7%
  Multi-family residential                         1,183            .8           735            .6
  Commercial                                       8,167           5.8         8,115           6.4
  Construction                                     4,312           3.1         1,668           1.3
  Land                                             3,754           2.7         3,156           2.5
                                                 -------          ----       -------         -----
     Total mortgage loans                       $135,269          96.5%     $122,895          97.5%
                                                 -------          ----       -------         -----

BUSINESS AND CONSUMER LOANS:

  Commercial business                           $    232            .2%     $    198            .2%
  Consumer loans:
    Secured by deposits                            1,922           1.4         1,972           1.6
    Secured by vehicles                              960            .6           332            .2
    Personal real estate loans                     1,253            .9           514            .4
    Other                                            526            .4           137            .1
                                                   -----           ---         -----           ---
    Total consumer loans                           4,661           3.3         2,955           2.3
                                                   -----           ---         -----           ---
      Total business and consumer loans           $4,893           3.5      $  3,153           2.5
                                                   -----           ---         -----           ---

    Total loans                                 $140,162         100.0%     $126,048         100.0%
                                                 -------         =====       -------         =====

Less:
  Undisbursed portion of loans in
   process                                      $  2,230                    $    799
  Unearned discounts                                 106                         121
  Net deferred loan origination fees                 893                         937
  Unrealized losses on loans held for
    sale                                              --                          58
  Allowance for loan losses                        1,000                       1,000
                                                 -------                     -------

     Net loans                                  $135,933                    $123,133
                                                 =======                     =======
</TABLE>

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

(1)      Includes first and second liens on single-family residences.






                                       4
<PAGE>   7

         CONTRACTUAL PRINCIPAL REPAYMENTS. The following table sets forth
certain information at September 30, 1998, regarding the dollar amount of loans
maturing in Jacksonville's portfolio, based on the contractual terms to
maturity, before giving effect to net items. Demand loans, loans having no
stated schedule of repayments and no stated maturity and overdrafts are reported
as due in one year.

<TABLE>
<CAPTION>
                                                                                DUE 3-5       DUE 5-10      DUE 10-15
                                                                                 YEARS         YEARS          YEARS
                                 DUE BEFORE      DUE BEFORE     DUE BEFORE       AFTER         AFTER          AFTER
                                   9/30/99         9/30/00        9/30/01       9/30/98       9/30/98        9/30/98
                                ------------    ------------   ------------    ---------     ----------    ------------

                                                                      (In Thousands)
<S>                             <C>                <C>            <C>           <C>           <C>             <C>
Single-family residential(1)    $   104            $ 295          $ 660         $ 3,405       $19,175         $44,569
Multi-family residential              -                6              -               -            79             868
Commercial                          226                3              -             294         3,423           3,442
Construction                     15,486                -              -               -             -               -
Land                                 38               19             14             196           746           1,210
Commercial business                  40                6              9               -             -               -
Consumer                            591            1,444          2,778           8,090         2,737           2,028
                                  -----            -----         ------           -----        ------          ------
    Total                       $16,485           $1,773         $3,461        $ 11,985      $ 26,160        $ 52,117
                                 ======            =====          =====          =====         ======          ======
</TABLE>

<TABLE>
<CAPTION>
                                    DUE MORE
                                     THAN 15
                                      YEARS
                                      AFTER
                                     9/30/98        TOTAL
                                   ----------   --------------

                                         (In Thousands)
<S>                                 <C>           <C>
Single-family residential(1)        $81,753       $149,961
Multi-family residential                138          1,091
Commercial                            2,376          9,764
Construction                              -         15,486
Land                                  1,548          3,771
Commercial business                       -             55
Consumer                              2,987         20,655
                                      -----       --------
    Total                           $88,802       $200,783
                                     ======        =======
</TABLE>


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

(1)      Includes first and second liens on single-family residences.





                                       5
<PAGE>   8

         The following table sets forth the dollar amount of all loans, before
net items, due after one year from September 30, 1998 which have fixed interest
rates or which have floating or adjustable interest rates.

<TABLE>
<CAPTION>
                                                                    FLOATING OR
                                              FIXED RATES         ADJUSTABLE-RATES             TOTAL
                                           -----------------    --------------------       --------------

                                                                  (In Thousands)
<S>                                             <C>                     <C>                   <C>
Single-family residential(1)                    $85,848                 $64,009               $149,857
Multi-family residential                            516                     575                  1,091
Commercial real estate                            3,454                   6,084                  9,538
Construction                                          0                       0                      0
Land                                              1,009                   2,724                  3,733
Commercial business                                  15                       0                     15
Consumer                                         20,064                       0                 20,064
                                                 ------                  ------                 ------
  Total                                        $110,906                 $73,392               $184,298
                                                 ======                  ======                =======
</TABLE>

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

(1)      Includes first and second liens on single-family residences.

         Scheduled contractual amortization of loans does not reflect the actual
term of Jacksonville's loan portfolio. The average life of loans is
substantially less than their contractual terms because of prepayments and
due-on-sale clauses, which give Jacksonville the right to declare a conventional
loan immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid.

         ORIGINATIONS, PURCHASES AND SALES OF LOANS. The lending activities of
Jacksonville are subject to the written, non-discriminatory, loan underwriting
and administration guidelines established by Jacksonville's Board of Directors
and management. Loan originations are obtained from a variety of sources,
including referrals from real estate brokers, developers, builders, existing
customers, newspaper, radio, periodical advertising and walk-in customers. Loan
applications are taken by lending personnel, and the loan department supervises
the obtaining of credit reports, appraisals and other documentation involved
with a loan. Property valuations are generally performed by independent outside
appraisers approved by Jacksonville's Board of Directors. Jacksonville requires
title insurance on most all mortgage loans except for certain small second
mortgages of a minimal amount. Jacksonville obtains a letter certificate from
title companies on some personal real estate loans and all home equity loans.

         Jacksonville's loan approval process is intended to assess the
borrower's ability to repay the loan, the viability of the loan and the adequacy
of the value of the property that will secure the loan. After a loan application
is first reviewed by Jacksonville's loan department, the loan can receive
approval with at least two officers authorization. All loan approvals by
officers are then reviewed and ratified by the Loan and Executive Committee. Any
loan not approved by at least two officers must be submitted to the Loan and
Executive Committee for review and disposition.

         Certain loans, because of their amount or because they do not meet one
or more specified guidelines, must receive direct approval of the Board of
Directors.

         Jacksonville originates both fixed- and adjustable-rate residential
real estate loans as market conditions dictate. In the current interest rate
environment, it follows a policy of selling approximately 95% of its loans
secured by first mortgage liens on single-family residences ("residential first
mortgage loans") with fixed rates and terms greater than 15 years to third
parties while retaining all of its variable-rate loans. When loans are sold to
others, except to Federal Home Loan Mortgage Corporation ("FHLMC"), servicing of
the loans is usually released to the buyers. At September 30, 1998, $77.4
million in loans were being serviced for others, primarily the FHLMC. See Note 5
to the Consolidated Financial Statements. While Jacksonville has utilized
various indices to adjust its adjustable-rate mortgages ("ARMs") portfolio, each
index would qualify such loans for securitization under FHLMC guidelines.
Adjustable-rate loans are currently indexed to an index of U.S. Treasury



                                       6
<PAGE>   9

obligations whose maturity matches the interest adjustment period for the
corresponding loan and have their interest rates readjusted every one to five
years. At September 30, 1998, $85.9 million or 42.8% of Jacksonville's total
loans, before net items, were fixed-rate single-family residential loans, and
$64.1 million or 31.9% of such total loans were adjustable-rate single-family
residential mortgage loans. Of these adjustable mortgages, $35.0 million, or
54.7%, have interest rates adjustable in one year, and the remainder adjust at
periods greater than one year up to five years.

         The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.

<TABLE>
<CAPTION>
                                                       YEAR ENDED SEPTEMBER 30,
                                         ---------------------------------------------------

                                             1998                1997              1996
                                         ---------------    -------------     --------------
         <S>                              <C>                   <C>               <C>
         LOAN ORIGINATIONS:
           Single-family residential      $55,408               $42,594           $45,113
           Multi-family residential            -                     -                658
           Land                               862                 1,876             1,159
           Commercial                         983                 1,079               697
           Construction                    20,135                10,126            11,707
           Commercial business                 -                     -                 -
           Consumer                        11,877                11,029             8,862
                                           ------                ------            ------
             Total loans originated        89,265                66,704            68,196
           Purchases                           -                    -                  -
             Total loans originated
               and purchased               89,265                66,704            68,196
                                           ------                ------            ------

         SALES AND LOAN PRINCIPAL
           REDUCTIONS:
           Loans sold                      28,189                22,311            21,848
           Loan principal
             repayments                    40,925                25,948            23,955
                                           ------                ------            ------
             Total loans sold and
               principal reductions        69,114                48,259            45,803


         Increase (decrease) due
           to other items, net(1)            (353)               (2,435)             (292)
                                            ------                ------            ------


         Net increase (decrease)
           in loan portfolio              $19,798               $16,010           $22,101
                                          =======                ======            ======
</TABLE>

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

(1)      Consists of loan foreclosures, extensions and changes in net items.





                                       7
<PAGE>   10

         SINGLE-FAMILY RESIDENTIAL LOANS. The primary lending activity of
Jacksonville is the origination of loans secured by first mortgage liens on
single-family residences. Jacksonville also offers second mortgage loans on
such properties including home improvement and home equity loans. At September
30, 1998, $150.0 million or 74.7% of Jacksonville's total loan portfolio,
before net items, consisted of single-family residential loans.

         The loan-to-value ratio, maturity and other provisions of the
residential first mortgage loans made by Jacksonville generally have reflected
the policy of making less than the maximum loan permissible under applicable
regulations, in accordance with sound lending practices, market conditions and
underwriting standards established by Jacksonville. All residential first
mortgage loans, except those made to facilitate the sale of such dwellings held
as real estate owned, are generally underwritten in conformance with current
guidelines of the FHLMC. Jacksonville's lending policies on residential first
mortgage loans generally limit the maximum loan-to-value ratio to 97% of the
lesser of the appraised value or purchase price of the property and generally
all residential first mortgage loans in excess of an 80% loan-to-value ratio
require private mortgage insurance.

         Jacksonville offers fixed-rate residential first mortgage loans with
terms up to 30 years. Such loans are amortized on a monthly basis with principal
and interest due each month and customarily include "due-on-sale" clauses, which
are provisions giving Jacksonville the right to declare a loan immediately due
and payable in the event the borrower sells or otherwise disposes of the real
property subject to the mortgage and the loan is not repaid. Jacksonville
enforces due-on-sale clauses to the extent permitted under applicable laws.
Approximately 99% of Jacksonville's residential first mortgage loan portfolio
consists of conventional loans, with the remaining loans either insured by the
FHA or partially guaranteed by the VA.

         Jacksonville is aware that there are inherent risks in originating
fixed-rate residential first mortgage loans for its portfolio, especially during
periods of historically low interest rates, but recognizes the need to respond
to market demand for fixed-rate loans and to generate income from any
origination fees, where applicable, for such loans. To address these concerns,
in October 1987 Jacksonville began a policy of selling substantially all of the
fixed-rate residential first mortgage loans that it originates to a large
mortgage banking company with operations throughout the United States. While
Jacksonville continues to maintain its loan sales relationship with the mortgage
banking company, a substantial majority of its loan sales since July 1993 have
been to FHLMC with servicing retained by Jacksonville. Since July 1993,
Jacksonville has sold $106.1 million of loans to FHLMC and has retained the
servicing on all of these loans. Since that same date, Jacksonville has sold
$27.4 million of loans to the mortgage banking company. During fiscal 1998,
Jacksonville sold $23.0 million of loans to FHLMC and $4.1 million to the
mortgage banking company. Also in 1998, Jacksonville sold $1.1 million in whole
loan originations under a bond program to another mortgage company.

         During the year ended September 30, 1998, Jacksonville originated $55.4
million of single-family residential loans of which $53.7 million, or 96.9%,
were fixed rate and $1.7 million, or 3.1%, were adjustable rate. Of the
fixed-rate single-family residential loans originated during the period,
Jacksonville sold $23.0 million, or 41.5%, to FHLMC. The volume of single-family
residential loans originated increased by 30.1% from $42.6 million during fiscal
1997 as compared to $55.4 million during fiscal 1998 and the percentage of sales
of such originations decreased from 52.4% in fiscal 1997 to 50.9% in fiscal
1998. Jacksonville anticipates that it will continue its policy of selling
substantially all of its fixed-rate residential first mortgage loan originations
with terms of more than 15 years as long as interest rates remain at current
levels or lower and will reevaluate this policy if there is a material and
prolonged rise in interest rates.

         Since November 1980, Jacksonville has been offering adjustable-rate
loans in order to decrease the vulnerability of its operations to changes in
interest rates. Interest rate adjustment periods range from one to five years.
The demand for adjustable-rate loans in Jacksonville's primary market area has
been a function of several factors, including the level of interest rates, the
expectations of changes in the level of interest rates and the difference
between the interest rates offered for fixed-rate loans and adjustable-rate
loans. The relative amount of fixed-rate and adjustable-rate residential loans
that can be originated at any time is largely





                                       8
<PAGE>   11

determined by the demand for each in a competitive environment. As interest
rates have fluctuated since November 1981, the demand for fixed- and
adjustable-rate loans has changed as Jacksonville's customers have preferred
adjustable rates in a high interest rate environment and fixed-rate loans as
interest rates lowered. In order to continue to increase and then to maintain a
high percentage of adjustable-rate residential first mortgage loans,
Jacksonville has offered various forms of adjustable-rate loans combined with a
policy of selling most 30 year fixed-rate loans from its portfolio. As a result,
at September 30, 1998, $64.1 million, or 42.7%, of the single-family residential
loans in Jacksonville's loan portfolio, before net items, consisted of
adjustable-rate loans.

         Jacksonville's residential first mortgage adjustable-rate loans are
fully amortizing loans with contractual maturities of up to 30 years. These
loans have interest rates which are scheduled to adjust every one, three or five
years in accordance with designated published indices based upon U.S. Government
securities. Jacksonville currently offers a one, three and five-year adjustable
mortgage with a 2% cap on the rate adjustment per period and a 4% to 6% cap rate
adjustment over the life of the loan, depending on its term. Jacksonville's
adjustable-rate residential first mortgage loans are not convertible by their
terms into fixed-rate loans, are not assumable, do not contain prepayment
penalties and do not produce negative amortization.

         Due to the generally lower rates of interest prevailing in recent
periods, Jacksonville's ability to originate adjustable-rate residential first
mortgage loans has decreased as consumer preference for fixed-rate loans has
increased. As a result, even as interest rates have fluctuated in recent years,
adjustable rate loans represented 3.1%, 10.7% and 23% of Jacksonville's total
originations of single-family residential loans during the years ended September
30, 1998, 1997 and 1996, respectively.

         Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payment by the borrower rises to the extent permitted by the terms of
the loan, thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates. Jacksonville believes that these risks, which have not had a
material adverse effect on Jacksonville to date, generally are less than the
risks associated with holding fixed-rate loans in an increasing interest rate
environment.

         Jacksonville also makes home improvement loans which amounted to $2.8
million as of September 30, 1998. These loans are secured by either first or
second liens on single-family residences. Second mortgage loans on single-family
residences made by Jacksonville are generally secured by properties on which
Jacksonville holds the first mortgage lien. Effective January 1, 1998, Texas law
permitted home equity lending and at September 30, 1998 there was a balance of
$7.8 million in home equity loans.

         COMMERCIAL MORTGAGE LOANS. At September 30, 1998, $9.8 million, or
4.9%, of Jacksonville's total loan portfolio, before net items, consisted of
loans secured by existing commercial real estate. Of these commercial mortgage
loans, $4.3 million, or 43.9%, represented loans secured by real estate acquired
in satisfaction of debts previously contracted or by improvements on such
properties. Jacksonville currently originates a limited number of commercial
mortgage loans. Commercial mortgage loan originations for the years ended
September 30, 1998, 1997 and 1996 were, respectively, $983,000 million, $1.08
million and $697,000.

         As of September 30, 1998, the commercial mortgage loans in
Jacksonville's portfolio not secured by real estate acquired in satisfaction of
debts previously contracted or improvements thereon totaled $5.5 million. These
loans have terms up to 30 years and have both fixed and adjustable rates. At
September 30, 1998, $2.7 million, or 27.6%, of the commercial mortgage loan
portfolio not secured by real estate acquired in satisfaction of debts
previously contracted consisted of adjustable-rate loans.

         The majority of Jacksonville's commercial real estate loans are secured
by office buildings, churches, retail shops and manufacturing facilities, and
are secured by property located in Jacksonville's lending area.



                                       9
<PAGE>   12

         Appraisals are required on all properties securing commercial real
estate loans. They generally are performed by an independent appraiser
designated by Jacksonville and are reviewed by management and members of the
loan and executive committee.

         In originating commercial mortgage loans, Jacksonville considers the
quality of the property, the credit of the borrower, cash flow of the project,
location of the real estate and the quality of management involved with the
property.

         As of September 30, 1998, there was one commercial mortgage loan
secured by former real estate owned properties with principal balances,
including funds utilized for improvements by the borrower on such properties, in
excess of $400,000.00. This loan was performing in accordance with its terms at
September 30, 1998.

         Commercial mortgage lending is generally considered to involve a higher
degree of risk than single-family residential lending. Such lending typically
involves large loan balances concentrated in a single borrower or groups of
related borrowers. In addition, the payment experience on loans secured by
income-producing properties is typically dependent on the successful operation
of the related real estate project and thus may be subject to a greater extent
to adverse conditions in the real estate market or in the economy generally.

         CONSTRUCTION LOANS. At September 30, 1998, construction loans totaled
$15.5 million or 7.7% of the total loan portfolio, before net items.

         Jacksonville makes construction loans to individuals for the
construction of their residences. During recent years, it expanded its
construction lending activities to include lending to developers for the
construction of single-family residences. Because Jacksonville views
construction loans as involving greater risk than permanent single-family
residential loans, it applies stricter underwriting standards to them.
Construction loan originations increased during the year ended September 30,
1998 to $20.1 million from $10.1 million during fiscal 1997.

         Construction lending is generally limited to Jacksonville's primary
lending area, within 100 miles of Jacksonville's home office or within 25 miles
of each branch office. Construction loans are only made to individuals and to
developers who have a sound financial and operational reputation in the market
area. The loans to individuals are structured to be converted to permanent loans
at the end of the construction phase, which typically is six months but may be
extended for 30- or 60-day periods for good reason. Construction loans have
rates and terms which generally exceed the non-construction loans then offered
by Jacksonville except that during the construction phase the borrower normally
only pays interest on the loan. Funds are released periodically pursuant to a
construction-completion schedule and only after an on-site inspection by an
employee of Jacksonville. Jacksonville generally attempts to mitigate the risks
associated with construction lending by, among other things, lending primarily
in its market area and using low loan-to-value ratios in the underwriting
process. The maximum loan to value ratio is 80% except for a small amount of
loans that have private mortgage insurance. Construction financing also is
generally considered to involve a higher degree of risk of loss than long-term
financing on improved, owner-occupied real estate because of the uncertainties
of construction, including the possibility of costs exceeding the initial
estimates.

         HOME EQUITY LOANS - From January, 1998, when home equity loans in Texas
became available, through September 30, 1998, Jacksonville made 251 of these
loans totaling $9.0 million. At September 30, 1998 the principal balance on home
equity loans totaled $7.8 million. Loans are secured by the homestead property,
and may not exceed 80% of the appraised value of the property based on either
the current market value as set forth by the County Appraisal District or by a
new appraisal done by a qualified person. These loans are usually in a second
lien position, but can be a first lien either through paying off the existing
first lien or by there not being any existing liens on the property at the time
the home equity loan is made. These loans are typically made for a term of 20
years or less. These loans are usually at a slightly higher rate of interest
than most first lien loans and have fewer closing cost, making them very
attractive for both consumer and Jacksonville.

         LAND LOANS. As of September 30, 1998, land loans totaled $3.8 million
or 1.9% of the total loan portfolio, before net items. As of the date,
Jacksonville had 127 land loans in its loan portfolio, over 90% of which were
utilized for ranching,


                                       10
<PAGE>   13

agricultural or residential purposes. Jacksonville does not make land loans for
speculative purposes. With limited exceptions, Jacksonville's underwriting
guidelines require land loans to have a loan-to-land value ratio of 80% and a
term of 20 years or less. The average balance of Jacksonville's land loans, as
of September 30, 1998, was approximately $30,000.

         CONSUMER LOANS. At September 30, 1998, consumer loans totaled $20.7
million or 10.3% of the total loan portfolio, before net items, and consisted
primarily of loans secured by deposits, loans secured by vehicles, personal real
estate loans and loans to purchase personal property. Loans secured by deposits
total $2.0 million at September 30, 1998. A loan secured by a deposit at
Jacksonville is structured to have a term that ends on the same date as the
maturity date of the certificate securing it or if secured by a statement
savings account has a one-year term with a hold on withdrawals that would result
in the balance being lower than the loan balance. Typically these loans require
quarterly payments of interest only. Jacksonville also makes loans to
individuals for future home sites and for additional property adjacent to their
existing residence. Although under Texas law such loans may have a term of up to
20 years, the average term of Jacksonville's personal real estate loans was
substantially less than 20 years as of September 30, 1998. All of these loans
are secured by the purchased land, but because these loans are typically for
$30,000 or less they are not underwritten in the same manner as the Bank's other
mortgage loans. Jacksonville relies on the general creditworthiness of the
borrower and uses tax valuations or limited appraisals to determine the value of
the property. In some cases a title search is obtained from a title insurance
company rather than a title policy. At September 30, 1998, the bank had 337
personal real estate loans with an average balance of $15,000. Jacksonville's
vehicle loan portfolio totaled $10.6 million at September 30, 1998. Jacksonville
makes both new and used vehicle loans. Most all used vehicle loans are
originated at higher interest rates than those rates on new vehicle loans. The
Bank does not purchase vehicle loans from dealers. The term for vehicle loans is
typically six months to five years with monthly payments of principal and
interest.

         MULTI-FAMILY AND COMMERCIAL BUSINESS LOANS. At September 30, 1998, $1.1
million, or 0.5%, and $55,000, or .03%, of Jacksonville's total loan portfolio,
before net items, consisted of multi-family loans and commercial business loans,
respectively. While Jacksonville has the authority, up to applicable
limitations, to engage in the business of making both multi-family and
commercial business loans, its policy has been to confine its primary lending
activities to other types of lending. Of the ten multi-family loans in
Jacksonville's loan portfolio as of September 30, 1998, the largest loan had a
principal amount of $365,000 which represented 33.2% of the multi-family loan
portfolio. As of September 30, 1998, the commercial business loan portfolio
consisted of seven loans, the largest of which was a $30,000 loan to a retail
grocery store secured by its inventory.

         LOAN ORIGINATION AND OTHER FEES. In some cases, in addition to interest
earned on loans, Jacksonville receives loan origination fees or "points" for
originating loans. Loan points are a percentage of the principal amount of the
mortgage loan and are charged to the borrower in connection with the origination
of the loan.

         Rider (new paragraph):

         The charging of points, in most cases, were limited during fiscal 1998
because of market conditions and strong competition in the one-to-four family
residential loans in the East Texas market. Most financial institutions charged
no points on these loan products; however, primarily in low principal
residential mortgages and commercial loans, Jacksonville continued to charge a
loan fee.

         In accordance with SFAS No. 91, which deals with the accounting for
non-refundable fees and costs associated with originating or acquiring loans,
Jacksonville's loan origination fees and certain related direct loan origination
costs are offset, and the resulting net amount is deferred and amortized as
interest income over the contractual life of the related loans as an adjustment
to the yield of such loans, adjusted for estimated prepayments based on
Jacksonville's historical prepayment experience. At September 30, 1998,
Jacksonville had $568,000 of loan fees which had been deferred and are being
recognized as income over the estimated maturities of the related loans.




                                       11
<PAGE>   14

         Loan fees received are accounted for substantially in accordance with
FASB Statement No. 91, "Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of Leases." Loan
fees and certain direct loan origination costs are deferred, and the net fee is
recognized as an adjustment to interest income over the contractual life of the
loans. Jacksonville has not deferred direct costs related to short-term loans
for which no origination fees are charged. Management considers this departure
to be immaterial considering the short-term nature of these loans. Commitment
fees and costs relating to commitments whose likelihood of exercise is remote
are recognized over the commitment period on a straight-line basis. If the
commitments subsequently exercised during the commitment period, the remaining
unamortized commitment fee at the time of exercise is recognized over the life
of the loan as an adjustment of yield. See Note [2] to the Consolidated
Financial Statements.

ASSET QUALITY

         DELINQUENT LOANS. The following table sets forth information concerning
delinquent loans at September 30, 1998, in dollar amount and as a percentage of
Jacksonville's total loan portfolio, before net items. The amounts presented
represent the total outstanding principal balances of the related loans, rather
than the actual payment amounts which are past due.

<TABLE>
<CAPTION>
                                       SINGLE-FAMILY              MULTI-FAMILY
                                        RESIDENTIAL               RESIDENTIAL               COMMERCIAL
                               ----------------------------  -----------------------  ------------------------

                                   AMOUNT      PERCENTAGE     AMOUNT     PERCENTAGE     AMOUNT     PERCENTAGE
                               -----------  ---------------  ---------  ------------  ----------- ------------
                                                              (Dollars in Thousands)
<S>                            <C>          <C>          <C>            <C>          <C>          <C>
Loans delinquent for:

  30-59 days                      $1,646       49.2%        $   -            - %      $ 51          1.5%
  60-89 days                         602       18.0             -            -           -            -
  90 days and over                   642       19.2             -            -           -            -
                                   -----        ----          ------       -----      -----        -----
    Total delinquent loans        $2,890       86.4 %        $  -            -  %     $ 51          1.5 %
                                   =====        ====          ======       =====       ===          ====
</TABLE>

<TABLE>
<CAPTION>
                                      CONSTRUCTION                   LAND                     CONSUMER
                                 ----------------------    -----------------------    ------------------------

                                  AMOUNT     PERCENTAGE     AMOUNT      PERCENTAGE      AMOUNT     PERCENTAGE
                                 ---------  -----------    ----------  -----------    ----------  ------------
                                                            (Dollars in Thousands)
<S>                              <C>        <C>            <C>         <C>            <C>         <C>
Loans delinquent for:

  30-59 days                       $  -           - %      $ 2            0.1%          $286         8.6%
  60-89 days                          -           -          -              -             75         2.2
  90 days and over                    -           -          4            0.1%            36         1.1
                                   ----        ----        ----           ----          ----        ----

    Total delinquent loans         $  -           - %      $ 6            0.2    %      $397        11.9%
                                  ======       =====        ===           ===            ===         ===
</TABLE>

<TABLE>
<CAPTION>
                                          TOTAL
                                 ------------------------

                                   AMOUNT    PERCENTAGE
                                 ---------- -------------

                                  (Dollars in Thousands)
<S>                              <C>             <C>
Loans delinquent for:

  30-59 days                      $1,985           59.4 %
  60-89 days                         677           20.2
  90 days and over                   682           20.4
                                   -----           ---
    Total delinquent loans        $3,344          100.0 %
                                   =====          ====
</TABLE>



                                       12
<PAGE>   15

         NON-PERFORMING ASSETS. All loans are reviewed on a regular basis and
are placed on a non-accrual status when, in the opinion of management, the
collection of additional interest is deemed insufficient to warrant further
accrual. Jacksonville does not accrue interest on loans past due 90 days or more
except when the estimated value of the collateral and collection efforts were
deemed sufficient to ensure full recovery. Uncollectible interest on loans that
are contractually past due is charged off or an allowance is established based
on management's periodic evaluation. The allowance is established by a charge to
interest income equal to all interest previously accrued, and income is
subsequently recognized only to the extent cash payments are received until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments is restored or until management accepts a payment that
results in a cure of the 90-day delinquency. In such cases, the loan is returned
to accrual status.

         REAL ESTATE OWNED. REO is real property acquired by Jacksonville
through foreclosure, deed in lieu of foreclosure, or through an exchange of
foreclosed real estate. It is typically a poor or nonearning asset, and its
acquisition in limited amounts is generally regarded as an unavoidable result of
normal business operations. However, the holding of abnormally large amounts of
REO for extensive periods of time can adversely affect earnings. As a result of
adverse economic conditions that existed in Jacksonville's market area during
the 1980s, Jacksonville, like most financial institutions in its market area,
acquired an inordinately large amount of REO consisting primarily of commercial
real estate and, to a lesser degree, single-family residential property.

         As the economy has improved in its market area in recent years,
Jacksonville has attempted to reduce gradually its outstanding REO each year by
following a policy of prudent management and market monitoring. The details of
this policy are embodied in Jacksonville's Real Estate Owned Policy adopted by
the Board of Directors in September 1990. The primary objectives of the REO
Policy are to: (1) establish procedures for the handling and disposition of REO;
(2) ensure that REO has been properly accounted for on the institution's books;
(3) set forth Jacksonville's philosophy for the management of repossessed
property; (4) provide for the periodic revaluation of real estate owned; and (5)
provide guidelines for the accounting of the sale of REO. These objectives are
monitored by the REO Disposition Committee.

         REO is recorded at the lower of unpaid principal balance of the loan
plus acquisition costs or fair value, as determined by an appraisal of the
property obtained at acquisition. Costs relating to development and improvement
of property are capitalized, whereas costs relating to holding the property are
expensed. Valuations are periodically performed by management and an allowance
for losses is established by a charge to operations if the carrying value of a
property exceeds its estimated net realizable value. Jacksonville develops an
asset plan for each parcel of REO that it holds for more than six months. The
plan includes specific marketing strategies, a consideration of necessary
improvements and an estimate of the expected holding period and asking price. As
a result of the general improvement in economic conditions in Jacksonville's
market area and through the implementation of the REO Policy, Jacksonville's REO
amounted to $531,000, $526,000 and $1.1 million as of September 30, 1998, 1997,
and 1996 respectively.

         Generally, a transfer of REO is recognized by Jacksonville as a sale
for accounting purposes upon consummation of the transaction unless Jacksonville
retains some type of continuing involvement in the property without a transfer
of the risks and rewards of ownership to the buyer or, under some circumstances,
if it has financed the sale of the REO. In the latter case, in order for a sale
to be recognized, a buyer must, among other things, demonstrate his commitment
to the property by making adequate initial and continuing investments. The
percentage of sales price viewed as an adequate initial investment level varies
with the type of loan, but a generally acceptable percentage of the sales price
is between 10% to 25% for commercial real estate and 5% for a single-family
primary residence. REO sales financed by Jacksonville in which a buyer's initial
investment is less than what is considered an adequate initial investment level
under the REO Policy are carried on Jacksonville's books as REO sold by the
deposit method until the buyer has an adequate level of equity. As of September
30, 1998, Jacksonville had $374,000 of REO sold by the deposit method.



                                       13
<PAGE>   16

         The following table sets forth the amounts and categories of
Jacksonville's non-performing assets at the dates indicated.

<TABLE>
<CAPTION>
                                                               SEPTEMBER 30,
                                       ----------------------------------------------------------

                                          1998        1997        1996        1995        1994
                                       ----------   ---------   ---------   ---------  ----------
                                                           (Dollars in Thousands)
<S>                                    <C>         <C>         <C>         <C>         <C>
Non-accruing loans:
  Single-family residential(1)         $   642     $  448      $  465      $  534      $  163
  Multi-family residential                   -          -           -           -           -
  Commercial                                 -        154           -           3          10
  Construction                               -          -           -           -           -
  Land                                       -          -         321          26         420
  Commercial business                        -          -           -           -           -
  Consumer                                  36         42          29           -           8
                                        ------       ----       -----       ------       -----
    Total non-accruing loans               678        644         815         563         601

Accruing loans 90 days or more
  delinquent                                 -          -           -           -           -
                                          ----       ----       -----      ------      ------
  Total non-performing loans               678        644         815         563         601
                                          ----       ----       -----      ------      ------

Real estate owned(2)                       531        526       1,051       2,052       2,549
                                          ----      -----       -----      ------       -----
  Total non-performing assets           $1,209     $1,170      $1,866      $2,615      $3,150
                                        ======      =====       =====       =====       =====

Troubled debt restructurings               379     $  383      $  387      $  391      $  395
                                        ======      =====       =====       =====       =====

Total non-performing loans and
  troubled debt restructurings
  as a percentage of total net loans       .83%      .59%        .76%        .70%        .81%
                                          =====      ===        ====        ====        ====

Total non-performing assets and
  troubled debt restructurings as
  a percentage of total assets             .60%      .66%       1.03%       1.51%       1.90%
                                          =====      ===        ====        ====        ====
</TABLE>

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

(1)      Includes first and second liens on single-family residences.

(2)      Includes real estate acquired by foreclosure, by deed in lieu of
         foreclosure and deemed in-substance foreclosure net of specified
         reserves.

         At September 30, 1998, management was not aware of any additional loans
with possible credit problems which caused it to have doubts as to the ability
of the borrowers to comply with present loan repayment terms and which in
management's view may result in the future inclusion of such items in the
non-performing asset categories.

         The interest income that would have been recorded during fiscal 1998,
1997 and 1996 if Jacksonville's non-accruing loans at the end of such periods
had been current in accordance with their terms during such periods were
approximately $48,000, $63,000 and $52,000, respectively. Jacksonville has not
committed to lend additional funds to debtors whose loans have been modified.
See Note [5] to the Consolidated Financial Statements. During the year ended
September 30, 1998, no interest income was actually recorded on any loans after
they were placed on non-accrual status.

         CLASSIFIED ASSETS. Federal regulations require that each insured
depositing institution classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them. There
are three classifications for problem assets: "substandard," "doubtful" and
"loss." Substandard assets have one or more defined weaknesses and are
characterized by the



                                       14
<PAGE>   17

distinct possibility that the insured institution will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. Another category
designated "special mention" also must be established and maintained for assets
which do not currently expose an insured institution to a sufficient degree of
risk to warrant classification as substandard, doubtful or loss. Assets
classified as substandard or doubtful require the institution to establish
general allowances for loan losses. If an asset or portion thereof is classified
loss, the insured institution must either establish specific allowances for loan
losses in the amount of 100% of the portion of the asset classified loss, or
charge-off such amount. General loss allowances established to cover possible
losses related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses do not qualify as regulatory capital. Federal
examiners may disagree with an insured institution's classifications and amounts
reserved.

         Jacksonville's classified assets at September 30, 1998 consisted of
$245,000 of assets classified as special mention, $1.7 million of assets
classified as substandard, and none classified as doubtful or loss. All of the
assets classified special mention were single-family residential loans. Of
assets classified substandard, $335,000, or 19.9%, were non residential real
estate parcels acquired as real estate owned, $1.0 million, or 59.5%, were
single-family residential loans, and $195,000 or 11.6%, were single-family
residences acquired as real estate owned. The remaining balance of $116,000 was
in consumer loans and repossessed autos.

         The following table sets forth the Bank's classified assets at the
dates indicated.

<TABLE>
<CAPTION>
                                                          SEPTEMBER 30,
                                           --------------------------------------------
                                               1998           1997            1996
                                           -----------    --------------   ----------
                                                          (In Thousands)
<S>                                         <C>              <C>              <C>
Classification:
  Special mention                           $  245           $   60           $   20
  Substandard                                1,681            1,923            3,213
  Doubtful                                      -                -                -
  Loss(1)                                       -                -                -
                                            ------            -----            -----
    Total classified assets                 $1,926           $1,983           $3,233
                                            ======            =====            =====
</TABLE>

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

(1)      Excludes foreclosed real estate that has been fully reserved.

         Allowance for Loan Losses. It is management's policy to maintain an
allowance for estimated losses on loans based upon an assessment of past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay and current economic conditions.
For fiscal 1998 non-performing loans increased to $678,000 while net charge-offs
for the period totaled $57,000. The Company's level of net loans outstanding
increased $17.1 million which included an increase of 38.4% in consumer loans.
Overall economic conditions remained stable for the market area and credit
quality for the applicants showed no material change. Upon consideration of such
factors, Jacksonville determined that $35,000 in provisions for loan losses were
appropriate primarily because of the increase in the loan portfolio. Although
management believes that it uses the best information available to make such
determinations, future adjustments to allowances may be necessary, and net
earnings could be significantly affected, if circumstances differ substantially
from the assumptions used in making the initial determinations. Currently, the
allowance for loan losses is formally reevaluated on a quarterly basis.



                                       15
<PAGE>   18

         At September 30, 1998, Jacksonville's allowance for loan losses
amounted to $1.2 million, the same amount as allocated at September 30, 1997.

         The following table sets forth an analysis of Jacksonville's allowance
for loan losses during the periods indicated.

<TABLE>
<CAPTION>
                                                                        YEAR ENDED SEPTEMBER 30,
                                    ---------------------------------------------------------------------------------------------

                                         1998                1997                 1996               1995             1994

                                    ---------------     ---------------   ------------------    ---------------   ---------------
                                                                         (Dollars in Thousands)
<S>                                  <C>                   <C>                 <C>                  <C>               <C>
Total net loans outstanding          $191,153              $174,044            $158,034             $135,933          $123,133

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

Average loans outstanding            $180,021              $163,569            $145,021             $128,623          $122,051

                                     ========               =======             =======              =======           =======
Balance at beginning of
  period                               $1,192              $  1,100            $  1,000             $  1,000          $    996

Charge-offs(1)                            (57)                 (18)                 --                  (57)              (24)

Recoveries(1)                              --                    --                 --                    32                10

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

Net charge-offs                           (57)                 (18)              1,000                  (25)              (14)

Provision for losses on loans              35                   110                 100                   25                18

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

Balance at end of period                $1,170             $  1,192            $  1,100             $  1,000           $ 1,000

                                        ======              =======             =======             ========           =======
Allowance for loan losses
  as a percent of total net
  loans outstanding                        .61%                 .68%                .70%                 .74%              .81%

                                           ====                 ===               =====                 ====              ====
Ratio of net charge-offs to
  average loans outstanding                .03%                 .01%                 --%                .02%              .01%

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

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

(1)      Charge-offs and recoveries for all periods presented consist
         principally of single-family residential loans.






                                       16
<PAGE>   19


         The following table presents the allocation of the allowance for loan
losses to the total amount of loans in each category listed at the dates
indicated.

<TABLE>
<CAPTION>
                                                                      SEPTEMBER 30,
                                 ------------------------------------------------------------------------------------
                                             1998                          1997                    1996

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

                                             % OF LOAN                      % OF LOAN                 % OF LOAN
                                               IN EACH                        IN EACH                   IN EACH
                                               CATEGORY                       CATEGORY                  CATEGORY
                                               TO TOTAL                       TO TOTAL                  TO TOTAL

                                     AMOUNT       LOANS            AMOUNT        LOANS          AMOUNT      LOANS
                                   ----------  -------------    ------------   ----------   ------------  ---------
                                                                  (Dollars in Thousands)
<S>                                   <C>            <C>           <C>            <C>         <C>            <C>
Mortgage loans                        $1,092         93.3%         $1,027         86.2%       $1,025         93.2%
Commercial business loans                  -             -             10           .8            20          1.8
Consumer loans                            78          6.7             155         13.0            55          5.0
                                      -------        ------          -----        -----         -----       -----

    Total allowance for loan losses   $1,170        100.0%         $1,192        100.0%       $1,100        100.0%
                                      ======        ======          =====        =====         =====        =====
</TABLE>

<TABLE>
<CAPTION>
                                                           SEPTEMBER 30,
                                       -----------------------------------------------------
                                                 1995                        1994
                                       -------------------------      -----------------------
                                                    % OF LOANS                 % OF LOANS
                                                      IN EACH                    IN EACH
                                                     CATEGORY                   CATEGORY
                                                        TO                         TO
                                                       TOTAL                     TOTAL
                                         AMOUNT        LOANS         AMOUNT       LOANS
                                       ----------- -------------    --------    -----------
                                          (Dollars in Thousands)       (Dollars in Thousands)
<S>                                      <C>            <C>          <C>           <C>
Mortgage loans                           $ 894          96.5%        $ 900         97.5%
Commercial business loans                   30            .2            42           .2
Consumer loans                              76           3.3            58          2.3
                                          -----         -----         ------       ------
    Total allowance for loan losses      $1,000         100.0%        $1,000      100.0%
                                          =====         =====         =====       =====
</TABLE>







                                       17
<PAGE>   20

MORTGAGE-BACKED SECURITIES

         Jacksonville has invested in a portfolio of mortgage-backed securities
which are insured or guaranteed by the FHLMC, FNMA or the GNMA. Mortgage-backed
securities increase the quality of Jacksonville's assets by virtue of the
guarantees that back them, are more liquid than individual mortgage loans and
may be used to collateralize borrowings or other obligations of Jacksonville. In
addition, at September 30, 1998, $12.8 million of Jacksonville's mortgage-backed
securities consist of pools of adjustable-rate mortgages. Mortgage-backed
securities of this type serve to reduce the interest rate risk associated with
changes in interest rates.

         The following table sets forth the activity in Jacksonville's
mortgage-backed securities portfolio during the periods indicated.

<TABLE>
<CAPTION>
                                                                  SEPTEMBER 30,
                                                   --------------------------------------------

                                                      1998            1997             1996
                                                   ----------      -----------      -----------
                                                              (dollars in Thousands)
<S>                                                <C>               <C>             <C>
Mortgage-backed securities at
  beginning of period                              $21,217           $12,107         $ 3,442
Purchases                                           17,663            11,372          10,927
Sales                                                   --                --              --
Repayments                                          (7,014)           (2,262)         (2,262)
                                                   --------            ------         -------
Mortgage-backed securities at end
   of period                                       $31,866           $21,217         $12,107
                                                   =======            ======          ======
Weighted average yield
  at end of period                                    7.03%             6.87%           7.06%
                                                      =====             ====            ====
</TABLE>

         At September 30, 1998, Jacksonville's mortgage-backed securities had a
book value and estimated market value of $31.9 million and $32.0 million,
respectively. Of the $31.9 million portfolio, $534,000 was scheduled to mature
in five years or less; $7.5 million was scheduled to mature in over five years
but less than ten years; and $23.8 million was scheduled to mature after ten
years. Due to prepayments of the underlying loans, the actual maturities of
mortgage-backed securities generally are substantially less than the scheduled
maturities.

         All mortgage-backed securities in the portfolio qualify for regulatory
liquidity under state savings bank regulations. Of the $31.9 million of mortgage
backed securities on September 30, 1998, $19.0 million consisted of fixed rate
and $12.8 million were adjustable rate securities. Of Jacksonville's total
investment in mortgage-backed securities at September 30, 1998, $20.3 million
consisted of FNMA certificates, $6.1 million consisted of GNMA certificates and
$5.5 million consisted of FHLMC certificates. See Note [4] to the Consolidated
Financial Statements for additional information.

            In August, 1998, Jacksonville entered into a leveraged transaction
wherein Jacksonville used Federal Home Loan Bank advances to purchase mortgage
backed securities. This transaction was conceived to compliment Jacksonville's
interest rate position and is just slightly longer in duration than the balance
sheet as a whole. Three FHLB advances were employed to insure adequate funding
if rates go up or down. Three mortgage-backed securities with different terms
were used to diversify assets. By diversifying, Jacksonville was insulated
against any one asset's poor performance because of secular trends in the
market. Before entering the leverage transactions, Jacksonville reviewed a model
presenting a worst case scenario which shocked the assets and liabilities 300
basis points. After a complete study and approval by the Board, Jacksonville
borrowed $15 million from the FHLB using three advances of $5,000,000 each with
staggered maturities to purchase three diversified assets of $5,000,000 each.

         The actual maturity of a mortgage-backed security may be less than its
stated maturity due to prepayments of the underlying mortgages. Prepayments that
are faster than anticipated may shorten the life of the security and adversely
affect its yield to maturity. The yield is based upon the interest income and
the amortization of any premium or discount related to the mortgage-backed
security. In accordance with generally accepted accounting principles, premiums
and discounts are amortized over the estimated lives of the loans, which
decrease and increase interest income,


                                       18
<PAGE>   21

respectively. The prepayment assumptions used to determine the amortization
period for premiums and discounts can significantly affect the yield of the
mortgage-backed security, and these assumptions are reviewed periodically to
reflect actual prepayments. Although prepayments of underlying mortgages depend
on many factors, including the type of mortgages, the coupon rate, the age of
mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates, the
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates generally is the most significant determinant
of the rate of prepayments. During periods of falling mortgage interest rates,
if the coupon rate of the underlying mortgages exceeds the prevailing market
interest rates offered for mortgage loans, refinancing generally increases and
accelerates the prepayment of the underlying mortgages and the related security.
Under such circumstances, Jacksonville may be subject to reinvestment risk
because to the extent that Jacksonville's mortgage-backed securities amortize or
prepay faster than anticipated, Jacksonville may not be able to reinvest the
proceeds of such repayments and prepayments at a comparable rate.

INVESTMENT ACTIVITIES

         Jacksonville's investment securities portfolio is managed in accordance
with a written Investment Policy adopted by the Board of Directors and
administered by the Investment Committee which consists of one outside Director,
the President and the Executive Vice President. The members of the Investment
Committee are: Dr. Joe Tollett, Jerry Chancellor and Bill W. Taylor. There is no
investment limit for investments in U.S. Treasury obligations and FHLB
obligations having maturities of ten years or less and in other U.S. federal
agency or federally sponsored agency obligations, including, but not limited to
FHLMC, FNMA, GNMA and the Student Loan Marketing Association, municipal
obligations rated AAA, AA, A or BBB or issued by a public housing agency and
backed by the full faith and credit of the U.S. government having maturities of
30 years or less. In addition, there are no investment limits on bankers
acceptances of 12 months or less and federal funds of 360 days or less. Up to
$100,000 per bank may be invested in commercial bank certificates of deposit
with maturities up to one year. Other investments must be approved by the Board
of Directors. At September 30, 1998, Jacksonville had U.S. Treasury notes and
U.S. Government agency held-to-maturity securities with an amortized cost of
$15.5 million and an estimated market value of $15.6 million. See note [3] to
the Consolidated Financial Statement for further information. At September 30,
1998, Jacksonville held U.S. Government securities as available-for-sale with an
amortized cost of $4.5 million and an estimated market value of $4.5 million.






                                       19
<PAGE>   22

         The following table sets forth Jacksonville's investment securities at
the dates indicated.

<TABLE>
<CAPTION>
                                                               SEPTEMBER 30,
                                             --------------------------------------------------
                                                 1998               1997              1996
                                             --------------   --------------      -------------
                                                              (In Thousands)
<S>                                              <C>              <C>              <C>
Available for sale(1):
 Mortgage-backed securities:
   FNMA Certificates                             $15,908          $ 4,852          $    -
   FHLMC Certificates                              3,697            6,540               -
   GNMA Certificates                               5,216               -                -
 U.S. agency securities                            4,521            3,469            7,359
                                                  -------          ------            -----
      Total available for sale                    29,342           14,861            7,359
                                                  -------          ------            -----

Held to maturity(1):
  Mortgage-backed securities:
    FNMA Certificates                              4,394            6,348            7,270
    FHLMC certificates                             1,805            2,398            3,553
    GNMA certificates                                846            1,079            1,284
  U.S. Treasury notes                              3,002            6,492            8,980
  U.S. agency securities                          12,490           15,969           17,467
                                                  ------           ------           ------

     Total held to maturity                       22,537           32,286           38,554
                                                 -------           ------           ------

        Total investment securities              $51,879          $47,147          $45,913
                                                 =======           ======           ======
</TABLE>

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

(1)         Securities classified as available for sale were carried at fair
         value at September 30, 1998, 1997 and 1996. Securities classified as
         held-to-maturity were carried at historical cost at all respective
         dates.

            At September 30, 1998, $6.5 million or 32.5 % of total investment
         securities excluding mortgage backed securities, held by Jacksonville
         were scheduled to mature in one year or less and had a weighted average
         yield of 5.92%. Of the remaining investment securities, $12.5 million
         was scheduled to mature after one year through five years and $1.0
         million was scheduled to mature after six years through ten years.






                                       20
<PAGE>   23

         The following table sets forth certain information regarding the
maturities of Jacksonville's investment securities at September 30, 1998.

<TABLE>
<CAPTION>
                                                               CONTRACTUALLY MATURING
                             ------------------------------------------------------------------------------------------
                                         WEIGHTED              WEIGHTED                  WEIGHTED             WEIGHTED
                               UNDER 1    AVERAGE      1-5      AVERAGE       6-10       AVERAGE   OVER 10     AVERAGE
                                YEAR       RATE       YEARS      RATE        YEARS         RATE     YEARS       RATE
                             ---------- -----------  -------- ----------  ----------    --------- ---------  ----------

                                                             (Dollars in Thousands)
<S>                             <C>          <C>       <C>         <C>       <C>           <C>      <C>          <C>
HELD TO MATURITY
U.S. Treasury notes
   and bills                    $3,001       5.98%     $  -          -  %    $ -           -    %   $ -            -

U.S. agency securities           2,496       5.70       9,995      6.11        -           -          -            -
                                ------                  -----                -----                  -----
   Total                        $5,497                $ 9,995               $  -                   $  -
                                 =====                 ======                =====                  =====

AVAILABLE FOR SALE
U.S. Treasury notes
   and bills                    $   -          -          -          -          -          -          -            -
U.S. agency securities           1,000       6.30       2,501      5.42      1,000       6.23         -            -
                                 -----                  -----                -----                  -----       ----
Total                           $1,000                 $2,501               $1,000                $   -
                                 =====                  =====                =====                  =====
Unrealized gain on
  securities available
  for sale                           8                     12                  -                      -            -
                                 -----                  -----                -----                  -----
    Total                       $1,008                 $2,513               $1,000                $   0
                                 =====                  =====                =====                  =====
</TABLE>

<TABLE>
<CAPTION>
                                        TOTAL
                                ---------------------

                                  AMOUNT      YIELD
                                ---------   ---------

                               (Dollars in Thousands)
<S>                               <C>           <C>
HELD TO MATURITY
U.S. Treasury notes
   and bills                      $ 3,001       5.98 %

U.S. agency securities             12,491       6.03 %
                                   ------
   Total                          $15,492
                                   ======

AVAILABLE FOR SALE
U.S. Treasury notes
   and bills                            0
U.S. agency securities              4,501       5.80%
                                    -----
Total                             $ 4,501
                                    =====
Unrealized gain on
  securities available
  for sale                             20
                                   -------
    Total                         $ 4,521
                                   ======
</TABLE>

INTEREST-BEARING DEPOSITS

         As of September 30, 1998 Jacksonville also had demand deposit accounts
in the FHLB of Dallas of $7.8 million as compared to $2.8 million as of
September 30, 1997. In order to comply with a policy adopted by its Board of
Directors, Jacksonville's deposits in FDIC-insured institutions are limited to
$100,000 per bank in certificates of deposit with a maximum maturity of one
year. As of September 30, 1998, Jacksonville had no certificates of deposit.





                                       21
<PAGE>   24

SOURCES OF FUNDS

         GENERAL. Deposits are the primary source of Jacksonville's funds for
lending and other investment purposes. In addition to deposits, Jacksonville
derives funds from loan principal repayments. Loan repayments are a relatively
stable source of funds, while deposit inflows and outflows are significantly
influenced by general interest rates and money market conditions. Borrowings may
be used on a short-term basis to compensate for reductions in the availability
of funds from other sources. They may also be used on a longer term basis for
general business purposes.

         DEPOSITS. Jacksonville's deposits are attracted principally from within
Jacksonville's primary market area through the offering of a broad selection of
deposit instruments, including demand and NOW accounts, money market accounts,
passbook savings accounts, and term certificate accounts. Included among these
deposit products are individual retirement account certificates of approximately
$19.9 million at September 30, 1998.

         Deposit account terms vary, with the principal differences being the
minimum balance required, the time periods the funds must remain on deposit and
the interest rate.

         Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by Jacksonville on a periodic basis. Determination of
rates and terms are predicated on funds acquisition and liquidity requirements,
rates paid by competitors, growth goals and federal regulations.

         Jacksonville does not advertise for deposits outside its local market
area or utilize the services of deposit brokers.

         The following table sets forth the dollar amount of deposits in the
various types of deposit programs offered by Jacksonville at the dates
indicated.

<TABLE>
<CAPTION>
                                                                           SEPTEMBER 30,
                                            --------------------------------------------------------------------------------

                                                     1998                     1997                        1996

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

                                              AMOUNT    PERCENTAGE    AMOUNT     PERCENTAGE        AMOUNT       PERCENTAGE
                                            ---------- -----------  --------- ---------------   ------------   -------------

                                                                          (Dollars in Thousands)
<S>                                          <C>            <C>         <C>            <C>        <C>             <C>
Certificate accounts:
2.00 - 4.00%                                 $    -           - %       $    -           - %      $     3,973        2.28%

4.01 - 6.00%                                  136,669       66.83        124,014       64.58           96,387       55.30

6.01 - 8.00%                                   16,781        8.21         21,431       11.16           31,581       18.11

8.01 - 10.00%                                     143         .07            146         .08              139         .08

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

Total certificate accounts                   $153,593       75.11%      $145,591       75.82%        $132,080     75.77%
                                              =======       =====        =======       ======         =======     ======

Transaction accounts:

Passbook savings                             $ 12,684        6.20%      $ 12,202        6.35%          $ 11,424      6.55%
Money market                                   13,858        6.78         15,829        8.24             17,648     10.12
Demand and NOW Accounts                        24,355       11.91         18,411        9.59             13,176      7.56
                                              -------       -----        -------       ------          -------     ------

Total transaction accounts                   $ 50,897       24.89%      $ 46,442       24.18%         $  42,248     24.23%
                                              =======       =====        =======       ======           =======     ======

Total deposits                               $204,490      100.00%      $192,033      100.00%         $ 174,328    100.00%
                                              =======      ======        =======       ======           =======    ======
</TABLE>



                                       22
<PAGE>   25

         The following table sets forth the savings activities of Jacksonville
during the periods indicated.

<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,
                                       ---------------------------------------------------------
                                            1998                 1997                 1996
                                       -----------------    -----------------   ----------------

                                                             (In Thousands)
<S>                                         <C>                <C>                 <C>
Net increase (decrease)
    before interest credited                $ 5,660            $11,162             $(4,111)

Interest credited                             6,797              6,543               4,628
                                             -------            ------              ------

Net increase (decrease) in deposits          12,457            $17,705             $   517
                                             ======             ======              ======
</TABLE>

         The following table shows the interest rate and maturity information
for Jacksonville's certificates of deposit at September 30, 1998.

<TABLE>
<CAPTION>
                                                                MATURITY DATE
                     ------------------------------------------------------------------------------------------------

                         ONE YEAR               OVER                OVER                OVER
 INTEREST RATE            OR LESS            1-2 YEARS           2-3 YEARS             3 YEARS              TOTAL
- --------------------   ------------------   -----------------   ----------------    --------------     ----------------

                                                               (In Thousands)
<S>                    <C>                 <C>                 <C>                  <C>                <C>
 2.00 -   4.00%        $   -               $   -               $     -              $  -               $    -
 4.01 -   6.00%         125,072              10,371                  -                1,226               136,669
 6.01 -   8.00%           4,517                  32                10,820             1,413                16,782
 8.01 -  10.00%            -                   -                       82                60                   142
                        -------              ------                ------             ------              -------
                       $129,589            $ 10,403            $   10,902            $ 2,699            $153,593
                        =======              ======                =======           ========            ========
</TABLE>


         The following table sets forth the maturities of Jacksonville's
certificates of deposit having principal amounts of $100,000 or more at
September 30, 1998.

<TABLE>
<CAPTION>
         CERTIFICATES OF DEPOSIT MATURING IN
         QUARTER ENDING:
         --------------------------------------
                                                            (In thousands)
<S>                                                                <C>
         December 31, 1998                                         $4,347
         March 31, 1999                                             2,406
         June 30, 1999                                              2,701
         September 30, 1999                                         3,067
         After September 30, 1999                                  13,156
                                                                  -------
         Total certificates of deposit
           with balances of $100,000
           or more                                                $25,677
                                                                   ======
</TABLE>

         The following table sets forth the maximum month-end balance and
average balance of Jacksonville's FHLB advances during the periods indicated.
See also, Note 10 to the Consolidated Financial Statements.

<TABLE>
<CAPTION>
                                                    YEAR ENDED SEPTEMBER 30,
                                         ------------------------------------------------
                                             1998             1997              1996
                                         ----------        ----------       -------------
                                                     (Dollars in Thousands)
<S>                                        <C>               <C>               <C>
Maximum balance                            $19,000           $5,000            $4,000
Average balance                              4,923            2,846             1,098
Weighted average interest
  rate of FHLB advances                       5.69%            6.04%             5.71%
</TABLE>



                                       23
<PAGE>   26

         The following table sets forth certain information as to Jacksonville's
long-term (terms to maturity in excess of 90 days) and short-term (terms to
maturity of 90 days or less) FHLB advances at the dates indicated.

<TABLE>
<CAPTION>
                                                                  SEPTEMBER 30,
                                                 -------------------------------------------------
                                                    1998              1997              1996
                                                 ------------     ------------        ------------
                                                             (Dollars in Thousands)
<S>                                             <C>                  <C>               <C>
FHLB long-term advances                         $17,000              $2,000            $2,000
  Weighted average interest rate                   5.19%               5.87%             5.71%

FHLB short-term advances                        $    -               $   -             $   -
  Weighted average interest rate                     - %                 - %               - %
</TABLE>

         BORROWINGS. While Jacksonville has not frequently borrowed from the
FHLB of Dallas, it may obtain advances from the FHLB of Dallas upon the security
of the common stock it owns in that bank and certain of its residential mortgage
loans, provided certain standards related to creditworthiness have been met.
Such advances are made pursuant to several credit programs, each of which has
its own interest rate and range of maturities. Such advances are generally
available to meet seasonal and other withdrawals of deposit accounts and to
permit increased lending. At September 30, 1998, Jacksonville had $17 million in
advances from the FHLB of Dallas.

         The Company's ESOP also borrowed funds from Jacksonville IHC for the
purchase of shares of the Company's Common Stock issued in connection with the
Conversion. As of September 30, 1998, the outstanding balance of that loan was
$1.2 million.

         SUBSIDIARIES. Jacksonville currently owns 100% of the capital stock of
J. S. & L. Corporation ("JS&L") which was established in December 1979. JS&L is
self sufficient due to income from $112,000 in investments, interest from
residential notes receivable and lease income. Its main activity is the
servicing of purchased residential first and second lien notes. The portfolio
includes 28 loans ranging in size from $1,000 to $121,000, most of which were
purchased at a discount. For most of the second lien notes purchased,
Jacksonville holds the first lien note. For the years ended September 30, 1998
and September 30, 1997, JS&L earned $37,000 and $44,000, respectively. JS&L now
invests in investments permissible for Jacksonville, leases computer equipment,
and originates and buys first and second liens. JS&L purchases first and second
lien notes pursuant to a written mortgage loan underwriting policy adopted by
JS&L's board of directors. Total investment in JS&L at September 30, 1998 was
$903,000. Total capital of JS&L at September 30, 1998 was $903,000 and, as of
that date, J'S&L has no outstanding indebtedness to Jacksonville.

         EMPLOYEES. Jacksonville and its subsidiary had 85 full-time employees
at September 30, 1998. None of these employees is represented by a collective
bargaining agent, and Jacksonville believes that it enjoys good relations with
its personnel.






                                       24
<PAGE>   27

                                   REGULATION

         Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Company, IHC and the Bank. The description
does not purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations.

THE COMPANY AND IHC

         REGULATIONS. The Company and IHC are registered unitary savings and
loan holding companies and are subject to OTS, Federal Deposit Insurance
Corporation ("FDIC") and Department regulation, examination, supervision and
reporting requirements. In addition, because the capital stock of the Company is
registered under Section 12(g) of the Securities Exchange Act of 1934, the
Company is also subject to various reporting and other requirements of the SEC.
As a subsidiary of a savings and loan holding company, the Bank is also subject
to certain Federal and state restrictions in its dealings with the Company and
affiliates thereof.

         FEDERAL ACTIVITIES RESTRICTIONS. There are generally no restrictions on
the activities of a savings and loan holding company which holds only one
subsidiary savings bank. However, if the Director of the OTS determines that
there is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings institution (i.e., a
savings association or savings bank), the Director may impose such restrictions
as are deemed necessary to address such risk, including limiting (I) payment of
dividends by the savings institution; (ii) transactions between the savings
institution and its affiliates; and (iii) any activities of the savings
institution that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings institution.
Notwithstanding the foregoing, if the savings institution subsidiary of such a
holding company fails to meet the Qualified Thrift Lender ("QTL") test, then
such unitary holding company also becomes subject to the activities restrictions
applicable to multiple savings and loan holding companies and, unless the
savings institution requalifies as a QTL within one year thereafter, must
register as, and become subject to the restrictions applicable to, a bank
holding company.

         If the Company or IHC were to acquire control of another savings
institution, other than through merger or other business combination with the
Bank, the Company and IHC would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
institution meets the QTL test, as set forth below, the activities of the
Company and any of its subsidiaries (other than the Bank or other subsidiary
savings institutions) would thereafter be subject to further restrictions. No
multiple savings and loan holding company or subsidiary thereof which is not a
savings institution may commence or continue beyond a limited period of time
after becoming a multiple savings and loan holding company or subsidiary thereof
any business activity, other than: (I) furnishing or performing management
services for a subsidiary savings institution; (ii) conducting an insurance
agency or escrow business; (iii) holding, managing, or liquidating assets owned
by or acquired from a subsidiary savings institution; (iv) holding or managing
properties used or occupied by a subsidiary savings institution; (v) acting as
trustee under deeds of trust; (vi) those activities authorized by regulation as
of March 5, 1987 to be engaged in by multiple savings and loan holding
companies; or (vii) unless the Director of the OTS by regulation prohibits or
limits such activities for savings and loan holding companies, those activities
authorized by the Federal Reserve Board as permissible for bank holding
companies. The activities described in (I) through (vi) above may be engaged in
only after giving the OTS prior notice and being informed that the OTS does not
object to such activities. In addition, the activities described in (vii) above
also must be approved by the Director of the OTS prior to being engaged in by a
multiple savings and loan holding company.

         RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without prior
approval of the Director of the OTS, (I) control of any other savings
institution or savings and loan holding company or substantially all the assets
thereof or (ii) more than 5% of the voting shares of a savings institution or
holding company thereof which is not a



                                       25
<PAGE>   28

subsidiary. Except with the prior approval of the Director of the OTS, no
director or officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock, may
acquire control of any savings institution, other than a subsidiary savings
institution, or of any other savings and loan holding company.

         The Director of the OTS may approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state only if (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office located in the state of the association to be acquired as of March
5, 1987; (ii) the acquirer is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the FDIA, or
(iii) the statutes of the state in which the institution to be acquired is
located specifically permit institutions to be acquired by the state-chartered
institutions or savings and loan holding companies located in the state where
the acquiring entity is located (or by a holding company that controls such
state-chartered savings institutions).

         LIMITATIONS ON DIVIDENDS. The Company is a legal entity separate and
distinct from Jacksonville. The Company's principal source of revenue consists
of dividends from Jacksonville. The payment of dividends by Jacksonville is
subject to various regulatory requirements including a requirement, as a result
of the Company's savings and loan holding company status, that Jacksonville
notify the Director not less than 30 days in advance of any proposed declaration
by its directors of a dividend.

        TEXAS REGULATIONS. Under the Texas Savings Bank Act ("TSBA"), each
registered holding company, such as the Company and IHC, is required to file
reports with the Department as required by the Texas Savings and Loan
Commissioner ("Commissioner") and is subject to such examination as the
Commissioner may prescribe.

REGULATION OF THE BANK

         The Bank is required to file reports with the Department and the FDIC
concerning its activities and financial condition, in addition to obtaining
regulatory approvals prior to entering into certain transactions, such as any
merger or acquisition with another institution. The regulatory system to which
the Bank is subject is intended primarily for the protection of the deposit
insurance fund and depositors, not stockholders. The regulatory structure also
provides the Department and the FDIC with substantial discretion in connection
with their supervisory and enforcement functions. The Department and the FDIC
conduct periodic examinations of the Bank in order to assess its compliance with
federal and state regulatory requirements. As a result of such examinations, the
Department and the FDIC may require various corrective actions.

         Virtually every aspect of the Bank's business is subject to numerous
federal and/or state regulatory requirements and restrictions with respect to
such matters as, for example, the nature and amounts of loans and investments
that may be made, the issuance of securities, the amount of reserves that must
be established against deposits, the establishment of branches, mergers,
non-banking activities and other operations. Numerous laws and regulations also
set forth special restrictions and procedural requirements with respect to the
extension of credit, credit practices, the disclosure of credit terms and
discrimination in credit transactions.

         The description of statutory provisions and regulations applicable to
savings banks set forth in this Form 10-K does not purport to be a complete
description of such statutes and regulations and their effects on the Bank.
Furthermore, the Bank cannot predict what other new regulatory requirements
might be imposed in the future.

         LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between
savings institutions and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company of
a savings institution (such as the Company and IHC) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (I) limit the extent to which the
savings institution or its subsidiaries may engage in covered transactions with
any one affiliate to an amount equal to 10% of such institution's capital stock
and surplus, and contain an aggregate limit on all such


                                       26
<PAGE>   29

transactions with all affiliates to an amount equal to 20% of such capital stock
and surplus and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable to the institution or
subsidiary, as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar transactions. In addition to the restrictions imposed by Sections 23A
and 23B, no savings institution may (I) loan or otherwise extend credit to an
affiliate, except for any affiliate which engages only in activities which are
permissible for bank holding companies, or (ii) purchase or invest in any
stocks, bonds, debentures, notes or similar obligations of any affiliate, except
for affiliates which are subsidiaries of the savings institution.

         In addition, Sections 22(h) and (g) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a savings institution (a "principal
stockholder"), and certain affiliated interests of each of them, may not exceed,
together with all other outstanding loans to such person and affiliated
interests, the savings institution's loans to one borrower limit (generally
equal to 15% of the institution's unimpaired capital and surplus). Section 22(h)
also requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons and also requires prior board approval for certain
loans. In addition, the aggregate amount of extensions of credit by a savings
institution to all insiders cannot exceed the institution's unimpaired capital
and surplus. Furthermore, Section 22(g) places additional restrictions on loans
to executive officers. At September 30, 1998, the Bank was in compliance with
the above restrictions.

         REGULATORY CAPITAL REQUIREMENTS. Federally-insured state-chartered
banks are required to maintain minimum levels of regulatory capital. These
standards generally must be as stringent as the comparable capital requirements
imposed on national banks. The FDIC also is authorized to impose capital
requirements in excess of these standards on individual banks on a case-by-case
basis.

         Under current FDIC regulations, the Bank is required to comply with
three separate minimum capital requirements: a "Tier 1 capital ratio" and two
"risk-based" capital requirements. "Tier 1 capital" generally includes common
stockholders' equity (including retained earnings), qualifying noncumulative
perpetual preferred stock and any related surplus, and minority interests in the
equity accounts of fully consolidated subsidiaries, minus intangible assets,
other than properly valued PMSRs up to certain specified limits and minus net
deferred tax assets in excess of certain specified limits.

         TIER 1 LEVERAGE CAPITAL RATIO. FDIC regulations establish a minimum
3.0% ratio of Tier 1 capital to total assets for the most highly-rated
state-chartered, FDIC-supervised banks, with an additional cushion of at least
100 to 200 basis points for all other state-chartered, FDIC-supervised banks,
which effectively imposes a minimum Tier 1 capital ratio for such other banks of
between 4.0% to 5.0%. Under FDIC regulations, highly-rated banks are those that
the FDIC determines are not anticipating or experiencing significant growth and
have well diversified risk, including no undue interest rate risk exposure,
excellent asset quality, high liquidity and good earnings. At September 30,
1998, the required Tier 1 leverage capital ratio for the Bank was 4.0% and its
actual Tier 1 leverage capital ratio was 13.14%.

         RISK-BASED CAPITAL REQUIREMENTS. The risk-based capital requirements
contained in FDIC regulations generally require the Bank to maintain a ratio of
Tier 1 capital to risk-weighted assets of at least 4.00% and a ratio of total
risk-based capital to risk-weighted assets of at least 8.00%. To calculate the
amount of capital required, assets are placed in one of four categories and
given a percentage weight (0%, 20%, 50% or 100%) based on the relative risk of
the category. For example, U.S. Treasury Bills and GNMA securities are placed in
the 0% risk category. FNMA and FHLMC securities are placed in the 20% risk
category, loans secured by one-to-four family residential properties and certain
privately-issued mortgage-backed securities are generally placed in the 50% risk
category and commercial and consumer loans and other assets are generally placed
in the 100% risk category. In addition, certain off-balance sheet items are
converted to balance sheet credit equivalent amounts and each amount is then
assigned to one of the four categories.



                                       27
<PAGE>   30

         For purposes of the risk-based capital requirements, "total capital"
means Tier 1 capital plus supplementary or Tier 2 capital, so long as the amount
of supplementary or Tier 2 capital that is used to satisfy the requirement does
not exceed the amount of Tier 1 capital. Supplementary or Tier 2 capital
includes, among other things, so-called permanent capital instruments
(cumulative or other perpetual preferred stock, mandatory convertible
subordinated debt and perpetual subordinated debt), so-called maturing capital
instruments (mandatorily redeemable preferred stock, intermediate-term preferred
stock, mandatory convertible subordinated debt and subordinated debt), and a
certain portion of the allowance for loan losses up to a maximum of 1.25% of
risk-weighted assets.

         At September 30, 1998, the Bank's Tier 1 capital to risk-weighted
assets ratio was 24.37%. On the same date, the Bank's total risked-based capital
percentage was 25.22%.

         The following table sets forth information with respect to each of the
Bank's capital requirements as of the dates shown.

<TABLE>
<CAPTION>
                                                  AS OF SEPTEMBER 30,
                                                  -------------------

                                                         1998
                                                         ----

                                                 ACTUAL       REQUIRED
                                                 ------       --------
           <S>                                   <C>              <C>
           Leverage ratio (or tangible           13.14  %         4.00 %
           capital requirement) (1):
           Tier 1 capital to total assets

           Tier 1 risk-based capital ratio       24.37            4.00
           (or core capital
           requirement)(1):
           Tier 1 risk-based capital to
           risk weighted assets

           Total risk-based capital ratio:       25.22            8.00
           Total risk-based capital risk to
           risk weighted assets
</TABLE>

         Prior to July 2, 1997 Jacksonville Savings and Loan Association was
regulated by the Office of Thrift Supervision and was subject to capital
requirements as set forth by that regulatory agency. The Bank and the
Association at September 30, 1997 and 1996, respectively, exceeded all minimum
capital requirements as set forth by the Office of Thrift Supervision at those
dates.






                                       28
<PAGE>   31

         The following table sets forth a reconciliation between the Bank's
stockholders' equity and each of its three regulatory capital requirements at
September 30, 1998.

<TABLE>
<CAPTION>
                                                                               TIER 1               TOTAL
                                                       TIER 1                RISK-BASED           RISK-BASED
                                                      CAPITAL                 CAPITAL              CAPITAL
                                                      -------                 -------              -------

                                                                       (Dollars in thousands)
         <S>                                      <C>                       <C>                     <C>
         Total stockholders' equity for           $ 33,657                  $33,657                 $33,657
         Jacksonville Savings Bank, SSB
         Unrealized gain on securities
                 available-for-sale                    <75>                     <75>                    <75>
         Less nonallowable assets:
                 Deferred Charges                      <32>                     <32>                    <32>
         Plus allowances for loan
                 and lease losses                        -                        -                    1,170
                                                    ---------------       --------------         --------------
          Total regulatory capital                   33,550                  33,550                   34,720

          Minimum required capital                   10,215                   5,508                   11,015

                                                    ---------------       --------------         --------------
          Excess regulatory capital               $  23,335                $ 28,042                 $ 23,705
                                                    ===============       ==============         ==============

          Bank's regulatory capital
                  percentage (1)                        13.1    %               24.4  %               25.2   %

          Minimum regulatory capital
                  required percentage                    4.0    %                4.0  %                8.0   %
                                                    ---------------       --------------         --------------

          Bank's regulatory capital
                  percentage in excess of
                  requirement                            9.1    %               20.4  %                17.2  %
                                                    ===============       ==============         ==============
</TABLE>

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


(1) Tier 1 capital is computed as a percentage of total adjusted assets of
$255.4 million. Risk-based capital is computed as a percentage of adjusted
risk-weighted assets of $137.7 million.






                                       29
<PAGE>   32

       FDIC INSURANCE PREMIUMS. The deposits of the Bank are insured to the
maximum extent permitted by the SAIF administered by the FDIC, and are backed by
the full faith and credit of the U.S. Government. As the insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious threat
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings institutions.

         The Bank currently pays deposit insurance premiums to the FDIC based on
a risk-based assessment system established by the FDIC for all SAIF-member
institutions. Under applicable regulations, institutions are assigned to one of
three capital groups based solely on the level of an institution's capital -
"well capitalized," "adequately capitalized" and "undercapitalized" - which are
defined in the same manner as the regulations establishing the prompt corrective
action system under Section 38 of the FDIA. These three groups are then divided
into three subgroups which reflect varying levels of supervisory concern, from
those which are considered to be healthy to those which are considered to be of
substantial supervisory concern. The matrix so created results in nine
assessment risk classifications with effective assessments between .04% for well
capitalized, healthy SAIF-member institutions to .27% for undercapitalized
SAIF-member institutions with substantial supervisory concerns. At September 30,
1998, the Bank was categorized as well capitalized.

         On September 30, 1997, amendments to the FDIA were signed into law. The
FDIA and implementing regulations provided that all SAIF-member institutions
would pay a special one time assessment of [65.7] basis points on the SAIF
assessment base as of March 31, 1995 to recapitalize the SAIF, which in the
aggregate, would be sufficient to bring the reserve ratio in the SAIF to 1.25%
of insured deposits. Jacksonville's special assessment amounted to $1.1 million
pursuant to the FDIA.

        The FDIA provided for FICO debt sharing by banks and thrifts with
proration sharing in the year 2000. Prior to the year 2000, SAIF insured
institutions will pay approximately 6.5 basis points for FICO, while BIF insured
institutions, such as commercial banks, will pay approximately 1.3 basis points.
The FICO provisions of the FDIA also prohibit deposit migration strategies to
avoid SAIF premiums. The FDIA also provided for the merger of the BIF and the
SAIF on January 1, 1999, with such merger being conditioned upon the prior
elimination of the federal thrift charter.

        Under Section 593 of the Internal Revenue Code, thrift institutions such
as the Bank, which meet certain definitional tests primarily relating to their
assets and the nature of their business, are permitted to establish a tax
reserve for bad debts and to make annual additions thereto, which additions may,
within specified limitations, be deducted in arriving at their taxable income.
The Bank's deduction with respect to "qualifying loans" which are generally
loans secured by certain interests in real property, prior to 1996, could be
computed using an amount based on the Bank's actual loss experience (the
"experience method") or a percentage of taxable income, computed without regard
to this deduction, and with additional modifications and reduced by the amount
of any permitted addition to the non-qualifying reserve.

      Effective January 1, 1996, the Bank is unable to make additions under the
"percentage" method to its tax bad debt reserve, and is only permitted to deduct
bad debts using the experience method and is additionally be required to
recapture (i.e. take into taxable income) over a six year period, the excess of
the balance of its bad debt reserve as of December 31, 1995 over the balance of
such reserve as of December 31, 1987 (if any). Such recapture requirements can
be suspended for each of two successive taxable years beginning January 1, 1996,
in which the Bank originates a minimum amount of certain residential loans based
upon the average of the principal amounts of such loans made by the Bank during
its six taxable years preceding 1996. At September 30, 1998, the Bank had fully
recaptured post-1987 tax bad debt reserves.

       REGULATORY CAPITAL REQUIREMENTS. The FDIA requires the Federal banking
agencies to revise their risk-based capital guidelines to, among other things,
take adequate account of interest rate risk. The Federal banking agencies
continue to consider modification of the capital requirements applicable to
banking organizations. In August 1995, the Federal banking agencies amended
their risk-based capital guidelines to provide that the banking agencies will
include in their evaluations of a bank's capital adequacy an assessment of the
bank's exposure to declines in the economic value



                                       30
<PAGE>   33

of the bank's capital due to changes in interest rates. The agencies also issued
a proposed policy statement that describes the process that the agencies will
use to measure and assess the exposure of a bank's capital to changes in
interest rates. The agencies stated that after they and the banking industry
gain sufficient experience with the measurement process, the agencies would
issue proposed regulations for establishing explicit charges against capital to
account for interest rate risk.

         The FDIA also requires the FDIC and the other Federal banking agencies
to revise their risk-based capital standards, with appropriate transition rules,
to ensure that they take into account concentration of credit risk and the risks
of nontraditional activities and to ensure that such standards reflect the
actual performance and expected risk of loss of multifamily mortgages, of which
the Bank had $1.1 million at September 30, 1998. In December 1995, the FDIC and
the other Federal banking agencies promulgated final amendments to their
respective risk-based capital requirements which would explicitly identify
concentration of credit risk and certain risks arising from nontraditional
activities, and the management of such risks as important factors to consider in
assessing an institution's overall capital adequacy. The FDIC may now require
higher minimum capital ratios based on certain circumstances, including where
the institution has significant risks from concentration of credit or certain
risks arising from nontraditional activities.

         The Federal banking agencies have agreed to adopt for regulatory
purposes Statement 115, which, among other things, generally adds a new element
to stockholders' equity under generally accepted accounting principles by
including net unrealized gains and losses on certain securities. In December
1994, the FDIC issued final amendments to its regulatory capital requirements
which would require that the net amount of unrealized losses from
available-for-sale equity securities with readily determinable fair values be
deducted for purposes of calculating the Tier 1 capital ratio. All other net
unrealized holding gains (losses) on available-for-sale securities are excluded
from the definition of Tier 1 capital. At September 30, 1998, the Bank had $29.3
million of securities, available-for-sale, with $75,000 of aggregate net
unrealized gain thereon.

         SAFETY AND SOUNDNESS STANDARDS. Each Federal banking agency is required
to prescribe, for all insured depository institutions and their holding
companies, standards relating to internal controls, information systems and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
compensation standards would prohibit employment contracts or other compensatory
arrangements that provide excess compensation, fees or benefits or could lead to
material financial loss to the institution. In addition, each Federal banking
agency also is required to adopt for all insured depository institutions and
their holding companies standards that specify (I) a maximum ratio of classified
assets to capital, (ii) minimum earnings sufficient to absorb losses without
impairing capital, (iii) to the extent feasible, a minimum ratio of market value
to book value for publicly-traded shares of the institution or holding company,
and (iv) such other standards relating to asset quality, earnings and valuation
as the agency deems appropriate. On July 10, 1995, the Federal banking agencies,
including the FDIC, adopted final rules and proposed guidelines concerning
safety and soundness required to be prescribed by regulations pursuant to
Section 39 of the FDIA. In general, the standards relate to operational and
managerial matters, asset quality and earnings and compensation. The operational
and managerial standards cover internal controls and information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, and compensation, fees and benefits. Under the asset
quality and earnings standards, which were adopted by the Federal Banking
agencies in October 1996, the Bank would be required to establish and maintain
systems to identify problem assets and prevent deterioration in those assets and
evaluate and monitor earnings to ensure that earnings are sufficient to maintain
adequate capital reserves. If an insured institution fails to meet any of the
standards promulgated by the regulators, then such institution will be required
to submit a plan within 30 days to the FDIC specifying the steps that it will
take to correct the deficiency. In the event that an insured institution fails
to submit or fails in any material respect to implement a compliance plan within
the time allowed by the FDIC, Section 39 of the FDIA provides that the FDIC must
order the institution to correct the deficiency and may restrict asset growth,
require the savings institution to increase its ratio of tangible equity to
assets, restrict the rates of interest that the institution may pay or take any
other action that would better carry out the purpose of prompt corrective


                                       31
<PAGE>   34

action. The Bank believes that it has been and will continue to be in compliance
with each of the standards as they have been adopted by the FDIC.

         Finally, each Federal banking agency is required to prescribe standards
for the employment contracts and other compensation arrangements of executive
officers, employees, directors and principal stockholders of insured depository
institutions that would prohibit compensation and benefits and arrangements that
are excessive or that could lead to a material financial loss for the
institution. In February 1996, the FDIC adopted final regulations regarding the
payment of severance and indemnification to management officials and other
affiliates of insured institutions ("institution affiliated parties" or "IAPs").
The limitations on severance or "golden parachute" payments apply to "troubled"
institutions which seek to enter into contracts with IAPs. A golden parachute
payment is generally considered to be any payment to an IAP which is contingent
on the termination of that person's employment and is received when the insured
institution is in a troubled condition. The definition of golden parachute
payment does not include payment pursuant to qualified retirement plans,
non-qualified bona fide deferred compensation plans, nondiscriminatory severance
pay plans, other types of common benefit plans, state statutes and death
benefits. Certain limited exceptions to the golden parachute payment prohibition
are provided for in cases involving the hiring of an outside executive,
unassisted changes of control and where the FDIC provides written permission to
make such payment. The limitations on indemnification payments apply to all
insured institutions, their subsidiaries and affiliated holding companies.
Generally, this provision prohibits such entities from indemnifying an IAP for
that portion of the costs sustained with regard to a civil or administrative
enforcement action commenced by any Federal banking agency which results in a
final order or settlement pursuant to which the IAP is assessed a civil monetary
penalty, removed from office, prohibited from participating in the affairs of an
insured institution or required to cease and desist from taking certain
affirmative actions. Nevertheless, institutions or holding companies may
purchase commercial insurance to cover such expenses (except for judgments or
penalties) and the institutions or holding company may advance legal expenses to
the IAP if its board of directors makes certain specific findings and the IAP
agrees in writing to reimburse the institution if it is ultimately determined
that the IAP violated a law, regulation or other fiduciary duty.

       ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS. The
activities and equity investments of FDIC-insured, state-chartered banks are
limited by Federal law to those that are permissible for national banks. An
insured state bank generally may not acquire or retain any equity investment of
a type, or in an amount, that is not permissible for a national bank. An insured
state bank is not prohibited from, among other things, (I) acquiring or
retaining a majority interest in a subsidiary, (ii) investing as a limited
partner in a partnership the sole purpose of which is direct or indirect
investment in the acquisition, rehabilitation or new construction of a qualified
housing project, provided that such limited partnership investments may not
exceed 2% of the bank's assets, (iii) acquiring up to 10% of the voting stock of
a company that solely provides or reinsures directors' and officers' liability
insurance, and (iv) acquiring or retaining the voting shares of a depository
institution if certain requirements are met.

       COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act ("CRA"),
as implemented by FDIC regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the FDIC, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. AS OF THE DATE OF ITS MOST RECENT REGULATORY EXAMINATION,
THE BANK WAS RATED "SATISFACTORY" WITH RESPECT TO ITS CRA COMPLIANCE.

       In May 1995, the FDIC and other Federal banking agencies promulgated
final revisions to their regulations concerning the CRA. The revised regulations
generally are intended to provide clearer guidance to financial institutions on
the nature and extent of their obligations under the CRA and the methods by
which the obligations will



                                       32
<PAGE>   35

be assessed and enforced. Among other things, the revised regulations substitute
for the current process-based assessment factors a new evaluation system that
would rate institutions based on their actual performance in meeting community
credit needs. In particular, the revised system will evaluate the degree to
which an institution is performing under tests and standards judged in the
context of information about the institution, its community, its competitors and
its peers with respect to (I) lending, (ii) service delivery systems and (iii)
community development. The revised regulations also specify that an
institution's CRA performance will be considered in an institution's expansion
(e.g., branching) proposals and may be the basis for approving, denying or
conditioning the approval of an application. Management of the Bank currently is
unable to predict the effects of the regulations under the CRA as recently
adopted.

       QUALIFIED THRIFT LENDER TEST. For the Company to qualify as a savings and
loan holding company, the Bank is required to meet a QTL test set forth under
Section 10(m) of the Home Owners Loan Act, as amended, ("HOLA"). Under Section
2303 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996, a
savings institution can comply with the QTL test set forth in the HOLA and
implementing regulations or by qualifying as a domestic building and loan
association as defined in Section 7701(a)(19) of the Code. The QTL test set
forth in HOLA requires that a depository institution must have at least 65% of
its portfolio assets (which consist of total assets less intangibles, properties
used to conduct the savings institution's business and liquid assets not
exceeding 20% of total assets) in qualified thrift investments on a monthly
average basis in nine of every 12 months. Loans and mortgage-backed securities
secured by domestic residential housing, as well as certain obligations of the
FDIC and certain other related entities may be included in qualifying thrift
investments without limit. Certain other housing-related and non-residential
real estate loans and investments, including loans to develop churches, nursing
homes, hospitals and schools, and consumer loans and investments in subsidiaries
engaged in housing-related activities may also be included. Qualifying assets
for the QTL test include investments related to domestic residential real estate
or manufactured housing, the book value of property used by an institution or
its subsidiaries for the conduct of its business, an amount of residential
mortgage loans that the institution or its subsidiaries sold within 90 days of
origination, shares of stock issued by any FHLB and shares of stock issued by
the FHLMC or the FNMA. The Bank was in compliance with the QTL test as of
September 30, 1998, with 100% of its assets invested in qualified thrift
investments.

         LEGISLATIVE AND REGULATORY PROPOSALS. Proposals to change the laws and
regulations governing the operations and taxation of, and federal insurance
premiums paid by, savings banks and other financial institutions and companies
that control such institutions are frequently raised in Congress, state
legislatures and before the OTS, FDIC and other bank regulatory authorities. The
likelihood of any major changes in the future and the impact such changes might
have on the Bank are impossible to determine. Similarly, proposals to change the
accounting treatment applicable to savings banks and other depository
institutions are frequently raised by the SEC, the FDIC, the IRS and other
appropriate authorities, including, among others, proposals relating to fair
market value accounting for certain classes of assets and liabilities. The
likelihood and impact of any additional future accounting rule changes and the
impact such changes might have on the Bank are impossible to determine.

         FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of
Dallas, which is one of 12 regional FHLBs that administers the home financing
credit function of savings institutions and commercial banks. Each FHLB serves
as a source of liquidity for its members within its assigned region. It is
funded primarily from proceeds derived from the sale of consolidated obligations
of the FHLB System. It makes loans to members (i.e., advances) in accordance
with policies and procedures established by its Board of Directors. As of
September 30, 1998, the Bank's advances from the FHLB of Dallas amounted to
$17.0 million or 7.5% of its total liabilities.

         As a member, the Bank is required to purchase and maintain stock in the
FHLB of Dallas in an amount equal to the greater of 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of total advances. At September 30, 1998, the
Bank had $1.6 million in FHLB stock, which was in compliance with this
requirement.

         The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or




                                       33
<PAGE>   36

interest subsidies on advances targeted for community investment and low- and
moderate-income housing projects. These contributions have adversely affected
the level of FHLB dividends paid and could continue to do so in the future.
These contributions also could have an adverse effect on the value of FHLB stock
in the future. For the year ended September 30, 1998, dividends paid by the FHLB
of Dallas to the Bank totaled $105,000.

         FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all
depository institutions to maintain reserves against their transaction accounts
(primarily NOW and Super NOW checking accounts) and non-personal time deposits.
At September 30, 1998, the Bank was in compliance with such requirements.

       The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy applicable liquidity requirements.
Because required reserves must be maintained in the form of vault cash or a
noninterest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce a bank's earning assets. The amount of funds
necessary to satisfy this requirement has not had a material affect on the
Bank's operations.

         TEXAS SAVINGS BANK LAW. To qualify as a Texas Savings Bank,
Jacksonville must qualify under and continue to meet the asset test of Section
7701(a)(19), Internal Revenue Code of 1986, relating to domestic savings and
loan associations. A Texas savings bank may make a loan or investment or engage
in an activity permitted under state law for a bank or savings and loan
association or under federal law for a federal savings and loan association,
savings bank, or national bank if the financial institution's principal office
is located in this state. A savings bank may make commercial loans up to 50% of
the savings bank's total assets. A savings bank must maintain in its portfolio
not less than 15 percent of the savings bank's deposits from its local service
area in: (1) first and second lien residential mortgage loans or foreclosed
residential mortgage loans originated in the savings bank's local service area;
(2) home improvement loans; (3) interim residential construction loans; (4)
mortgage-backed securities secured by loans in the savings bank's local service
area; and (5) loans for community reinvestment. The loans to one borrower rules
for Texas savings bank may not be less restrictive than those applicable to
savings associations under the Federal Home Owners' Loan Act ("HOLA"). Under the
HOLA, unless more stringent conditions are imposed by the Director of the OTS,
savings associations are subject to the lending limits applicable to national
banks, which include a limitation on loans to any one borrower of 15% of
capital. Notwithstanding that limitation, savings associations generally may
make loans to one borrower not to exceed $500,000, to develop domestic
residential housing units, not to exceed the lesser of $30,000,000 or 30 percent
of the savings association's unimpaired capital and unimpaired surplus. For
loans to finance the sale of real property acquired in satisfaction of debts
previously contracted, loans to any one borrower may not exceed 50 percent of
unimpaired capital and surplus. A Texas savings bank or subsidiary may not
invest in an equity security unless the security qualifies as an investment
grade security under rules adopted by the Texas Commissioner and Finance
Commission or the security is an eligible investment for a federal savings and
loan association. Investments in subsidiaries are generally limited to 10
percent of the savings bank's total assets. Unless approved in advance by the
Commissioner, a Texas savings bank must maintain an amount equal to at least 10
percent of its average daily deposits for the most recently completed calendar
quarter in liquid investments specified by statute, including cash, reserve
balances, and readily marketable investments.



                                       34
<PAGE>   37

ITEM 2. PROPERTIES.

At September 30, 1998, Jacksonville conducted its business from its main office
at Commerce & Neches Streets, Jacksonville, Texas, and six full-service branches
in Cherokee County and surrounding counties.

       Set forth below is certain information with respect to the office and
other properties of Jacksonville at September 30, 1998.

<TABLE>
<CAPTION>
DESCRIPTION/                                 LEASED/          NET BOOK VALUE
ADDRESS                                       OWNED            OF PROPERTY              DEPOSITS
- ---------------------------------          -----------       ----------------     ------------------

                                                              (In Thousands)
<S>                                           <C>                <C>                     <C>
Main Office                                   Owned              $ 538                   $ 76,636
Commerce and Neches Streets
Jacksonville, Texas

Branch Office                                 Owned                691                     55,218
1015 North Church Street
Palestine, Texas

Branch Office                                 Owned                 81                     13,948
107 East Fourth Street
Rusk, Texas

Branch Office                                 Owned                511                     16,171
1412 Judson Road
Longview, Texas

In-Store Branch Office                        Leased               219                      1,428
Wal-Mart Supercenter
515 E. Loop 281
Longview, Texas

Branch Office                                 Owned                463                     22,319
617 South Palestine Street
Athens, Texas

Branch Office                                 Owned              1,433                     18,770
5620 Old Bullard Road
Tyler, Texas
</TABLE>


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

         In addition to the above offices, Jacksonville owns two other
properties: (1) Lots in Spring Park South Estates No. 3, Jacksonville, Texas;
(2) Lots in Spring Park South Estates No. 2, Jacksonville, Texas (net book value
of both properties: $1.00).





                                       35
<PAGE>   38

ITEM 3.  LEGAL PROCEEDINGS.

         Jacksonville is involved in routine legal proceedings occurring in the
         ordinary course of business which, in the aggregate, are believed by
         management to be immaterial to the financial condition of Jacksonville.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         Not applicable.

PART II.

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS.

         The information required herein is incorporated by reference from page
         42 of the Company's 1998 Annual Report to Stockholders, which is
         included herein as Exhibit 13 ("Annual Report").

ITEM 6.  SELECTED FINANCIAL DATA.

         The information required herein is incorporated by reference from page
         1 of the Company's 1998 Annual Report.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS.

         The information required herein is incorporated by reference from
         pages 2 to 6 of the Company's 1998 Annual Report.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

         The information required herein is incorporated by reference from page
         3 of the Company's 1998 Annual Report.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The information required herein is incorporated by reference from pages
         17 to 22 of Company's 1998 Annual Report.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         Not applicable.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         The information required herein is incorporated by reference from pages
         5 to 10 of the Company's definitive proxy statement, dated December 26,
         1998, ("Proxy Statement").

ITEM 11. EXECUTIVE COMPENSATION.

         The information required herein is incorporated by reference from
         pages 10 to 14 of the Company's Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The information required herein is incorporated by reference from
         pages 3 and 4 of the Company's Proxy Statement.





                                       36
<PAGE>   39

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information required herein is incorporated by reference from
         page 16 of the Company's Proxy Statement.

PART IV.

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K.

         (a)    Documents filed as part of this Report

                (1)    The following financial statements are incorporated by
                reference from Item 8 hereof (see Exhibit 13 attached hereto):
                Independent Auditor's Report

                Consolidated Statements of Financial Condition at September 30,
                1998 and 1997

                Consolidated Statements of Earnings for the Years Ended
                September 30, 1998, 1997 and 1996

                Consolidated Statements of Changes in Stockholders' Equity for
                the Years Ended September 30, 1998, 1997 and 1996

                Consolidated Statements of Cash Flows for the Years Ended
                September 30, 1998, 1997, and 1996

                Notes to Consolidated Financial Statements

                (2)    All schedules for which provision is made in the
                applicable accounting regulations of the Securities and
                Exchange Commission are omitted because of the absence of
                conditions under which they are required or because the required
                information is included in the financial statements and related
                notes thereto.








                                       37
<PAGE>   40

     (3)      The following exhibits are filed as part of this Form 10-K and
                this list includes the Exhibit Index.
<TABLE>
<CAPTION>
                   NO.                                 EXHIBITS
              ------------       ----------------------------------------
                 <S>             <C>
                   3.1           Articles of Incorporation*
                   3.2           Bylaws*
                   4.1           Specimen Common Stock Certificate*
                 10.1(a)         1994 Stock Incentive Plan**(1)
                 10.1(b)         1994 Directors' Stock Option Plan**(1)
                 10.1(c)         1994 Management Recognition Plan***(1)
                 10.1(d)         1996 Management Recognition Plan***(1)
                 10.1(e)         1996 Stock Option Plan**(1)
                 10.1(f)         Employee Stock Ownership Plan*(1)
                 10.1(g)         Acquisition Agreement by and among Jacksonville
                                 Bancorp, Inc., Jacksonville IHC, Inc., and
                                 Jacksonville Savings and Loan Association
                  10.2           1996 Management Recognition Plan***(1)
                  10.6           Employment Agreement by and among Jacksonville
                                 Bancorp, Inc., Jacksonville Savings and Loan
                                 Association and Jerry M. Chancellor
                                 (representative of a similar agreement entered
                                 into with Bill W. Taylor)*(1)
                   13            1998 Annual Report to Stockholders specified
                                 portion (p.1 to 15) of the Registrant's Annual
                                 Report to Stockholders for the year ended September
                                 30, 1998
                   23            Consent of Independent Auditors
                   27            Financial Data Schedule
</TABLE>

       *Incorporated herein by reference to the Registrant's Registration
Statement No.  33-81015 on Form S-1.

       **Incorporated herein by reference to the Registrant's Registration
Statement No. 333-18031 on Form S-8.

       ***Incorporated herein by reference to the Registrant's Form 10-K filed
as of December 30, 1997.

       (b) Reports on Form 8-K during the quarter ended September 30, 1998:

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

(1) Management contract or compensatory plan or arrangement.






                                       38
<PAGE>   41

           1.              On September 9, 1998, the Company filed a
                           current report on Form 8-K reporting the
                           declaration of a $0.125 per share dividend.

           2.              On August 6, 1998, the Company filed a
                           current report on Form 8-K announcing 3rd
                           quarter earnings for the period ended June
                           10, 1998.

           3.              On July 27, 1998, the Company filed a
                           current report on Form 8-K announcing
                           approval to repurchase 5% stock buyback.

       (c) See (a)(3) above for all exhibits filed herewith and the Exhibit
Index.

       (d) There are no other financial statements and financial statement
schedules which were excluded from Item 8 which are required to be included
herein.






                                       39
<PAGE>   42

                                   SIGNATURES

       Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                        JACKSONVILLE BANCORP, INC.

DECEMBER 22, 1998                             By:/s/ Jerry M. Chancellor
                                                 -------------------------------
                                                 Jerry M. Chancellor
                                                 Chief Executive Officer

       Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.


/s/ Jerry M. Chancellor                                        DECEMBER 22, 1998
- ----------------------------------------------------
Jerry M. Chancellor, Director and Chief Executive
  Officer (Principal Executive Officer)


/s/ W. G. Brown                                                DECEMBER 22, 1998
- ----------------------------------------------------
W. G. Brown, Chairman


/s/ Charles Broadway                                           DECEMBER 22, 1998
- ---------------------------------------------------
Charles Broadway, Director


/s/ Ray W. Beall                                               DECEMBER 22, 1998
- ----------------------------------------------------
Ray W. Beall, Director






                                       40
<PAGE>   43

/s/ Dr. Joe Tollett                                            DECEMBER 22, 1998
- ----------------------------------------------------
Dr. Joe Tollett, Director


/s/ Bill W. Taylor                                             DECEMBER 22, 1998
- ----------------------------------------------------
Bill W. Taylor, Director and
  Executive Vice President (Principal Financial
  and Accounting Officer)


/s/ Robert Brown                                               DECEMBER 22, 1998
- ----------------------------------------------------
Robert Brown, Director

                                 END OF DOCUMENT







                                       41

<PAGE>   1
                         [JACKSONVILLE BANCORP LOGO]


                               1998 ANNUAL REPORT










<PAGE>   2


Dear Stockholder:

         On behalf of your Board of Directors, we take pleasure in presenting
our 1998 annual report.

         Fiscal 1998 was the first full year for our wholly owned operating
subsidiary Jacksonville Savings Bank, SSB ("the Bank"), formerly Jacksonville
Savings and Loan Association, to operate under a Texas Savings Bank charter.
We are pleased with the results.  Having the word "Bank" in our name has made
the public aware that we offer most all banking products rather than those
typically thought of as offered by thrifts.  Our fiscal 1998 net profit
reflected our primary objective of profitable growth by utilizing the positive
aspects of the charter change.

         During fiscal 1998, the Bank opened its first in-store branch in the
Wal-Mart Supercenter located at 515 E. Loop in Longview, Texas. After nine
months of operation the branch has met most of management's expectations.  At
September 30, 1998 the branch had deposits of $1.4 million, shy of pro-forma
estimates by $260,000, while loan balances for the same period reached $1.6
million which exceeded estimates by $130,500.

         Our results of operations in fiscal 1998 reflected another year of
solid performance.  Company assets increased from $233.9 million to $263.2
million, an increase of 12.5%.  Loans receivable, net rose by 9.8% from $174.0
million in 1997 to $191.2 million in 1998. Loan originations for the year
totaled $89.3 million of which the company sold $23 million in loans to Federal
Home Loan Mortgage Corporation and retained servicing rights on these loans,
and $5.2 million whole loans were sold to the secondary market, servicing
released.  The growth in the loans originated is indicative of the strength of
our market share in the East Texas area.

         Included in our loan growth are increases in consumer loan volume and
the addition of home equity loans to our portfolio.  Consumer loans increased
from $14.9 million at September 30, 1997 to $20.7 million at September 30,
1998.  The State of Texas approved home equity lending beginning January, 1998
and through September 30, 1998 we had originated $9.0 million in home equity
loans.

         The Company posted growth of $12.5 million in deposits to $204.5
million at September 30, 1998 compared to $192.0 million for the same period in
1997.  Composite cost of funds on deposits increased only slightly from 4.71%
in 1997 to 4.76% in September 1998.










<PAGE>   3
         Net income for the year totaled $3.3 million, or $1.44 per share basic
and $1.38 per share diluted, as compared to $3.2 million, or $1.30 per share
basic and $1.27 per share diluted for fiscal 1997.

         While the 1998 fiscal year results were favorable, we were
disappointed that our stock value, following the down trend of the market, fell
from $17.25 at the beginning of the fiscal year to $15.50 at September 30,
1998, after reaching a high of $24.75 on December 31, 1997.  We hope that our
solid performance and steady earnings growth will improve the value of your
stock as we are committed to meet our stockholders expectations for a
competitive return on your investment.  Book value of the stock at September
30, 1998 was $14.88 per share and we paid total dividends for the year of $.50
per share.

         Because of the market value of our stock, management felt it was an
excellent opportunity to continue to repurchase Treasury shares in order to
create more stockholder value.  During the year the Company purchased a total
of 54,825 shares bringing total Treasury shares to 285,925 at fiscal year end.

         With our strong growth in assets our capital to asset ratio declined
from 14.44% in 1997 to 13.51% in 1998.  Our capital position is still in excess
of most of our industry peers.  While this limits our return on equity to some
extent, it supplies substantial assurance that the Company will remain strong
even with a down turn of the economy. In fiscal 1999 we expect to continue to
leverage the excess capital through controlled growth in an effort to improve
your rate of return.

         Our company has remained diligent in becoming "Year 2000" compliant.
Our in-house system has been through all phases of our Year 2000 Compliance
Project.  A full in-house system test was completed successfully on November 6,
1998.  All internal programs have been placed into production and our in-house
system is considered to be Year 2000 compliant.  For external vendors we are
still in the testing stage which is expected to be complete by December 31,
1998.

         In 1999 we will strive to gain more market share in East Texas by
offering competitive banking products in a friendly customer oriented
atmosphere. The Board of Directors, Management and Employees of your Company
remain committed to maximizing the value of your investment in Jacksonville
Bancorp, Inc.  We thank you for the confidence that you have placed in the
Company and look forward to reporting continued successes in the future.



Sincerely,


/s/ JERRY CHANCELLOR


Jerry Chancellor
President & CEO









<PAGE>   4
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>

                                                                                                         Page
                                                                                                         ----
<S>                                                                                                       <C>
President's Letter to Stockholders

Selected Consolidated Financial Data  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    1

Management's Discussion and Analysis of Financial Condition
    and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    2
         Average Balances, Net Interest Income and Yields Earned and Rates Paid . . . . . . . . . . . .    7
         Rate/Volume Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    8

Comparison of Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    9

Liquidity & Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   12

Independent Auditors' Report  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   16 

Consolidated Financial Statements:
         Consolidated Statements of Financial Condition . . . . . . . . . . . . . . . . . . . . . . . .   17 
         Consolidated Statements of Earnings  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   18 
         Consolidated Statements of Stockholders' Equity  . . . . . . . . . . . . . . . . . . . . . . .   19 
         Consolidated Statements of Cash Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   21 

Notes to Consolidated Financial Statements  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   23 

Stock Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   42

Directors and Executive Officers  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   43

Banking Locations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   43

Stockholder Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   44

Transfer Agent/Registrar  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   44

Shareholder Requests  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   44
</TABLE>
<PAGE>   5
                      SELECTED CONSOLIDATED FINANCIAL DATA
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

    The following selected consolidated financial and other data of the Company
does not purport to be complete and is qualified in its entirety by reference
to the more detailed financial information contained elsewhere herein.





<TABLE>
<CAPTION>

                                                                               SEPTEMBER 30
                                                    ==================================================================
                                                      1998          1997           1996          1995          1994
                                                    =======       =======        ========      =======       =========
 <S>                                                  <C>            <C>           <C>            <C>         <C>
 SELECTED FINANCIAL CONDITION AND OTHER DATA:
 Total assets ....................................... $263,160       $233,944      $217,856       $199,251    $187,021
 Cash and cash equivalents ..........................   10,868          4,114         5,193          8,051       7,003
 Investment securities ..............................   20,013         25,931        33,805         42,907      44,892
 Mortgage-backed securities .........................   31,866         21,217        12,107          3,442       2,995
 Loans receivable, net ..............................  191,153        174,044       158,034        135,933     123,133
 Foreclosed real estate, net.........................      531            526         1,051          2,052       2,549
 Deposits ...........................................  204,490        192,033       174,328        173,811     159,343
 Borrowings .........................................   17,000          2,000         2,000            358       4,461
 Stockholders' equity ...............................   35,562         33,788        35,431         20,331      18,989
 Full-service offices ...............................        7              6             6              6           5
</TABLE>

<TABLE>
<CAPTION>
                                                                        YEAR ENDED SEPTEMBER 30,
                                                    ==================================================================
                                                      1998          1997           1996          1995          1994
                                                    =======       =======        ========      =======       =========
 <S>                                                  <C>            <C>           <C>            <C>         <C>

 SELECTED OPERATING DATA:
 Total interest income ...........................     $18,541        $17,172       $15,394        $13,232     $12,895
 Total interest expense ..........................       9,628          8,771         8,453          7,127       5,623
                                                       -------        -------       -------        -------     -------
   Net interest income ...........................       8,913          8,401         6,941          6,105       7,272
 Provision for losses on loans ...................          35            110           100             25          18
                                                       -------        -------       -------        -------     -------
   Net interest income after provision for losses                                                                    
     on loans  ...................................       8,878          8,291         6,841          6,080       7,254

 Noninterest income ..............................       1,554          1,392         1,290            927         970
 Noninterest expense .............................       5,639          5,063         5,846          5,045       4,638
                                                       -------        -------       -------        -------     -------
 Income before income taxes ......................       4,793          4,620         2,284          1,962       3,586
 Income taxes ....................................       1,468          1,380           704            573       1,184
                                                       -------        -------       -------        -------     -------
 Net income ......................................     $ 3,325        $ 3,240       $ 1,580        $ 1,389     $ 2,402
                                                       =======        =======       =======        =======     =======
 Earnings per share(1)
   Basic .........................................     $  1.44        $  1.30       $   .64        $   .56     $   .43
   Diluted .......................................        1.38           1.27           .63            .56         .43
                                                       -------        -------       -------        -------     -------
 Dividends Payout Ratio ..........................       45.25%         36.98%        55.50%         29.47%      19.92%
                                                       =======        =======       =======        =======     =======
</TABLE>

<TABLE>
<CAPTION>
                                                                 AT OR FOR THE YEAR ENDED SEPTEMBER 30,
                                                    ==================================================================
                                                      1998          1997           1996          1995          1994
                                                    =======       =======        ========      =======       =========
 <S>                                                 <C>            <C>           <C>          <C>            <C>    
 SELECTED OPERATING RATIOS(2):                                                                                       
 Return on average assets .......................      1.37%          1.45%          .76%         .73%          1.28% 
 Return on average equity .......................      9.98           9.35          6.13         7.06          16.57 
 Average equity to average assets ...............     13.74          15.54         12.41        10.37           7.73 
 Equity to assets at end of period ..............     13.51          14.44         16.27        10.20          10.15 
 Interest rate spread(3) ........................      3.21           3.32          2.99         3.08           3.95 
 Net interest margin(3) .........................      3.84           3.94          3.50         3.40           4.12 
 Non-performing loans and troubled debt                                                                              
   restructurings to total loans at end of                                                                           
   period(4) ....................................       .55            .59           .76          .70            .81   
                                                                                                                     
 Non-performing assets and troubled debt                                                                             
   restructurings to total assets at end of 
   period(4) ....................................       .60            .66          1.03         1.51           1.90 
 Average interest-earning assets to average                                                                          
   interest-bearing liabilities .................    115.38         114.95        111.92       107.81         105.28 
 Net interest income after provision for loan                                                                        
   losses to total noninterest expense ..........    157.45         163.78        117.01       120.52         156.40 
</TABLE>


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

(1) Earnings per share amounts for prior years have been restated to give
    effect to the exchange ratio of 1.41785 in connection with the
    Reorganization effective March 29, 1996.

(2) With the exception of end of period ratios, all ratios are based on average
    monthly balances during the periods and are annualized where appropriate.

(3) Interest rate spread represents the difference between the weighted average
    yield on interest-earning assets and the weighted average rate on
    interest-bearing liabilities.  Net interest margin represents net interest
    income as a percentage of average interest-earning assets.

(4) Non-performing loans consist of non-accrual loans and accruing loans that
    are contractually past due 90 days or more, non-performing assets consist
    of non-performing loans and real estate acquired by foreclosure, deed in
    lieu thereof or deemed insubstance foreclosure and troubled debt
    restructurings consist of restructured debt in accordance with Statement of
    Financial Accounting Standards No. 15.


                                      1


<PAGE>   6
                     MANAGEMENT DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

         Jacksonville Bancorp, Inc. (the "Company"), through its wholly-owned
subsidiary, Jacksonville IHC, Inc., ("IHC") and Jacksonville Savings Bank, SSB
("Jacksonville"), wholly owned subsidiary of IHC, is primarily engaged in
attracting deposits from the general public and using those and other available
sources of funds to originate loans secured by single-family residences located
in Cherokee County and surrounding counties in East Texas.  To a lesser extent,
Jacksonville also originates construction loans, land loans, consumer loans,
and home equity loans that began January 1, 1998 after State of Texas approval.
It also has a significant amount of investments in mortgage-backed securities
and United States Government and federal agency obligations.

         The profitability of Jacksonville depends primarily on its net
interest income, which is the difference between interest and dividend income
on interest-earning assets, principally loans, mortgage-backed securities and
investment securities, and interest expense on interest-bearing deposits and
borrowings.  Jacksonville's net earnings also is dependent, to a lesser extent,
on the level of its noninterest income (including servicing fees and other
fees) and its noninterest expenses, such as compensation and benefits,
occupancy and equipment insurance premiums, and miscellaneous other expenses,
as well as federal income tax expense.

ASSET AND LIABILITY MANAGEMENT

         The ability to maximize net interest income is largely dependent upon
the achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate-sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time.  The difference, or the interest rate repricing "gap," provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates.  A gap is considered positive when
the amount of interest rate-sensitive assets exceeds the amount of interest
rate-sensitive liabilities, and is considered negative when the amount of
interest rate-sensitive liabilities exceeds the amount of interest
rate-sensitive assets.  Generally, during a period of rising interest rates, a
negative gap within shorter maturities would adversely affect net interest
income, while a positive gap within shorter maturities would result in an
increase in net interest income, and during a period of falling interest rates,
a negative gap within shorter maturities would result in an increase in net
interest income while a positive gap within shorter maturities would have the
opposite effect.

         The lending activities of savings associations have historically
emphasized long-term, fixed-rate loans secured by single-family residences, and
the primary source of funds of such institutions has been deposits.  The
deposit accounts of savings associations generally bear interest rates that
reflect market rates and largely mature or are subject to repricing within a
short period of time. This factor, in combination with substantial investments
in long-term, fixed-rate loans, has historically caused the income earned by
savings associations on their loan portfolios to adjust more slowly to changes
in interest rates than their cost of funds.


                                      2

<PAGE>   7
         Jacksonville originates both fixed- and variable-rate residential real
estate loans as market conditions dictate.  Prior to November 1980,
Jacksonville, like virtually all savings associations, originated only
fixed-rate loans and held them in portfolio until maturity.  As a result of the
problems caused by holding fixed-rate loans in a rapidly increasing
interest-rate environment, changes in regulations to allow for variable-rate
loans and consumer demand for such loans during periods of high interest rates,
in the 1980's Jacksonville began to transform its portfolio into loan products
the interest rates of which adjust periodically.  As a result, Jacksonville's
loan portfolio, as of September 30, 1998 consisted of 38.1% of adjustable or
floating rate loans.

         In order to meet its customers' demand for fixed-rate loans during
periods of lower interest rates, until 1994 Jacksonville followed a policy of
selling to third parties a high percentage of the fixed-rate loans it
originated while retaining its variable-rate loans.  The mixture of
originations for sale and originations for portfolio varies depending on the
general mix of interest-earning assets Jacksonville then currently holds in its
portfolio and other factors such as market fees for loan sales and the overall
interest-rate environment. As interest rates declined in late 1991,
Jacksonville originated an increasingly higher percentage of fixed-rate
residential first mortgage loans and continued to sell approximately 90% of
such loans upon origination.  Since 1994, it has been Jacksonville's policy to
retain a large portion of its fixed-rate residential first mortgage loans with
terms of 15 years or less.

         Notwithstanding the foregoing, however, because Jacksonville's
interest-bearing liabilities which mature or reprice within short periods
substantially exceed its earning assets with similar characteristics, material
and prolonged increases in interest rates generally would adversely affect net
interest income, while material and prolonged decreases in interest rates
generally, but to a lesser extent because of their historically low levels,
would have the opposite effect.

         The Bank's interest rate risk and asset-liability management are the
responsibility of the Interest Rate Risk Committee which reports to the Board
of Directors and is comprised of members of the Bank's senior management.  The
Committee is actively involved in formulating the economic projections used by
the Bank in its planning and budgeting process and establishes policies which
monitor and coordinate the Bank's sources, uses and pricing of funds.

         Interest rate risk, including mortgage prepayment risk, is the most
significant non-credit related risk to which the Bank is exposed.  Net interest
income, the Bank's primary source of revenue, is affected by changes in
interest rates as well as fluctuations in the level and duration of assets and
liabilities on the Bank's balance sheet.

         Interest rate risk can be defined as the exposure of the Bank's net
interest income or financial position to adverse movements in interest rates.
In addition to directly impacting net interest income, changes in the level of
interest rates can also affect, (i) the amount of loans originated and sold by
the institution, (ii) the ability of borrowers to repay adjustable or variable
rate loans, (iii) the average maturity of loans, which tend to increase when
new loan rates are substantially higher than rates on existing loans and,
conversely, decrease when rates on new loans are substantially lower than rates
on existing loans, (iv) the value of the Bank's mortgage loans and the
resultant ability to realize gains on the sale of such assets and (v) the
carrying value of investment securities classified as available-for-sale and
the resultant adjustments to shareholder's equity.


                                      3
<PAGE>   8
         The primary objective of the Bank's asset-liability management is to
maximize net interest income while maintaining acceptable levels of interest
rate sensitivity.  To accomplish this the Bank monitors interest rate
sensitivity by use of a sophisticated simulation model which analyzes resulting
net interest income under various interest rate scenarios and anticipated
levels of business activity.  Complicating management's efforts to measure
interest rate risk is the uncertainty of assumptions used for the maturity,
repricing, and/or runoff characteristics of some of the Bank's assets and
liabilities.

         To cope with these uncertainties, management gives careful attention
to its assumptions.  For example, certain of the Bank's interest-bearing
deposit products (NOW accounts, savings and money market deposits) have no
contractual maturity and based on historical experience have only a fractional
sensitivity to movements in market rates.  Because management believes it has
some control with respect to the extent and timing of rates paid on
non-maturity deposits, certain assumptions based on historical experience are
built into the model.  Another major assumption built into the model involves
the ability customers have to prepay loans, often without penalty.  The risk of
prepayment tends to increase when interest rates fall.  Since future prepayment
behavior of loan customers is uncertain, the resultant interest rate
sensitivity of loan assets cannot be determined exactly.  The Bank utilizes
market consensus prepayment assumptions related to residential mortgages.

         The Bank uses simulation analysis to measure the sensitivity of net
interest income over a specified time period (generally 1 year) under various
interest-rate scenarios using the assumptions discussed above.  The Bank's
policy on interest rate risk specifies that if interest rates were to shift
immediately up or down 200 basis points, estimated net interest income should
decline by less than 20%.  Management estimates, based on its simulation model,
that an instantaneous 2% increase in interest rates at September 30, 1998,
would result in less than a 7.50% decrease in net interest income over the next
twelve months, while a 2% decrease in rates would result in less than an 2.15%
decrease in net interest income over the next twelve months.  It should be
emphasized that the results are highly dependent on material assumptions such
as those discussed above.  It should also be noted that the exposure of the
Bank's net interest income to gradual and/or modest changes in interest rates
is relatively small.

         At September 30, 1998, the Bank was within the acceptable ranges set
forth in the Bank's Interest Rate Risk policy.

YEAR 2000 COMPLIANCE

         Jacksonville has been actively addressing the Year 2000 problem since
1996.  The data system operated by Jacksonville is maintained by an in-house
staff consisting of five personnel.  The Year 2000 Compliance Project consist
of five phases; Awareness, Assessment, Modification, Testing, and
Implementation.  The in-house system has been through all five phases of the
Year 2000 Compliance Project.  A full system test was completed successfully on
November 6, 1998.  All internal programs have been placed into production and
Jacksonville's system is considered to be Year 2000 compliant. Since the main
system has been through all five phases of the plan, the possibility of failure
is minute.  However, as Jacksonville employs a staff of programmers, any
remediation to software problems that may occur would be rapid.


                                      4
<PAGE>   9
         For all software supplied by external vendors three phases of the plan
have been completed and the staff is currently working in phase four testing.
This phase is expected to be completed by December 31, 1998.  Should any of the
small number of external vendors not be ready by the March 31, 1999 deadline, a
replacement would be introduced.

         The cost of the Year 2000 plan is considered to be minimal to the
institution since an in-house staff has been able to perform the majority of
the necessary steps toward Y2K compliance.

CHANGES IN FINANCIAL CONDITION

         At September 30, 1998, Jacksonville's assets totaled $263.2 million,
as compared to $233.9 million at September 30, 1997.  Total assets increased
$29.2 million, or 12.5%, from September 30, 1997 to September 30, 1998.  The
increase in total assets during fiscal 1998 was principally the result of a
$17.1 million or 9.8% increase in loans receivable, net from $174.0 million at
September 30, 1997 to $191.2 million at September 30, 1998.  The increase was
primarily the result of an increase in single-family residential loans of $8.9
million or 6.3%, an increase in construction loans, net of $4.7 million or
43.4% and an increase in consumer loans of $5.7 million or 38.4% during the
period.  A $7.0 million, or 31.0% decrease in investment securities, held to
maturity; and a $2.8 million, or 28.3% decrease in mortgage-backed securities,
held to maturity, was more than offset  by a $13.4 million increase in
mortgage-backed securities, available for sale and a $1.1 million, or 30.3%
increase in investment securities available for sale.  The increase in
mortgage-backed securities, available for sale, was primarily due to the
Jacksonville's  decision to implement a limited wholesale growth strategy
involving leveraged investing using FHLB advances to increase earnings.

         During the year ended September 30, 1998, total liabilities increased
$27.5 million or 13.8% to $227.4 million.  This increase was primarily the
result of an increase in total deposits of $12.5 million, or 6.5%; and an
increase in advances from Federal Home Loan Bank of $15.0 million which
proceeds were used to purchase mortgage-backed securities.

         Stockholders equity increased from $33.8 million at September 30, 1997
to $35.6 million at September 30, 1998, an increase of $1.8 million or 5.25%.
The increase was primarily the results of annual earnings after dividends less
the purchase of 54,825 Treasury shares in the amount of $990,000.

         At September 30, 1997, Jacksonville's assets totaled $233.9 million,
as compared to $217.9 million at September 30, 1996.  Total assets increased
$16.0 million, or 7.4%, from September 30, 1996 to September 30, 1997.  The
increase in total assets during fiscal 1997 was principally the result of a
$16.0 million or 10.1% increase in loans receivable, net from $158.0 million at
September 30, 1996 to $174.0 million at September 30, 1997.  The increase
resulted from an increase in single-family residential loans of $8.5 million or
6.5%, an increase in construction loans, net of $1.7 million or 42.9% and an
increase in consumer loans of $6.1 million or 68.4% during the period.  A $4.0
million, or 15.1% decrease in investment securities, held to maturity; a $3.9
million, or 52.9% decrease in investment securities, available for sale; and a
$2.3 million, or 18.9% decrease in mortgage-backed securities, held to
maturity, was more than offset by a $11.4 million increase in mortgage-backed
securities, available for sale.  These adjustments in Jacksonville's investment
and mortgage-backed securities portfolio were a result of management's decision
to use these funds to invest in loan originations and to purchase adjustable
mortgage-backed securities.


                                      5
<PAGE>   10
         During the year ended September 30, 1997, total liabilities increased
$17.9 million or 9.8% to $200.0 million.  This increase was primarily the
result of an increase in total deposits of $17.7 million, or 10.2%; an increase
in accrued expenses and other liabilities of $832,000, offset by a reduction in
the SAIF special assessment payable of $1.1 million.

         Stockholders equity decreased $1.6 million or 4.64% from $35.4 million
in 1996 to $33.8 million in 1997 primarily as a result of annual earnings after
dividends less the purchase of Treasury shares in the amount of $3.4 million.


                                      6
<PAGE>   11
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID

         The following table presents for the periods indicated the total
dollar amount of interest from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollar and rates, and the net interest margin.
The table does not reflect any effect of income taxes.  All average balances
are based on month-end balances.  Management believes that the use of average
monthly balances is representative of its operations.


<TABLE>
<CAPTION>
                                 SEPTEMBER
                                  30, 1998                1998                                     1997                
                                 =========   =================================    ==================================== 
                                  YIELD/     AVERAGE                    YIELD/        AVERAGE                  YIELD/  
                                   RATE      BALANCE     INTEREST        RATE         BALANCE     INTEREST      RATE   
                                 =========   ========    ========     ========    =============   =========   ======== 
                                                                                                                       
                                                                                                                       
 <S>                               <C>     <C>           <C>             <C>        <C>           <C>           <C>    
INTEREST-EARNING ASSETS:                                                                                               
 Loans receivable(3) .............  8.24%   $180,021      $15,442         8.58%      $163,569      $14,094       8.62% 
 Mortgage-backed securities ......  7.03      22,286        1,501         6.74         16,434        1,135       6.91  
 Investment securities ...........  5.97      23.502        1,261         5.36         28,292        1,657       5.86  
 Other interest-earning assets(1)   5.43       6,326          337         5.33          5,041          286       5.68  
                                            --------      -------                    --------      -------             
Total interest-earning assets.....          $232,135      $18,541        7.99%       $213,336      $17,172       8.05% 
                                            --------      =======      =======       --------      =======     ======  
Non-interest-earning assets ......            10,306                                    9,586                          
                                            --------                                 --------                          
   Total assets ..................          $242,441                                 $222,922                          
                                            ========                                 ========                          
INTEREST-BEARING LIABILITIES:
 Transaction accounts.............  2.51%   $ 47,720      $ 1,217         2.55%      $ 43,884      $ 1,140       2.60% 
 Time deposits ...................  5.43     148,546        8,131         5.47        138,863        7,459       5.37  
                                            --------      -------                    --------      -------             
   Total deposits ................  4.69     196,266        9,348         4.76        182,747        8,599       4.71  
                                            --------      -------                    --------      -------             
 Borrowings.......................  5.19       4,923          280         5.69          2,846          172       6.04  
                                            --------      -------                    --------      -------             
   Total interest-bearing                                                                                              
     liabilities .................           201,189      $ 9,628         4.78%       185,593      $ 8,771       4.73% 
                                            --------      =======      =======       --------      =======     ======  
Non-interest-bearing liabilities..             7,949                                    2,688                          
                                            --------                                 --------                          
   Total liabilities .............           209,138                                  188,281                          
                                            --------                                 --------                          
Stockholder's Equity .............            33,303                                   34,641                          
                                            --------                                 --------                          
   Total liabilities and                                                                                               
     stockholders' equity ........          $242,441                                 $222,922                          
                                            ========                                 ========                          
Net interest income;                                                                                                   
 interest rate speed .............                        $ 8,913        3.21%                     $ 8,401       3.32% 
                                                          =======      =======                     =======     ======  
Net interest margin(2)............                                       3.84%                                   3.94% 
                                                                       =======                                 ======  
Average interest-earning                                                                                               
 assets to average interest                                                                                            
 bearing liabilities .............                                     115.38%                                 114.95% 
                                                                       =======                                 ======  
            
</TABLE>


<TABLE>
<CAPTION>
                                             
                                                       1996
                                     ======================================
                                      AVERAGE                      YIELD/
                                      BALANCE        INTEREST       RATE
                                     =========     ===========   ==========
                                   
                                   
 <S>                                   <C>           <C>            <C>
INTEREST-EARNING ASSETS:           
 Loans receivable(3) .............      $145,021      $12,169        8.39%
 Mortgage-backed securities ......         9,561          700        7.32
 Investment securities ...........        37,109        2,170        5.85
 Other interest-earning assets(1)          6,446          355        5.51
                                        --------      -------
Total interest-earning assets.....      $198,137      $15,394        7.77% 
                                        ========      =======     ======= 
Non-interest-earning assets ......         9,565
                                        --------                          
   Total assets ..................      $207,702
                                        ========                          
INTEREST-BEARING LIABILITIES:                       
 Transaction accounts.............      $ 44,661      $ 1,124        2.52%
 Time deposits ...................       131,401        7,266        5.53
                                        --------      -------
   Total deposits ................       176,062        8,390        4.77
                                        --------             
 Borrowings.......................         1,098           63        5.71
                                        --------      -------
   Total interest-bearing                                                 
     liabilities .................       177,160      $ 8,453        4.78%
                                        --------      =======     =======
Non-interest-bearing liabilities..         4,761
                                        --------             
   Total liabilities .............       181,921
                                        --------             
Stockholder's Equity .............        25,781
                                        --------             
   Total liabilities and           
     stockholders' equity ........      $207,702
                                        ========             
Net interest income;               
 interest rate speed .............                    $ 6,941        2.99%
                                                      =======     =======
Net interest margin(2)............                                   3.50%
                                                                  =======
Average interest-earning           
 assets to average interest        
 bearing liabilities .............                                 111.92%
                                                                  =======
            
</TABLE>

- ------------------
  (1) Consists primarily of interest-bearing deposits.

  (2) Net interest margin is net interest income divided by average
      interest-earning assets.

  (3) Includes non-accrual loans which do not significantly impact the average.


                                      7
<PAGE>   12
         The following table describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected Jacksonville's interest income and expense during the periods
indicated.  For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), (ii) changes in rate
(change in rate multiplied by prior year volume), and (iii) total change in
rate and volume.  The combined effect of changes in both rate and volume has
been allocated proportionately to the change due to rate and the change due to
volume.

<TABLE>
<CAPTION>
                                                                
                                                                
                                                      YEAR ENDED SEPTEMBER 30,                      
                              ==========================================================================
                                          1998 VS. 1997                          1997 VS. 1996          
                              ==================================     ================================== 
                                                                                                        
                                     INCREASE                               INCREASE                    
                                    (DECREASE)         TOTAL               (DECREASE)          
                                      DUE TO          INCREASE               DUE TO            TOTAL  
                              ===================== ============     ======================   INCREASE
                                RATE       VOLUME    (DECREASE)        RATE         VOLUME   (DECREASE) 
                              ========    ========= ============     ==========   ========= =========== 
                                                       (DOLLARS IN THOUSANDS)         
<S>                           <C>         <C>          <C>           <C>           <C>        <C>       
INTEREST-EARNING ASSETS:                                                                                
 Loans ......................   $ (65)      $1,413       $1,348       $ 340          $1,585     $1,925  
 Mortgage-backed securities..     (33)         399          366         (37)            472        435  
 Investment securities.......    (133)        (263)        (396)          3            (516)      (513) 
 Other interest-earning                                                                                 
  assets ....................     (19)          70           51          12             (81)       (69) 
                                ------      ------       ------       -----          ------     ------  
   Total interest-earning                                                                               
     assets .................   $(250)      $1,619       $1,369        $318          $1,460     $1,778  
                                ======      ======       ======       =====          ======     ======  
                                                                                                        
INTEREST-BEARING LIABILITIES: 
 Deposits ...................   $   94     $   655       $  749       $(104)         $  313     $  209  
 Other borrowings ...........      (11)        119          108          (5)            114        109  
                                ------     -------       ------       ------         ------     ------  
 Total interest-bearing                                                                                 
 liabilities ................   $   83     $   774       $  857       $(109)         $  427     $  318  
                                ======     =======       ======       ======         ======     ======  
 Increase (decrease in net                                                                              
 interest income ............                            $  512                                 $1,460  
                                                        =======                                 ======  
</TABLE>                        


<TABLE>
<CAPTION>
                             
                             
                                      YEAR ENDED SEPTEMBER 30, 
                                ===================================
                                           1996 VS. 1995
                                ===================================
                             
                                       INCREASE                 
                                      (DECREASE)          TOTAL  
                                        DUE TO           INCREASE
                                ====================== ============
                                  RATE         VOLUME   (DECREASE)
                                =========    ========= ============
                                      (DOLLARS IN THOUSANDS)
<S>                               <C>        <C>         <C>
INTEREST-EARNING ASSETS:     
 Loans ......................      $466        $1,366     $1,832
 Mortgage-backed securities..       (22)          473        451
 Investment securities.......       147          (267)      (120)
 Other interest-earning                                          
  assets ....................       (13)           12         (1)
                                   ----        ------     ------
   Total interest-earning                                       
     assets .................      $578        $1,584     $2,162
                                   ====        ======     ======
                             
INTEREST-BEARING LIABILITIES:                
 Deposits ...................      $922        $  544     $1,466
 Other borrowings ...........       (11)         (129)      (140)
                                   ----        ------     ------
 Total interest-bearing      
 liabilities ................      $911        $  415     $1,326
                                   ====        ======     ======
 Increase (decrease in net   
 interest income ............                             $  836
                                                          ======
</TABLE>                     


                                      8

<PAGE>   13
                      COMPARISON OF RESULTS OF OPERATIONS

         GENERAL.  Jacksonville had net earnings of $3.3 million for the year
ended September 30, 1998 as compared to $3.2 million for the year ended
September 30, 1997.  During fiscal 1998, Jacksonville's net interest income
increased by $511,000 and its noninterest income increased by $162,000 while
the provision for losses on loans decreased $75,000.  Noninterest expense
increased by $576,000, primarily as a result of an increase in compensation and
benefits of $490,000.

         The $86,000 increase in net earnings for fiscal 1998  was primarily
the result of an increase in the average balance of interest-earning assets of
18.8 million or 8.81%.  The amount of such assets increased primarily as a
result of use of the increase in deposits and advances from the Federal Home
Loan Bank, to fund loans receivable and mortgage backed securities.  While the
average balance of interest-earning assets increased, the Bank experienced
generally lower interest rates during the period in which loans were originated
which resulted in the average yield on Jacksonville's interest-earning assets
decreasing by 6 basis points from 8.05% in fiscal 1997 to 7.99% in fiscal 1998.
The positive impact on earnings resulting from the increase in average balance
on Jacksonville's interest-earning assets was offset by a 5 basis point
increase  in the average rate paid on interest-bearing liabilities from 4.73%
in fiscal 1997 to 4.78% in fiscal 1998.  The interest rate spread decreased
from 3.32% in fiscal 1997 to 3.21% in 1998.

         NET INTEREST INCOME.  Net interest income increased by $511,000, or
6.1%, for the year ended September 30, 1998 compared to the year ended
September 30, 1997.  This increase was due primarily to a $1.4 million, or
8.0%, increase in total interest income partially offset by a $857,000 or 9.8%
increase total interest expense.

         The $1.4 million increase in total interest income was the result of
increases in interest on loans receivable of $1.3 million or 9.6%, and interest
on mortgage-backed securities of $367,000 or 32.3%, and increase of $50,000 in
other interest income, offset by a decrease in interest income of $397,000, or
23.9% from investment securities. The increase in interest income from loans
receivable was due primarily to a $16.5 million, or 10.1%, increase in the
average balance of Jacksonville's loan portfolio.  The increase in interest
income from mortgage-backed securities reflects an increase in average balance
from $16.4 million in fiscal 1997 to $22.3 million in fiscal 1998 with a
decrease in average yield from 6.91% to 6.74% in the respective periods.  The
decrease in interest income from investment securities reflects primarily a
decrease in average balance from $28.3 million to $23.5 million, or 16.9%.  The
decrease in the average balance of securities reflects a shift in portfolio mix
by management of Jacksonville as funds from maturing investment securities were
used to purchase mortgage-backed securities and to fund new mortgage loans.
The average yield on loans originated and retained by Jacksonville during
fiscal 1998 was 8.57%.

         The $857,000 increase in total interest expense from $8.8 million for
the year ended September 30, 1997, to $9.6 million for the year ended September
30, 1998, was primarily due to an increase in the growth of deposits, and to an
increase in interest paid on FHLB advances.  The average rate paid on deposits
increased from 4.71% in fiscal 1997 to 4.76 % in fiscal 1998.  The 5 basis
point increase in rates paid on average deposits resulted from managements
decision to offer slightly higher savings rates to attract more market share of
retail money.


                                      9
<PAGE>   14
         Jacksonville's net interest rate spread was 3.21% for the year ended
September 30, 1998 as compared to 3.32% in fiscal 1997.

         PROVISION FOR LOSSES ON LOANS.  Jacksonville's provision for loan
losses was $35,000 for the year ended September 30, 1998 compared to $110,000
for the year ended September 30, 1997. Provisions for losses on loans are
charged to earnings to bring the total allowance to a level deemed appropriate
by management based on historical experience, the volume and type of lending
conducted by Jacksonville, industry standards, the amount of non-performing
assets, general economic conditions, particularly as they relate to
Jacksonville's market area, and other factors related to the collectability of
Jacksonville's loan portfolio.  While non-performing loans increased to
$678,000 during fiscal 1998, net charge-offs for the period were up only
$39,000 and totaled only $57,000 for the year.  The Company's level of net
loans outstanding increased $17.1 million which included an increase of 38.4%
in consumer loans.  Overall economic conditions remained stable for the market
area and credit quality for the applicants showed no material change.  Upon
consideration of such factors, Jacksonville determined that $35,000 in
provisions for losses on loans were appropriate in 1998, primarily because of
the increase in the loan portfolio.   Jacksonville's allowance for losses
amounted to $1.2 million at September 30, 1998 the same amount as allocated on
September 30, 1997.

         NON-INTEREST INCOME.  Noninterest income amounted to $1.6 million for
the year ended September 30, 1998 compared to $1.4 million in fiscal 1997.  The
$162,000 increase  was due primarily to an increase in fees and deposit service
charges of $168,000; an increase of $61,000 in other noninterest income
partially offset by a decrease in income from origination of loan servicing of
$22,000, and a decrease of $44,000 in real estate operations, net.  The
increase in income from fees and deposit service charges reflects an increase
in loan originations and an increase in service charges on deposits.

         NON-INTEREST EXPENSE.  Noninterest expense amounted to $5.6 million
for the year ended September 30, 1998 compared to $5.1 million during fiscal
1997.  The primary reason for the $576,000, or 11.4% increase in noninterest
expense during fiscal 1998 was from increases in compensation and benefits of
$490,000; in provisions for real estate losses of $89,000, and other
noninterest expenses of $54,000, offset by a reduction in insurance expense of
$57,000.

         INCOME TAXES.  Income tax expense amounted to $1.5 million during the
year ended September 30, 1998, compared to $1.4 million in fiscal 1997.  The
changes in such amounts primarily reflect differences in gross income levels of
Jacksonville.  See Note 11 to Consolidated Financial Statements.


COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND
1996

          GENERAL.  Jacksonville had net earnings of $3.2 million for the year
ended September 30, 1997 as compared to $1.6 million for the year ended
September 30, 1996.  During fiscal 1997, Jacksonville's net interest income
increased by $1.5 million and its noninterest income increased by $102,000
while the provision for losses on loans increased $10,000.  Noninterest expense
decreased by $783,000, primarily as a result of the payment of the SAIF special
assessment of $1.1 million in 1996; offset by an increase of $292,000 in
compensation and benefits.

                                      10
<PAGE>   15
         The $1.6 million increase in net earnings for fiscal 1997  was
primarily the result of an increase in the average balance of interest-earning
assets of $15.2 million or 7.7%.  The amount of such assets increased primarily
as a result of use of the increase in deposits to fund loans receivable and
mortgage backed securities.  The amount of the increased earnings was enhanced
by generally higher interest rates during the period in which the loans were
originated which resulted in the average yield on Jacksonville's
interest-earning assets increasing by 28 basis points from 7.77% in fiscal 1996
to 8.05% in fiscal 1997.  The positive impact on earnings resulting from the
increase in average balance of and average yield on Jacksonville's
interest-earning assets was further enhanced by a 5 basis point decrease  in
the average rate paid on interest-bearing liabilities from 4.78% in fiscal 1996
to 4.73% in fiscal 1997.  The interest rate spread increased from 2.99% in
fiscal 1996 to 3.32% in 1997.

         NET INTEREST INCOME.  Net interest income increased by $1.5 million,
or 21.0%, for the year ended September 30, 1997 compared to the year ended
September 30, 1996.  This increase was due primarily to a $1.8 million, or
11.6%, increase in total interest income partially offset by a $318,000 or 3.8%
increase total interest expense.

         The $1.8 million increase in total interest income was the result of
increases in interest on loans receivable of $1.9 million or 15.8%, and
interest on mortgage-backed securities of $435,000 or 62.1%, offset by a
decrease in interest income of $513,000, or 23.6% from investment securities.
The increase in interest income from loans receivable was due primarily to a
$18.5 million, or 12.8%, increase in the average balance of Jacksonville's loan
portfolio.  The increase in interest income from mortgage-backed securities
reflects an increase in average balance from $9.6 million in fiscal 1996 to
$16.4 million in fiscal 1997 partially offset by a decline in average yield
from 7.32% to 6.91% in the respective periods.  The decrease in interest income
from investment securities reflects primarily a decrease in average balance
from $37.1 million to $28.3 million, or 23.8%.  The decrease in the average
balance of securities reflects a shift in portfolio mix by management of
Jacksonville as funds from maturing investment securities were used to purchase
mortgage-backed securities and to fund new mortgage loans.  The average yield
on loans originated and retained by Jacksonville during fiscal 1997 was 8.6%.

         The $318,000 increase in total interest expense from $8.5 million for
the year ended September 30, 1996, to $8.8 million for the year ended September
30, 1997, was primarily due to an increase in the growth of deposits.  The
average rate paid on deposits decreased from 4.77% in fiscal 1996 to 4.71% in
fiscal 1997.  The 6 basis point decrease in rates paid on average deposits
resulted from a general decrease in market rates of interest in the area on
longer term certificates of deposit which matured in 1997 and were reinvested
at lower rates.

         Jacksonville's net interest rate spread was 3.32% for the year ended
September 30, 1997 as compared to 2.99% in fiscal 1996.

         PROVISION FOR LOSSES ON LOANS.  Jacksonville's provision for loan
losses was $110,000 for the year ended September 30, 1997 compared to $100,000
for the year ended September 30, 1996. Provisions for losses on loans are
charged to earnings to bring the total allowance to a level deemed appropriate
by management based on historical experience, the volume and type of lending
conducted by Jacksonville, industry standards, the amount of non-performing
assets, general economic conditions, particularly as they relate to
Jacksonville's market area, and other


                                      11

<PAGE>   16
factors related to the collectability of Jacksonville's loan portfolio.  While
non-performing loans reduced to $644,000 during fiscal 1997, net charge-offs
for the period were up $18,000.  The Company's level of net loans outstanding
increased $16.0 million which included an increase of 68.4% in consumer loans.
Overall economic conditions remained stable for the market area and credit
quality for the applicants showed no material change.  Upon consideration of
such factors, Jacksonville determined that $110,000 in provisions for losses on
loans were appropriate in 1997, primarily because of the increase in the loan
portfolio.  Jacksonville's allowance for losses amounted to $1.2 million at
September 30, 1997 as compared to $1.1 million at September 30, 1996.

         NON-INTEREST INCOME.  Noninterest income amounted to $1.4 million for
the year ended September 30, 1997 compared to $1.3 million in fiscal 1996.  The
$102,000 increase  was due primarily to an increase in fees and deposit service
charges of $41,000 and an increase in income from real estate operations, net,
of $95,000; an increase of $33,000 in other noninterest income partially offset
by a decrease in income from origination of loan servicing of $68,000, as
management lowered its estimate of the value of servicing rights for loans
originated and sold during 1997. The increase in income from fees and deposit
service charges reflects an increase in loan originations and an increase in
service charges on deposits.

         NON-INTEREST EXPENSE.  Noninterest expense amounted to $5.1 million
for the year ended September 30, 1997 compared to $5.8 million during fiscal
1996.  The primary reason for the $784,000, or 13.4% decrease in noninterest
expense during fiscal 1997 was the $1.1 million SAIF special assessment paid in
1996 combined with a reduction in insurance expense of $223,000, partially
offset by increases in compensation and benefits of $292,000; in occupancy and
equipment of $86,000; in provisions for real estate losses of $13,000, and
other noninterest expenses of $118,000.  The Bank has actively marketed and
sold foreclosed real estate and the local real estate market has continued to
improve resulting in the reversal of previously established allowance for
losses on foreclosed real estate in 1997 and 1996.  The SAIF special assessment
resulted from legislation enacted into law on September 30, 1996 which, among
other things recapitalized the SAIF through the special assessment. Pursuant to
regulatory provisions recently promulgated by the Federal Deposit Insurance
Corporation, the recapitalization resulted in a substantial reduction of
deposit insurance premiums for most SAIF members.

         INCOME TAXES.  Income tax expense amounted to $1.4 million during the
year ended September 30, 1997, compared to $704,000 in fiscal 1996.  The
changes in such amounts primarily reflect differences in gross income levels of
Jacksonville.  See Note 11 to Consolidated Financial Statements.  During fiscal
1997 the Internal Revenue Service completed its examination of tax years 1994
and 1995 with no substantial change to net income in either year.

LIQUIDITY AND CAPITAL RESOURCES

         Jacksonville is required under applicable state regulations to
maintain specified levels of liquidity in an amount not less than 10% of its
average daily deposits for the most recently completed calendar quarter in cash
and readily marketable investments.


                                      12
<PAGE>   17
         Cash was generated by Jacksonville's operating activities of $3.8 and
$3.5 million during the years ended September 30, 1998 and 1997, respectively,
primarily as a result of net earnings of $3.3 million and $3.2 million,
respectively.  The adjustments to reconcile net earnings to net cash provided
by operations during the periods presented consisted primarily of the provision
for losses on loans, depreciation and amortization expense, amortization of
deferred loan origination fees and increases or decreases in other assets and
other liabilities.

         The primary investing activity of Jacksonville is lending and
purchases of investment and mortgage-backed securities, which is funded with
cash provided from operations and financing activities, as well as proceeds
from amortization and prepayments on existing loans and proceeds from
maturities of investment securities and mortgage-backed securities.  During the
year ended September 30, 1998, Jacksonville's investing activities used cash of
$22.3 million principally as a result of net loan originations of $17.1
million; to purchase mortgage backed securities totaling $17.7 million; to
purchase investment securities of $12.5 million partially offset by proceeds on
maturity of investment securities of $18.5 million and principal paydown on MBS
of $6.9 million.

          During the year ended September 30, 1997, Jacksonville's investing
activities used cash of $17.3 million principally as a result of net loan
originations of $16.1 million; purchases of mortgage-backed securities of $11.4
million; purchases of investment securities of $6.0 million; partially offset
by net proceeds from maturities of investment securities of $14.0 million; and
principal paydowns on mortgage-backed securities of $2.3 million.

         During the year ended September 30, 1998, Jacksonville's financing
activities generated cash of $25.2 million as a result of a net increase in
deposits of $12.5 million, and net increase of $15.0 million in advances from
FHLB offset by the purchase of Treasury Stock in the amount of $990,000; the
payment of dividends in the amount of $1.2 million, and a net decrease of
$116,000 in advance payments by borrowers for property taxes and insurances.

         Jacksonville's financing activities generated cash of $12.7 million
during the year ended September 30, 1997 as a result of a net increase in
deposits of $17.7 million and an increase of $405,000 in tax and insurance
escrow accounts; offset by purchase of Treasury Stock of $3.4 million; purchase
of MRP shares of $836,000 and dividends paid of $1.2 million.  For additional
information about cash flows from Jacksonville operating, financing and
investing activities, see the Consolidated Statements of Cash Flows included in
the Consolidated Financial Statements.

         At September 30, 1998, Jacksonville had 8.7 million of outstanding
commitments to originate residential real estate loans and no commitments to
purchase investment securities.  At the same date, the total amount of
certificates of deposit which are scheduled to mature by September 30, 1999 are
$129.6 million.  Jacksonville believes that it has adequate resources to fund
commitments as they arise and that it can adjust the rate on savings
certificates to retain deposits in changing interest rate environments.  If
Jacksonville requires funds beyond its internal funding capabilities, advances
from the FHLB of Dallas are available as an additional source of funds.

         Jacksonville is required to maintain specified amounts of capital
pursuant to the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA") and regulations promulgated by the FDIC thereunder.  The
capital standards generally require the maintenance of


                                      13
<PAGE>   18
regulatory capital sufficient to meet Tier 1 leveraged capital requirement, a
Tier 1 risk based capital requirement and a total risk-based capital
requirement.  At September 30, 1998, Jacksonville's Tier 1 leveraged capital
and Tier 1 risk-based capital totaled $33.5 million or 13.14% of adjusted total
assets and 24.37% of risk-weighted assets, respectively.  These capital levels
exceeded the minimum requirements at that date by approximately $23.3 million
and $28.0 million, respectively.  Jacksonville's total risk based capital was
$34.7 million at September 30, 1998 or 25.22% of risk-weighted assets which
exceeded the current requirement of 8% of risk-weighted assets by approximately
$23.7 million.

ACCOUNTING REQUIREMENTS

         In May 1995 the FASB issued Statement of Financial Accounting
Standards No. 122 ("SFAS No. 122") entitled "Accounting for Mortgage Servicing
Rights."  This statement eliminates the accounting distinction between rights
to service mortgage loans for others that are acquired through loan origination
activities and those acquired through purchase transactions.  The provisions of
SFAS No. 122 must be applied prospectively in fiscal years beginning after
December 15, 1995. Jacksonville adopted the provisions of SFAS No. 122,
effective October 1, 1995, and the effect of such change was to increase assets
and net income as reflected in the consolidated financial statements.

         In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," establishing financial accounting and reporting
standards for stock-based employee compensation plans. SFAS No. 123 encourages
all entities to adopt a new method of accounting to measure compensation cost
of all employee stock compensation plans based on the estimated fair value of
the award at the date it is granted.  Companies are, however, allowed to
continue to measure compensation cost for those plans using the intrinsic value
based method of accounting, which generally does not result in compensation
expense recognition for most plans.  Companies that elect to remain with the
existing accounting are required to disclose in a footnote to the financial
statements pro forma net income and, if presented, earnings per share, as if
SFAS No. 123 had been adopted.  The accounting requirements of SFAS No. 123 are
effective for transactions entered into in fiscal years that begin after
December 15, 1995; however, companies are required to disclose information for
awards granted in their first fiscal year beginning after December 15, 1994.
The Company has elected to disclose the effect of this standard in the
consolidated financial statements and accordingly the adoption of this standard
in 1997 did not effect consolidated financial position or results of
operations.

         In June, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130").  This statement, which the Company will be required to
adopt, 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 e 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 statement for earlier
periods provided for comparative purposes is required.  The company will adopt
("SFAS 130") beginning October 1, 1998.


                                      14
<PAGE>   19
         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" ("SFAS 131").  This
statement, which the Company will be required to adopt, 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 SFAS 131 in the year beginning October 1, 1998.

         In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
which amends FASB Statements No. 52 and 107, and supersedes FASB Statements No.
80, 105 and 119.  SFAS No.  133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded
in other contracts and for hedging activities.  SFAS No. 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair value.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999.  Initial application of SFAS No. 133 should be as of the
beginning of an entity's fiscal quarter; on that date, hedging relationships
must be designated anew and documented pursuant to the provisions of SFAS No.
133.  Earlier application of SFAS No. 133 is encouraged but is permitted only
as of the beginning of any fiscal quarter that begins after issuance of SFAS
No. 133.  The Company has not yet determined the impact on its results of
operations, financial position or cash flows as a result of implementing SFAS
No. 133.

IMPACT OF INFLATION AND CHANGING PRICES

         The consolidated financial statements and related financial data
presented herein have been prepared in accordance with GAAP, which require the
measurement of financial position and operating results in terms of historical
dollars, without considering changes in relative purchasing power over time due
to inflation.

         Unlike most industrial companies, virtually all of Jacksonville's
assets and liabilities are monetary in nature.  As a result, interest rates
generally have a more significant impact on a financial institution's
performance than does the effect of inflation.





                             [Financials to come]



                                      15

<PAGE>   20





                          INDEPENDENT AUDITORS' REPORT



The Board of Directors
Jacksonville Bancorp, Inc.

We have audited the accompanying consolidated statements of financial condition
of Jacksonville Bancorp, Inc. and subsidiaries, as of September 30, 1998 and
1997, and the related consolidated statements of earnings, stockholders'
equity, and cash flows for each of the years in the three-year period ended
September 30, 1998.  These consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Jacksonville
Bancorp, Inc. and subsidiaries, as of September 30, 1998 and 1997, and the
results of their operations and cash flows for each of the years in the three
year period ended September 30, 1998, in conformity with generally accepted
accounting principles.





                                           /s/ HENRY & PETERS, P.C.  
                                           HENRY & PETERS, P.C.




Tyler, Texas
October 22, 1998





                                       16
<PAGE>   21
                           JACKSONVILLE BANCORP, INC.
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                          SEPTEMBER 30, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                                                          1998            1997
                                                                                                      -----------      -----------
                                                                ASSETS
<S>                                                                                                <C>              <C>
Cash on hand and in banks                                                                          $    3,086,417   $    1,336,212
Interest-bearing deposits                                                                               7,781,229        2,777,833
Investment securities:
  Held-to-maturity, approximate fair market value of
    $15,587,250 and $22,508,860, respectively                                                          15,492,501       22,461,957
  Available-for-sale, carried at fair value                                                             4,520,484        3,468,900
Mortgage-backed certificates:
  Held-to-maturity, approximate fair market value of
    $7,133,165 and $9,936,023, respectively                                                             7,045,343        9,824,878
  Available-for-sale, carried at fair value                                                            24,820,600       11,392,514
Loans receivable, net                                                                                 191,153,399      174,044,353
Accrued interest receivable                                                                             2,090,470        1,952,013
Foreclosed real estate, net                                                                               530,728          526,234
Premises and equipment, net                                                                             3,935,778        3,388,532
Stock in Federal Home Loan Bank of Dallas, at cost                                                      1,621,900        1,844,400
Mortgage servicing rights                                                                                 534,463          437,581
Deferred tax assets                                                                                       322,265          325,303
Other assets                                                                                              224,597          163,776
                                                                                                     ------------     ------------
         Total assets                                                                                $263,160,174     $233,944,486
                                                                                                     ============     ============

                                                 LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
  Deposits                                                                                           $204,489,918     $192,033,298
  Advance from Federal Home Loan Bank                                                                  17,000,000        2,000,000
  Advances from borrowers for taxes and insurance                                                       3,807,168        3,923,588
  Accrued expenses and other liabilities                                                                2,131,267        1,981,724
                                                                                                     ------------     ------------
    Total liabilities                                                                                 227,428,353      199,938,610

DEFERRED INCOME
  Gain on sale of real estate owned                                                                       169,740          217,672

STOCKHOLDERS' EQUITY
  Preferred stock, no par value, 5,000,000 shares authorized; none issued                                       -                -
  Common stock, $.01 par value, 25,000,000 shares authorized;
    2,675,972 and 2,674,668 shares issued; 2,390,047 and 2,443,568
    shares outstanding in 1998 and 1997, respectively                                                      26,760           26,747
  Additional paid-in capital                                                                           22,649,848       22,471,258
  Retained earnings, substantially restricted                                                          18,963,133       16,788,491
  Less:
  Treasury stock, at cost (285,925 and 231,100 shares, respectively)                                   (4,413,266)      (3,423,528)
    Shares acquired by Employee Stock Ownership Plan                                                   (1,223,932)      (1,378,106)
    Shares acquired by Management Recognition Plan                                                       (515,344)        (682,483)
    Net unrealized gain (loss) on investments available-for-sale,
      net of income taxes of $38,575 and $(7,303), respectively                                            74,882          (14,175)
                                                                                                     ------------     ------------
         Total stockholders' equity                                                                    35,562,081       33,788,204
                                                                                                     ------------     ------------
         Total liabilities and stockholders' equity                                                  $263,160,174     $233,944,486
                                                                                                     ============     ============
</TABLE>



  See accompanying notes to consolidated financial statements.





                                       17
<PAGE>   22
                           JACKSONVILLE BANCORP, INC.
                      CONSOLIDATED STATEMENTS OF EARNINGS
                 YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                              1998                  1997                    1996
                                                          -----------           -----------              -----------
<S>                                                      <C>                   <C>                      <C>
INTEREST INCOME
  Loans receivable                                        $15,442,039           $14,093,616              $12,169,431
  Mortgage-backed securities                                1,501,491             1,134,799                  700,215
  Investment securities                                     1,260,766             1,657,500                2,170,435
  Other                                                       336,885               286,566                  354,197
                                                          -----------           -----------              -----------
    Total interest income                                  18,541,181            17,172,481               15,394,278

INTEREST EXPENSE
  Deposits                                                  9,348,433             8,599,136                8,390,643
  Interest on borrowings                                      279,894               171,913                   62,749
                                                          -----------           -----------              -----------
    Total interest expense                                  9,628,327             8,771,049                8,453,392
                                                          -----------           -----------              -----------
    Net interest income                                     8,912,854             8,401,432                6,940,886

PROVISION FOR LOSSES ON LOANS                                  35,000               110,084                  100,000
                                                          -----------           -----------              -----------
    Net interest income after provision for
      losses on loans                                       8,877,854             8,291,348                6,840,886

NONINTEREST INCOME
  Fees and deposit service charges                          1,116,117               947,783                  906,612
  Real estate operations, net                                 135,315               179,718                   84,309
  Other                                                       162,171               101,604                   68,245
  Mortgage servicing rights                                   140,394               162,462                  230,491
                                                          -----------           -----------              -----------
    Total noninterest income                                1,553,997             1,391,567                1,289,657

NONINTEREST EXPENSE
  Compensation and benefits                                 3,759,893             3,269,947                2,977,991
  Occupancy and equipment                                     529,524               529,124                  442,633
  Insurance expense                                           167,851               224,658                  447,528
  Provisions for real estate losses                              (144)              (88,737)                (102,142)
  Other                                                     1,181,369             1,127,519                1,010,016
  SAIF special assessment                                           -                     -                1,070,478
                                                          -----------           -----------              -----------
    Total noninterest expense                               5,638,493             5,062,511                5,846,504
                                                          -----------           -----------              -----------

INCOME BEFORE TAXES ON INCOME                               4,793,358             4,620,404                2,284,039

TAXES ON INCOME
  Current                                                   1,428,256             1,383,880                  623,000
  Deferred                                                     40,000                (3,000)                  81,000
                                                          -----------           -----------              -----------
    Total income tax expense                                1,468,256             1,380,880                  704,000
                                                          -----------           -----------              -----------
      Net earnings                                        $ 3,325,102           $ 3,239,524              $ 1,580,039
                                                          ===========           ===========              ===========

EARNINGS PER COMMON SHARE
  Basic                                                   $      1.44           $      1.30              $       .64
                                                          ===========           ===========              ===========
  Diluted                                                 $      1.38           $      1.27              $       .63
                                                          ===========           ===========              ===========
</TABLE>





See accompanying notes to consolidated financial statements.





                                       18
<PAGE>   23
                           JACKSONVILLE BANCORP, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                 YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996

<TABLE>
<CAPTION>

                                                                              Unvested       Unvested
                                                              Additional       Shares         Shares
                                                  Common        Paid-in       Held by         Held by
                                                   Stock        Capital         ESOP            MRP
                                                ----------    ----------     ---------       ---------
<S>                                             <C>           <C>           <C>              <C>
BALANCE AT SEPTEMBER 30, 1995                   $   26,510    $6,901,244     $(358,309)      $(121,875)
  Shares issued under stock option plan                 78        54,762             -               -
  ESOP shares released                                   -        20,480       124,820               -
  Accrual of management recognition
    plan awards                                          -             -             -          97,500
  Cancellation of shares held by
    Jacksonville Federal Mutual
    Holding Company                                (16,128)       16,128             -               -
  Proceeds from issuance of 1,618,409
    shares of Jacksonville Bancorp, Inc.
    common stock on March 29, 1996, net
    of 140 fractional shares acquired, and
    net of offering expense of $863,178             16,183    15,304,729    (1,294,730)              -
  Return of capital from Jacksonville
    Federal Mutual Holding Company                       -             -             -               -
  Change in net unrealized loss on
    securities available-for-sale                        -             -             -               -
  Dividends declared                                     -             -             -               -
  Net earnings                                           -             -             -               -
                                                ----------    ----------     ---------       ---------
BALANCE AT SEPTEMBER 30, 1996                       26,643    22,297,343    (1,528,219)        (24,375)

<CAPTION>
                                                 Unrealized
                                                (Loss) Gain
                                               on Securities                                    Total
                                                 Available-     Retained       Treasury     Stockholders'
                                                  For-Sale      Earnings         Stock         Equity
                                               -------------  -----------   -------------   ------------
<S>                                               <C>         <C>           <C>              <C>
BALANCE AT SEPTEMBER 30, 1995                     $(60,555)   $13,943,851   $           -    $20,330,866
  Shares issued under stock option plan                  -              -               -         54,840
  ESOP shares released                                   -              -               -        145,300
  Accrual of management recognition
    plan awards                                          -              -               -         97,500
  Cancellation of shares held by
    Jacksonville Federal Mutual
    Holding Company                                      -              -               -              -
  Proceeds from issuance of 1,618,409
    shares of Jacksonville Bancorp, Inc.
    common stock on March 29, 1996, net
    of 140 fractional shares acquired, and
    net of offering expense of $863,178                  -              -               -     14,026,182
  Return of capital from Jacksonville
    Federal Mutual Holding Company                       -        100,000               -        100,000
  Change in net unrealized loss on
    securities available-for-sale                  (27,094)             -               -        (27,094)
  Dividends declared                                     -       (876,965)              -       (876,965)
  Net earnings                                           -      1,580,039               -      1,580,039
                                               -------------  -----------   -------------   ------------
BALANCE AT SEPTEMBER 30, 1996                      (87,649)    14,746,925               -     35,430,668
</TABLE>





                                       19
<PAGE>   24
                           JACKSONVILLE BANCORP, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                 YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
                                   CONTINUED

<TABLE>
<CAPTION>
                                                                Unvested        Unvested
                                                 Additional       Shares         Shares
                                      Common       Paid-in       Held by         Held by
                                       Stock       Capital         ESOP            MRP
                                      -------   -----------   -----------      ----------
<S>                                   <C>       <C>           <C>              <C>
BALANCE AT SEPTEMBER 30, 1996         $26,643   $22,297,343   $(1,528,219)     $  (24,375)
  Shares issued under stock
    option plan                           104        73,237             -               -
  ESOP shares released                      -       100,678       150,113               -
  Purchase of management
    recognition plan shares                 -             -             -        (835,693)
  Accrual of management
    recognition plan awards                 -             -             -         177,585
  Change in net unrealized
    gain (loss) on securities
      available-for-sale                    -             -             -               -
  Dividends declared                        -             -             -               -
  Net earnings                              -             -             -               -
  Purchase of Treasury stock                -             -             -               -
                                      -------   -----------   -----------      ----------
BALANCE AT SEPTEMBER 30, 1997          26,747    22,471,258    (1,378,106)       (682,483)
  Shares issued under stock
    option plan                            13         9,180             -               -
  ESOP shares released                      -       169,410       154,174               -
  Accrual of management
    recognition plan awards                 -             -             -         167,139
  Change in net unrealized
    gain (loss) on securities
      available-for-sale                    -             -             -               -
  Dividends declared                        -             -             -               -
  Net earnings                              -             -             -               -
  Purchase of Treasury stock                -             -             -               -
                                      -------   -----------   -----------      ----------
BALANCE AT SEPTEMBER 30, 1998         $26,760   $22,649,848   $(1,223,932)     $ (515,344)
                                      =======   ===========   ===========      ==========

<CAPTION>

                                   Unrealized
                                   (Loss) Gain
                                  on Securities                                    Total
                                    Available-     Retained       Treasury     Stockholders'
                                     For-Sale      Earnings         Stock         Equity
                                   ----------    -----------   -------------   ------------
<S>                                <C>           <C>           <C>             <C>
BALANCE AT SEPTEMBER 30, 1996      $  (87,649)   $14,746,925   $           -   $ 35,430,668
  Shares issued under stock
    option plan                             -              -               -         73,341
  ESOP shares released                      -              -               -        250,791
  Purchase of management
    recognition plan shares                 -              -               -       (835,693)
  Accrual of management
    recognition plan awards                 -              -               -        177,585
  Change in net unrealized
    gain (loss) on securities
      available-for-sale               73,474              -               -         73,474
  Dividends declared                        -     (1,197,958)              -     (1,197,958)
  Net earnings                              -      3,239,524               -      3,239,524
  Purchase of Treasury stock                -              -      (3,423,528)    (3,423,528)
                                   ----------    -----------   -------------   ------------
BALANCE AT SEPTEMBER 30, 1997         (14,175)    16,788,491      (3,423,528)    33,788,204
  Shares issued under stock
    option plan                             -              -               -          9,193
  ESOP shares released                      -              -               -        323,584
  Accrual of management
    recognition plan awards                 -              -               -        167,139
  Change in net unrealized
    gain (loss) on securities
      available-for-sale               89,057              -               -         89,057
  Dividends declared                        -     (1,150,460)              -     (1,150,460)
  Net earnings                              -      3,325,102               -      3,325,102
  Purchase of Treasury stock                -              -        (989,738)      (989,738)
                                   ----------    -----------   -------------   ------------
BALANCE AT SEPTEMBER 30, 1998      $   74,882    $18,963,133   $  (4,413,266)  $ 35,562,081
                                   ==========    ===========   =============   ============
</TABLE>
See accompanying notes to consolidated financial statements.





                                       20
<PAGE>   25
                          JACKSONVILLE BANCORP, INC.
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996


<TABLE>
<CAPTION>
                                                                           1998           1997            1996
                                                                      ------------   ------------     ------------
<S>                                                                   <C>            <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                                          $  3,325,102   $  3,239,524     $  1,580,039
  Adjustments to reconcile net income to net cash
    provided by (used in) operating activities:
      Depreciation                                                         165,233        212,715          187,119
      Amortization/accretion of securities                                 166,145         37,035          148,300
      Provision for losses (gains) on loans and on real estate              35,144         21,347           (2,142)
      Loans originated for sale                                        (28,189,992)   (22,311,000)     (21,848,000)
      Loans sold                                                        28,189,992     22,311,000       21,848,000
      Net gain on sale of equipment                                        (11,640)             -                -
      Net (gain) loss on sale of other real estate                        (132,794)       179,521          162,422
      Accrual of MRP awards                                                167,139        177,585           97,500
      Release of ESOP shares                                               323,584        250,791           85,217
      Change in assets and liabilities:
         (Increase) decrease in other assets                               (60,821)       280,312           24,709
         (Increase) decrease in deferred tax assets                        (42,840)        (3,000)          57,332
         (Decrease) increase SAIF assessment payable                             -     (1,070,478)       1,070,478
         Increase in accrued expenses and
          other liabilities                                                149,543        831,826          163,262
         Decrease in deferred income                                       (47,932)      (141,243)         (79,137)
         Increase in mortgage servicing rights                             (96,882)      (206,040)        (231,541)
         Increase in accrued interest receivable                          (138,457)      (318,971)        (184,694)
                                                                      ------------   ------------     ------------
          Net cash provided by operating activities                      3,800,524      3,490,924        3,078,864
                                                                      ------------   ------------     ------------

CASH FLOWS FROM INVESTING ACTIVITIES
  Proceeds on maturity of investment securities                         18,456,288     13,955,186       23,409,535
  Purchase of investment securities                                    (12,493,297)    (5,995,546)     (14,474,405)
  Net principal payments/originations on loans                         (17,145,410)   (16,062,470)     (21,825,762)
  Proceeds from sale of foreclosed real estate                             129,520        376,174          565,545
  Proceeds from sale of equipment                                           33,735              -                -
  Purchase of mortgage-backed securities                               (17,662,769)   (11,371,963)     (10,926,796)
  Principal paydowns on mortgage-backed securities                       6,937,889      2,251,044        2,238,744
  Capital expenditures                                                    (734,574)      (345,182)        (534,461)
  Purchase of stock in FHLB Dallas                                         (24,500)      (104,500)        (103,700)
  Sale of stock in FHLB Dallas                                             247,000              -                -
  Return of capital from mutual holding company                                  -              -          100,000
                                                                      ------------   ------------     ------------
           Net cash used in investing activities                       (22,256,118)   (17,297,257)     (21,551,300)
                                                                      ------------   ------------     ------------
</TABLE>





                                       21
<PAGE>   26
                           JACKSONVILLE BANCORP, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                 YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
                                   CONTINUED

<TABLE>
<CAPTION>
                                                           1998              1997            1996
                                                         -----------      -----------    -------------
<S>                                                      <C>             <C>             <C>
CASH FLOWS FROM FINANCING ACTIVITIES
  Net increase in deposits                               $12,456,620      $17,705,411    $     516,941
    Net (decrease) increase in advance payments by
    borrowers for property taxes and insurance              (116,420)         405,390          191,615
  Advances from FHLB                                      20,000,000        5,000,000        4,000,000
  Payment of FHLB advance                                 (5,000,000)      (5,000,000)      (2,000,000)
  Proceeds from sale of common stock                               -                -       14,026,182
  Proceeds from exercise of stock options                      9,193           73,341           54,840
  Payment of ESOP loan                                             -                -         (298,226)
  Purchase of Treasury stock                                (989,738)      (3,423,528)               -
  Purchase of MRP shares                                           -         (835,693)               -
  Dividends paid                                          (1,150,460)      (1,197,958)        (876,965)
                                                         -----------      -----------    -------------
           Net cash provided by financing activities      25,209,195       12,726,963       15,614,387
                                                         -----------      -----------    -------------
           Net increase (decrease) in cash
              and cash equivalents                         6,753,601       (1,079,370)      (2,858,049)

CASH AND CASH EQUIVALENTS
  Beginning of year                                        4,114,045        5,193,415        8,051,464
                                                         -----------      -----------    -------------
  End of year                                            $10,867,646      $ 4,114,045    $   5,193,415
                                                         ===========      ===========    =============
</TABLE>

See accompanying notes to consolidated financial statements.





                                       22
<PAGE>   27
                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          SEPTEMBER 30, 1998 AND 1997


NOTE 1 - BASIS OF PRESENTATION AND REORGANIZATION
  The accompanying consolidated financial statements include the accounts of
  Jacksonville Bancorp, Inc. (Company), and its wholly-owned subsidiary
  Jacksonville IHC, Inc. (IHC), and its wholly-owned subsidiary Jacksonville
  Savings Bank, SSB (Bank), and its wholly-owned subsidiary JS&L Corporation
  (JS&L).  The Company, through its principal subsidiary, the Bank, is
  primarily engaged in attracting deposits from the general public and using
  those and other available sources of funds to originate loans secured by
  single-family residences located in the East Texas area. To a lesser extent,
  the Bank also originates construction loans, land loans, and consumer loans.
  IHC's main activity is holding an intercompany loan receivable from the Bank
  in connection with the Bank's employee stock ownership plan. JS&L's main
  activity is the servicing of purchased residential mortgage notes receivable.
  All significant intercompany transactions and balances are eliminated in
  consolidation.

  On March 29, 1996, Jacksonville Savings and Loan Association (Association),
  and Jacksonville Federal Mutual Holding Company (Mutual Holding Company),
  completed a second step conversion (Reorganization).  As part of the
  Reorganization, Jacksonville Bancorp, was formed as a first-tier wholly-owned
  subsidiary of the Association.  The Mutual Holding Company was converted to
  an interim federal stock savings association and simultaneously merged with
  and into the Association.  At that point, the Mutual Holding Company ceased
  to exist and 1,137,500 shares, or 60.8%, of the outstanding Association's
  common stock owned by the Mutual Holding Company was canceled.  A second
  interim savings and loan association (Interim) which was formed by
  Jacksonville Bancorp solely for the Reorganization was then merged with and
  into the Association.  As a result of the merger of Interim with and into the
  Association, the Association became a wholly-owned subsidiary of Jacksonville
  Bancorp.  Pursuant to an exchange ratio of 1.41785 shares for each share of
  the Association common stock, the 737,734 outstanding public shares of the
  Association were exchanged for approximately 1,045,996 shares of Jacksonville
  Bancorp.  The exchange ratio insured that the public stockholders of the
  Association maintained a 39.2% ownership interest in Jacksonville Bancorp.
  Concurrent with the Reorganization, Jacksonville Bancorp sold 1,618,409
  additional shares to members of the Mutual Holding Company, employees of the
  Association, and the public at a price of $10.00 per share. Reorganization
  and offering costs of approximately $863,000 resulted in net proceeds from
  the offering of approximately 14,026,000.

  Each depositor of the Association, as of the effective date of the
  Conversion, will have upon liquidation of the Association a right to their
  pro rata interest in a liquidation account established pursuant to
  regulations for the benefit of such depositors.  The Association maintains
  records to ensure such rights will receive statutory priority as required.
  The reorganization was accounted for as a change in corporate form with the
  historic basis of accounting for the Association unchanged.

  On July 2, 1997, the Association consummated its conversion to a
  state-chartered savings bank, Jacksonville Savings Bank, SSB.  The main
  purpose of the conversion was to reduce the duplication associated with
  meeting the regulatory requirements of three regulators.  With the conversion
  to a state savings bank, the Bank will be regulated by the Texas Savings and
  Loan Department as its primary federal regulator, and the insurer of its
  deposits will be the FDIC.  Prior to the conversion, the Association's
  primary federal regulator had been the Office of Thrift Supervision.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  INVESTMENT AND MORTGAGE-BACKED SECURITIES
  The Association classifies and accounts for debt and equity securities as
  follows:

    HELD-TO-MATURITY
    Debt and equity 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.





                                       23
<PAGE>   28
                          JACKSONVILLE BANCORP, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         SEPTEMBER 30, 1998 AND 1997
                                  CONTINUED
                                      
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
  INVESTMENT AND MORTGAGE-BACKED SECURITIES - CONTINUED
    AVAILABLE-FOR-SALE
    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 retained earnings until realized.

    TRADING SECURITIES
    Debt and equity securities that are bought and held principally for the
    purpose of selling them in the near term are classified as trading
    securities and reported at market value, with unrealized gains and losses
    included in earnings.

  PREMISES AND EQUIPMENT
  Land is carried at cost.  Building, leasehold improvements, and furniture,
  fixtures, and equipment are carried at cost, less accumulated depreciation
  and amortization.  Buildings and furniture, fixtures and equipment are
  depreciated using the straight-line method over the estimated useful lives of
  the assets. The cost of leasehold improvements is being amortized using the
  straight-line method over the terms of the related leases.

  FEDERAL INCOME TAXES
  The Company and its subsidiaries plan to file a consolidated Federal income
  tax return.  The tax provision or benefit is based on income or loss reported
  for financial statement purposes, and differs from amounts currently payable
  or refundable because certain revenues and expenses are recognized for
  financial reporting purposes differently than they are recognized for tax
  reporting purposes.  The cumulative effects of any temporary differences are
  reflected as deferred income taxes using the liability method (see Note 11).

  LOANS RECEIVABLE
  Loans receivable are stated at unpaid principal balances, less the allowance
  for loan losses, and net deferred loan origination fees and discounts.
  Discounts on loans are recognized over the lives of the loans using the
  interest method.

  The allowance for loan losses is increased by charges to income and decreased
  by charge-offs (net of recoveries). Management's periodic evaluation of the
  adequacy of the allowance is based on the Bank's past loan loss experience
  known, and inherent risks in the portfolio, adverse situations that may
  affect the borrower's ability to repay, estimated value of any underlying
  collateral, and current economic conditions. Currently, the allowance for
  loan losses is formally reevaluated on a quarterly basis.  In management's
  opinion there are no material loans, either individually or in the aggregate,
  which are impaired as defined by Statement of Financial Accounting Standards
  No. 114, as amended by Statement No. 118.  While management uses available
  information to recognize losses on loans, further additions to the allowance
  may be necessary based on changes in economic conditions.  In addition,
  various regulatory agencies as an integral part of their examinations,
  periodically review the allowance for loan losses.

  Uncollectible interest on loans that are contractually past due is
  charged-off or an allowance is established based on management's periodic
  evaluation.  The allowance is established by a charge to interest income
  equal to all interest previously accrued, and income is subsequently
  recognized only to the extent cash payments are received until, in
  management's judgment, the borrower's ability to make periodic interest and
  principal payments is back to normal, in which case the loan is returned to
  accrual status.





                                       24
<PAGE>   29
                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          SEPTEMBER 30, 1998 AND 1997
                                   CONTINUED

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
  LOANS HELD-FOR-SALE
  Mortgage loans originated and intended for sale in the secondary market are
  carried at the lower of cost or estimated market value in the aggregate.  Net
  unrealized losses are recognized by charges to earnings.

  LOAN ORIGINATION AND COMMITMENT FEES AND RELATED COSTS
  Loan fees received are accounted for substantially in accordance with FASB
  Statement No. 91, "Accounting for Nonrefundable Fees and Costs Associated
  with Originating or Acquiring Loans and Initial Direct Costs of Leases."
  Loan fees and certain direct loan origination costs are deferred, and the net
  fee is recognized as an adjustment to interest income over the contractual
  life of the loans.  Commitment fees and costs relating to commitments whose
  likelihood of exercise is remote are recognized over the commitment period on
  a straight-line basis.  If the commitment is subsequently exercised during
  the commitment period, the remaining unamortized commitment fee at the time
  of exercise is recognized over the life of the loan as an adjustment of
  yield.

  FORECLOSED REAL ESTATE
  Real estate properties acquired through loan foreclosure are initially
  recorded at the lower of cost (loan balance) or fair value, less estimated
  costs of disposition, at the date of foreclosure.  Costs relating to
  development and improvement of property are capitalized, whereas costs
  relating to holding property are expensed.

  Valuations are periodically performed by management, and an allowance for
  losses is established by a charge to operations if the carrying value of a
  property exceeds its estimated net realizable value.  Currently, all major
  foreclosed real estate properties are formally reevaluated on a quarterly
  basis to determine the adequacy of the allowance for losses.

  Gains on sale of foreclosed real estate are accounted for in accordance with
  Statement of Financial Accounting Standards No. 66.  When the borrower's
  initial cash down payment does not meet the minimum requirements, the gain on
  sale is deferred and recorded on the installment basis until such time as
  sufficient principal payments are received to meet the minimum down payment
  requirements.  Losses on sale of foreclosed real estate are recognized at the
  date of sale.

  ESTIMATES
  The preparation of financial consolidated statements in conformity with
  generally accepted accounting principles requires management to make
  estimates and assumptions that affect the reported amounts of assets and
  liabilities and disclosure of contingent assets and liabilities at the date
  of the financial statements and the reported amounts of revenues and expenses
  during the reporting period.  Actual results could differ from those
  estimates.

  Material estimates that are particularly susceptible to significant change
  relate to the determination of the allowance for losses on loans and the
  valuation of real estate acquired in connection with foreclosures or in
  satisfaction of loans.  In connection with the determination of the
  allowances for losses on loans and foreclosed real estate, management obtains
  independent appraisals for significant properties.

  MORTGAGE SERVICING RIGHTS
  The cost of mortgage servicing rights is amortized in proportion to, and over
  the period of, estimated net servicing revenues.  Impairment of mortgage
  servicing rights is assessed based on the estimated fair value of those
  rights.  Fair values are estimated using discounted cash flows based on
  current market interest rates and market data regarding sales of mortgage
  servicing rights.  The Bank sells predominately single-family first mortgage
  loans with simple risk characteristics and uses a single stratum for purposes
  of measuring impairment. The amount of impairment recognized is the amount by
  which the capitalized mortgage servicing rights exceed their fair value.





                                       25
<PAGE>   30
                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          SEPTEMBER 30, 1998 AND 1997
                                   CONTINUED

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
  EARNINGS PER SHARE
  The Company has 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.
  Shares issued to its Employee Stock Ownership Plan (ESOP) are accounted for
  in accordance with AICPA Statement of Position 93-6.  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 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:

<TABLE>
<CAPTION>
                                                                     Years Ended June 30,
                                                          --------------------------------------------
                                                             1998             1997            1996
                                                          ----------       ----------       ----------
    <S>                                                   <C>              <C>              <C>
    Basic net earnings per share
      Net income                                          $3,325,102       $3,239,524       $1,580,039
      Weighted-average shares outstanding                  2,304,567        2,485,535        2,483,708
                                                          ----------       ----------       ----------
           Per share                                      $     1.44       $     1.30       $      .64
                                                          ==========       ==========       ==========
    Diluted net earnings per share
      Net income                                          $3,325,102       $3,239,524       $1,580,039
      Weighted-average shares outstanding
         plus assumed conversions                          2,412,993        2,554,565        2,517,334
                                                          ----------       ----------       ----------
           Per share                                      $     1.38       $     1.27       $      .63
                                                          ==========       ==========       ==========
    Calculation of weighted average shares
      outstanding plus assumed conversions
         Weighted-average shares outstanding               2,304,567        2,485,535        2,483,708
         Effect of dilutive stock options                    108,426           69,030           33,626
                                                          ----------       ----------       ----------
                                                           2,412,993        2,554,565        2,517,334
                                                          ==========       ==========       ==========
</TABLE>

  STOCK-BASED COMPENSATION
  Statement of Financial Accounting Standards No. 123, "Accounting for
  Stock-Based compensation," encourages, but does not require companies to
  record compensation cost for stock-based employee compensation plans at fair
  value.  The Company has chosen to continue to account for stock-based
  compensation using the intrinsic value method prescribed in Accounting
  Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
  and related Interpretations.  Accordingly, compensation cost for stock
  options is measured as the excess, if any, of the quoted market price of the
  company's stock at the date of the grant over the amount an employee must pay
  to acquire the stock.

  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,
  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 October 1, 1998.





                                       26
<PAGE>   31
                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          SEPTEMBER 30, 1998 AND 1997
                                   CONTINUED

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
  RECENT ACCOUNTING PRONOUNCEMENTS - CONTINUED
  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, 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 beginning October 1, 1998.

  In June 1998, the Financial Accounting Standards Board issued Statement of
  Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
  and Hedging Activities" (FAS 133).  FAS 133 establishes accounting and
  reporting standards for derivative instruments, including certain derivative
  instruments embedded in other contracts and for hedging activities and
  requires that an entity recognize all derivatives as either assets or
  liabilities in the statement of financial condition and measure those
  instruments at fair value.  FAS 133 is effective for all fiscal quarters of
  fiscal years beginning after June 15, 1999.  Initial application of FAS 133
  should be as of the beginning of an entity's fiscal quarter; on that date,
  hedging relationships must be designated anew and documented pursuant to the
  provisions of FAS 133.  Earlier application of FAS 133 is encouraged but is
  permitted only as of the beginning of any fiscal quarter that begins after
  issuance of FAS 133.  The Company has not yet determined the impact on its
  results of operations, financial position or cash flows as a result of
  implementing FAS 133.

  CASH FLOWS
  For purposes of the statement of cash flows, the Company considers all highly
  liquid debt instruments purchased with an original maturity of three months
  or less to be cash equivalents.  A summary of cash and cash equivalents
  follows:

<TABLE>
<CAPTION>
                                                                                September 30,
                                                                --------------------------------------------
                                                                    1998            1997             1996
                                                                -----------      -----------      ----------
    <S>                                                         <C>              <C>             <C>
    Cash on hand and in banks                                   $ 3,086,417      $ 1,336,212      $2,777,737
    Interest bearing deposits                                     7,781,229        2,777,833       2,415,678
                                                                -----------      -----------      ----------
    Cash and cash equivalents                                   $10,867,646      $ 4,114,045      $5,193,415
                                                                ===========      ===========      ==========
    Supplemental disclosure:
      Cash paid for:
         Interest                                               $ 9,567,381      $ 8,776,209      $8,439,688
                                                                ===========      ===========      ==========
         Income taxes                                           $ 1,441,000      $   825,000      $  500,000
                                                                ===========      ===========      ==========
    Non-cash operating activities:
      Change in deferred taxes on net unrealized gains
         and losses on securities available-for-sale            $   (45,878)     $   (37,850)     $   13,957
                                                                ===========      ===========      ==========
    Non-cash investing activities:
      Change in net unrealized gains and losses
         on securities available-for-sale                       $   134,935      $   111,323     $   (41,051)
                                                                ===========      ===========     ===========
      Transfer from loans to real estate acquired
         through foreclosure                                    $   353,000      $   689,000     $   410,000
                                                                ===========      ===========     ===========
      Loans made relating to sale of foreclosed
         real estate                                            $   384,000       $  569,805      $1,308,536
                                                                ===========       ==========      ==========
</TABLE>





                                       27
<PAGE>   32
                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          SEPTEMBER 30, 1998 AND 1997
                                   CONTINUED

NOTE 3 - INVESTMENT SECURITIES
  The amortized cost and estimated market values of investments in debt
  securities are as follows as of September 30, 1998:

<TABLE>
<CAPTION>
                                                                    Available-for-sale
                                           ----------------------------------------------------------------
                                                                                                 Estimated
                                               Amortized       Unrealized      Unrealized         Market
                                                 Cost             Gains         Losses             Value
                                           ------------    --------------     -----------      ------------
    <S>                                    <C>             <C>                <C>              <C>
    U. S. Agency securities                $  4,500,000    $       20,484     $          -     $  4,520,484
                                           ============    ==============     ============     ============
</TABLE>

<TABLE>
<CAPTION>
                                                                    Held-to-maturity
                                            ---------------------------------------------------------------
                                                                                                  Estimated
                                               Amortized       Unrealized       Unrealized         Market
                                                 Cost             Gains           Losses           Value
                                            -----------    --------------     ------------      -----------
    <S>                                     <C>            <C>                <C>               <C>
    U. S. Treasury notes                    $ 3,002,139    $       14,212     $          -      $ 3,016,351
    U. S. Agency securities                  12,490,362            80,537                -       12,570,899
                                            -----------    --------------     ------------      -----------
                                            $15,492,501    $       94,749     $          -      $15,587,250
                                            ===========    ==============     ============      ===========
</TABLE>

  The amortized cost and estimated market values of investments in debt
  securities are as follows as of September 30, 1997:

<TABLE>
<CAPTION>
                                                                     Available-for-sale
                                           ----------------------------------------------------------------
                                                                                                  Estimated
                                               Amortized       Unrealized       Unrealized         Market
                                                 Cost             Gains           Losses            Value
                                           ------------    --------------     -----------      ------------
    <S>                                    <C>            <C>               <C>                <C>
    U.S. Agency securities                 $  3,493,535   $         6,400   $       31,035     $  3,468,900
                                           ============   ===============   ==============     ============
</TABLE>

<TABLE>
<CAPTION>
                                                                     Held-to-maturity
                                            ---------------------------------------------------------------
                                                                                                  Estimated
                                               Amortized       Unrealized       Unrealized         Market
                                                 Cost             Gains           Losses            Value
                                            -----------    --------------     ------------      -----------
    <S>                                     <C>            <C>              <C>                 <C>
    U. S. Treasury notes                    $ 6,492,139    $       17,582   $        6,121      $ 6,503,600
    U. S. Agency securities                  15,969,818            49,129           13,687       16,005,260
                                            -----------    --------------     ------------      -----------
                                            $22,461,957    $       66,711   $       19,808      $22,508,860
                                            ===========    ==============   ==============      ===========
</TABLE>

  The scheduled maturities of securities at September 30, 1998, were as
follows:

<TABLE>
<CAPTION>
                                                    Held-to-maturity                   Available-for-sale
                                                       securities                        securities
                                            -----------------------------       ---------------------------
                                                               Estimated                          Estimated
                                             Amortized          Market           Amortized         Market
                                               Cost              Value              Cost            Value
                                            -----------       -----------       ----------       ----------
    <S>                                     <C>               <C>               <C>              <C>
    Due in one year or less                 $ 5,498,204       $ 5,526,350       $1,000,000       $1,007,500
    Due from one to five years                9,994,297        10,060,900        2,500,000        2,511,750
    Due from five to ten years                        -                 -        1,000,000        1,001,234
                                            -----------    --------------     ------------      -----------
                                            $15,492,501       $15,587,250       $4,500,000       $4,520,484
                                            ===========       ===========       ==========       ==========
</TABLE>





                                       28
<PAGE>   33
                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          SEPTEMBER 30, 1997 AND 1996
                                   CONTINUED

NOTE 3 - INVESTMENT SECURITIES - CONTINUED
  The scheduled maturities of securities at September 30, 1997, were as
follows:

<TABLE>
<CAPTION>
                                                 Held-to-maturity                   Available-for-sale
                                                    securities                        securities
                                            -----------------------------       ---------------------------
                                                              Estimated                           Estimated
                                             Amortized          Market          Amortized          Market
                                               Cost             Value             Cost              Value
                                            -----------       -----------       ----------       ----------
    <S>                                     <C>               <C>               <C>              <C>
    Due in one year or less                 $ 9,501,221       $ 9,485,475       $  500,000       $  480,000
    Due from one to five years               11,960,736        12,015,885        1,993,603        1,998,900
    Due from five to ten years                1,000,000         1,007,500          999,932          990,000
                                            -----------       -----------       ----------       ----------
                                            $22,461,957       $22,508,860       $3,493,535       $3,468,900
                                            ===========       ===========       ==========       ==========
</TABLE>

NOTE 4 - MORTGAGE-BACKED SECURITIES
  The amortized cost and estimated market values of mortgage-backed securities
are summarized as follows:

<TABLE>
<CAPTION>
                                                                      Held-to-maturity
                                             --------------------------------------------------------------
                                                                                                  Estimated
     September 30,                            Amortized        Unrealized       Unrealized         Market
         1998                                   Cost              Gains           Losses            Value
    ------------------                       ----------        ----------      -----------       -----------
    <S>                                      <C>               <C>             <C>               <C>
    GNMA certificates                        $  846,654        $   34,643      $     4,170       $  877,127
    FHLMC certificates                        1,804,915            14,816            6,627        1,813,104
    FNMA certificates                         4,393,774            53,086            3,926        4,442,934
                                             ----------        ----------      -----------       -----------
                                             $7,045,343        $  102,545      $    14,723       $7,133,165
                                             ==========        ==========      ===========       ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                     Available-for-sale
                                            ---------------------------------------------------------------
                                                                                                  Estimated
      September 30,                          Amortized         Unrealized       Unrealized         Market
          1998                                 Cost               Gains           Losses            Value
    ------------------                      -----------        ----------       -----------    ------------
    <S>                                     <C>                <C>              <C>            <C>
    GNMA certificates                       $ 5,194,110        $   21,468       $        -      $ 5,215,578
    FHLMC certificates                        3,685,407            12,171              965        3,696,613
    FNMA certificates                        15,848,111            64,420            4,122       15,908,409
                                            -----------        ----------       ----------      -----------
                                            $24,727,628        $   98,059       $    5,087      $24,820,600
                                            ===========        ==========       ==========      ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                      Held-to-maturity
                                             --------------------------------------------------------------
                                                                                                  Estimated
      September 30,                           Amortized        Unrealized       Unrealized         Market
          1997                                  Cost              Gains           Losses            Value
    ------------------                       ----------       -----------     ------------       ----------
    <S>                                      <C>              <C>             <C>                <C>
    GNMA certificates                        $1,078,879       $    47,797     $      9,000       $1,117,676
    FHLMC certificates                        2,397,944            25,736           13,579        2,410,101
    FNMA certificates                         6,348,055            65,604            5,413        6,408,246
                                             ----------       -----------     ------------       ----------
                                             $9,824,878       $   139,137     $     27,992       $9,936,023
                                             ==========       ===========     ============       ==========
</TABLE>


<TABLE>
<CAPTION>
                                                                     Available-for-sale
                                            ---------------------------------------------------------------
                                                                                                  Estimated
       September 30,                         Amortized         Unrealized       Unrealized         Market
           1997                                Cost               Gains           Losses            Value
    ------------------                      -----------        ----------       -----------     -----------
    <S>                                     <C>                 <C>              <C>            <C>
    GNMA certificates                       $         -         $       -        $       -      $         -
    FHLMC certificates                        4,840,229            11,962              354        4,851,837
    FNMA certificates                         6,549,129                 -            8,452        6,540,677
                                            -----------        ----------       -----------     -----------
                                            $11,389,358         $  11,962        $   8,806      $11,392,514
                                            ===========         =========        =========      ===========
</TABLE>





                                       29
<PAGE>   34
                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          SEPTEMBER 30, 1998 AND 1997
                                   CONTINUED

NOTE 4 - MORTGAGE-BACKED SECURITIES - CONTINUED
  The scheduled maturities of mortgage-backed securities at September 30, 1998,
were as follows:

<TABLE>
<CAPTION>
                                                 Held-to-maturity                   Available-for-sale
                                                    securities                        securities
                                             ----------------------------      ----------------------------
                                                              Estimated                           Estimated
                                             Amortized          Market          Amortized          Market
                                               Cost             Value             Cost              Value
                                             ----------       -----------      -----------      -----------
    <S>                                      <C>               <C>             <C>              <C>
    Due in one year or less                  $        -        $        -      $         -      $         -
    Due from one to five years                  533,677           530,730                -                -
    Due from five to ten years                2,473,169         2,518,509        5,027,873        5,063,511
    Due after ten years                       4,038,497         4,083,926       19,699,755       19,757,089
                                             ----------       -----------      -----------      -----------
                                             $7,045,343        $7,133,165      $24,727,628      $24,820,600
                                             ==========        ==========      ===========      ===========
</TABLE>

  The scheduled maturities of mortgage-backed securities as of September 30,
1997, were as follows:


<TABLE>
<CAPTION>
                                                   Held-to-maturity                    Available-for-sale
                                                    securities                          securities
                                             ----------------------------      ----------------------------
                                                               Estimated                         Estimated
                                              Amortized         Market          Amortized          Market
                                                Cost            Value             Cost              Value
                                             ----------       -----------      -----------      -----------
    <S>                                      <C>               <C>             <C>              <C>
    Due in one year or less                  $        -        $        -      $         -      $         -
    Due from one to five years                  767,975           769,643                -                -
    Due from five to ten years                4,091,899         4,658,611                -                -
    Due after ten years                       4,965,004         4,507,769       11,389,358       11,392,514
                                             ----------       -----------      -----------      -----------
                                             $9,824,878        $9,936,023      $11,389,358      $11,392,514
                                             ==========        ==========      ===========      ===========
</TABLE>
NOTE 5 - LOANS RECEIVABLE
  Loans receivable  are summarized as follows:

<TABLE>
<CAPTION>
                                                                        September 30,
                                                              ---------------------------------
                                                                  1998                  1997
                                                              ------------         ------------
    <S>                                                       <C>                  <C>
    Mortgage loans (principally conventional):
      Single family residential                               $149,960,319         $141,106,415
      Multi-family residential                                   1,091,156            1,143,982
      Commercial                                                 9,763,998            9,491,964
      Construction                                              15,486,672           10,799,609
      Land                                                       3,770,811            3,445,890
                                                              ------------         ------------
                                                               180,072,956          165,987,860
    Business and Consumer loans:
      Commercial business                                           54,602               76,261
      Consumer:
         Secured by deposits                                     2,022,974            2,126,445
         Secured by vehicles                                    10,576,958            6,537,021
         Personal real estate loans                              5,171,309            4,274,291
         Other                                                   2,884,160            1,983,294
                                                              ------------         ------------
                                                                20,710,003           14,997,312
                                                              ------------         ------------
         Total loans                                           200,782,959          180,985,172
      Less:
         Undisbursed portion of loans in process                (7,845,663)          (5,024,707)
         Unearned discounts                                        (45,904)             (62,338)
         Net deferred loan-origination fees                       (567,671)            (661,797)
         Allowance for loan losses                              (1,170,322)          (1,191,977)
                                                              ------------         ------------
           Net loans                                          $191,153,399         $174,044,353
                                                              ============         ============
</TABLE>





                                       30
<PAGE>   35
                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          SEPTEMBER 30, 1998 AND 1997
                                   CONTINUED

NOTE 5 - LOANS RECEIVABLE - CONTINUED
  The Bank at September 30, had mortgage loan commitments outstanding
substantially all of which are at rates to be determined at closing (rates
range from 6.00% to 9.25%) as follows:

<TABLE>
<CAPTION>
                                            1998             1997
                                         ----------       ----------
         <S>                             <C>              <C>
         Variable-rate                   $   55,122       $  729,000
         Fixed-rate                       4,953,322        4,092,301
                                         ----------       ----------
                                         $5,008,444       $4,821,301
                                         ==========       ==========
</TABLE>

  The Bank had committed to sell a substantial portion of fixed-rate loans when
funded.

  Activity in the allowance for loan losses are summarized as follows as of
September 30,:

<TABLE>
<CAPTION>
                                                             1998             1997             1996
                                                          ----------       ----------       ----------
    <S>                                                   <C>              <C>              <C>
    Balance at beginning of period                        $1,191,977       $1,100,000       $1,000,000
      Provision charged to income                             35,000          110,084          100,000
      Charge-offs                                            (56,656)         (18,107)               -
      Recoveries                                                   -                -                -
                                                          ----------       ----------       ----------
    Balance at end of period                              $1,170,321       $1,191,977       $1,100,000
                                                          ==========       ==========       ==========
</TABLE>

  At September 30, 1998 and 1997, there were no material loans which were
  impaired as defined by FASB Statement No. 114, as amended by FASB Statement
  No. 118.  However, the Bank did have non-accrual loans, for which FASB
  Statement No. 114 does not apply, of $678,000 and $644,000, at September 30,
  1998 and 1997, respectively.  The Bank is not committed to lend additional
  funds to debtors whose loans have been modified.

  Loans to officers and directors totaled $411,000 and $354,000 at September
  30, 1998 and 1997, respectively.

  Mortgage loans serviced for others are not included in the accompanying
  consolidated statements of financial condition.  The unpaid principal
  balances of these loans are summarized as follows as of September 30,:

<TABLE>
<CAPTION>
                                                            1998               1997             1996
                                                         -----------      -----------      -----------
  <S>                                                    <C>              <C>              <C>
  Mortgage loans underlying FHLMC
    pass-through securities                              $77,445,977      $62,078,118      $47,171,302
                                                         ===========      ===========      ===========
</TABLE>

  Custodial escrow balances maintained in connection with the foregoing loan
  servicing were approximately $1,651,000 and $1,419,000, at September 30, 1998
  and 1997, respectively.

NOTE 6 - REAL ESTATE
  An analysis of the activity in the allowance for losses in real estate
  acquired in settlement of loans at September 30, were as follows:

<TABLE>
<CAPTION>
                                                             1998              1997              1996
                                                          ----------       ----------       -----------
    <S>                                                   <C>              <C>              <C>
    Balance at beginning of period                        $1,304,972       $1,691,527       $2,050,507
      Provisions for losses                                     (144)         (88,737)        (102,142)
      Charge-offs                                                  -         (297,818)        (256,838)
      Recoveries                                                   -                -                -
                                                          ----------       ----------       -----------
    Balance at end of period                              $1,304,828       $1,304,972       $1,691,527
                                                          ==========       ==========       ==========
</TABLE>

  For regulatory reporting purposes the above amounts are reported as
  "specific" reserves and are allocated to specific properties.  The Bank
  carries its "general valuation allowance" as an allowance for loan losses
  (see Note 5).





                                       31
<PAGE>   36
                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          SEPTEMBER 30, 1998 AND 1997
                                   CONTINUED

NOTE 7 - ACCRUED INTEREST RECEIVABLE
  Accrued interest receivable is summarized as follows as of September 30,:

<TABLE>
<CAPTION>
                                                             1998             1997
                                                          ----------       ----------
    <S>                                                   <C>              <C>
    Investment securities                                 $  289,565       $  384,752
    Mortgage-backed securities                               212,242          149,218
    Loans receivable                                       1,588,663        1,418,043
                                                          ----------       ----------
                                                          $2,090,470       $1,952,013
                                                          ==========       ==========
</TABLE>

NOTE 8 - PREMISES AND EQUIPMENT
  Premises and equipment consist of the following:

<TABLE>
<CAPTION>
                                                        September 30,
                                                  ---------------------------              Estimated
                                                     1998            1997                Useful Lives
                                                  ----------      -----------            -------------
    <S>                                          <C>             <C>                     <C>
    Land                                          $1,046,057      $   777,094                 -
    Building and improvements                      3,287,552        3,082,986            5 to 40 years
    Furniture, fixtures and equipment              2,175,602        1,978,494            3 to 15 years
                                                  ----------      -----------        
                                                   6,509,211        5,838,574
    Less accumulated depreciation                  2,573,433        2,450,042
                                                  ----------      -----------
                                                  $3,935,778       $3,388,532
                                                  ==========       ==========
</TABLE>

NOTE 9 - DEPOSITS
  Deposits at September 30, are summarized as follows:

<TABLE>
<CAPTION>
                                                      1998                             1997
                                       -----------------------------      ----------------------------
                                          Amount            Percent          Amount            Percent
                                       ------------         --------      -----------          -------
    <S>                                <C>                    <C>        <C>                    <C>
    Transaction accounts:
      Demand and NOW                   $ 24,355,223            11.91     $ 18,411,158             9.60
      Money market                       13,858,303             6.78       15,829,107             8.24
      Passbook savings                   12,683,902             6.20       12,202,513             6.35
                                       ------------         --------     ------------          -------
                                         50,897,428            24.89       46,442,778            24.19
                                       ------------         --------     ------------          -------
    Certificates of deposit:
      4% to 5%                           39,539,063            19.34       24,305,496            12.66
      5% to 6%                           97,129,878            47.50       99,707,956            51.92
      6% to 7%                           16,674,103             8.16       21,280,985            11.08
      7% to 8%                              106,608              .05          150,153              .08
      8% to 9%                              142,838              .06          145,930              .07
                                       ------------         --------     ------------          -------
                                        153,592,490            75.11      145,590,520            75.81
                                       ------------         --------     ------------          -------
                                       $204,489,918           100.00     $192,033,298           100.00
                                       ============         ========     ============          =======
</TABLE>

  The aggregate amount of short-term jumbo certificates of deposit with a
  minimum denomination of $100,000 was approximately $25,677,000 and
  $23,191,000, at September 30, 1998 and 1997, respectively.

  Scheduled maturities of certificates of deposit are as follows as of
September 30,:

<TABLE>
<CAPTION>
                                                                     1998
                                                        ----------------------------
    <S>                                                 <C>                    <C>
    Term to maturity                                        Amount            Percent
    ----------------                                    ------------         --------
    Within 12 months                                    $129,588,803            84.37
    12 to 24 months                                       10,402,657             6.78
    24 to 36 months                                       10,902,131             7.09
    Greater than 36 months                                 2,698,899             1.76
                                                        ------------         --------
                                                        $153,592,490           100.00
                                                        ============         ========
</TABLE>





                                       32
<PAGE>   37
                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          SEPTEMBER 30, 1998 AND 1997
                                   CONTINUED

NOTE 9 - DEPOSITS - CONTINUED
  Interest expense on deposits at September 30, are summarized as follows:

<TABLE>
<CAPTION>
                                                             1998            1997              1996
                                                          ----------       ----------       ----------
    <S>                                                  <C>              <C>              <C>
    Money Market                                          $  648,031       $  597,484       $  579,466
    Passbook savings                                         370,980          340,422          338,728
    NOW  198,448                                             201,920          205,815
    Certificates of deposit                                8,130,974        7,459,310        7,266,634
                                                          ----------       ----------       ----------
                                                          $9,348,433       $8,599,136       $8,390,643
                                                          ==========       ==========       ==========
</TABLE>

  The Federal Reserve Board requires all depository institutions to maintain
  reserves against their transaction accounts (primarily NOW and Super NOW
  checking accounts) and non-personal time deposits. Required reserves must be
  maintained in the form of vault cash or a non-interest-bearing account at a
  Federal Reserve Bank.

  In September 1996, Congress passed legislation to recapitalize the Savings
  Association Insurance Fund (SAIF) which insures Bank depositors up to
  applicable limits established by the Federal Deposit Insurance Corporation
  (FDIC).  This recapitalization will result in a substantial reduction in
  future insurance premiums (based on current rates) and will put the Bank at
  the same premium level as a well capitalized commercial bank.  This one time
  assessment of $1,070,000 was accrued as a charge to expense in the
  accompanying September 30, 1996 statement of earnings.

NOTE 10 - BORROWINGS
  Information related to Federal Home Loan Bank borrowings as of September 30,
is provided in the table below:

<TABLE>
<CAPTION>
                                                                    1998              1997
                                                                  -----------     ------------
      <S>                                                        <C>              <C>
      Balance at end of period                                    $17,000,000     $  2,000,000
      Average amount outstanding during the period                  4,923,000        2,846,000
      Maximum amount outstanding during the period                 19,000,000        5,000,000
      Weighted average interest rate during the period                   5.7%            6.00%
      Interest rates at end of period                            4.9% - 5.56%             5.8%
</TABLE>

  Scheduled repayments of Federal Home Loan Bank borrowings at September 30,
1998 are as follows:

<TABLE>
      <S>                              <C>
      Under 1 year                      $ 2,000,000
      Due 1 to 5 years                       -
      Due 6 to 10 years                  15,000,000
      Over 10 years                          -
                                        -----------
                                        $17,000,000
                                        ===========
</TABLE>
  The advances are collateralized by a blanket lien on first mortgage loans.

NOTE 11 - FEDERAL INCOME TAXES
  The Company and its subsidiaries file a consolidated federal income tax
  return.  Previously, if certain conditions are met in determining taxable
  income, the Bank is allowed a special bad-debt deduction, based on a
  percentage of taxable income (presently 8%), or on specified experience
  formulas.  This special bad-debt deduction is repealed for years beginning
  after January 1, 1997.

<TABLE>
                                  <S>              <C>              <C>
                                  $1,468,256       $1,380,880       $  704,000
                                  ==========       ==========       ==========
</TABLE>                  





                                       33
<PAGE>   38
                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          SEPTEMBER 30, 1998 AND 1997
                                   CONTINUED

NOTE 11 - FEDERAL INCOME TAXES - CONTINUED
  The provision for Federal income taxes differs from that computed at the
statutory corporate tax rate as follows:

<TABLE>
<CAPTION>
                                                             1998            1997              1996
                                                          ----------       ----------       ----------
    <S>                                                   <C>              <C>              <C>
    Computed "expected" tax expense                       $1,629,742       $1,570,937       $  776,573
    Adjustments:
      SFAS No. 122 mortgage servicing rights                 (32,940)         (55,237)         (78,367)
      Bad-debt deduction and real estate losses              (33,299)        (161,600)         (12,200)
      Other                                                  (95,247)          26,780           17,994
                                                          ----------       ----------       ----------
</TABLE>

  Deferred taxes are provided for timing differences in the recognition of
  income and expense for tax and financial statement purposes.  The sources and
  effects of these differences are as follows:

<TABLE>
<CAPTION>
                                                               1998           1997              1996
                                                             -------        ---------         --------
    <S>                                                      <C>            <C>                <C>
    Deferred loan fees                                       $20,842         $ 33,529          $45,270
    Accrued pension liability                                  8,678          (18,192)         (15,877)
    FHLB stock dividends                                           -           35,530           35,360
    Deferred compensation                                      5,738           31,883           21,707
    Deferred loan costs                                         (428)         (65,334)               -
    Other, net                                                 5,170          (20,416)          (5,460)
                                                             -------        ---------          -------
                                                             $40,000        $  (3,000)         $81,000
                                                             =======        =========          =======
</TABLE>

  The components of the net deferred tax assets shown in the accompanying
balance sheets at were comprised of the following:

<TABLE>
<CAPTION>
                                                                              1998             1997
                                                                             --------         --------
    <S>                                                                      <C>              <C>
    Deferred income tax assets:
      Net unrealized loss on available-for-sale securities                   $      -         $  8,376
      Deferred loan fees                                                      204,169          225,011
      Deferred compensation and other employee benefits                       320,099          333,872
      Deferred loan costs                                                      65,762           65,334
                                                                             --------         --------
         Total deferred income tax assets                                     590,030          632,593
    Deferred income tax liabilities:
      Net unrealized gain on available-for-sale securities                     38,575                -
      FHLB stock dividends                                                    165,618          165,618
      Book/tax depreciation difference                                        146,200          141,672
                                                                             --------         --------
         Total deferred income tax liabilities                                350,393          307,290
                                                                             --------         --------
      Net deferred income tax assets                                         $239,637         $325,303
                                                                             ========         ========
</TABLE>

  Stockholders' equity at September 30, 1998 and 1997, includes approximately
  $3,000,000, for which no deferred Federal income tax liability (approximately
  $1,020,000) has been recognized.  These amounts represent an allocation of
  bad-debt deductions for tax purposes only (base year bad debt reserve).
  Reduction of amounts so allocated for purposes other than tax bad-debt losses
  would create income for tax purposes only, which would be subject to the
  then-current corporate income tax rate.

NOTE 12 - STOCKHOLDERS' EQUITY
  The Mutual Holding Company had requested and received approval from the
  Office of Thrift Supervision to waive receipt of dividends on its shares
  through March 31, 1996.  Dividends declared by the Association on Mutual
  Holding Company shares total $1,365,000 at September 30, 1996.  Since the
  Mutual Holding Company ceased to exist effective March 29, 1996, this amount
  remains restricted for the payment of dividends to Company stockholders.





                                       34
<PAGE>   39
                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          SEPTEMBER 30, 1998 AND 1997
                                   CONTINUED

NOTE 13 - PENSION PLAN, THRIFT PLAN AND DEFERRED COMPENSATION
  The Bank has a qualified defined benefit retirement plan covering
  substantially all of its employees.  The benefits are based on each
  employee's years of service and the average of the highest compensation for
  sixty consecutive completed calendar months.  The benefits are reduced by a
  specified percentage of the employee's social security benefit.  An employee
  becomes fully vested upon completion of five years of qualifying service.  It
  is the policy of the Bank to fund an amount between the minimum and the
  maximum amount that can be deducted for Federal income tax purposes.

  The following table sets forth the plan's funded status and amounts
  recognized in the Bank's consolidated statements of financial condition at
  September 30:

    Actuarial present value of benefit obligations:

<TABLE>
<CAPTION>
                                                                             1998              1997
                                                                           ----------      -----------
    <S>                                                                   <C>              <C>
      Accumulated benefit obligation:
         Vested                                                            $1,215,554      $   946,464
         Nonvested                                                             18,875            8,702
                                                                           ----------      -----------
                                                                            1,234,429          955,166
      Effect of projected future compensation                                 965,165          738,890
                                                                           ----------      -----------

    Projected benefit obligation for service rendered to date               2,199,594        1,694,056
    Plan assets at fair value; primarily cash and short-term investments    1,796,216        1,596,085
                                                                           ----------      -----------
    Plan assets in excess of (less than) projected benefit obligation     $  (403,378)     $   (97,971)
                                                                          ===========      ===========
</TABLE>

    The components of computed net pension expense for the years ended
September 30, are as follows:

<TABLE>
<CAPTION>
                                                            1998              1997             1996
                                                          ----------       ----------       ----------
    <S>                                                   <C>              <C>              <C>
    Service cost - benefits earned during the year        $   89,998       $   95,691       $  127,148
    Interest cost on projected benefit obligation            116,967          149,291          155,090
    Actual return on plan assets                            (102,787)        (112,625)        (118,323)
    Net amortization and deferral                            (11,786)         (50,215)         (10,411)
                                                          ----------       ----------      -----------
           Net pension expense                            $   92,392       $   82,142       $  153,504
                                                          ==========       ==========       ==========
    Assumptions used to develop the net periodic
      pension cost were:
         Discount rate                                         6.50%            7.00%            7.00%
         Expected long-term rate of return on assets           6.00%            6.50%            6.50%
         Rate on increase in compensation levels               5.00%            5.00%            5.00%
</TABLE>

  The Bank has a defined contribution thrift plan in effect for substantially
  all employees.  Compensation and benefits expense includes $43,870 in 1998,
  $39,516 in 1997, and $39,508 in 1996 for such plan.  The thrift plan permits
  employee contributions in the amount of 1% to 6% of compensation.  The Bank
  contributes for each thrift plan participant a matching contribution equal to
  50% of the participant's contribution. In addition to the required matching
  contributions, the Bank may contribute an additional amount of matching
  contributions determined by the Board of Directors at its discretion.

  In addition to the aforementioned benefit plans, the Bank has deferred
  compensation arrangements with key officers and certain directors.  The
  deferred compensation is funded through life insurance contracts and calls
  for annual payments for a period of ten years.  The Bank funds the cost of
  the insurance for the officers while the cost of directors' insurance is
  funded through a reduction in their normal directors' fees.  Vesting occurs
  after specified years of service and payments begin upon retirement.  Expense
  reported in the statement of earnings under these arrangements totaled
  approximately $112,000 in 1998, $100,000 in 1997, and $73,000 in 1996.  At
  September 30, 1998 and 1997, the Bank had recorded a net liability of
  $300,000 and $300,000, respectively, related to such arrangements.





                                       35
<PAGE>   40
                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          SEPTEMBER 30, 1998 AND 1997
                                   CONTINUED

NOTE 14 - EMPLOYEE STOCK OWNERSHIP PLAN
  The Bank has established an Employee Stock Ownership Plan (ESOP) for
  employees age 21 or older who have at least one year of credited service with
  the Bank.  The ESOP will be funded by the Bank's contributions made in cash
  (which primarily will be invested in Company common stock) or common stock.
  Benefits may be paid either in shares of common stock or in cash.  The Bank
  accounts for its ESOP in accordance with the AICPA's Statement of Position
  93-6.

  During 1994, the ESOP borrowed $511,870 from a local bank and used the
  proceeds to purchase 51,187 shares of Association common stock (exchanged for
  72,575 shares of Jacksonville Bancorp stock in 1996).  The balance of this
  note was paid in full in connection with the Reorganization.  Also, in
  conjunction with the Reorganization, the ESOP acquired an additional 129,473
  shares of common stock of the Company.

  The Bank makes annual contributions to the ESOP equal to the debt service,
  less dividends received on the unallocated shares.  The ESOP shares have been
  pledged as collateral for the loan.  As the loan is repaid, shares are
  released from collateral and committed for allocation to active employees,
  based on the proportion of debt service paid in the year.  The shares pledged
  as collateral is reported as stock acquired by the ESOP plan in the statement
  of financial condition.  As shares are released from collateral, the Bank
  reports compensation expense equal to the average fair value of the shares
  over the period in which the shares were earned.  Also, the shares become
  outstanding for earnings per share computations. Dividends on allocated
  shares are recorded as a reduction of retained earnings, and dividends on
  unallocated shares are recorded as a reduction of the loan and accrued
  interest.  ESOP compensation expense was $285,000, $223,000, and $153,000 for
  the years ended September 30, 1998, 1997, and 1996, respectively. At
  September 30, 1998 and 1997, 86,902 and 63,754 ESOP shares, respectively,
  have been released for allocation, of which 72,152 and 42,331 were allocated
  to participants at September 30, 1998 and 1997, respectively.  The fair value
  of the unreleased shares of 115,149 and 138,297 at September 30, 1998 and
  1997, was approximately $1,439,363 and $2,385,000, respectively.

NOTE 15 - MANAGEMENT RECOGNITION PLAN
  As part of the initial conversion, the Bank adopted a Management Recognition
  Plan (MRP) to enable the Bank to provide officers and employees with a
  proprietary interest in the Association as incentive to contribute to its
  success.

  The Bank contributed $292,500 to the MRP Trust, and the MRP Trust purchased
  29,250 shares of common stock (exchanged for 41,472 shares of Jacksonville
  Bancorp stock in 1996).  The committee appointed by the board of directors on
  March 31, 1994, granted all 41,472 shares to 13 officers.  The shares granted
  are in the form of restricted stock to be earned and payable over a
  three-year period at the rate of one-third per year beginning, March 31,
  1995.

  In October 1996, the Bank adopted a second MRP Trust.  The Bank contributed
  $835,700 to the MRP Trust, and the MRP Trust purchased 55,028 shares of
  common stock.  The shares granted are in the form of restricted stock earned
  and payable over a five-year period at twenty percent (20%) per year,
  beginning on October 22, 1997.

  Compensation expense in the amount of the fair market value of the common
  stock at the date of the grant to the officer or employee is being recognized
  pro rata over the period during which the shares are earned and payable. MRP
  expense included in compensation and benefits in the accompanying
  consolidated statements of earnings totaled $167,000, $177,000, and $97,500
  for the years ended September 30, 1998, 1997, and 1996, respectively.





                                       36
<PAGE>   41
                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          SEPTEMBER 30, 1998 AND 1997
                                   CONTINUED

NOTE 16 - STOCK OPTION PLANS
  Certain directors and officers have options to purchase shares of the
  Associations' common stock under its 1994 Stock Incentive Plans.  The option
  price is the fair market value at the date of grant.  The options are
  exercisable, beginning September 30, 1994, and expire March 31, 2004.  Under
  the option plans, 73,123 shares were reserved for issuance and, at September
  30, 1994, no shares remain available for future grant to directors, officers
  and employees on a merit basis.  In connection with the formation of the
  Company and issuance of additional stock effective March 31, 1996, the shares
  under option were converted to Company shares at a ratio of 1.41785 for each
  share under option.  The option price per share was adjusted according to
  $7.05 per share.

  On October 22, 1996, stockholders approved the Company's 1996 Stock Incentive
  Plans.  Under these plans, 161,840 shares were reserved for issuance to
  director and officers.  All shares were granted and no shares remain
  available for future grant.  The option price is the fair market value at the
  date of grant.  The options are exercisable, beginning October 1997, vest 20%
  per year, and expire October 22, 2007.

  A summary of activity in the Company's stock incentive plans follows:

<TABLE>
<CAPTION>
                                                              Number       Aggregate      Weighted Average
                                                               of           Option             Price
                                                             Shares          Price           Per Share
                                                           ---------      -----------         --------
    <S>                                                      <C>          <C>                 <C>
    Options outstanding at September 30, 1996                 94,485      $   666,390         $   7.05
      Options granted                                        161,840        2,043,230            12.63
      Options exercised                                       10,403           73,341             7.05
                                                           ---------      -----------         --------
    Options outstanding at September 30, 1997                245,922        2,636,279            10.70
      Options granted                                              -                -                -
      Options exercised                                        1,304            9,193             7.05
                                                           ---------      -----------         --------
    Options outstanding at September 30, 1998
      (excise price of $7.05 to $12.63 per share)            244,618       $2,627,086           $10.74
                                                           =========       ==========           ======
    Exercisable at September 30, 1998                        115,138       $  992,337           $ 8.62
                                                           =========       ==========           ======
</TABLE>

  The weighted average fair value at date of grant for options granted under
  the 1996 Stock Incentive Plans was approximately $4.10 per option.  The fair
  value of options at date of grant was estimated using a binomial model with
  the following assumptions:

<TABLE>
      <S>                                                       <C>
      Expected life (years)                                       8
      Interest rate                                             6.6%
      Volatility                                                 20%
      Dividend yield                                              3%
</TABLE>

  Stock-based compensation costs would have reduced net income and earnings per
  share on a proforma basis for 1998 and 1997, by approximately $88,000 and
  $.04 per share each year, respectively, had the fair values at options
  granted in that year been recognized as compensation expense on a
  straight-line basis over the vesting period of the grant.  The proforma
  effect on net income for 1998 and 1997 is not representative of the proforma
  effect on net income for future years, because it does not take into effect
  grants made in prior years.





                                       37
<PAGE>   42
                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          SEPTEMBER 30, 1998 AND 1997
                                   CONTINUED

NOTE 17 - COMMITMENTS AND CONTINGENCIES
  In the ordinary course of business, the Company and subsidiaries have various
  outstanding commitments and contingent liabilities that are not reflected in
  the accompanying consolidated financial statements.  In addition, the Company
  and subsidiaries are defendants in certain claims and legal actions arising
  in the ordinary course of business.  In the opinion of management, after
  consultation with legal counsel, the ultimate disposition of these matters is
  not expected to have a material adverse effect on the consolidated financial
  position of the Company and subsidiaries.

  The Bank is obligated under noncancelable operating leases for computer
  equipment.  Leases are generally short-term and the remaining commitment at
  September 30, 1998, is not significant to the Company's operations or
  financial condition.

NOTE 18 - REGULATORY MATTERS
  The Bank is subject to various regulatory capital requirements administered
  by the federal banking agencies.  Failure to meet minimum capital
  requirements can initiate certain mandatory - and possibly additional
  discretionary - actions by regulators that, if undertaken, could have a
  direct material effect on the Bank's financial statements.  Under capital
  adequacy guidelines and the regulatory framework for prompt corrective
  action, the Bank must meet specific capital guidelines that involve
  quantitative measures of the Bank's assets, liabilities, and certain
  off-balance-sheet items as calculated under regulatory accounting practices.
  The Bank's capital amounts and classification are also subject to qualitative
  judgments by the regulators about components, risk-weightings, and other
  factors.

  Quantitative measures established by regulation to ensure capital adequacy
  require the Bank to maintain minimum amounts and ratios (set forth in the
  table below) of total and Tier I capital (as defined in the regulations) to
  risk-weighted assets (as defined), and of Tier I capital to average assets
  (as defined). Management believes that, as of September 30, 1998 and 1997,
  the Bank meets all capital adequacy requirements to which it is subject.

<TABLE>
<CAPTION>
                                                                                                To Be Well
                                                                                             Capitalized Under
                                                                     For Capital             Prompt Corrective
                                               Actual:              Adequacy Purposes:       Action Provisions:
                                    ---------------------------------------------------------------------------
As of September 30, 1998:            Amount        Ratio         Amount       Ratio          Amount      Ratio
- -------------------------           -----------    ------      -----------   ------        -----------   -----
    <S>                             <C>             <C>       <C>              <C>        <C>            <C>
    Risk-based capital
      (to risk-weighted assets)     $34,720,000     25.2%      $11,015,360     8.0%        $13,769,200   10.0%
    Tier I capital
      (to risk-weighted assets)     $33,550,000     24.4%      $ 5,507,680     4.0%        $ 8,261,520    6.0%
    Tier I capital
      (to average assets)           $33,550,000     13.1%      $10,214,640     4.0%        $12,768,300    5.0%
</TABLE>

<TABLE>
<CAPTION>
As of September 30, 1997:            Amount        Ratio         Amount      Ratio           Amount      Ratio
- -------------------------           -----------    ------       ----------   ------        -----------   -----
    <S>                             <C>            <C>          <C>            <C>         <C>           <C>
    Risk-based capital
      (to risk-weighted assets)     $32,870,234    26.37%       $9,971,621     8.0%        $12,464,526   10.0%
    Tier I capital

      (to risk-weighted assets)     $31,678,257    25.41%       $4,985,810     4.0%         $7,478,715    6.0%
    Tier I capital
      (to average assets)           $31,678,257    13.66%       $9,278,927     4.0%        $11,598,658    5.0%
</TABLE>





                                       38
<PAGE>   43
                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          SEPTEMBER 30, 1998 AND 1997
                                   CONTINUED

NOTE 19 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
  The Company is party to financial instruments with off-balance-sheet risk in
  the normal course of business to meet the financing needs of its customers.
  These financial instruments include commitments to extend credit.  Those
  instruments involve, to varying degrees, elements of credit and interest rate
  risk in excess of the amount recognized in the financial statements.  The
  contractual amounts of those instruments reflect the extent of involvement
  the Company has in particular classes of financial instruments.

  The Company's exposure to credit loss in the event of nonperformance by the
  other party to the financial instrument for commitments to extend credit is
  represented by the contractual amount of those instruments. The Company uses
  the same credit policies in making commitments and conditional obligations as
  they do for on-balance-sheet instruments.  Unless noted otherwise, the
  Company generally requires collateral to support financial instruments with
  credit risk.

  Commitments to extend credit are agreements to lend to a customer as long as
  there is no violation of any condition established in the contract.
  Commitments generally have fixed expiration dates or other termination
  clauses and may require payment of a fee.  Since the majority of the
  commitments are expected to be funded, the total commitment amounts represent
  future expected cash requirements.  The Company evaluates each customer's
  credit worthiness on a case-by-case basis.  The amount of collateral obtained
  if deemed necessary by the Company upon extension of credit is based in part
  on management's credit evaluation of the counter-part.  Collateral held
  varies, but consists principally of residential real estate and deposits.

NOTE 20 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
  The economy of the Company's market area, East Texas, has in the past been
  directly tied to the oil and gas industry.  Oil and gas prices have had an
  indirect effect on the Bank's business.  Although the Bank has a diversified
  loan portfolio, a significant portion of its loans are secured 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 much of this group represents loans secured
  by residential dwellings that are primarily owner-occupied.  Losses on this
  type of loan have historically been less than those on speculative and
  commercial properties.  The Bank's loan policy requires appraisal prior to
  funding any real estate loans and outlines the appraisal requirements on
  those renewing.

NOTE 21 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
  The following methods and assumptions were used to estimate the fair value of
  each class of financial instruments for which it is practicable to estimate
  that value:

  CASH AND INTEREST-BEARING DEPOSITS
  For these short-term instruments, the carrying amount is a reasonable
  estimate of fair value.

  INVESTMENT AND MORTGAGE-BACKED SECURITIES
  For securities held as investments, fair value equals quoted market price, if
  available.  If a quoted market price is not available, fair value is
  estimated using quoted market prices for similar securities.

  ACCRUED INTEREST
  The carrying amounts of accrued interest approximates their fair values.





                                       39
<PAGE>   44
                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          SEPTEMBER 30, 1998 AND 1997
                                   CONTINUED

NOTE 21 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
  LOANS RECEIVABLE
  For certain homogeneous categories of loans, such as residential mortgages,
  fair value is estimated using the quoted market prices for securities backed
  by similar loans, adjusted for differences in loan characteristics.  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.

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

  BORROWINGS
  Rates currently available to the Bank for debt with similar terms and
  remaining maturities are used to estimate fair value of existing debt.

  COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS-OF-CREDIT
  At September 30, 1998 and 1997, the Bank had not issued any standby
  letters-of-credit.  Commitments to extend credit totaled $5,008,444 and
  $4,821,301, at September 30, 1998 and 1997, respectively, and consisted
  primarily of agreements to fund mortgage loans at the prevailing rates based
  upon acceptable collateral.  Fees charged for these commitments are not
  significant to the operations or financial position of the Bank and primarily
  represent a recovery of underwriting costs.  The Company has not been
  required to perform on any financial guarantees during the past two years.
  The Company has not incurred any losses on its commitments in the last three
  years.

  The estimated fair values of the Company's financial instruments at September
  30, are as  follows:
<TABLE>
<CAPTION>
                                                          1998                             1997
                                            ----------------------------------------------------------------
                                              Carrying           Fair            Carrying          Fair
                                               Amount           Value             Amount           Value
                                            -------------    -------------    -------------    -------------
  <S>                                       <C>              <C>             <C>              <C>
  Financial assets:
    Cash and interest-bearing deposits       $ 10,867,646     $ 10,867,647     $  4,114,045     $  4,115,045
                                             ============     ============     ============     ============
    Investment securities                    $ 20,012,985     $ 20,107,734     $ 25,930,857     $ 25,977,760
                                             ============     ============     ============     ============
    Accrued interest receivable              $  2,090,470     $  2,090,470     $  1,952,013     $  1,952,013
                                             ============     ============     ============     ============
    Loans and mortgage-backed securities     $224,189,664                      $196,453,722
    Less:  Allowance for loan losses            1,170,322                         1,191,977
                                            -------------                      ------------
                                             $223,019,342     $226,335,745     $195,261,745     $197,461,422
                                             ============     ============     ============     ============
  Financial liabilities:
    Deposits                                 $204,489,918     $202,220,080     $192,033,298     $193,185,498
                                             ============     ============     ============     ============
    Borrowings                               $ 17,000,000     $ 17,000,000     $  2,000,000     $  2,000,000
                                             ============     ============     ============     ============
</TABLE>





                                       40
<PAGE>   45
                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          SEPTEMBER 30, 1998 AND 1997
                                   CONTINUED

NOTE 22 - CONDENSED FINANCIAL STATEMENTS OF JACKSONVILLE BANCORP, INC. (PARENT
  COMPANY ONLY)
  Jacksonville Bancorp, Inc., was organized in December 1995, and began
  operations on March 29, 1996, effective with the Reorganization.  The
  Company's condensed balance sheets as of September 30, and, related condensed
  statements of earnings for the years ended September 30, are as follows:
<TABLE>
<CAPTION>
                                                                                      1998            1997
                                                                                   -----------     -----------
                                    BALANCE SHEETS
  <S>                                                                             <C>              <C>
  ASSETS
    Cash in Bank                                                                   $   709,446     $   788,522
    Investment in subsidiary                                                        35,076,618      33,262,798
    Other assets                                                                        81,085          42,347
                                                                                   -----------     -----------
           Total assets                                                            $35,867,149     $34,093,667
                                                                                   ===========     ===========

  LIABILITIES AND STOCKHOLDERS' EQUITY
    Other liabilities                                                              $     6,300     $         -
    Dividends payable                                                                  298,768         305,464
    Stockholders' equity                                                            35,562,081      33,788,203
                                                                                   -----------     -----------
           Total liabilities and stockholders' equity                              $35,867,149     $34,093,667
                                                                                   ===========     ===========

                                 STATEMENTS OF EARNINGS

    General and administrative expenses                                            $  112,113      $    91,845
                                                                                   -----------     -----------
      Loss before income taxes and equity in undistributed
         earnings of subsidiaries                                                      112,113          91,845
    Income tax (benefit)                                                               (38,738)        (31,226)
                                                                                   -----------     -----------
      Loss before equity in earnings of subsidiaries                                    73,375          60,619
    Dividends from subsidiaries                                                      2,181,000         374,107
    Equity in undistributed earnings of subsidiaries                                 1,217,477       2,926,036
                                                                                   -----------     -----------
           Net earnings                                                            $ 3,325,102     $ 3,239,524
                                                                                   ===========     ===========
</TABLE>





                                       41
<PAGE>   46
                               STOCK INFORMATION

         Shares of Jacksonville Bancorp, Inc.'s common stock are traded
nationally under the symbol "JXVL" on the NASDAQ National Market System.  At
December 11, 1998, the Company had 2,367,547 shares of common stock outstanding
and had 398 stockholders of record.

         The following table sets forth the reported high and low sale prices
of a share of the Company's common stock as reported by NASDAQ (the common
stock commenced trading on the NASDAQ National Market System on March 29, 1996)
and cash dividends paid per share of common stock during the periods indicated.
Data prior to that data is given with respect to Jacksonville Savings & Loan
Association.

<TABLE>
<CAPTION>
                                                        HIGH            LOW                DIVIDEND
 <S>                                                <C>              <C>                   <C>
 Quarter ended December 31, 1994(1)                   $  7.40         $  7.40                $0.10

 Quarter ended March 31, 1995(1)                         7.58            7.14                $0.10

 Quarter ended June 30, 1995(1)                          7.58            7.31                $0.10

 Quarter ended September 30, 1995(1)                    12.69            8.11                $0.10

 Quarter ended December 31, 1995(1)                     11.90           10.57                $0.10

 Quarter ended March 31, 1996(1)                        11.63           10.40                $0.10

 Quarter ended June 30, 1996                            10.88            9.13                $0.125

 Quarter ended September 30, 1996                       13.13           10.00                $0.125

 Quarter ended December 31, 1996                        15.00           12.50                $0.125

 Quarter ended March 31, 1997                           15.75           13.94                $0.125

 Quarter ended June 30, 1997                            15.13           13.25                $0.125

 Quarter ended September 30, 1997                       17.25           14.75                $0.125

 Quarter ended December 31, 1997                        24.75           16.88                $0.125

 Quarter ended March 31, 1998                           23.00           19.13                $0.125

 Quarter ended June 30, 1998                            22.00           18.00                $0.125

 Quarter ended September 30, 1998                       18.50           14.50                $0.125
</TABLE>


(1) Amounts previously reported for Jacksonville stock have been restated to
    reflect the exchange of 1.41785 shares of the Company stock for each share
    of Jacksonville stock during the second quarter of fiscal 1996.


                                        42

<PAGE>   47
                        DIRECTORS AND EXECUTIVE OFFICERS



<TABLE>
 <S>                                                                  <C>
 W. G. BROWN                                                          JERRY M. CHANCELLOR
 Chairman of the Board of the Company; Retired, Owner                 Director and President and Chief Executive Officer
 of Brown Lumber Industries                                           of the Company

 RAY W. BEALL                                                         BILL W. TAYLOR
 Director of the Company; Retired senior executive                    Director and Executive Vice President of the Company
 for Beall's Department Store

 CHARLES BROADWAY                                                     DR. JOE TOLLETT
 Director of the Company, Retired Chief Executive                     Director of the Company; Retired Pediatrician
 Officer of the Company

 ROBERT BROWN
 Director of the Company; Manager, Brown Lumber
 Industries
</TABLE>


                               BANKING LOCATIONS

                                  MAIN OFFICE
                          Commerce and Neches Streets
                           Jacksonville, Texas 75766
                                 (903) 586-9861

                                 BRANCH OFFICES


<TABLE>
 <S>                                                 <C>
 1015 North Church Street                            617 South Palestine Street
 Palestine, Texas 75801                              Athens, Texas 75751
 (903) 729-3228                                      (903) 677-2511

 107 East Fourth Street                              5620 Old Bullard Road
 Rusk, Texas 75785                                   Tyler, Texas 75703
 (903) 683-2287                                      (903) 534-9144

 1412 Judson Road                                    515 E. Loop 281
 Longview, Texas 75601                               Longview, Texas 75608
 (903) 758-0118                                      (903) 663-9271
</TABLE>


                                      43


<PAGE>   48
                            STOCKHOLDER INFORMATION

         Jacksonville Bancorp, Inc. is a Texas-chartered corporation and
savings and loan holding company.  Its primary asset, Jacksonville Savings and
Loan Association, is a Texas-chartered stock savings and loan association which
conducts business from its main office in Jacksonville, Texas and six branch
offices in the neighboring communities.


                            TRANSFER AGENT/REGISTRAR

         Chase Mellon Shareholder Services
         451 West 33rd Street
         New York, New York  10001
         212-273-8000


                              SHAREHOLDER REQUESTS

         Requests for annual reports, quarterly reports and related stockholder
literature should be directed to Corporate Secretary, Jacksonville Bancorp,
Inc., Commerce and Neches Streets, Jacksonville, Texas 75766.

         Shareholders needing assistance with stock records, transfers or lost
certificates, please contact the Company's transfer agent, Mellon Securities
Trust Company.


                                      44

<PAGE>   1

                       [HENRY & PETERS, PC LETTERHEAD]

                       CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
Jacksonville Bancorp, Inc.


We consent to the use of our report dated October 22, 1998, on the consolidated 
financial statements of Jacksonville Bancorp, Inc. and subsidiaries as of 
September 30, 1998 and 1997, and for each of the years in the three-year period 
ended September 30, 1998, in Jacksonville Bancorp, Inc.'s Form 10-K for the
year ended  September 30, 1998.


                                   /s/ HENRY & PETERS, P.C.
                                   ----------------------------
                                   HENRY & PETERS, P.C.



Tyler, Texas
December 17, 1998


<TABLE> <S> <C>

<ARTICLE> 9
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                          SEP-30-1998
<PERIOD-START>                             OCT-01-1997
<PERIOD-END>                               SEP-30-1998
<CASH>                                           3,086
<INT-BEARING-DEPOSITS>                           7,781
<FED-FUNDS-SOLD>                                     0
<TRADING-ASSETS>                                     0
<INVESTMENTS-HELD-FOR-SALE>                     29,341
<INVESTMENTS-CARRYING>                          22,538
<INVESTMENTS-MARKET>                            22,720
<LOANS>                                        192,329
<ALLOWANCE>                                      1,175
<TOTAL-ASSETS>                                 263,160
<DEPOSITS>                                     204,490
<SHORT-TERM>                                     2,043
<LIABILITIES-OTHER>                              6,065
<LONG-TERM>                                     15,000
                                0
                                          0
<COMMON>                                            27
<OTHER-SE>                                      35,535
<TOTAL-LIABILITIES-AND-EQUITY>                 263,160
<INTEREST-LOAN>                                 15,442
<INTEREST-INVEST>                                2,762
<INTEREST-OTHER>                                   337
<INTEREST-TOTAL>                                18,541
<INTEREST-DEPOSIT>                               9,348
<INTEREST-EXPENSE>                               9,628
<INTEREST-INCOME-NET>                            8,913
<LOAN-LOSSES>                                       35
<SECURITIES-GAINS>                                   0
<EXPENSE-OTHER>                                  5,630
<INCOME-PRETAX>                                  4,793
<INCOME-PRE-EXTRAORDINARY>                       4,793
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                     3,325
<EPS-PRIMARY>                                     1.44
<EPS-DILUTED>                                     1.38
<YIELD-ACTUAL>                                    7.99
<LOANS-NON>                                        682
<LOANS-PAST>                                         0
<LOANS-TROUBLED>                                   379
<LOANS-PROBLEM>                                  1,395
<ALLOWANCE-OPEN>                                 1,192
<CHARGE-OFFS>                                     (57)
<RECOVERIES>                                         0
<ALLOWANCE-CLOSE>                                1,170
<ALLOWANCE-DOMESTIC>                             1,170
<ALLOWANCE-FOREIGN>                                  0
<ALLOWANCE-UNALLOCATED>                              0
        

</TABLE>



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