JACKSONVILLE BANCORP INC
10-K405, 1999-12-23
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, 1999

                                      OR

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

          For the transition period from             to
                                         -----------    -------------
                        Commission File No: 000-28070

                           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
                                ---     ---


                                       -1-
<PAGE>   2
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 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 10, 1999, the aggregate value of the 1,714,573 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
217,091 shares held by all directors and officers of the Registrant as a group
and 202,048 shares held by Jacksonville Bancorp, Inc. Employee Stock Ownership
Plan, was approximately $25,289,952. This figure is based on the closing price
of $14.75 per share of the Registrant's Common Stock on December 10, 1999.

Number of shares of Common Stock outstanding as of December 10, 1999:
2,133,712.

                      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, 1999 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.


                                       -2-
<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 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, home equity loans, and a limited number of
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 the
principal business activity in the city 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


                                       -3-
<PAGE>   4
Junior College, Texas College, Lon Morris College, Jacksonville College, and
Trinity Valley Junior College. According to reports from the Bureau of Labor
Statistics, as of September 30, 1999, the unemployment rate in Cherokee County
and surrounding counties in East Texas was estimated to be 5.35% as compared to
5.5% in 1998 and the estimated unemployment rates for the United States during
these periods were 4.1% and 5.0% respectively.

LENDING ACTIVITIES

     At September 30, 1999, Jacksonville's net loan portfolio totaled $216.3
million representing approximately 74.5% of Jacksonville's $290.4 million of
total assets at that date. The principal lending activity of Jacksonville is the
origination of single-family residential loans. At September 30, 1999,
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, 1999,
Jacksonville's single-family residential loan portfolio totaled $164.7 million,
representing approximately 72.9% of Jacksonville's total loans, before net
items, at that date. Jacksonville held $12.0 million in commercial real estate
loans at that date, representing 5.3% of total loans, before net items. Of the
commercial real estate loans, $3.5 million, or 29.1%, 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 $4.8 million in new commercial loans during fiscal 1999. The only
other significant areas of lending activity by Jacksonville are construction
loans, land loans, and consumer loans which, as of September 30, 1999,
represented $21.2 million, or 9.4%, $3.2 million, or 1.4% and $24.0 million, or
10.6% of total loans. Home equity loans in the amount of $15.5 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, 1999, Jacksonville's limit on loans-to-one borrower was
$5.0 million, and its five largest loans or groups of loans-to-one borrower,
including related entities, aggregated $1.4 million, $1.3 million, $1.1 million,
$993,000, and $912,000. 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 $1.3 million was a loan to develop a residential subdivision. The $1.1
million loan was for two commercial buildings, while the $993,000 loan was for
commercial real estate with residential real estate as additional collateral.
The $912,000 loan was for multiple town house units. All of these loans are
secured primarily by residential and nonresidential real estate located in
Cherokee County and surrounding counties in East Texas.


                                       -4-
<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,
                                     -------------------------------------------------------------------------------
                                                  1999                     1998                         1997
                                     --------------------------   -------------------------   ----------------------
                                     AMOUNT           %           AMOUNT            %         AMOUNT         %
                                     ------------   -----------   ------------    ---------   -----------  ---------
                                      (Dollars in Thousands)
<S>                                  <C>            <C>             <C>            <C>         <C>         <C>
MORTGAGE LOANS:

  Single-family residential(1)       $164,661        72.9%           $149,961         74.7%     $141,107       78.0%
  Multi-family residential                819          .4%              1,091          0.5         1,144         .7
  Commercial                           12,000         5.3%              9,764          4.9         9,492        5.2
  Construction                         21,171         9.4%             15,486          7.7        10,799        5.9
  Land                                  3,172         1.4%              3,771          1.9         3,446        1.9
                                     --------        ----             -------         ----       -------       ----
     Total mortgage loans            $201,823        89.4%           $180,073         89.7%     $165,988       91.7%
                                     --------        ----             -------         ----       -------       ----

BUSINESS AND CONSUMER LOANS:

  Commercial business                 $     6           -            $     55           - %     $    76         - %
  Consumer loans:
    Secured by deposits                 2,183         1.0%              2,023          1.0         2,127        1.2
    Secured by vehicles                12,414         5.4%             10,577          5.3         6,537        3.6
    Personal real estate loans          5,399         2.4%              5,171          2.6         4,274        2.4
    Other                               4,019         1.8%              2,884          1.4         1,983        1.1
                                       ------         ----             ------          ---        ------      -----
    Total consumer loans               24,015        10.6%             20,655         10.3        14,921        8.3
                                       ------        ----              ------         ----        ------      -----
    Total business and consumer loans  24,021        10.6%             20,710         10.3        14,997        8.3
                                       ------        ----              ------         ----        ------      -----

    Total loans                      $225,844       100.0%           $200,783        100.0%     $180,985      100.0%
                                      -------       =====             -------        =====       -------      =====

Less:
  Undisbursed portion of loans in
   process                            $ 7,835                        $  7,846                   $  5,025
  Unearned discounts                       34                              46                         62
  Net deferred loan origination fees      496                             568                        662
  Unrealized losses on loans held for
    sale                                    -                               -                          -
  Allowance for loan losses             1,212                           1,170                      1,192
                                        -----                           -----                      -----
     Net loans                       $216,267                        $191,153                   $174,044
                                      =======                         =======                    =======
</TABLE>


                                       -5-
<PAGE>   6
<TABLE>
<CAPTION>
                                                               SEPTEMBER 30,
                                                ---------------------------------------------------
                                                          1996                        1995
                                                -----------------------    ------------------------
                                                   AMOUNT          %          AMOUNT           %
                                                -------------  --------    -------------   --------
                                                                 (Dollars in Thousands)

<S>                                             <C>            <C>          <C>            <C>
MORTGAGE LOANS:

  Single-family residential(1)                  $132,599          81.4%     $117,853          84.1%
  Multi-family residential                         1,268            .8         1,183            .8
  Commercial                                       8,604           5.3         8,167           5.8
  Construction                                     6,996           4.3         4,312           3.1
  Land                                             4,395           2.7         3,754           2.7
                                                 -------          ----       -------          ----
     Total mortgage loans                       $153,862          94.5%     $135,269          96.5%
                                                 -------          ----       -------          ----

BUSINESS AND CONSUMER LOANS:

  Commercial business                           $    219            .1%     $    232            .2%
  Consumer loans:
    Secured by deposits                            2,290           1.4         1,922           1.4
    Secured by vehicles                            2,961           1.8           960            .6
    Personal real estate loans                     2,686           1.6         1,253            .9
    Other                                            922            .6           526            .4
                                                   -----           ---         -----           ---
    Total consumer loans                           8,859           5.4         4,661           3.3
                                                   -----           ---         -----           ---
      Total business and consumer loans            9,078           5.5         4,893           3.5
                                                   -----           ---         -----           ---

    Total loans                                 $162,940         100.0%     $140,162         100.0%
                                                 -------         =====       -------         =====

Less:
  Undisbursed portion of loans in
   process                                        $2,956                    $  2,230
  Unearned discounts                                  89                         106
  Net deferred loan origination fees                 761                         893
  Unrealized losses on loans held for
    sale                                               -                           -
  Allowance for loan losses                        1,100                       1,000
                                                 -------                     -------

     Net loans                                  $158,034                    $135,933
                                                 =======                     =======
</TABLE>


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

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


                                       -6-
<PAGE>   7
     CONTRACTUAL PRINCIPAL REPAYMENTS. The following table sets forth certain
information at September 30, 1999, 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
                                   9/30/00         9/30/01        9/30/02       9/30/99       9/30/99        9/30/99
                                ------------    ------------   ------------    ---------     ----------    ------------

                                                                      (In Thousands)

<S>                             <C>             <C>             <C>          <C>             <C>            <C>
Single-family residential(1)    $     77        $   307         $   733      $  3,668         $22,332        $48,896
Multi-family residential               2                                                          191            547
Commercial                           193                             28           493           2,370          3,984
Construction                      21,171                                                                         987
Land                                   7             22              52           121             553
Commercial business                                   6
Consumer                             953          1,967           3,609         9,332           2,672          2,256
                                  ------          -----           -----        ------          ------         ------
    Total                       $ 22,403        $ 2,302         $ 4,422      $ 13,614         $28,118        $56,670
                                  ======          =====           =====        ======          ======         ======


<CAPTION>
                                    DUE MORE
                                     THAN 15
                                      YEARS
                                      AFTER
                                     9/30/99        TOTAL
                                   ----------   --------------

                                         (In Thousands)
<S>                                <C>          <C>
Single-family residential(1)        $88,648       $164,661
Multi-family residential                 79            819
Commercial                            4,932         12,000
Construction                                        21,171
Land                                  1,430          3,172
Commercial business                                      6
Consumer                              3,226         24,015
                                     ------        -------
    Total                           $98,315       $225,844
                                     ======        =======
</TABLE>



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

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


                                       -7-
<PAGE>   8
     The following table sets forth the dollar amount of all loans, before net
items, due after one year from September 30, 1999 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)                    $110,977                $53,607               $164,584
Multi-family residential                             485                    332                    817
Commercial real estate                             6,357                  5,450                 11,807
Construction                                           0                      0                      0
Land                                               1,117                  2,048                  3,165
Commercial business                                    6                      0                      6
Consumer                                          23,062                      0                 23,062
                                                 -------                 ------                -------
  Total                                        $ 142,004                $61,437               $203,441
                                                 =======                 ======                =======
</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 most 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. Prior to fiscal 1999 Jacksonville
followed 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. However, during 1999 management
elected


                                       -8-
<PAGE>   9
to portfolio a greater percentage of its fixed rate mortgage product because of
increased interest rates. 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, 1999, $82.4 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 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, 1999, $102.0
million or 45.2% of Jacksonville's total loans, before net items, were
fixed-rate single-family residential loans, and $62.7 million or 27.8% of such
total loans were adjustable-rate single-family residential mortgage loans. Of
these adjustable mortgages, $26.1 million, or 41.6%, 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,
                                         ---------------------------------------------------
                                             1999                1998              1997
                                         ---------------    -------------     --------------

<S>                                      <C>                <C>               <C>
         LOAN ORIGINATIONS:
           Single-family residential      $ 62,885              $55,408           $42,594
           Multi-family residential              0                    -                 -
           Land                                342                  862             1,876
           Commercial                        4,799                  983             1,079
           Construction                     23,446               20,135            10,126
           Commercial business                   0                   -                 -
           Consumer                         13,362               11,877            11,029
                                           ------                ------            ------
             Total loans originated        104,834               89,265            66,704
           Purchases                             -                    -                 -
             Total loans originated
               and purchased               104,834               89,265            66,704
                                           -------               ------            ------

         SALES AND LOAN PRINCIPAL
           REDUCTIONS:
           Loans sold                       23,866               28,189            22,311
           Loan principal
             repayments                     55,907               40,925            25,948
                                            ------               ------            ------
             Total loans sold and
               principal reductions         79,773               69,114            48,259


         Increase (decrease) due
           to other items, net(1)             (591)                (353)           (2,435)
                                            -------              -------           -------


         Net increase (decrease)
           in loan portfolio               $24,470              $19,798           $16,010
                                           =======              =======           =======
</TABLE>

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

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

     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


                                       -9-
<PAGE>   10
loans. At September 30, 1999, $164.7 million or 72.9% 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 $124.6 million of loans to FHLMC and has retained the
servicing on all of these loans. Since that same date, Jacksonville has sold
$32.8 million of loans to the mortgage banking company. During fiscal 1999,
Jacksonville sold $18.5 million of loans to FHLMC and $5.4 million to the
mortgage banking company. Loan sales were down primarily as a result of
Jacksonville electing to portfolio more of its loan originations because of
interest rates increases.

     During the year ended September 30, 1999, Jacksonville originated $62.9
million of single-family residential loans of which $59.4 million, or 94.4%,
were fixed rate and $3.5 million, or 5.6%, were adjustable rate. Of the
fixed-rate single-family residential loans originated during the period,
Jacksonville sold $18.5 million, or 31.1%, to FHLMC. The volume of single-family
residential loans originated increased by 13.5% from $55.4 million during fiscal
1998 as compared to $62.9 million during fiscal 1999 and the percentage of sales
of such originations decreased from 50.9% in fiscal 1998 to 38.0% in fiscal
1999. During the year Jacksonville elected to portfolio a large number of its 15
and 30 year mortgage loan product because of the increased interest rates.
Jacksonville will reevaluate this policy if there is a material and prolonged
change in interest rates and may elect to again sell most of its loan
originations with terms of more than 15 years.

     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


                                      -10-
<PAGE>   11
largely 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, 1999, $62.7 million, or 27.8%, 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 5.6%, 3.1%, and 10.7% of Jacksonville's total
originations of single-family residential loans during the years ended September
30, 1999, 1998, and 1997, 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 $2.5
million as of September 30, 1999. 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, 1999 there was a balance of
$15.5 million in home equity loans.

     COMMERCIAL MORTGAGE LOANS. At September 30, 1999, $12.0 million, or 5.3%,
of Jacksonville's total loan portfolio, before net items, consisted of loans
secured by existing commercial real estate. Of these commercial mortgage loans,
$3.5 million, or 29.1%, 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, 1999, 1998 and 1997 were, respectively, $4.8 million, $983,000
million, and $1.08 million.

     As of September 30, 1999, the commercial mortgage loans in Jacksonville's
portfolio not secured by real estate acquired in satisfaction of debts
previously contracted or improvements thereon totaled $8.5 million. These loans
have terms up to 30 years and have both fixed and adjustable rates. At September
30, 1999, $5.9 million, or 69.4%, 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


                                      -11-
<PAGE>   12
located in Jacksonville's lending area.

     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.

     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, 1999, construction loans totaled $21.2
million or 9.4% 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, 1999 to $23.4 million from $20.1
million during fiscal 1998.

     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 - At September 30, 1999 the principal balance on home
equity loans totaled $15.5 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, 1999, land loans totaled $3.2 million or
1.4% of the total loan portfolio, before net items. As of the date, Jacksonville
had 100 land loans in its loan portfolio, over 90% of which were utilized for
ranching, agricultural or residential


                                      -12-
<PAGE>   13
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, 1999, was
approximately $32,000.

     CONSUMER LOANS. At September 30, 1999, consumer loans totaled $24.0 million
or 10.6% 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
$2.2 million at September 30, 1999. 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, 1999. All of these loans are secured by the purchased
land, but because these loans are typically for $40,000 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, 1999, the bank had 336 personal real estate loans with
an average balance of $16,000. Jacksonville's vehicle loan portfolio totaled
$12.4 million at September 30, 1999. 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, 1999, $819,000
or .4%, and $6,000, or .0%, 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 nine multi-family loans in
Jacksonville's loan portfolio as of September 30, 1999, the largest loan had a
principal amount of $351,000 which represented 42.9% of the multi-family loan
portfolio. As of September 30, 1999, Jacksonville had only one commercial
business loan with a principal balance of $6,000.

     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.

     The charging of points, in most cases, were limited during fiscal 1999
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, 1999,
Jacksonville had $496,000 of loan fees which had been deferred and are being
recognized as income over the estimated maturities of the related loans.


                                      -13-
<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.


                                      -14-
<PAGE>   15
ASSET QUALITY

     DELINQUENT LOANS. The following table sets forth information concerning
delinquent loans at September 30, 1999, 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                      $1,261         34.5%        $    -            -%      $ 754         20.7%
  60-89 days                         437         12.0              -            -
  90 days and over                   435         11.9              -            -
                                   -----         ----          ------       -----       -----         -----
    Total delinquent loans        $2,133         58.4%        $    -            -%      $ 754         20.7%
                                   =====         ====          ======       =====         ===         ====



<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                      $   -            - %        $    -            -%      $ 577         15.8%
  60-89 days                          -            -               -            -          76          2.1
  90 days and over                    -            -               -            -         109          3.0
                                   ----         ----           -----         ----         ---         ----

    Total delinquent loans        $   -            - %        $    -            -%      $ 762         20.9%
                                   ====         ====           =====         ====         ===         ====


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

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

                                  (Dollars in Thousands)

<S>                              <C>        <C>
Loans delinquent for:

  30-59 days                      $2,592         71.0%
  60-89 days                         513         14.1
  90 days and over                   544         14.9
                                   -----         ----
    Total delinquent loans        $3,649        100.0%

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


     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


                                      -15-
<PAGE>   16
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.

     FORECLOSED REAL ESTATE. Foreclosed real estate(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 $346,000, $531,000, and $526,000 as of September 30, 1999, 1998, and
1997 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, 1999, Jacksonville had no REO sold by the deposit method.


                                      -16-
<PAGE>   17
     The following table sets forth the amounts and categories of Jacksonville's
non-performing assets at the dates indicated.

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

                                           1999        1998        1997        1996        1995
                                        ---------   ---------   ---------   ---------   ----------
                                                           (Dollars in Thousands)

<S>                                    <C>        <C>          <C>         <C>          <C>
Non-accruing loans:
  Single-family residential(1)          $     435   $     642   $     448    $    465   $      534
  Multi-family residential                      -           -           -           -            -
  Commercial                                    -           -         154           -            3
  Construction                                  -           -           -           -            -
  Land                                          -           -           -         321           26
  Commercial business                           -           -           -           -            -
  Consumer                                    109          36          42          29            -
                                              ---         ---         ---         ---          ---
    Total non-accruing loans                  544         678         644         815          563

Accruing loans 90 days or more
  delinquent                                  -             -           -           -            -
                                              ---         ---         ---         ---          ---
  Total non-performing loans                  544         678         644         815          563
                                              ---         ---         ---         ---          ---

Real estate owned(2)                          346         531         526       1,051        2,052
                                              ---       -----       -----       -----        -----
  Total non-performing assets           $     890   $   1,209   $   1,170    $  1,866   $    2,615
                                              ===       =====       =====       =====        =====

Troubled debt restructurings            $     338        $379   $     383    $    387   $      391
                                              ===         ===         ===         ===          ===

Total non-performing loans and
  troubled debt restructurings
  as a percentage of total net loans         .41%        .55%        .59%        .76%         .70%
                                             ===         ===         ===         ===          ===

Total non-performing assets and
  troubled debt restructurings as
  a percentage of total assets               .42%        .60%        .66%       1.03%        1.51%
                                             ===         ===         ===        ====         ====
</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, 1999, 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 1999, 1998,
and 1997 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 $26,000, $48,000, and $63,000, 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, 1999, no interest income was actually recorded on any loans after
they were placed on non-accrual status.


                                      -17-
<PAGE>   18
     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 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, 1999 consisted of $67,000
of assets classified as special mention, $1.5 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, $346,000, or 23.0%, were non residential real estate
parcels acquired as real estate owned, $960,000, or 63.8%, were single-family
residential loans. The remaining balance of $198,000 was in consumer loans and
repossessed autos.


                                      -18-
<PAGE>   19
     The following table sets forth the Bank's classified assets at the dates
indicated.

<TABLE>
<CAPTION>
                                                 SEPTEMBER 30,
                                  ------------------------------------------
                                      1999           1998            1997
                                  -----------    --------------   ----------
                                                 (In Thousands)

<S>                               <C>            <C>              <C>
Classification:
  Special mention                  $   67           $  245           $   60
  Substandard                       1,504            1,681            1,923
  Doubtful                              -               -                -
  Loss(1)                               -               -                -
                                    -----            -----            -----
    Total classified assets        $1,571           $1,926           $1,983
                                    =====            =====            =====
</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 1999 non-performing loans decreased to $544,000 while net charge-offs
for the period totaled $18,000. The Company's level of net loans outstanding
increased $25.1 million which included an increase of 16.3% 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 $60,000 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.

     At September 30, 1999, Jacksonville's allowance for loan losses amounted to
$1.2 million, the same amount as allocated at September 30, 1998.


                                      -19-
<PAGE>   20
     The following table sets forth an analysis of Jacksonville's allowance for
loan losses during the periods indicated.

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

                                         1999                1998                 1997               1996             1995

                                    ---------------     ---------------   ------------------    ---------------   ---------------
                                                                         (Dollars in Thousands)

<S>                                 <C>                 <C>               <C>                   <C>               <C>
Total net loans outstanding          $216,267              $191,153            $174,044             $158,034          $135,933

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

Average loans outstanding            $205,057              $180,021            $163,569             $145,021          $128,623

                                     ========               =======             =======              =======           =======
Balance at beginning of
  period                             $  1,170              $  1,192            $  1,100             $  1,000          $  1,000

Charge-offs                               (18)                  (57)                (18)                  --               (57)

Recoveries                                 --                    --                  --                   --                32

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

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

Provision for losses on loans              60                    35                 110                  100                25

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

Balance at end of period             $  1,212             $   1,170            $  1,192             $  1,100          $  1,000

                                        ======              =======             =======             ========           =======
Allowance for loan losses
  as a percent of total net
  loans outstanding                        .56%                 .61%                .68%                 .70%              .74%

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

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


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


                                      -20-
<PAGE>   21
     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,
                                 ------------------------------------------------------------------------------------
                                             1999                          1998                    1997

                                 --------------------------    --------------------------   -------------------------
                                               % 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                       $  957            79%        $1,092         93.3%       $1,027         86.2%
Commercial business loans                 -             -              -            -            10           .8
Consumer loans                          255            21             78          6.7           155         13.0
                                      -----         -----          -----        -----         -----        -----

    Total allowance for loan losses  $1,212         100.0%        $1,170        100.0%       $1,192        100.0%
                                      =====         =====          =====        =====         =====        =====


<CAPTION>
                                                           SEPTEMBER 30,
                                       -----------------------------------------------------
                                                 1996                        1995
                                       -------------------------      -----------------------
                                                    % 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                          $1,025           93.2%       $ 894         96.5%
Commercial business loans                   20            1.8           30           .2
Consumer loans                              55            5.0           76          3.3
                                         -----          -----        -----        -----
    Total allowance for loan losses     $1,100          100.0%      $1,000        100.0%
                                         =====          =====        =====        =====
</TABLE>


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, 1999, $8.7 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.


                                      -21-
<PAGE>   22
     The following table sets forth the activity in Jacksonville's
mortgage-backed securities portfolio during the periods indicated.

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

                                                      1999            1998             1997
                                                   ----------      -----------      -----------
                                                              (dollars in Thousands)

<S>                                                <C>             <C>              <C>
Mortgage-backed securities at
  beginning of period                              $31,866           $21,217         $12,107
Purchases                                           14,161            17,663          11,372
Sales                                                   --                --              --
Repayments                                          (8,387)           (7,014)         (2,262)
                                                    ------            -------         -------
Mortgage-backed securities at end
   of period                                       $37,640           $31,866         $21,217
                                                    ======            ======          ======
Weighted average yield
  at end of period                                    6.70%             7.03%           6.87%
                                                     =====             =====           =====
</TABLE>


     At September 30, 1999, Jacksonville's mortgage-backed securities had a book
value and estimated market value of $38.5 million and $37.6 million,
respectively. Of the $38.5 million portfolio, $254,000 was scheduled to mature
in five years or less; $6.0 million was scheduled to mature in over five years
but less than ten years; and $32.2 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 $38.5 million of mortgage
backed securities on September 30, 1999, $29.8 million consisted of fixed rate
and $8.7 million were adjustable rate securities. Of Jacksonville's total
investment in mortgage-backed securities at September 30, 1999, $15.9 million
consisted of FNMA certificates, $4.6 million consisted of GNMA certificates and
$3.4 million consisted of FHLMC certificates and $14.6 million in Private Label
mortgage backed certificates. See Note [4] to the Consolidated Financial
Statements for additional information.

     During fiscal 1999 Jacksonville continued a limited wholesale growth
strategy involving leveraged investing 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. Diversified FHLB
advances were employed to insure adequate funding if rates go up or down.
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 with staggered maturities to purchase mortgage backed securities.

     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, respectively. The prepayment assumptions
used to determine the amortization


                                      -22-
<PAGE>   23
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, 1999, Jacksonville had U.S. Government agency
held-to-maturity securities with an amortized cost of $7.0 million and an
estimated market value of $6.9 million. See note [3] to the Consolidated
Financial Statement for further information. At September 30, 1999, Jacksonville
held U.S. Government Agency securities as available-for-sale with an amortized
cost of $12.0 million and an estimated market value of $11.7 million.


                                      -23-
<PAGE>   24
     The following table sets forth Jacksonville's investment and
mortgage-backed securities at the dates indicated.

<TABLE>
<CAPTION>
                                                               SEPTEMBER 30,
                                             --------------------------------------------------
                                                 1999               1998              1997
                                             --------------   --------------      -------------
                                                              (In Thousands)

<S>                                          <C>              <C>                 <C>
Available for sale(1):
 Mortgage-backed securities
   Private Label Certificates                     $14,161         $     -           $    -
   FNMA Certificates                               12,721          15,908            4,852
   FHLMC Certificates                               2,132           3,697            6,540
   GNMA Certificates                                3,969           5,216               -
 U.S. agency securities                            11,712           4,521            3,469
                                                   ------          ------           ------
      Total available for sale                     44,695          29,342           14,861
                                                   ------          ------           ------

Held to maturity(1):
  Mortgage-backed securities:
    FNMA Certificates                               2,866           4,394            6,348
    FHLMC certificates                              1,263           1,805            2,398
    GNMA certificates                                 528             846            1,079
  U.S. Treasury notes                                   0           3,002            6,492
  U.S. agency securities                            6,999          12,490           15,969
                                                   ------          ------           ------

     Total held to maturity                        11,656          22,537           32,286
                                                   ------          ------           ------

        Total investment and
        mortgage-backed securities                $56,351         $51,879          $47,147
                                                   ======          ======           ======
</TABLE>

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

     (1) Securities classified as available for sale were carried at fair value
at September 30, 1999, 1998, and 1997. Securities classified as held-to-maturity
were carried at historical cost at all respective dates.

     At September 30, 1999, $3.0 million or 16% 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 5.49%. Of the
remaining investment securities, $14.8 million was scheduled to mature after one
year through five years and $1.0 million was scheduled to mature six years
through ten years.


                                      -24-
<PAGE>   25
     The following table sets forth certain information regarding the maturities
of Jacksonville's investment securities at September 30, 1999.

<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. agency securities          $1,999      5.58%      $5,000     5.86%       $   0          0%      $    0        0%

                                 -----                  -----                  ----                   -----
   Total                        $1,999                 $5,000                 $   0                  $    0
                                 =====                  =====                  ====                   =====

AVAILABLE FOR SALE

U.S. agency securities          $1,000      5.31%      $10,027    5.98%       $ 999       6.03%           0        0%

                                 -----                  ------                  ---                   -----
Total                           $1,000                 $10,027                $ 999                  $    0
                                 =====                  ======                 ====                   =====
Unrealized gain on
  securities available
  for sale                          (7)                   (267)                (40)                       0


                                 -----                  ------                -----                   -----
    Total                       $2,992                 $14,760                $ 959                  $    0
                                 =====                  ======                 ====                   =====


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

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

                               (Dollars in Thousands)

<S>                             <C>         <C>
HELD TO MATURITY

U.S. agency securities            $6,999         5.78%
                                   -----
   Total                          $6,999
                                   =====

AVAILABLE FOR SALE

U.S. agency securities           $12,026         5.93%
                                  ------
Total                            $19,025
                                  ======
Unrealized gain on
  securities available
  for sale                          (314)
                                  -------
    Total                        $18,711
                                  ======
</TABLE>


INTEREST-BEARING DEPOSITS


                                      -25-
<PAGE>   26
     As of September 30, 1999 Jacksonville also had demand deposit accounts in
the FHLB of Dallas of $3.6 million as compared to $7.8 million as of September
30, 1998. 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, 1999, Jacksonville had no certificates of deposit.

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
$20.3 million at September 30, 1999.

     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.


                                      -26-
<PAGE>   27
     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,
                                            --------------------------------------------------------------------------------

                                                     1999                     1998                        1997

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

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

                                                                          (Dollars in Thousands)

<S>                                         <C>        <C>          <C>           <C>              <C>          <C>
Certificate accounts:

4.01 - 6.00%                                 $143,412       66.64%      $136,669        66.83%       $124,014       64.58%

6.01 - 8.00%                                   16,822        7.81         16,781         8.21          21,431       11.16

8.01 - 10.00%                                     150        0.07            143          .07             146         .08

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

Total certificate accounts                   $160,384       74.52%      $153,593        75.11%       $145,591       75.82%
                                              =======       =====        =======        =====         =======      ======

Transaction accounts:

Passbook savings                              $13,982        6.50%      $ 12,684         6.20%       $ 12,202        6.35%
Money market                                   12,934        6.01         13,858         6.78          15,829        8.24
Demand and NOW Accounts                        27,909       12.97         24,355        11.91          18,411        9.59
                                              -------       -----        -------       ------          -------     ------

Total transaction accounts                    $54,825       25.48%      $ 50,897        24.89%       $ 46,442       24.18%
                                              =======       =====        =======       ======          =======     ======

Total deposits                               $215,209      100.00%      $204,490       100.00%       $192,033      100.00%
                                              =======      ======        =======       ======         =======      ======
</TABLE>


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

<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,
                                       ---------------------------------------------------------
                                            1999                 1998                 1997
                                       -----------------    -----------------   ----------------

                                                             (In Thousands)

<S>                                    <C>                   <C>                <C>
Net increase
    before interest credited                $3,800             $ 5,660             $11,162

Interest credited                            6,919               6,797               6,543
                                            ------              ------              ------

Net increase in deposits                   $10,719             $12,457             $17,705
                                            ======              ======              ======
</TABLE>


                                      -27-
<PAGE>   28
     The following table shows the interest rate and maturity information for
Jacksonville's certificates of deposit at September 30, 1999.

<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>
    4.01-6.00 %        $133,647              $ 7,931              $1,416                $418              $143,412
    6.01-8.00 %           4,506               11,175               1,141                   -                16,822
    8.01-10.00%               -                   87                  63                   -                   150
                        -------               ------               -----                 ---               -------
                       $138,153              $19,193              $2,620                $418              $160,384
                        =======               ======               =====                 ===               =======
</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, 1999.

<TABLE>
<CAPTION>
         CERTIFICATES OF DEPOSIT MATURING IN
         QUARTER ENDING:
         --------------------------------------
                                                            (In thousands)

         <S>                                                <C>
         December 31, 1999                                   $ 6,119
         March 31, 2000                                        3,861
         June 30, 2000                                         3,721
         September 30, 2000                                    3,156
         After September 30, 2000                             11,038
                                                              ------
         Total certificates of deposit
           with balances of $100,000
           or more                                           $27,895
                                                              ======
</TABLE>


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

<TABLE>
<CAPTION>
                                                    YEAR ENDED SEPTEMBER 30,
                                         ------------------------------------------------
                                             1999             1998              1997
                                         ----------        ----------       -------------
                                                     (Dollars in Thousands)

<S>                                      <C>               <C>              <C>
Maximum balance                          $39,000            $19,000            $5,000
Average balance                           24,542              4,923             2,846
Weighted average interest
  rate of FHLB advances                     4.98%              5.69%             6.04%
</TABLE>



     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)


                                      -28-
<PAGE>   29
 FHLB advances at the dates indicated.

<TABLE>
<CAPTION>
                                                                  SEPTEMBER 30,
                                                 -------------------------------------------------
                                                    1999              1998              1997
                                                 ------------     ------------        ------------
                                                             (Dollars in Thousands)

<S>                                             <C>               <C>                 <C>
FHLB long-term advances                         $27,500             $17,000            $2,000
  Weighted average interest rate                   5.29%               5.19%             5.87%

FHLB short-term advances                        $ 7,500             $     -            $    -
  Weighted average interest rate                   5.34%                  - %               - %
</TABLE>


     BORROWINGS. Until fiscal 1998 and fiscal 1999 wherein management elected to
implement a wholesale growth strategy using FHLB advances Jacksonville had not
frequently borrowed from the FHLB of Dallas. It obtains 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, 1999, Jacksonville had $35.0 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, 1999, the outstanding balance of that loan was
$1.1 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 investments, interest from residential notes
receivable and lease income. Since its original charter, JS&L's main activity
has been the servicing of purchased residential first and second lien notes. The
portfolio includes 23 loans ranging in size from $1,000 to $105,000, 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, 1999
and September 30, 1998, JS&L earned $31,000 and $37,000, 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. In addition to these activities, during 1999 the
Federal Deposit Insurance Corporation gave approval for the Company through its
subsidiary, JS&L, to enter into a proposed residential real estate development
in Hallsville, Texas, a community near Longview, Texas. The project involved
acquisition and development of a 66 acre tract of land for single-family homes.
JS&L entered into a real estate development and management agreement with
Lagniappe Development Co., a Longview, Texas developer and Coldwell
Bankers/Lenhart Properties, Inc., a real estate broker/agent, to develop and
sell 70 residential lots to be sold to builders and individuals for home
construction. JS&L executed a development loan through its parent, Jacksonville
on February 25, 1999 in the amount of $1,500,000. At September 30, 1999, draws
against the interim loan totaled $637,814 and the development was in Phase II of
the project, utility construction. The project is expected to be completed by
late spring 2000. JS&L has received contingency contracts to acquire 25 lots
from area builders.

     Total investment in JS&L at September 30, 1999 was $914,000. Total capital
of JS&L at September 30, 1999 was $914,000.

     EMPLOYEES. Jacksonville and its subsidiary had 93 full-time employees at
September 30, 1999. None of these employees is represented by a collective
bargaining agent, and Jacksonville believes that it enjoys good relations with
its personnel.


                                      -29-
<PAGE>   30
                                   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. 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, as applied to the Company and to IHC, 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.

     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 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


                                      -30-
<PAGE>   31
its directors of a dividend.

     FINANCIAL MODERNIZATION. On November 12, 1999, President Clinton signed
into law the Gramm-Leach-Bliley Act which, among other things, will, effective
March 11, 2000, permit bank holding companies to become financial holding
companies and thereby affiliate with securities firms and insurance companies
and engage in other activities that are financial in nature. No regulatory
approval will be required for a financial holding company to acquire a company,
other than a bank or savings association, engaged in activities that are
financial in nature or incidental to activities that are financial in nature, as
determined by the Federal Reserve Board. The Gramm-Leach-Bliley Act defines
"financial in nature" to include securities underwriting, dealing and market
making; sponsoring mutual funds and investment companies; insurance underwriting
and agency; merchant banking activities; and activities that the Federal Reserve
Board has determined to be closely related to banking. A national bank also may
engage, subject to limitations on investment, in activities that are financial
in nature, other than insurance underwriting, insurance company portfolio
investment, real estate development and real estate investment, through a
financial subsidiary of the bank, if the bank is well capitalized, well managed
and has at least a satisfactory Community Reinvestment Act rating. Subsidiary
banks of a financial holding company or national banks with financial
subsidiaries must continue to be well capitalized and well managed in order to
continue to engage in activities that are financial in nature without regulatory
actions or restrictions, which could include divestiture of the financial in
nature subsidiary or subsidiaries. In addition, a financial holding company or a
bank may not acquire a company that is engaged in activities that are financial
in nature unless each of the subsidiary banks of the financial holding company
or the bank has a Community Reinvestment Act rating of satisfactory or better.

     The FDIC and Federal Reserve have yet to issue implementing regulations for
this new legislation, and the effect of such regulations, when adopted and as
applied to the Company and IHC, cannot be predicted. However, the legislation is
expected to increase competition for the Company, since it will permit bank
holding companies to engage in services previously prohibited to them.

     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.


                                      -31-
<PAGE>   32
     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 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, 1999, 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


                                      -32-
<PAGE>   33
diversified risk, including no undue interest rate risk exposure, excellent
asset quality, high liquidity and good earnings. At September 30, 1999, the
required Tier 1 leverage capital ratio for the Bank was 4.0% and its actual Tier
1 leverage capital ratio was 11.0%.

     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.

     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, 1999, the Bank's Tier 1 capital to risk-weighted assets
ratio was 19.00%. On the same date, the Bank's total risked-based capital
percentage was 19.72%.

     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,          AS OF SEPTEMBER 30,
                                                  -------------------          -------------------

                                                         1999                         1998
                                                         ----                         ----
                                                 ACTUAL       REQUIRED          ACTUAL       REQUIRED
                                                 ------       --------          ------       --------

           <S>                                   <C>          <C>               <C>          <C>
           Leverage ratio (or tangible            11.04%         4.00%          13.14%         4.00%
           capital requirement) (1):
           Tier 1 capital to total assets

           Tier 1 risk-based capital ratio        19.00          4.00           24.37          4.00
           (or core capital
           requirement)(1):
           Tier 1 risk-based capital to
           risk weighted assets

           Total risk-based capital ratio:
           Total risk-based capital risk to
           risk weighted assets                   19.72          8.00           25.22          8.00
</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.


                                      -33-
<PAGE>   34
     The following table sets forth a reconciliation between the Bank's
stockholders' equity and each of its three regulatory capital requirements at
September 30, 1999.

<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             $ 32,179                $ 32,179                $ 32,179
           Jacksonville Savings Bank, SSB
         Unrealized loss on securities
           available-for-sale                            801                     801                     801
         Less nonallowable assets:
           Deferred Charges                           (1,028)                 (1,028)                 (1,028)
         Plus allowances for loan
           and lease losses                                -                       -                   1,212
                                                      ------                  ------                  ------
          Total regulatory capital                    31,952                  31,952                  33,164


          Minimum required capital                    11,576                   6,727                  13,454

                                                      ------                  ------                  ------
          Excess regulatory capital                 $ 20,376                $ 25,225                $ 19,710
                                                      ======                  ======                  ======

          Bank's regulatory capital
           percentage (1)                               11.0%                   19.0%                   19.7%
          Minimum regulatory capital
           required percentage                           4.0%                    4.0%                    8.0%
                                                        ----                    ----                    ----
          Bank's regulatory capital
           percentage in excess of
           requirement                                   7.0%                   15.0%                   11.7%
                                                         ===                    ====                    ====
</TABLE>


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


(1) Tier 1 capital is computed as a percentage of total adjusted assets of
$289.4 million. Risk-based capital is computed as a percentage of adjusted
risk-weighted assets of $168.2 million.

     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


                                      -34-
<PAGE>   35
 .27% for undercapitalized SAIF-member institutions with substantial supervisory
concerns. At September 30, 1999, 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.

     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 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 $819,000 at September 30, 1999. 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


                                      -35-
<PAGE>   36
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, 1999, the Bank had $44.7 million of securities,
available-for-sale, with $801,000 of aggregate net unrealized loss 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
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


                                      -36-
<PAGE>   37
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 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.,


                                      -37-
<PAGE>   38
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.

     Under the Gramm-Leach-Bliley Act, discussed above, Jacksonville will be
subject to examination under the CRA not more frequently than once every 60
months where it receives the highest CRA rating and not more frequently than
once every 48 months where its CRA rating is satisfactory. The Jacksonville's
CRA rating is satisfactory.

     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, 1999, with in excess of 98% 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. As
previously indicated, in November the Congress enacted the Gramm-Leach-Bliley
Act, which makes major changes to Federal banking laws. The likelihood of any
further 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, 1999, the Bank's advances from the FHLB of Dallas amounted to $35.0 million
or 13.7% 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.


                                      -38-
<PAGE>   39
At September 30, 1999, the Bank had $2.0 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 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, 1999,
dividends paid by the FHLB of Dallas to the Bank totaled $98,000.

     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, 1999, 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.

ITEM 2. PROPERTIES.

At September 30, 1999, Jacksonville conducted its business from its main office
at Commerce & Neches Streets, Jacksonville, Texas, and six full-service branches
in Cherokee County and


                                      -39-
<PAGE>   40
surrounding counties. At September 30, 1999 construction on a second branch in
Tyler, Texas was near completion and opened for operation on October 18, 1999.

     Set forth below is certain information with respect to the office and other
properties of Jacksonville at September 30, 1999.

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

                                                              (In Thousands)

<S>                                         <C>               <C>                  <C>
Main Office                                   Owned              $ 481                  $ 79,732
Commerce and Neches Streets
Jacksonville, Texas

Branch Office                                 Owned                650                    55,000
1015 North Church Street
Palestine, Texas

Branch Office                                 Owned                 95                    13,846
107 East Fourth Street
Rusk, Texas

Branch Office                                 Owned                497                    17,159
1412 Judson Road
Longview, Texas

In-Store Branch Office                        Leased               203                     2,733
Wal-Mart Supercenter
515 E. Loop 281
Longview, Texas

Branch Office                                 Owned                492                    24,988
617 South Palestine Street
Athens, Texas

Branch Office                                 Owned              1,121                    21,751
5620 Old Bullard Road
Tyler, Texas

*Branch Office                                Owned              1,044                         -
2507 University Blvd.
Tyler, Texas
Opened on Oct.18,1999
</TABLE>

- ----------------------
       * Under construction at September 30, 1999.

         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).

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
43 of the Company's 1999 Annual Report to Stockholders, which is included herein
as Exhibit 13 ("Annual Report").

ITEM 6.  SELECTED FINANCIAL DATA.


                                      -40-
<PAGE>   41
         The information required herein is incorporated by reference from page
         3 of the Company's 1999 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
         4 to 17 of the Company's 1999 Annual Report.

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

         The information required herein is incorporated by reference from pages
         5 and 6 of the Company's 1999 Annual Report.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The information required herein is incorporated by reference from pages
         F-1 to F-24 of Company's 1999 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
         4 to 11 of the Company's definitive proxy statement, dated December 23,
         1999, ("Proxy Statement").

ITEM 11. EXECUTIVE COMPENSATION.

         The information required herein is incorporated by reference from pages
         11 to 17 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.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information required herein is incorporated by reference from page
         17 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,
                1999 and 1998

                Consolidated Statements of Earnings for the Years Ended
                September 30, 1999, 1998, and 1997

                Consolidated Statements of Changes in Stockholders' Equity for
                the Years Ended September 30, 1999, 1998, and 1997

                Consolidated Statements of Cash Flows for the Years Ended
                September 30, 1999, 1998, and 1997

                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


                                      -41-
<PAGE>   42
                conditions under which they are required or because the required
                information is included in the financial statements and related
                notes thereto.


                                      -42-
<PAGE>   43
     (3)        The following exhibits are filed as part of this Form 10-K and
                this list includes the Exhibit Index.

<TABLE>
<CAPTION>
                   NO.                                 EXHIBITS
              ------------       ----------------------------------------

              <C>                <S>
                   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            1999 Annual Report to Stockholders specified
                                 portion (p.1 to 46) of the Registrant's Annual
                                 Report to Stockholders for the year ended September
                                 30, 1999
                   23            Consent of Independent Auditors
                   27            Financial Data Schedule
</TABLE>
       (1) Management contract or compensatory plan or arrangement.

       *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 28, 1998.

       ****Incorporated herein by reference to the Registrant's Form 10-K filed
as of December 29, 1997.

       (b) Reports on Form 8-K during the quarter ended September 30, 1999:

        1.   On July 13, 1999, the Company filed a current report on Form 8-K
             reporting earnings for the quarter ended June 30, 1999.

        2.   On September 16, 1999, the Company filed a current report on Form
             8-K reporting the declaration of a $0.125 per share dividend.

        3.   On September 16, 1999, 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.


                                      -43-
<PAGE>   44
                                   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 23, 1999                             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 23, 1999
- - ----------------------------------------------------
Jerry M. Chancellor, Director and Chief Executive
  Officer (Principal Executive Officer)


/s/ W. G. Brown                                        DECEMBER 23, 1999
- - ----------------------------------------------------
W. G. Brown, Chairman


/s/ Charles Broadway                                   DECEMBER 23, 1999
- - ---------------------------------------------------
Charles Broadway, Director


/s/ Ray W. Beall                                       DECEMBER 23, 1999
- - ----------------------------------------------------
Ray W. Beall, Director


/s/ Dr. Joe Tollett                                    DECEMBER 23, 1999
- - ----------------------------------------------------
Dr. Joe Tollett, Director


/s/ Bill W. Taylor                                     DECEMBER 23, 1999
- - ----------------------------------------------------
Bill W. Taylor, Director and
  Executive Vice President (Principal Financial
  and Accounting Officer)


/s/ Robert Brown                                       DECEMBER 23, 1999
- - ----------------------------------------------------
Robert Brown, Vice Chairman and Director


/s/Jerry Hammons                                       DECEMBER 23, 1999
- - ----------------------------------------------------
Jerry Hammons, Director/ Senior Vice President



                                      -44-

<PAGE>   1
                                                                      EXHIBIT 13

                               1999 ANNUAL REPORT


<PAGE>   2

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                     Page
                                                                                                     ----
<S>                                                                                               <C>
President's Letter to Stockholders....................................................................1

Selected Consolidated Financial Data..................................................................3

Management's Discussion and Analysis of Financial Condition
     and Results of Operations........................................................................4

Comparison of Results of Operations..................................................................13

Independent Auditor's Report........................................................................F-1

Consolidated Financial Statements:
            Consolidated Statements of Financial Condition..........................................F-2
            Consolidated Statements of Earnings.....................................................F-3
            Consolidated Statements of Stockholders' Equity.........................................F-4
            Consolidated Statements of Cash Flows...................................................F-6

Notes to Consolidated Financial Statements..........................................................F-7

Stock Information....................................................................................43

Directors and Executive Officers.....................................................................44

Banking Locations....................................................................................45

Stockholder Information..............................................................................46

Transfer Agent/Registrar.............................................................................46

Shareholder Requests.................................................................................46
</TABLE>


<PAGE>   3


Dear Stockholder:

       We are pleased to present to our stockholders the results of fiscal 1999.
It was a year of solid performance in our earnings and steady growth in our loan
and deposit portfolios, assets and book value per share.

       Net income for the year totaled $3.64 million or $1.60 per diluted share
compared to $3.33 million or $1.38 per diluted share in 1998. This represents an
increase of 15.9% in earnings per share for the year.

       Total assets increased $27.2 million to $290.4 million as net deposit
growth totaled $10.7 million and net loan growth totaled $25.1 million. Net loan
growth increased 13.1% as a result of managements decision to portfolio some of
its high quality loans as interest rates increased.

       With our strong growth in assets our capital to asset ratio declined from
13.5% in 1998 to 11.8% in 1999. Our capital position is still in excess of most
of our industry peers. In fiscal 2000 we expect to continue to leverage the
excess capital through controlled growth in an effort to improve your rate of
return.

       Jacksonville Bancorp, Inc. repurchased 209,835 shares of stock during the
year and at September 30, 1999 outstanding shares had been reduced to 2,180,212.
Book value rose from $14.88 per share at the beginning of the year to $15.70 at
year end. Dividends were paid each quarter at $.125 per share.

       We are excited about the investment we have made in our second branch
location in Tyler, Texas which opened in October. This branch will play an
important role in our loan and deposit growth plans and profitability in the
future.

       In 1999, in an effort to grow and diversify our balance sheet and to
improve profitability, JS&L Corporation, a Company subsidiary, entered into a
real estate development and management agreement to acquire and develop a 66
acre tract of land for single-family homes in


<PAGE>   4

Hallsville, Texas, a community near Longview, Texas. At this time water and
sewer lines are being constructed in the subdivision as phase II nears
completion. Currently, there are contingency contracts executed for the purchase
of twenty-five lots out of the seventy that will be available.

       In 2000 we will strive to gain more market share in East Texas by
offering more banking products. Jacksonville Savings Bank is currently in
process of installing a voice response system and also anticipates having debit
cards available to our customers during the first calendar quarter of 2000.

       Our Company has remained diligent in becoming "Year 2000" compliant. All
systems, both in-house and those supplied by external vendors, have been tested
and implemented. Management considers your Company to be Y2-K compliant.
Policies, plans, and procedures have been developed to guide contingency
business resumption efforts in the event of some unforeseen development, such as
power or telecommunications failure. Like all companies, we face the uncertainty
of external influences on our operation at the turn of the century. However, the
substantial investment in time and resources we have made in this area allows us
to look forward to the new millennium with confidence.

       Our directors, management and staff want to thank you, our stockholders,
for your investment and belief in our effort and vision. We appreciate your
support in pursuit of our goals and we remain committed to maximizing the value
of your investment. We look forward to reporting continued successes in the new
millennium.

Sincerely,

Jerry Chancellor
President & CEO


<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,
                                                                 -------------------------------------------------------------
                                                                    1999                  1998                   1997
                                                                 ---------------- ---------------------- ---------------------
<S>                                                              <C>              <C>                     <C>
SELECTED FINANCIAL CONDITION AND OTHER DATA:
Total assets...................................................         $290,392               $263,160              $233,944
Cash and cash equivalents......................................            6,568                 10,868                 4,114
Investment securities..........................................           18,711                 20,013                25,931
Mortgage-backed securities.....................................           37,640                 31,866                21,217
Loans receivable, net..........................................          216,267                191,153               174,044
Foreclosed real estate, net....................................              346                    531                   526
Deposits.......................................................          215,209                204,490               192,033
Borrowings.....................................................           35,000                 17,000                 2,000
Stockholders' equity...........................................           34,219                 35,562                33,788
Full-service offices...........................................                7                      7                     6
</TABLE>


<TABLE>
<CAPTION>
                                                                               SEPTEMBER 30,
                                                                 ------------------------------------------
                                                                          1996                 1995
                                                                 ----------------------- ------------------
<S>                                                                 <C>                   <C>
SELECTED FINANCIAL CONDITION AND OTHER DATA:
Total assets...................................................                $217,856           $199,251
Cash and cash equivalents......................................                   5,193              8,051
Investment securities..........................................                  33,805             42,907
Mortgage-backed securities.....................................                  12,107              3,442
Loans receivable, net..........................................                 158,034            135,933
Foreclosed real estate, net....................................                   1,051              2,052
Deposits.......................................................                 174,328            173,811
Borrowings.....................................................                   2,000                358
Stockholders' equity...........................................                  35,431             20,331
Full-service offices...........................................                       6                  6
</TABLE>

<TABLE>
<CAPTION>
                                                                             AT OR FOR THE YEAR ENDED SEPTEMBER 30,
                                                                 -------------------------------------------------------------
                                                                         1999                  1998                   1997
                                                                 ---------------- ---------------------- ---------------------
<S>                                                               <C>              <C>                     <C>
SELECTED OPERATING DATA:
Total interest income..........................................          $20,465                $18,541               $17,172
Total interest expense.........................................           10,711                  9,628                 8,771
                                                                          ------                  -----                 -----
   Net interest income.........................................            9,754                  8,913                 8,401
Provision for losses on loans..................................               60                     35                   110
                                                                          ------                  -----                 -----
   Net interest income after provision for
     losses on loans                                                       9,694                  8,878                 8,291
Noninterest income.............................................            1,687                  1,554                 1,392
Noninterest expense............................................            5,876                  5,639                 5,063
                                                                          ------                  -----                 -----
Income before income taxes.....................................            5,505                  4,793                 4,620
Income taxes...................................................            1,867                  1,468                 1,380
                                                                          ------                  -----                 -----
Net income.....................................................         $  3,638               $  3,325              $  3,240
                                                                        ========               ========              ========
Earnings per share(1)
   Basic.......................................................         $   1.65              $    1.44             $    1.30
   Diluted.....................................................             1.60                   1.38                  1.27
                                                                        ========               ========              ========
Dividends Payout Ratio.........................................            30.07%                 34.60%                36.98%
                                                                        ========               ========              ========

Selected Operating Ratios(2):

Return on average assets.......................................             1.33%                  1.37%                 1.45%
Return on average equity.......................................            10.82                   9.98                  9.35
Average equity to average assets...............................            12.88                  13.74                 15.54
Equity to assets at end of period..............................            11.78                  13.51                 14.44
Interest rate spread(3)........................................             3.23                   3.21                  3.32
Net interest margin(3).........................................             3.72                   3.84                  3.94
Non-performing loans and troubled debt
   restructurings to total loans at end of period(4)...........              .41                    .55                   .59
Non-performing assets and troubled debt
   restructurings to total assets at end of period(4)..........              .42                    .60                   .66
Average interest-earning assets to average
   interest-bearing liabilities................................           111.90                 115.38                114.95
Net interest income after provision for loan losses
   to total noninterest expense................................           164.98                 157.45                163.78
</TABLE>

<TABLE>
<CAPTION>
                                                                     AT OR FOR THE YEAR ENDED SEPTEMBER 30,
- ---------------------------------------------------------------    ---------------------- ------------------
                                                                              1996               1995
- ---------------------------------------------------------------    ---------------------- ------------------
<S>                                                                 <C>                    <C>
SELECTED OPERATING DATA:
Total interest income..........................................                  $15,394            $13,232
Total interest expense.........................................                    8,453              7,127
                                                                                   -----              -----
   Net interest income.........................................                    6,941              6,105
Provision for losses on loans..................................                      100                 25
                                                                                   -----              -----
   Net interest income after provision for
     losses on loans                                                               6,841              6,080
Noninterest income.............................................                    1,290                927
Noninterest expense............................................                    5,846              5,045
                                                                                   -----              -----
Income before income taxes.....................................                    2,284              1,962
Income taxes...................................................                      704                573
                                                                                   -----              -----
Net income.....................................................                 $  1,580           $  1,389
                                                                                ========           ========
Earnings per share(1)
   Basic.......................................................                 $    .64           $    .56
   Diluted.....................................................                      .63                 56
                                                                                ========           ========
Dividends Payout Ratio.........................................                   55.50%             29.47%
                                                                                ========           ========

Selected Operating Ratios(2):

Return on average assets.......................................                     .76%               .73%
Return on average equity.......................................                     6.13               7.06
Average equity to average assets...............................                    12.41              10.37
Equity to assets at end of period..............................                    16.27              10.20
Interest rate spread(3)........................................                     2.99               3.08
Net interest margin(3).........................................                     3.50               3.40
Non-performing loans and troubled debt
   restructurings to total loans at end of period(4)...........                      .76                .70
Non-performing assets and troubled debt
   restructurings to total assets at end of period(4)..........                     1.03               1.51
Average interest-earning assets to average
   interest-bearing liabilities................................                   111.92             107.81
Net interest income after provision for loan losses
   to total noninterest expense................................                   117.01             120.52
</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 in substance foreclosure and troubled debt
      restructurings consist of restructured debt in accordance with Statement
      of Financial Accounting Standards No. 15.

                                       3
<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. 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

                                       4
<PAGE>   7

slowly to changes in interest rates than their cost of funds.

       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, 1999 consisted of 29.0% 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 had been Jacksonville's policy to retain a large portion of its
fixed-rate residential first mortgage loans with terms of 15 years or less and
to sell those fixed rate mortgages with terms in excess of 15 years. However,
during fiscal 1999 management elected to hold in portfolio a greater percentage
of its 30 year fixed rate mortgages due to increased interest rates.

       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.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

       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 one of 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,

                                       5
<PAGE>   8

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.

       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, 1999, would result
in less than a 10.3% decrease in net interest income over the next twelve
months, while a 2% decrease in rates would result in less than a .25% increase
in net interest income over the next twelve months. In 1998, management
estimated, 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, 1999, the Bank was
within the acceptable ranges set forth in the Bank's Interest Rate Risk policy.


                                       6
<PAGE>   9

"SAFE HARBOR" STATEMENT

            In addition to historical information, forward-looking statements
are contained herein that are subject to risks and uncertainties that could
cause actual results to differ materially from those reflected in the
forward-looking statements. Factors that could cause future results to vary from
current expectations, include, but are not limited to, the impact of economic
conditions (both generally and more specifically in the markets in which
Jacksonville operates), the impact of competition for Jacksonville's customers
from other providers of financial services, the impact of government legislation
and regulation (which changes from time to time and over which Jacksonville has
no control), and other risks detailed in this Form 10-K and in Jacksonville's
other Securities and Exchange Commission filings. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. Jacksonville undertakes no
obligation to publicly revise these forward-looking statements, to reflect
events or circumstances that arise after the date hereof. Readers should
carefully review the risk factors described in other documents Jacksonville
files from time to time with the Securities and Exchange Commission.

YEAR 2000 STATEMENT

       Jacksonville has been actively working since 1996 to address the Y2K
impact on the Company. Management formed a Year 2000 compliance team which
developed a plan to correct any harmful impact of Year 2000 issues on its
operations.

       The Y2K project consisted of five phases: Awareness, Assessment,
Modification, Testing, and Implementation. The in-house data system, operated
and maintained by an in-house staff of five personnel, has completed all five
phases of the Year 2000 compliance project. A full system test was completed
successfully on November 6, 1998 and all internal programs have been implemented
and placed into production. Management believes the system is Year 2000
compliant and feels the possibility of failure is minute. However, Jacksonville
employs a staff of programmers to remedy any software problems that may occur.

       Jacksonville also has completed all five compliance phases for software
supplied by external vendors and this software has been determined to be Y2K
compliant.

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

       Disruptions in the economy generally resulting from Year 2000 issues
outside our data system could adversely affect the Company. Jacksonville has
developed a contingency plan in the event that material Year 2000 situations
arise. This plan has been approved by regulatory authorities.

NEW ACCOUNTING PRONOUNCEMENTS

       SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" was adopted

                                       7
<PAGE>   10

by FASB on June 30, 1998. This Statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Among other things, it supersedes
FASB Statements No. 80, "Accounting for Futures Contracts," No. 105, "Disclosure
of Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk," and No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments." It amends FASB Statement NO. 107, "Disclosures about Fair Value of
Financial Instruments, " to include in Statement 107 the disclosure provisions
about concentrations of credit risk from Statement 105. The Statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transactions. This Statement precludes
designating a nonderivative financial instrument as a hedge of an asset,
liability, unrecognized firm commitment, or forecasted transaction except that a
nonderivative instrument denominated in a foreign currency may be designated as
a hedge of the foreign currency exposure of an unrecognized firm commitment
denominated in a foreign currency or a net investment in a foreign operation.

       Statement No. 137 deferred the effective date of Statement No. 133 to all
fiscal years beginning after June 15, 2000. The Statement may not be applied
retroactively to financial statements of prior periods. The Statement's adoption
will have no material impact on the Corporation's financial condition or result
of operations.

       Also in 1998, the FASB issued Statement No. 134 "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." This statement establishes
accounting standards for certain activities of mortgage banking enterprises and
for other enterprises with similar mortgage operations. This Statement amends
SFAS No. 65 which as previously amended by SFAS Nos. 115 and 125, required a
mortgage banking enterprise to classify a mortgage-backed security as a trading
security following the securitization of the mortgage loan held for sale. This
Statement further amends SFAS No. 65 to require that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking activities
must classify the resulting mortgage-backed security or other retained interests
based on the entity's ability and intent to sell or hold those investments. The
determination of the appropriate classification for securities retained after
the securitization of mortgage loans by a mortgage banking enterprise now
conforms to SFAS No. 115. The only new requirement is that if an entity has a
sales commitment in place, the security must be classified into trading. This
Statement is effective for the first fiscal quarter beginning after December 15,
1998. The Statement's adoption had no impact on the bank's financial condition
and results of operations.


                                       8
<PAGE>   11

CHANGES IN FINANCIAL CONDITION

       At September 30, 1999, Jacksonville's assets totaled $290.4 million, as
compared to $263.2 million at September 30, 1998. Total assets increased $27.2
million, or 10.3%, from September 30, 1998 to September 30, 1999. The increase
in total assets during fiscal 1999 was principally the result of a $25.1 million
or 13.1% increase in loans receivable, net from $191.2 million at September 30,
1998 to $216.3 million at September 30, 1999. The increase was primarily the
result of an increase in single-family residential loans of $14.7 million or
9.8%, an increase in construction loans, net of $5.7 million or 36.7% and an
increase in consumer loans of $3.4 million or 16.3% during the period. A $8.5
million, or 54.8% decrease in investment securities, held to maturity; and a
$2.4 million, or 33.9% decrease in mortgage-backed securities, held to maturity,
was offset by a $8.2 million increase in mortgage-backed securities, available
for sale and a $7.2 million, or 159.1% increase in investment securities
available for sale. The increase in mortgage-backed securities, available for
sale, was primarily due to Jacksonville's decision to continue a limited
wholesale growth strategy involving leveraged investing using FHLB advances to
increase earnings. Management also elected to place most investment securities
in the "available for sale" category for securities purchased during the year.

       During the year ended September 30, 1999, total liabilities increased
$28.6 million or 12.6% to $256.0 million. This increase was primarily the result
of an increase in total deposits of $10.7 million, or 5.2%; and an increase in
advances from Federal Home Loan Bank of $18 million which proceeds were used to
purchase mortgage-backed securities and for funding loan originations.

       Stockholders equity decreased from $35.6 million at September 30, 1998 to
$34.2 million at September 30, 1999, a decrease of $1.3 million or 3.8%. The
decrease was primarily the results of annual earnings after dividends less the
purchase of 209,835 Treasury shares in the amount of $3.4 million.

       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 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 the Federal Home Loan Bank of Dallas of $15.0

                                       9
<PAGE>   12

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.


                                       10
<PAGE>   13

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,
                                                  1999                                  1999
                                            ---------------- -----------------------------------------------------------
                                                 YIELD/           AVERAGE                                  YIELD/
                                                  RATE            BALANCE             INTEREST              RATE
                                            ---------------- ------------------ ------------------- --------------------
<S>                                          <C>               <C>               <C>                 <C>
INTEREST-EARNING ASSETS:
   Loans receivable(1)................                 8.15%          $205,057             $17,092                 8.34%
   Mortgage-backed securities.........                 6.70             34,029               2,223                 6.53
   Investment securities..............                 6.00             17,684                 880                 4.98
   Other interest-earning assets(2)...                 5.60              5,380                 270                 5.02
                                                                         -----                 ---
Total interest-earning assets.........                                $262,150             $20,465                 7.81%
                                                                      --------             =======                 =====
Non-interest-earning assets...........                                  11,529
                                                                        ------
      Total assets....................                                $273,679
                                                                      ========

INTEREST-BEARING LIABILITIES:
   Transaction accounts...............                 2.69%           $54,114              $1,289                 2.38%
   Time deposits......................                 5.19            155,623               8,199                 5.27
                                                                       -------               -----
      Total deposits..................                                 209,737               9,488                 4.52
                                                                       -------               -----
   Borrowings.........................                 5.39             24,542               1,223                 4.98
                                                                        ------               -----
      Total interest-bearing
         liabilities..................                                 234,279             $10,711                 4.57%
                                                                       -------             =======                ======
Non-interest-bearing liabilities......                                   5,785
                                                                         -----
      Total liabilities...............                                 240,064
                                                                       -------
Stockholder's Equity..................                                  33,615
                                                                        ------
      Total liabilities and
         stockholders' equity.........                                $273,679
                                                                      ========
Net interest income; interest
   rate spread........................                                                      $9,754                 3.23%
                                                                                            ======                 =====
Net interest margin(3)................                                                                             3.72%
                                                                                                                   =====
Average interest-earning assets to
   average interest bearing liabilities                                                                          111.90%
                                                                                                                 =======
</TABLE>

<TABLE>
<CAPTION>

                                                                        1998
                                            ------------------------------------------------------------
                                                   AVERAGE                                   YIELD/
                                                   BALANCE              INTEREST              RATE
                                            --------------------- -------------------- -----------------
<S>                                        <C>                     <C>                  <C>
INTEREST-EARNING ASSETS:
   Loans receivable(1)................                  $180,021              $15,442              8.58%
   Mortgage-backed securities.........                    22,286                1,501              6.74
   Investment securities..............                    23.502                1,261              5.36
   Other interest-earning assets(2)...                     6,326                  337              5.33
                                                           -----                  ---
Total interest-earning assets.........                  $232,135              $18,541              7.99%
                                                        --------              =======              ====
Non-interest-earning assets...........                    10,306
                                                          ------
      Total assets....................                  $242,441
                                                        ========

INTEREST-BEARING LIABILITIES:
   Transaction accounts...............                 $  47,720             $  1,217              2.55%
   Time deposits......................                   148,546                8,131              5.47
                                                         -------                -----
      Total deposits..................                   196,266                9,348              4.76
                                                         -------                -----
   Borrowings.........................                     4,923                  280              5.69
                                                           -----                  ---
      Total interest-bearing
         liabilities..................                   201,189             $  9,628              4.78%
                                                         -------             ========              ====
Non-interest-bearing liabilities......                     7,949
                                                           -----
      Total liabilities...............                   209,138
                                                         -------
Stockholder's Equity..................                    33,303
                                                          ------
      Total liabilities and
         stockholders' equity.........                  $242,441
                                                        ========
Net interest income; interest
   rate spread........................                                       $  8,913              3.21%
                                                                             ========              ====
Net interest margin(3)................                                                             3.84%
                                                                                                   ====
Average interest-earning assets to
   average interest bearing liabilities                                                          115.38%
                                                                                                 ======
</TABLE>

<TABLE>
<CAPTION>

                                                                      1997
                                          -----------------------------------------------------------
                                                AVERAGE                                   YIELD/
                                                BALANCE              INTEREST              RATE
                                          -------------------- -------------------- -----------------
<S>                                       <C>                   <C>                  <C>
INTEREST-EARNING ASSETS:
   Loans receivable(1)................               $163,569              $14,094              8.62%
   Mortgage-backed securities.........                 16,434                1,135              6.91
   Investment securities..............                 28,292                1,657              5.86
   Other interest-earning assets(2)...                  5,041                  286              5.68
                                                        -----                  ---
Total interest-earning assets.........               $213,336              $17,172              8.05%
                                                     --------              =======              ====
Non-interest-earning assets...........                  9,586
                                                        -----
      Total assets....................               $222,922
                                                     ========

INTEREST-BEARING LIABILITIES:
   Transaction accounts...............              $  43,884             $  1,140              2.60%
   Time deposits......................                138,863                7,459              5.37
                                                      -------                -----
      Total deposits..................                182,747                8,599              4.71
                                                      -------                -----
   Borrowings.........................                  2,846                  172              6.04
                                                        -----                  ---
      Total interest-bearing
         liabilities..................                185,593             $  8,771              4.73%
                                                      -------             ========              ====
Non-interest-bearing liabilities......                  2,688
                                                        -----
      Total liabilities...............                188,281
                                                      -------
Stockholder's Equity..................                 34,641
                                                       ------
      Total liabilities and
         stockholders' equity.........               $222,922
                                                     ========
Net interest income; interest
   rate spread........................                                    $  8,401              3.32%
                                                                          ========              ====
Net interest margin(3)................                                                          3.94%
                                                                                                ====
Average interest-earning assets to
   average interest bearing liabilities                                                       114.95%
                                                                                              ======
</TABLE>

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

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

(2) Consists primarily of interest-bearing deposits.

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


                                       11
<PAGE>   14


Rate/Volume Analysis

            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,
                                          -------------------------------------------------------
                                                               1999 VS. 1998
                                          -------------------------------------------------------
                                                       INCREASE
                                                      (DECREASE)
                                                        DUE TO                       TOTAL
                                          ---------------- ------------------       INCREASE
                                                RATE             VOLUME            (DECREASE)
                                          ---------------- ------------------ -------------------
<S>                                       <C>             <C>                  <C>
INTEREST-EARNING ASSETS:
  Loans.............................               $(421)             $2,071              $1,650
  Mortgage-backed securities                         (44)                766                 722
  Investment securities.............                 (86)               (295)               (381)
  Other interest-earning assets.....                 (19)                (48)                (67)
                                                   ------             ------              ------
     Total interest-earning assets..               $(570)             $2,494              $1,924
                                                   ======             ======              ======

INTEREST-BEARING LIABILITIES:
  Deposits..........................               $(382)             $  522              $  140
  Other borrowings..................                 (30)                973                 943
                                                   ------             ------              ------
     Total interest-bearing
        liabilities.................               $(412)             $1,495              $1,083
                                                   ======             ======              ======

  Increase in net
     interest income................                                                      $  841
                                                                                          ======
</TABLE>

<TABLE>
<CAPTION>
                                                          YEAR ENDED SEPTEMBER 30,
                                        ------------------------------------------------------------
                                                               1998 VS. 1997
                                        ------------------------------------------------------------
                                                        INCREASE
                                                       (DECREASE)
                                                         DUE TO                          TOTAL
                                        -------------------- ---------------------      INCREASE
                                                RATE                 VOLUME            (DECREASE)
                                        -------------------- --------------------- -----------------
                                                            (DOLLARS IN THOUSANDS)
<S>                                       <C>             <C>                  <C>
INTEREST-EARNING ASSETS:
  Loans.............................                $  (65)                $1,413            $1,348
  Mortgage-backed securities                           (33)                   399               366
  Investment securities.............                  (133)                  (263)             (396)
  Other interest-earning assets.....                   (19)                    70                51
                                                     ------                ------            ------
     Total interest-earning assets..                 $(250)                $1,619            $1,369
                                                     ======                ======            ======

INTEREST-BEARING LIABILITIES:
  Deposits..........................                 $  94                $   655           $   749
  Other borrowings..................                   (11)                   119               108
                                                     ------                ------            ------
     Total interest-bearing
        liabilities.................                 $  83                $   774           $   857
                                                     ======               =======           =======

  Increase in net
     interest income................                                                        $   512
                                                                                            =======
</TABLE>

<TABLE>
<CAPTION>
                                                          YEAR ENDED SEPTEMBER 30,
                                          -------------------------------------------------------
                                                               1997 VS. 1996
                                           ------------------------------------------------------
                                                         INCREASE
                                                        (DECREASE)
                                                          DUE TO                        TOTAL
                                           ------------------------------------        INCREASE
                                                 RATE                VOLUME           (DECREASE)
                                           ---------------      ---------------      ------------
<S>                                       <C>             <C>                  <C>
INTEREST-EARNING ASSETS:
  Loans.............................                 $340               $1,585            $1,925
  Mortgage-backed securities                          (37)                 472               435
  Investment securities.............                    3                 (516)             (513)
  Other interest-earning assets.....                   12                  (81)              (69)
                                                     ----               ------            ------
     Total interest-earning assets..                 $318               $1,460            $1,778
                                                     ====               ======            ======

INTEREST-BEARING LIABILITIES:
  Deposits..........................               $ (104)             $   313           $   209
  Other borrowings..................                   (5)                 114               109
                                                     ----               ------            ------
     Total interest-bearing
        liabilities.................               $ (109)             $   427           $   318
                                                   ======              =======           =======

  Increase in net
     interest income................                                                      $1,460
                                                                                          ======
</TABLE>


                                       12
<PAGE>   15

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND
1998

       General. Jacksonville had net earnings of $3.6 million for the year ended
September 30, 1999 as compared to $3.3 million for the year ended September 30,
1998. During fiscal 1999, Jacksonville's net interest income increased by
$841,000 and its noninterest income increased by $133,000 while the provision
for losses on loans increased $25,000. Noninterest expense increased by
$237,000, primarily as a result of an increase in compensation and benefits of
$70,000, an increase in occupancy and equipment of $121,000, and an increase in
other noninterest expense of $48,000, offset by a decrease in insurance expense
of $2,000.

       The $313,000 increase in net earnings for fiscal 1999 was primarily the
result of an growth in interest-earning assets of $30.0 million or 12.9%. 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, and loan originations. 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 18
basis points from 7.99% in fiscal 1998 to 7.81% in fiscal 1999. The positive
impact on earnings resulting from the increase in average balance on
Jacksonville's interest-earning assets was enhanced by a 21 basis point decrease
in the average rate paid on interest-bearing liabilities from 4.78% in fiscal
1998 to 4.57% in fiscal 1999. The interest rate spread increased from 3.21% in
fiscal 1998 to 3.23% in 1999.

       NET INTEREST INCOME. Net interest income increased by $841,000, or 9.4%,
for the year ended September 30, 1999 compared to the year ended September 30,
1998. This increase was due primarily to a $1.9 million, or 10.4 %, increase in
total interest income partially offset by a $1.1 million or 11.2% increase total
interest expense.

       The $1.9 million increase in total interest income was primarily the
result of increases in interest on loans receivable of $1.6 million or 10.7%,
and interest on mortgage-backed securities of $722,000 or 48.1%, offset by a
decrease of $381,000 or 30.2% in interest income on investment securities and a
decrease in other interest income of $66,000. The increase in interest income
from loans receivable was due primarily to a $25.0 million, or 13.9%, 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 $22.3 million in fiscal 1998 to $34.0 million in fiscal 1999 with a
decrease in average yield from 6.74% to 6.53% in the respective periods. The
decrease in interest income from investment securities reflects primarily a
decrease in average balance from $23.5 million to $17.7 million, or 24.8%. 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
1999 was 8.2%.

       The $1.1 million increase in total interest expense from $9.6 million for
the year ended September 30, 1998, to $10.7 million for the year ended September
30, 1999, 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
decreased from 4.76% in fiscal 1998 to 4.52% in fiscal 1999.

       Jacksonville's net interest rate spread was 3.23 % for the year ended
September 30, 1999 as compared to 3.21% in fiscal 1998.

       PROVISION FOR LOSSES ON LOANS. Jacksonville's provision for loan losses
was $60,000 for

                                       13
<PAGE>   16

the year ended September 30, 1999 compared to $35,000 for the year ended
September 30, 1998. 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.
Non-performing loans decreased to $544,000 during fiscal 1999, and net
charge-offs for the period decreased $39,000 and totaled only $18,000 for the
year. The Company's level of net loans outstanding increased $25.1 million which
included an increase of 16.3% 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 $60,000 in provisions for losses on loans were appropriate in 1999,
primarily because of the increase in the loan portfolio. Jacksonville's
allowance for losses amounted to $1.2 million at September 30, 1999 the same
amount as allocated on September 30, 1998.

       NON-INTEREST INCOME. Noninterest income amounted to $1.7 million for the
year ended September 30, 1999 compared to $1.6 million in fiscal 1998. The
$133,000 increase was due primarily to an increase in fees and deposit service
charges of $207,000; an increase of $14,000 in other noninterest income
partially offset by a decrease in income from origination of loan servicing of
$87,000. 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 $5.9 million for
the year ended September 30, 1999 compared to $5.6 million during fiscal 1998.
The primary reason for the $237,000, or 4.2% increase in noninterest expense
during fiscal 1999 was from increases in compensation and benefits of $70,000;
in occupancy and equipment of $121,000, and other noninterest expenses of
$48,000, offset by a reduction in insurance expense of $2,000.

       INCOME TAXES. Income tax expense amounted to $1.9 million during the year
ended September 30, 1999, compared to $1.5 million in fiscal 1998. 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, 1998 AND
1997

       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

                                       14
<PAGE>   17

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 in 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.

       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

                                       15
<PAGE>   18

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.

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. At September 30, 1999 the Bank's liquidity was
$64.9 million with a liquidity ratio of 30.3%.

       Cash was generated by Jacksonville's operating activities of $3.9 and
$3.8 million during the years ended September 30, 1999 and 1998, respectively,
primarily as a result of net earnings of $3.6 million and $3.3 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,
1999, Jacksonville's investing activities used cash of $32.7 million principally
as a result of net loan originations of $24.9 million; to purchase mortgage
backed securities totaling $14.8 million; to purchase investment securities of
$13.0 million; capital expenditures of $907,000; investment in real estate of
$713,000; to purchase stock in FHLB of $353,000; partially offset by proceeds on
maturity of investment securities of $14.0 million; principal paydown on MBS of
$7.8 million; and proceeds from sale of foreclosed real estate of $133,000.

       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, 1999, Jacksonville's financing
activities generated cash of $24.6 million as a result of a net increase in
deposits of $10.7 million; net increase of $18.0

                                       16
<PAGE>   19

million in advances from FHLB, and net increase of $288,000 in advance payments
by borrowers for property taxes and insurances; offset by the purchase of
Treasury Stock in the amount of $3.4 million; and the payment of dividends in
the amount of $1.1 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. 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, 1999, Jacksonville had $3.3 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, 2000 are
$138.2 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 regulatory capital sufficient to
meet a Tier 1 leveraged capital requirement, a Tier 1 risk based capital
requirement and a total risk-based capital requirement. At September 30, 1999,
Jacksonville's Tier 1 leveraged capital and Tier 1 risk-based capital totaled
$32.0 million or 11.04% of adjusted total assets and 19.0% of risk-weighted
assets, respectively. These capital levels exceeded the minimum requirements at
that date by approximately $20.4 million and $25.2 million, respectively.
Jacksonville's total risk based capital was $33.2 million at September 30, 1999
or 19.72% of risk-weighted assets which exceeded the current requirement of 8%
of risk-weighted assets by approximately $19.7 million.

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.

                                       17
<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, 1999 and
1998, 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, 1999.

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, 1999 and 1998, and the
results of their operations and cash flows for each of the years in the three
year period ended September 30, 1999, in conformity with generally accepted
accounting principles.

                                                    HENRY & PETERS, P.C.

Tyler, Texas
November 16, 1999


                                       18
<PAGE>   21


                           JACKSONVILLE BANCORP, INC.
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                           SEPTEMBER 30, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                                                      1999                1998
                                                                                                ---------------     ---------------
<S>                                                               <C>                        <C>                 <C>
                                    ASSETS

Cash on hand and in banks                                                                        $    2,995,572     $    3,086,417
Interest-bearing deposits                                                                             3,572,114          7,781,229
Investment securities:
   Held-to-maturity, approximate fair market value of
      $6,892,900 and $15,587,250 respectively                                                         6,999,329         15,492,501
   Available-for-sale, carried at fair value                                                         11,711,605          4,520,484
Mortgage-backed certificates:
   Held-to-maturity, approximate fair market value of
      $4,642,925 and $7,133,165 respectively                                                          4,657,579          7,045,343
   Available-for-sale, carried at fair value                                                         32,982,733         24,820,600
Loans receivable, net                                                                               216,267,027        191,153,399
Accrued interest receivable                                                                           2,254,158          2,090,470
Foreclosed real estate, net                                                                             346,317            530,728
Premises and equipment, net                                                                           4,582,898          3,935,778
Stock in Federal Home Loan Bank of Dallas, at cost                                                    1,974,400          1,621,900
Investment in real estate                                                                               712,796                  -
Mortgage servicing rights                                                                               587,553            534,463
Other assets                                                                                            747,529            546,862
                                                                                               ----------------   ----------------
            Total assets                                                                           $290,391,610       $263,160,174
                                                                                               ================   ================

                      LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

   Deposits                                                               $215,209,204             $204,489,918
   Advance from Federal Home Loan Bank                                      35,000,000               17,000,000
   Advances from borrowers for taxes and insurance                           4,095,425                3,807,168
   Accrued expenses and other liabilities                                    1,722,240                2,131,267
                                                                       ---------------          ---------------
      Total liabilities                                                    256,026,869              227,428,353
DEFERRED INCOME
   Gain on sale of real estate owned                                         145,815                    169,740
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 2,675,972 shares issued;
      2,180,212 and 2,390,047 shares outstanding in 1999 and
      1998, respectively                                                        26,760                   26,760
   Additional paid-in capital                                               22,722,712               22,649,848
   Retained earnings, substantially restricted                              21,507,284               18,963,133
   Accumulated other comprehensive income (loss)                              (801,201)                  74,882
   Less:
      Treasury stock, at cost (495,760 and 285,925 shares,
        respectively)                                                                                (7,771,886)        (4,413,266)
      Shares acquired by Employee Stock Ownership Plan                       (1,116,537)             (1,223,932)
      Shares acquired by Management Recognition Plan                           (348,206)               (515,344)
                                                                       ----------------         ----------------
            Total stockholders' equity                                      34,218,926               35,562,081
                                                                       ----------------           -------------
               Total liabilities and stockholders' equity                                          $290,391,610       $263,160,174
                                                                                                   ============       ============
</TABLE>


See accompanying notes to consolidated financial statements.

                                       F-2


<PAGE>   22

                           JACKSONVILLE BANCORP, INC.
                       CONSOLIDATED STATEMENTS OF EARNINGS
                  YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
                                                        1999                   1998                     1997
                                                   -------------         ---------------           -------------
<S>                                                <C>                   <C>                      <C>
INTEREST INCOME
   Loans receivable                                $  17,091,560          $   15,442,039           $  14,093,616
   Mortgage-backed securities                          2,223,096               1,501,491               1,134,799
   Investment securities                                 880,071               1,260,766               1,657,500
   Other                                                 270,598                 336,885                 286,566
                                                   -------------          --------------           -------------
      Total interest income                           20,465,325              18,541,181              17,172,481

INTEREST EXPENSE
   Deposits                                            9,488,048               9,348,433               8,599,136
   Interest on borrowings                              1,223,328                 279,894                 171,913
                                                   -------------          --------------           -------------
      Total interest expense                          10,711,376               9,628,327               8,771,049
                                                   -------------          --------------           -------------
      Net interest income                              9,753,949               8,912,854               8,401,432
PROVISION FOR LOSSES ON LOANS                             60,000                  35,000                 110,084
                                                   -------------          --------------           -------------
      Net interest income after provision for
         losses on loans                               9,693,949               8,877,854               8,291,348

NONINTEREST INCOME
   Fees and deposit service charges                    1,322,649               1,116,117                 947,783
   Real estate operations, net                           135,196                 135,315                 179,718
   Other                                                 176,271                 162,171                 101,604
   Mortgage servicing rights                              53,090                 140,394                 162,462
                                                   -------------          --------------           -------------
      Total noninterest income                         1,687,206               1,553,997               1,391,567

NONINTEREST EXPENSE
   Compensation and benefits                           3,829,581               3,759,893               3,269,947
   Occupancy and equipment                               650,676                 529,524                 529,124
   Insurance expense                                     165,849                 167,851                 224,658
   Provisions for real estate losses                           -                    (144)                (88,737)
   Other                                               1,229,471               1,181,369               1,127,519
                                                   -------------           -------------          --------------
      Total noninterest expense                        5,875,577               5,638,493               5,062,511
                                                   -------------          --------------           -------------

INCOME BEFORE TAXES ON INCOME                          5,505,578               4,793,358               4,620,404

TAXES ON INCOME
   Current                                             1,759,347               1,428,256               1,383,880
   Deferred                                              108,000                  40,000                  (3,000)
                                                  --------------           -------------          --------------
      Total income tax expense                         1,867,347               1,468,256               1,380,880
                                                   -------------          --------------           -------------
         Net earnings                              $   3,638,231          $    3,325,102           $   3,239,524
                                                   =============          ==============           =============

EARNINGS PER COMMON SHARE

   Basic                                           $        1.65           $        1.44           $        1.30
                                                   =============           =============           =============
   Diluted                                         $        1.60           $        1.38           $        1.27
                                                   =============           =============           =============
</TABLE>



See accompanying notes to consolidated financial statements.

                                       F-3


<PAGE>   23



                           JACKSONVILLE BANCORP, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997


<TABLE>
<CAPTION>

                                                                               Additional             Compre-
                                                                Common          Paid-in               hensive
                                                                Stock           Capital                Income
                                                              --------        ------------         -------------
<S>                                                         <C>               <C>                 <C>
BALANCE AT SEPTEMBER 30, 1996                                 $26,643          $22,297,343
   Shares issued under stock
      option plan                                                 104               73,237
   ESOP shares released                                             -              100,678
   Purchase of management
      recognition plan shares                                       -                    -
   Accrual of management
      recognition plan awards                                       -                    -
   Comprehensive income:
      Net earnings                                                  -                    -           $3,239,524
      Other comprehensive income, net
         of tax, unrealized gains on
            securities available-for-sale                           -                    -               73,474
                                                                                                     ----------
               Comprehensive income                                                                  $3,312,998
                                                                                                     ==========
   Dividends declared                                               -                    -
   Purchase of 231,000 Treasury shares                              -                    -
                                                            ---------        -------------
BALANCE AT SEPTEMBER 30, 1997                                  26,747           22,471,258
   Shares issued under stock
      option plan                                                  13                9,180
   ESOP shares released                                             -              169,410
   Accrual of management
      recognition plan awards                                       -                    -
   Comprehensive income:
      Net earnings                                                  -                    -           $3,325,102
      Other comprehensive income, net
         of tax, unrealized gains on
            securities available-for-sale                           -                    -               89,057
                                                                                                     ----------
               Comprehensive income                                                                  $3,414,159
                                                                                                     ==========
   Dividends declared                                               -                    -
   Purchase of 54,825 Treasury shares                               -                    -
                                                            ---------        -------------
BALANCE AT SEPTEMBER 30, 1998                                 $26,760          $22,649,848
</TABLE>

<TABLE>
<CAPTION>
                                                             Accumulated
                                                                Other
                                                            Comprehensive             Retained              Treasury
                                                            Income (Loss)             Earnings               Stock
                                                            -------------          --------------        -------------
<S>                                                         <C>                   <C>                    <C>
BALANCE AT SEPTEMBER 30, 1996                                  $(87,649)           $   14,746,925        $         -
   Shares issued under stock
      option plan                                                     -                         -                  -
   ESOP shares released                                               -                         -                  -
   Purchase of management
      recognition plan shares                                         -                         -                  -
   Accrual of management
      recognition plan awards                                         -                         -                  -
   Comprehensive income:
      Net earnings                                                    -                 3,239,524                  -
      Other comprehensive income, net
         of tax, unrealized gains on
            securities available-for-sale                        73,474                         -                  -

               Comprehensive income

   Dividends declared                                                 -               (1,197,958)                  -
   Purchase of 231,000 Treasury shares                                -                         -        (3,423,528)
                                                              ---------             -------------       ------------
BALANCE AT SEPTEMBER 30, 1997                                  (14,175)                16,788,491        (3,423,528)
   Shares issued under stock
      option plan                                                     -                         -                  -
   ESOP shares released                                               -                         -                  -
   Accrual of management
      recognition plan awards                                         -                         -                  -
   Comprehensive income:
      Net earnings                                                    -                 3,325,102                  -
      Other comprehensive income, net
         of tax, unrealized gains on
            securities available-for-sale                        89,057                         -                  -

               Comprehensive income

   Dividends declared                                                 -               (1,150,460)                  -
   Purchase of 54,825 Treasury shares                                 -                         -          (989,738)
                                                              ---------             -------------      -------------
BALANCE AT SEPTEMBER 30, 1998                                  $ 74,882               $18,963,133       $(4,413,266)
</TABLE>

<TABLE>
<CAPTION>
                                                                    Shares             Shares
                                                                   Acquired           Acquired                Total
                                                                      by                 by               Stockholders'
                                                                     ESOP               MRP                   Equity
                                                               -------------      ------------            -------------
<S>                                                           <C>                  <C>                    <C>
BALANCE AT SEPTEMBER 30, 1996                                  $ (1,528,219)      $   (24,375)            $ 35,430,668
   Shares issued under stock
      option plan                                                          -                 -                  73,341
   ESOP shares released                                              150,113                 -                 250,791
   Purchase of management
      recognition plan shares                                              -         (835,693)               (835,693)
   Accrual of management
      recognition plan awards                                              -           177,585                 177,585
   Comprehensive income:
      Net earnings                                                         -                 -               3,239,524
      Other comprehensive income, net
         of tax, unrealized gains on
            securities available-for-sale                                  -                 -                  73,474
               Comprehensive income

   Dividends declared                                                      -                 -             (1,197,958)
   Purchase of 231,000 Treasury shares                                     -                 -             (3,423,528)
                                                               -------------      ------------            ------------
BALANCE AT SEPTEMBER 30, 1997                                    (1,378,106)         (682,483)              33,788,204
   Shares issued under stock
      option plan                                                          -                 -                   9,193
   ESOP shares released                                              154,174                 -                 323,584
   Accrual of management
      recognition plan awards                                              -           167,139                 167,139
   Comprehensive income:
      Net earnings                                                         -                 -               3,325,102
      Other comprehensive income, net
         of tax, unrealized gains on
            securities available-for-sale                                  -                 -                  89,057
               Comprehensive income

   Dividends declared                                                      -                 -             (1,150,460)
   Purchase of 54,825 Treasury shares                                      -                 -               (989,738)
                                                               -------------      ------------            ------------
BALANCE AT SEPTEMBER 30, 1998                                   $(1,223,932)      $  (515,344)            $ 35,562,081
</TABLE>


                                       F-4


<PAGE>   24



                           JACKSONVILLE BANCORP, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
                                   (CONTINUED)

<TABLE>
<CAPTION>

                                                                      Additional            Compre-
                                                      Common           Paid-in              hensive
                                                      Stock            Capital               Income
                                                   -----------      --------------        ------------
<S>                                                <C>              <C>                 <C>
BALANCE AT SEPTEMBER 30, 1998                       $26,760          $22,649,848
   ESOP shares released                                   -               72,864
   Accrual of management
      recognition plan awards                             -                    -
   Comprehensive income:
      Net earnings                                        -                    -           $3,638,231
      Other comprehensive income, net
         of tax, unrealized (loss) on
            securities available-for-sale                 -                    -            (876,083)
                                                                                          -----------
               Comprehensive income                                                        $2,762,148
                                                                                           ==========
   Dividends declared                                     -                    -
   Purchase of 209,835 Treasury shares                    -                    -
                                                    -------          -----------
BALANCE AT SEPTEMBER 30, 1999                       $26,760          $22,722,712
                                                    =======          ===========
</TABLE>

<TABLE>
<CAPTION>
                                                 Accumulated
                                                    Other
                                                Comprehensive        Retained            Treasury
                                                Income (Loss)        Earnings             Stock
                                                -------------      ------------      ---------------
<S>                                             <C>               <C>                 <C>
BALANCE AT SEPTEMBER 30, 1998                    $   74,882         $18,963,133       $(4,413,266)
   ESOP shares released                                   -                   -                  -
   Accrual of management
      recognition plan awards                             -                   -                  -
   Comprehensive income:
      Net earnings                                        -           3,638,231                  -
      Other comprehensive income, net
         of tax, unrealized (loss) on
            securities available-for-sale         (876,083)                   -                  -

               Comprehensive income

   Dividends declared                                     -         (1,094,080)                  -
   Purchase of 209,835 Treasury shares                    -                   -        (3,358,620)
                                                 ----------         -----------       ------------
BALANCE AT SEPTEMBER 30, 1999                    $(801,201)         $21,507,284       $(7,771,886)
                                                 ==========         ===========       ============
</TABLE>

<TABLE>
<CAPTION>
                                                      Shares            Shares
                                                     Acquired          Acquired          Total
                                                        by                by         Stockholders'
                                                       ESOP              MRP             Equity
                                                   ------------      ------------     ------------
<S>                                               <C>               <C>               <C>
BALANCE AT SEPTEMBER 30, 1998                     $(1,223,932)        $(515,344)       $35,562,081
   ESOP shares released                                107,395                 -           180,259
   Accrual of management
      recognition plan awards                                -           167,138           167,138
   Comprehensive income:
      Net earnings                                           -                 -         3,638,231
      Other comprehensive income, net
         of tax, unrealized (loss) on
            securities available-for-sale                    -                 -         (876,083)

               Comprehensive income

   Dividends declared                                        -                 -       (1,094,080)
   Purchase of 209,835 Treasury shares                       -                 -       (3,358,620)
                                                  ------------        ----------       -----------
BALANCE AT SEPTEMBER 30, 1999                     $(1,116,537)        $(348,206)       $34,218,926
                                                  ============        ==========       ===========
</TABLE>



See accompanying notes to consolidated financial statements.

                                       F-5


<PAGE>   25



                           JACKSONVILLE BANCORP, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997

<TABLE>
<CAPTION>

                                                                          1999                    1998                    1997
                                                                    ---------------         ---------------         ---------------
<S>                                                                <C>                      <C>                      <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                        $    3,638,231          $    3,325,102          $    3,239,524
   Adjustments to reconcile net income to net cash
      provided by (used in) operating activities:
         Depreciation                                                       259,416                 165,233                 212,715
         Amortization/accretion of securities                               175,132                 166,145                  37,035
         Provision for losses on loans and on real estate                    60,000                  35,144                  21,347
         Loans originated for sale                                     (23,866,321)            (28,189,992)            (22,311,000)
         Loans sold                                                      23,866,321              28,189,992              22,311,000
         Net gain on sale of equipment                                            -                (11,640)                       -
         Net (gain) loss on sale of other real estate                     (187,400)               (132,794)                 179,521
         Accrual of MRP awards                                              167,138                 167,139                 177,585
         Release of ESOP shares                                             180,259                 323,584                 250,791
         Change in assets and liabilities:
            Decrease (increase) in other assets                             250,647               (103,661)                 277,312
            Decrease in SAIF assessment payable                                   -                       -             (1,070,478)
            (Decrease) increase in accrued expenses and
              other liabilities                                           (409,027)                 149,543                 831,826
            Decrease in deferred income                                    (23,925)                (47,932)               (141,243)
            Increase in mortgage servicing rights                          (53,090)                (96,882)               (206,040)
            Increase in accrued interest receivable                       (163,688)               (138,457)               (318,971)
                                                                     --------------          --------------          --------------
               Net cash provided by operating activities                  3,893,693               3,800,524               3,490,924
                                                                     --------------          --------------          --------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Proceeds on maturity of investment securities                         13,965,068              18,456,288              13,955,186
   Purchase of investment securities                                   (12,998,125)            (12,493,297)             (5,995,546)
   Net principal payments/originations on loans                        (24,934,510)            (17,145,410)            (16,062,470)
   Proceeds from sale of foreclosed real estate                             132,693                 129,520                 376,174
   Proceeds from sale of equipment                                                -                  33,735                       -
   Purchase of mortgage-backed securities                              (14,751,466)            (17,662,769)            (11,371,963)
   Principal paydowns on mortgage-backed securities                       7,809,676               6,937,889               2,251,044
   Capital expenditures                                                   (906,536)               (734,574)               (345,182)
   Purchase of stock in FHLB Dallas                                       (352,500)                (24,500)               (104,500)
   Sale of stock in FHLB Dallas                                                   -                 247,000                       -
   Investment in real estate                                              (712,796)                       -                       -
                                                                     --------------          --------------          --------------
               Net cash used in investing activities                   (32,748,496)            (22,256,118)            (17,297,257)
                                                                     --------------          --------------          --------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Net increase in deposits                                             $10,719,286             $12,456,620             $17,705,411
   Increase (decrease) in advance payments by
      borrowers for property taxes and insurance                            288,257               (116,420)                 405,390
   Advances from FHLB                                                    49,500,000              20,000,000               5,000,000
   Payment of FHLB advances                                            (31,500,000)             (5,000,000)             (5,000,000)
   Proceeds from exercise of stock options                                        -                   9,193                  73,341
   Purchase of Treasury stock                                           (3,358,620)               (989,738)             (3,423,528)
   Purchase of MRP shares                                                         -                       -               (835,693)
   Dividends paid                                                       (1,094,080)             (1,150,460)             (1,197,958)
                                                                     --------------          --------------          --------------
               Net cash provided by financing activities                 24,554,843              25,209,195              12,726,963
                                                                     --------------          --------------          --------------
               Net (decrease) increase in cash and cash
                 equivalents                                            (4,299,960)               6,753,601             (1,079,370)

CASH AND CASH EQUIVALENTS
   Beginning of year                                                     10,867,646               4,114,045               5,193,415
                                                                     --------------          --------------          --------------
   End of year                                                       $    6,567,686          $   10,867,646          $    4,114,045
                                                                     ==============          ==============          ==============
</TABLE>


See accompanying notes to consolidated financial statements.

                                       F-6


<PAGE>   26



                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           SEPTEMBER 30, 1999 AND 1998

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 July 2, 1997, the Bank 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.

  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. Buildings, 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 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.

                                      F-7


<PAGE>   27



                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           SEPTEMBER 30, 1999 AND 1998
                                    CONTINUED

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
 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.

 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.

 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. Investment in real estate is recorded
 at cost. 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 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 real estate are recognized at the date of sale.

 ESTIMATES
 The preparation of consolidated financial 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.

                                       F-8


<PAGE>   28



                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           SEPTEMBER 30, 1999 AND 1998
                                    CONTINUED

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
 ESTIMATES - CONTINUED
 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.

 EARNINGS PER SHARE
 The Company has adopted the provisions of Statement of Financial Accounting
 Standards No. 128, "Earnings Per Share" (FAS 128). The standard requires a dual
 presentation of basic and diluted EPS. This statement provides for 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.

 Earnings per share on a basic and diluted basis is calculated as follows:

<TABLE>
<CAPTION>
                                                                           Years Ended September 30,
                                                      ---------------------------------------------------------------
                                                           1999                    1998                    1997
                                                      ---------------         ---------------         ---------------
<S>                                                   <C>                     <C>                     <C>
      Basic net earnings per share
         Net income                                    $    3,638,231          $    3,325,102          $    3,239,524
         Weighted-average shares outstanding                2,202,425               2,304,567               2,485,535
                                                       --------------          --------------          --------------
               Per share                               $         1.65          $         1.44          $         1.30
                                                       ==============          ==============          ==============
      Diluted net earnings per share
         Net income                                    $    3,638,231          $    3,325,102          $    3,239,524
         Weighted-average shares outstanding
            plus assumed conversions                        2,278,965               2,412,993               2,554,565
                                                       --------------          --------------          --------------
               Per share                               $         1.60          $         1.38          $         1.27
                                                       ==============          ==============          ==============
      Calculation of weighted average shares
         outstanding plus assumed conversions
            Weighted-average shares outstanding        $    2,202,425          $    2,304,567          $    2,485,535
            Effect of dilutive stock options                   76,540                 108,426                  69,030
                                                       --------------          --------------          --------------
                                                       $    2,278,965          $    2,412,993          $    2,554,565
                                                       ==============          ==============          ==============
</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.

                                       F-9


<PAGE>   29



                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           SEPTEMBER 30, 1999 AND 1998
                                    CONTINUED

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
 COMPREHENSIVE INCOME
 In June 1997, the Financial Accounting Standards Board issued Statement of
 Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS
 130). This statement establishes standards for reporting and display of
 comprehensive income and its components in a full set of general-purpose
 financial statements. The standard requires that all items that are required to
 be recognized under accounting standards as components of comprehensive income
 be reported in a financial statement that is displayed with the same prominence
 as other financial statements. The Company adopted the provisions of FAS 130,
 effective October 1, 1998, and reclassified financial statements for earlier
 periods.

 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 at
 September 30:

<TABLE>
<CAPTION>

                                                                            1999                      1998               1997
                                                                       --------------             -----------        -----------
<S>                                                                    <C>                        <C>               <C>
      Cash on hand and in banks                                        $    2,995,572             $ 3,086,417        $ 1,336,212
      Interest bearing deposits                                             3,572,114               7,781,229          2,777,833
                                                                       --------------             -----------        -----------
            Cash and cash equivalents                                  $    6,567,686             $10,867,646        $ 4,114,045
                                                                       ==============             ===========        ===========
      Supplemental disclosure:
         Cash paid for:
            Interest                                                   $   10,644,167             $ 9,567,381        $ 8,776,209
                                                                       ==============             ===========        ===========
            Income taxes                                               $    2,090,000             $ 1,441,000        $   825,000
                                                                       ==============             ===========        ===========
      Non-cash operating activities:
         Change in deferred taxes on net unrealized gains
            and losses on securities available-for-sale                $      451,315             $   (45,878)       $   (37,850)
                                                                       ==============             ===========        ===========
      Non-cash investing activities:
         Change in net unrealized gains and losses
            on securities available-for-sale                           $   (1,327,398)            $   134,935        $   111,323
                                                                       ==============             ===========        ===========
         Transfer from loans to real estate acquired
            through foreclosure                                        $      391,000             $   353,000        $   689,000
                                                                       ==============             ===========        ===========
         Loans made relating to sale of foreclosed real estate         $      630,000             $   384,000        $   569,805
                                                                       ==============             ===========        ===========
</TABLE>



                                      F-10


<PAGE>   30



                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           SEPTEMBER 30, 1999 AND 1998
                                    CONTINUED

NOTE 3 - INVESTMENT SECURITIES
 The amortized cost and estimated market values of investments in debt
 securities are as follows as of September 30, 1999:

<TABLE>
<CAPTION>
                                                                        Available-for-sale
                                      -------------------------------------------------------------------------------------
                                                                                                               Estimated
                                        Amortized            Unrealized                Unrealized                Market
                                           Cost                Gains                     Losses                  Value
                                      -------------     -------------------         ---------------          --------------
<S>                                 <C>                 <C>                         <C>                       <C>
      U.S. Agency securities            $12,026,229     $                 -           $     314,624             $11,711,605
                                        ===========     ===================           =============             ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                         Held-to-maturity
                                     -------------------------------------------------------------------------------------
                                      Amortized               Unrealized              Unrealized                 Market
                                         Cost                   Gains                   Losses                   Value
                                     -------------         ---------------           -------------           -------------
<S>                                 <C>                    <C>                     <C>                       <C>
      U. S. Treasury notes            $          -          $            -            $          -            $          -
      U. S. Agency securities            6,999,329                   1,821                 108,250               6,892,900
                                     -------------         ---------------           -------------           -------------
                                      $  6,999,329          $        1,821            $    108,250            $  6,892,900
                                      ============          ==============            ============            ============
</TABLE>

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 scheduled maturities of securities at September 30, 1999, 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           $  1,999,329            $  2,001,150     $  1,000,000             $   992,500
      Due from one to five years           5,000,000               4,891,750       10,026,969               9,759,905
      Due from five to ten years                   -                       -          999,260                 959,200
                                        ------------            ------------     ------------             -----------
                                        $  6,999,329            $  6,892,900     $ 12,026,229             $11,711,605
                                        ============            ============     ============             ===========
</TABLE>



                                      F-11


<PAGE>   31


                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           SEPTEMBER 30, 1999 AND 1998
                                    CONTINUED

NOTE 3 - INVESTMENT SECURITIES - CONTINUED

   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>

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
      1999                 Cost              Gains           Losses           Value
- ------------------       ----------       ----------       ----------       ----------
<S>                      <C>              <C>              <C>              <C>
GNMA certificates        $  528,190       $   15,547       $    8,325       $  535,411
FHLMC certificates        1,263,090            6,293           22,276        1,247,107
FNMA certificates         2,866,299            5,834           11,726        2,860,407
                         ----------       ----------       ----------       ----------
                         $4,657,579       $   27,674       $   42,327       $4,642,925
                         ==========       ==========       ==========       ==========
</TABLE>

<TABLE>
<CAPTION>
                                                 Available-for-sale
                         -----------------------------------------------------------------
                                                                                Estimated
    September 30,         Amortized        Unrealized        Unrealized          Market
       1999                 Cost              Gains            Losses             Value
- ------------------       -----------       -----------       -----------       -----------
<S>                      <C>               <C>               <C>               <C>
GNMA certificates        $ 4,085,032       $         -       $   116,134       $ 3,968,898
FHLMC certificates         2,141,045                 -             8,968         2,132,077
FNMA certificates         13,008,451             3,415           290,867        12,720,999
Private label             14,647,522                 -           486,763        14,160,759
                         -----------       -----------       -----------       -----------
                         $33,882,050       $     3,415       $   902,732       $32,982,733
                         ===========       ===========       ===========       ===========
</TABLE>

<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>

                                      F-12




<PAGE>   32



                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           SEPTEMBER 30, 1999 AND 1998
                                    CONTINUED

NOTE 4 - MORTGAGE-BACKED SECURITIES - CONTINUED

   The scheduled maturities of mortgage-backed securities as of September 30,
   1999, 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          $   254,271       $   249,744       $         -       $         -
Due from one to five years                 -                 -                 -                 -
Due from five to ten years         1,811,971         1,818,815         4,316,525         4,214,101
Due after ten years                2,591,337         2,574,366        29,565,525        28,768,632
                                 -----------       -----------       -----------       -----------
                                 $ 4,657,579       $ 4,642,925       $33,882,050       $32,982,733
                                 ===========       ===========       ===========       ===========
</TABLE>

   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>

NOTE 5 - LOANS RECEIVABLE

   Loans receivable are summarized as follows:

<TABLE>
<CAPTION>
                                                               September 30,
                                                    ----------------------------------
                                                         1999                 1998
                                                    -------------        -------------
<S>                                                 <C>                  <C>
Mortgage loans (principally conventional):
   Single family residential                        $ 164,660,709        $ 149,960,319
   Multi-family residential                               818,933            1,091,156
   Commercial                                          12,000,070            9,763,998
   Construction                                        21,171,094           15,486,672
   Land                                                 3,172,273            3,770,811
                                                    -------------        -------------
                                                      201,823,079          180,072,956
Business and Consumer loans:
   Commercial business                                      5,717               54,602
   Consumer:
      Secured by deposits                               2,182,615            2,022,974
      Secured by vehicles                              12,413,881           10,576,958
      Personal real estate loans                        5,398,994            5,171,309
      Other                                             4,019,559            2,884,160
                                                    -------------        -------------
                                                       24,020,766           20,710,003
                                                    -------------        -------------
      Total loans                                     225,843,845          200,782,959
   Less:
      Undisbursed portion of loans in process         (7,835,438)          (7,845,663)
      Unearned discounts                                 (33,746)             (45,904)
      Net deferred loan-origination fees                (496,032)            (567,671)
      Allowance for loan losses                       (1,211,602)          (1,170,322)
                                                    -------------        -------------
         Net loans                                  $ 216,267,027        $ 191,153,399
                                                    =============        =============
</TABLE>

                                      F-13


<PAGE>   33



                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           SEPTEMBER 30, 1999 AND 1998
                                    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 7.00% to 10.00%) as follows:

<TABLE>
<CAPTION>
                       1999             1998
                    ----------       ----------
<S>                 <C>              <C>
Variable-rate       $  245,300       $   55,122
Fixed-rate           3,676,098        4,953,322
                    ----------       ----------
                    $3,921,398       $5,008,444
                    ==========       ==========
</TABLE>

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

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

<TABLE>
<CAPTION>
                                         1999               1998               1997
                                     -----------        -----------        -----------
<S>                                  <C>                <C>                <C>
Balance at beginning of period       $ 1,170,321        $ 1,191,977        $ 1,100,000
   Provision charged to income            60,000             35,000            110,084
   Charge-offs                           (18,719)           (56,656)           (18,107)
   Recoveries                                  -                  -                  -
                                     -----------        -----------        -----------
Balance at end of period             $ 1,211,602        $ 1,170,321        $ 1,191,977
                                     ===========        ===========        ===========
</TABLE>

   At September 30, 1999 and 1998, 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 $544,000 and $678,000, at September 30,
   1999 and 1998, respectively. The Bank is not committed to lend additional
   funds to debtors whose loans have been modified.

   Loans to executive officers and directors totaled $375,000 and $411,000, at
   September 30, 1999 and 1998, 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>
                                          1999              1998              1997
                                      -----------       -----------       -----------
<S>                                   <C>               <C>               <C>
Mortgage loans underlying FHLMC
   pass-through securities            $82,417,319       $77,445,977       $62,078,118
                                      ===========       ===========       ===========
</TABLE>

   Custodial escrow balances maintained in connection with the foregoing loan
   servicing were approximately $1,734,000 and $1,651,000, at September 30, 1999
   and 1998, 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, is as follows:

<TABLE>
<CAPTION>
                                         1999              1998               1997
                                     -----------       -----------        -----------
<S>                                  <C>               <C>                <C>
Balance at beginning of period       $ 1,304,828       $ 1,304,972        $ 1,691,527
   Provisions for losses                       -              (144)           (88,737)
   Charge-offs                                 -                 -           (297,818)
   Recoveries                                  -                 -                  -
                                     -----------       -----------        -----------
Balance at end of period             $ 1,304,828       $ 1,304,828        $ 1,304,972
                                     ===========       ===========        ===========
</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).

                                      F-14


<PAGE>   34


                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           SEPTEMBER 30, 1999 AND 1998
                                    CONTINUED

NOTE 7 - ACCRUED INTEREST RECEIVABLE

   Accrued interest receivable is summarized as follows as of September 30:

<TABLE>
<CAPTION>
                                    1999             1998
                                 ----------       ----------
<S>                              <C>              <C>
Investment securities            $  290,330       $  289,565
Mortgage-backed securities          230,137          212,242
Loans receivable                  1,733,691        1,588,663
                                 ----------       ----------
                                 $2,254,158       $2,090,470
                                 ==========       ==========
</TABLE>

NOTE 8 - PREMISES AND EQUIPMENT

  Premises and equipment consist of the following:

<TABLE>
<CAPTION>
                                               September 30,
                                        ---------------------------         Estimated
                                           1999             1998           Useful Lives
                                        ----------       ----------       -------------
<S>                                     <C>              <C>              <C>
Land                                    $1,046,057       $1,046,057             -
Building and improvements                4,078,547        3,287,552       5 to 40 years
Furniture, fixtures and equipment        2,298,227        2,175,602       3 to 15 years
                                        ----------       ----------
                                         7,422,831        6,509,211
Less accumulated depreciation            2,839,933        2,573,433
                                        ----------       ----------
                                        $4,582,898       $3,935,778
                                        ==========       ==========
</TABLE>

NOTE 9 - DEPOSITS

   Deposits at September 30, are summarized as follows:

<TABLE>
<CAPTION>
                                            1999                            1998
                               ----------------------------    ----------------------------
                                  Amount           Percent        Amount           Percent
                               ------------       ---------    ------------       ---------
<S>                            <C>                <C>         <C>                  <C>
Transaction accounts:
   Demand and NOW              $ 27,909,374           12.97    $ 24,355,223           11.91
   Money market                  12,933,426            6.01      13,858,303            6.78
   Passbook savings              13,981,896            6.50      12,683,902            6.20
                               ------------       ---------    ------------       ---------
                                 54,824,696           25.48      50,897,428           24.89
                               ------------       ---------    ------------       ---------
Certificates of deposit:
   4% to 5%                      70,521,467           32.77      39,539,063           19.34
   5% to 6%                      72,890,759           33.87      97,129,878           47.50
   6% to 7%                      16,749,804            7.78      16,674,103            8.16
   7% to 8%                          72,420             .03         106,608             .05
   8% to 9%                         150,058             .07         142,838             .06
                               ------------       ---------    ------------       ---------
                                160,384,508           74.52     153,592,490           75.11
                               ------------       ---------    ------------       ---------
                               $215,209,204          100.00    $204,489,918          100.00
                               ============       =========    ============       =========
</TABLE>

   The aggregate amount of short-term jumbo certificates of deposit with a
   minimum denomination of $100,000 was approximately $27,895,000 and
   $25,677,000, at September 30, 1999 and 1998, respectively.

   Scheduled maturities of certificates of deposit were as follows as of
   September 30, 1999:

<TABLE>
<CAPTION>
 Term to maturity               Amount           Percent
- ----------------------       ------------       ---------
<S>                          <C>                <C>
Within 12 months             $138,153,185           86.14
12 to 24 months                19,192,856           11.97
24 to 36 months                 2,620,072            1.63
Greater than 36 months            418,395             .26
                             ------------       ---------
                             $160,384,508          100.00
                             ============       =========
</TABLE>


                                      F-15

<PAGE>   35



                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           SEPTEMBER 30, 1999 AND 1998
                                    CONTINUED

NOTE 9 - DEPOSITS - CONTINUED

   Interest expense on deposits at September 30, is summarized as follows:

<TABLE>
<CAPTION>
                                 1999             1998             1997
                              ----------       ----------       ----------
<S>                           <C>              <C>              <C>
Money Market                  $  703,551       $  648,031       $  597,484
Passbook savings                 395,352          370,980          340,422
NOW                              189,723          198,448          201,920
Certificates of deposit        8,199,422        8,130,974        7,459,310
                              ----------       ----------       ----------
                              $9,488,048       $9,348,433       $8,599,136
                              ==========       ==========       ==========
</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.

NOTE 10 - BORROWINGS

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

<TABLE>
<CAPTION>
                                                           1999               1998
                                                       -----------        -----------
<S>                                                 <C>                 <C>
Balance at end of period                               $35,000,000        $17,000,000
Average amount outstanding during the period            24,541,667          4,923,000
Maximum amount outstanding during the period            39,000,000         19,000,000
Weighted average interest rate during the period             4.98%               5.7%
Interest rates at end of period                      4.93% - 5.66%       4.9% - 5.56%
</TABLE>

   These borrowings are payable at maturity and may be subject to earlier call
   by Federal Home Loan Bank.

   Scheduled repayments and potential calls of Federal Home Loan Bank borrowings
   at September 30, 1999 were as follows:

<TABLE>
<CAPTION>
Maturing             Callable
- ------------------- -----------
<S>                 <C>               <C>
Under 1 year        $ 7,500,000       $10,000,000
1 to 5 years         12,500,000        10,000,000
6 to 10 years        15,000,000                 -
Over 10 years                 -                 -
                    -----------       -----------
                    $35,000,000       $20,000,000
                    ===========       ===========
</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 were met in determining taxable
   income, the Bank was 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 was repealed for years beginning
   after January 1, 1997.

   The provision for Federal income taxes differs from that computed at the
   statutory corporate tax rate as follows:

<TABLE>
<CAPTION>
                                                       1999               1998               1997
                                                   -----------        -----------        -----------
<S>                                                <C>                <C>                <C>
Computed "expected" tax expense                    $ 1,871,897        $ 1,629,742        $ 1,570,937
Adjustments:
   SFAS No. 122 mortgage servicing rights             (18,051)           (32,940)           (55,237)
   Bad-debt deduction and real estate losses          (43,316)           (33,299)          (161,600)
   Other                                                56,817           (95,247)             26,780
                                                   -----------        -----------        -----------
                                                   $ 1,867,347        $ 1,468,256        $ 1,380,880
                                                   ===========        ===========        ===========
</TABLE>

                                      F-16


<PAGE>   36



                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           SEPTEMBER 30, 1999 AND 1998
                                    CONTINUED

NOTE 11 - FEDERAL INCOME TAXES - CONTINUED

   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>
                                  1999           1998            1997
                                --------       --------        --------
<S>                             <C>            <C>             <C>
Deferred loan fees              $ 18,668       $ 20,842        $ 33,529
Accrued pension liability         19,230          8,678         (18,192)
FHLB stock dividends              32,893              -          35,530
Deferred compensation                196          5,738          31,883
Deferred loan costs                2,492           (428)        (65,334)
Other, net                        34,521          5,170         (20,416)
                                --------       --------        --------
                                $108,000       $ 40,000        $ (3,000)
                                ========       ========        ========
</TABLE>

   The components of the net deferred tax assets (included in other assets) at
   September 30, were comprised of the following:

<TABLE>
<CAPTION>
                                                                1999           1998
                                                              --------       --------
<S>                                                           <C>            <C>
Deferred income tax assets:
   Net unrealized loss on available-for-sale securities       $412,740       $      -
   Deferred loan fees                                          185,501        204,169
   Deferred compensation and other employee benefits           300,633        320,099
   Deferred loan costs                                          63,270         65,762
                                                              --------       --------
      Total deferred income tax assets                         962,144        590,030

Deferred income tax liabilities:
   Net unrealized gain on available-for-sale securities              -         38,575
   FHLB stock dividends                                        198,511        165,618
   Book/tax depreciation difference                            180,893        146,200
                                                              --------       --------
      Total deferred income tax liabilities                    379,404        350,393
                                                              --------       --------
   Net deferred income tax assets                             $582,740       $239,637
                                                              ========       ========
</TABLE>

   Stockholders' equity at September 30, 1999 and 1998, 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 - 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.


                                      F-17



<PAGE>   37



                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           SEPTEMBER 30, 1999 AND 1998
                                    CONTINUED

NOTE 12 - PENSION PLAN, THRIFT PLAN AND DEFERRED COMPENSATION - CONTINUED

   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>
                                                                               1999               1998
                                                                           -----------        -----------
<S>                                                                        <C>                <C>
   Accumulated benefit obligation:
      Vested                                                               $ 1,421,986        $ 1,215,554
      Nonvested                                                                 21,857             18,875
                                                                           -----------        -----------
                                                                             1,443,843          1,234,429
   Effect of projected future compensation                                     762,416            965,165
                                                                           -----------        -----------

Projected benefit obligation for service rendered to date                    2,206,259          2,199,594
Plan assets at fair value; primarily cash and short-term investments         2,081,287          1,796,216
                                                                           -----------        -----------
Plan assets in excess of (less than) projected benefit obligation          $ (124,972)       $  (403,378)
                                                                           ===========        ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                                        1999             1998             1997
                                                     ---------        ---------        ---------
<S>                                                  <C>              <C>              <C>
Service cost - benefits earned during the year       $ 120,801        $  89,998        $  95,691
Interest cost on projected benefit obligation          141,472          116,967          149,291
Actual return on plan assets                         (105,165)        (102,787)        (112,625)
Net amortization and deferral                          (3,046)         (11,786)         (50,215)
                                                     ---------        ---------        ---------
         Net pension expense                         $ 154,062        $  92,392        $  82,142
                                                     =========        =========        =========

Assumptions used to develop the net
  periodic pension cost were:
      Discount rate                                      6.50%            6.50%            7.00%
      Expected long-term rate of return on assets        6.00%            6.00%            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 $49,679 in 1999,
   $43,870 in 1998, and $39,516 in 1997 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 1999, $112,000 in 1998, and $100,000 in 1997. At
   September 30, 1999 and 1998, the Bank had recorded a net liability of
   $300,000, related to such arrangements.


                                      F-18




<PAGE>   38



                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           SEPTEMBER 30, 1999 AND 1998
                                    CONTINUED

NOTE 13 - 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.

   In prior years the ESOP acquired 202,048 shares of Company stock through
   borrowings from IHC. 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 are 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 $131,000, $285,000, and
   $223,000, for the years ended September 30, 1999, 1998, and 1997,
   respectively. At September 30, 1999 and 1998, 102,787 and 86,902 ESOP shares,
   respectively, have been released for allocation, of which 93,327 and 72,152
   were allocated to participants at September 30, 1999 and 1998, respectively.
   The fair value of the unreleased shares of 99,261 and 115,146 at September
   30, 1999 and 1998, was approximately $1,514,000 and $1,439,000, respectively.

NOTE 14 - MANAGEMENT RECOGNITION PLAN

   In prior years, the Bank has adopted a Management Recognition Plan (MRP) 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
   41,472 shares of common stock, all of which were awarded to officers. The
   shares granted were 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 were in the form of restricted stock to be
   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, $167,000, and $177,000
   for the years ended September 30, 1999, 1998, and 1997, respectively.

NOTE 15 - STOCK OPTION PLANS

   Certain directors and officers have options to purchase shares of the Bank'
   common stock under its 1994 and 1996 Stock Incentive Plans. The option price
   is the fair market value at the date of grant and all shares have been
   granted. The option price ranges from $7.05 to $1,263 per share and expire
   between March 2004 and October 2007.



                                      F-19

<PAGE>   39



                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           SEPTEMBER 30, 1999 AND 1998
                                    CONTINUED

NOTE 15 - STOCK OPTION PLANS - CONTINUED

   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, 1997                 245,922       $2,636,279       $   10.70
   Options granted                                              -                -               -
   Options exercised                                        1,304            9,193            7.05
                                                       ----------       ----------       ---------
Options outstanding at September 30, 1998                 244,618        2,627,086           10.74
   Options granted                                              -                -               -
   Options exercised                                            -                -               -
                                                       ----------       ----------       ---------
Options outstanding at September 30, 1999
   (exercise price of $7.05 to $12.63 per share)          244,618       $2,627,086       $   10.74
                                                       ==========       ==========       =========

Exercisable at September 30, 1999                         147,514       $1,401,200       $    9.50
                                                       ==========       ==========       =========
</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 1999 and 1998, by approximately $88,000 each
   year, respectively, had the fair values of 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 1999 and 1998 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.

NOTE 16 - 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, 1999, is not significant to the Company's operations or
   financial condition.

NOTE 17 - 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.



                                      F-20



<PAGE>   40



                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           SEPTEMBER 30, 1999 AND 1998
                                    CONTINUED

NOTE 17 - REGULATORY MATTERS - CONTINUED

   Quantitative measures established by regulation to ensure capital adequacy
   require the Bank to maintain minimum amounts and ratios (set forth in the
   table below) of total and Tier 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, 1999 and 1998,
   the Bank met 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, 1999:                Amount           Ratio       Amount           Ratio      Amount        Ratio
- -------------------------             ------------       -------   ------------       -------    ---------      -----
<S>                                   <C>                 <C>       <C>                 <C>      <C>            <C>
   Risk-based capital
      (to risk-weighted assets)       $33,163,000         19.7%     $13,453,290         8.0%     $16,817,400    10.0%

   Tier I capital
      (to risk-weighted assets)       $31,952,000         19.0%     $ 6,726,960         4.0%     $10,090,440     6.0%

   Tier I capital
      (to average assets)             $31,952,000         11.0%     $11,575,600         4.0%     $14,469,500     5.0%

As of September 30, 1998:
- -------------------------
   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>

NOTE 18 - 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.



                                      F-21



<PAGE>   41



                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           SEPTEMBER 30, 1999 AND 1998
                                    CONTINUED

NOTE 19 - 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 20 - 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.

   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, 1999 and 1998, the Bank had not issued any standby
   letters-of-credit. Commitments to extend credit totaled $3,921,398 and
   $5,008,444, at September 30, 1999 and 1998, 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.



                                      F-22



<PAGE>   42



                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           SEPTEMBER 30, 1999 AND 1998
                                    CONTINUED

NOTE 20 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED

   The estimated fair values of the Company's financial instruments at September
   30, are as follows:

<TABLE>
<CAPTION>
                                                            1999                                  1998
                                              -------------------------------       -------------------------------
                                                 Carrying           Fair              Carrying             Fair
                                                  Amount            Value              Amount              Value
                                              ------------       ------------       ------------       ------------
<S>                                           <C>                <C>                <C>                <C>
Financial assets:
   Cash and interest-bearing deposits         $  6,567,686       $  6,567,686       $ 10,867,646       $ 10,867,647
                                              ============       ============       ============       ============
   Investment securities                      $ 18,710,934       $ 18,604,505       $ 20,012,985       $ 20,107,734
                                              ============       ============       ============       ============
   Accrued interest receivable                $  2,254,158       $  2,254,158       $  2,090,470       $  2,090,470
                                              ============       ============       ============       ============
   Loans and mortgage-backed securities       $255,118,941                          $224,189,663
   Less:  Allowance for loan losses              1,211,602                             1,170,321
                                              ------------                          ------------
                                              $253,907,339       $253,606,198       $223,019,342       $226,335,745
                                              ============       ============       ============       ============
Financial liabilities:
   Deposits                                   $215,209,204       $208,817,490       $204,489,918       $202,220,080
                                              ============       ============       ============       ============
   Borrowings                                 $ 35,000,000       $ 35,000,000       $ 17,000,000       $ 17,000,000
                                              ============       ============       ============       ============
</TABLE>

NOTE 21 - 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>
                                                                                                    1999                 1998
                                                                                                ------------        ------------
                                 BALANCE SHEETS
<S>                                                                                             <C>                 <C>
ASSETS
     Cash in Bank                                                                               $  1,162,127        $    709,446
     Investment in subsidiary                                                                     33,324,014          35,076,618
     Other assets                                                                                     32,781              81,085
                                                                                                ------------        ------------
            Total assets                                                                        $ 34,518,922        $ 35,867,149
                                                                                                ================================
LIABILITIES AND STOCKHOLDERS' EQUITY
     Other liabilities                                                                          $      7,200        $      6,300
     Dividends payable                                                                               272,539             298,768
     Stockholders' equity                                                                         34,239,183          35,562,081
                                                                                                ------------        ------------
               Total liabilities and stockholders' equity                                       $ 34,518,922        $ 35,867,149
                                                                                                ================================
                             STATEMENTS OF EARNINGS

    General and administrative expenses                                                         $    110,876        $    112,113
                                                                                                ------------        ------------
         Loss before income taxes and equity in undistributed
            earnings of subsidiaries                                                                 110,876             112,113
    Income tax (benefit)                                                                             (37,537)            (38,738)
                                                                                                ------------        ------------
         Loss before equity in earnings of subsidiaries                                               73,339              73,375
    Dividends from subsidiaries                                                                    4,955,746           2,181,000
    Equity in undistributed earnings of subsidiaries                                              (1,223,920)          1,217,477
                                                                                                ------------        ------------
               Net earnings                                                                     $  3,658,487        $  3,325,102
                                                                                                ================================
</TABLE>


                                      F-23



<PAGE>   43



                           JACKSONVILLE BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           SEPTEMBER 30, 1999 AND 1998
                                    CONTINUED

NOTE 20 - YEAR 2000 ISSUE

   The Year 2000 issue relates to electronic data processing systems and other
   electronic equipment that have used a two-digit field rather than a
   four-digit field to represent the year. As a result, system failures and data
   processing errors could occur and have an adverse effect on the Company's
   operations. Management has implemented an action plan in order to prepare its
   systems and equipment for the Year 2000 date change. The Company's action
   plan is complete and consisted of five phases which include awareness,
   assessment, renovation, validation, and implementation. In addition,
   management has developed a business resumption contingency plan that
   addresses both internal and external system failures. The Company is
   following the Year 2000 project management process as prescribed by the
   Federal Financial Institution's Examination Council. Because of the
   unprecedented nature of the Year 2000 issue, its effects and the success of
   related remediation efforts will not be fully determinable until the Year
   2000 and thereafter.



                                      F-24


<PAGE>   44

                                STOCK INFORMATION

            Shares of Jacksonville Bancorp, Inc.'s common stock are traded
nationally under the symbol "JXVL" on the Nasdaq National Market. At December
10, 1999, the Company had 2,133,712 shares of common stock outstanding and had
1,477 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 on March 29, 1996) and cash
dividends paid per share of common stock during the periods indicated. Data
prior to that date is given with respect to Jacksonville Savings & Loan
Association.

<TABLE>
<CAPTION>
                                                     HIGH                  LOW                        DIVIDEND
<S>                                                     <C>                  <C>                             <C>
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

Quarter ended December 31, 1998                          17.50                14.13                          0.125

Quarter ended March 31, 1999                             16.75                14.75                          0.125

Quarter ended June 30, 1999                              16.13                13.25                          0.125

Quarter ended September 30, 1999                         16.50                15.00                          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.



                                       43


<PAGE>   45




                        DIRECTORS AND EXECUTIVE OFFICERS

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

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

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

ROBERT BROWN                                        JERRY HAMMONS
Vice Chairman and Director of the Company;          Director and Senior Vice President of the
Manager, Brown Lumber  Industries                   Company
</TABLE>



                                       44


<PAGE>   46




                                BANKING LOCATIONS

                                   MAIN OFFICE

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

                                 BRANCH OFFICES

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

                              (Under Construction)
                            2507 University Boulevard
                               Tyler, Texas 75707


                                       45


<PAGE>   47


                             STOCKHOLDER INFORMATION

            Jacksonville Bancorp, Inc. is a Texas-chartered corporation and
savings and loan holding company. Its primary asset, Jacksonville Savings Bank,
SSB, is a Texas-chartered stock savings bank 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.



                                       46


<PAGE>   1
                                                                      EXHIBIT 23

                        [HENRY & PETERS, PC LETTERHEAD]

                        CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
Jacksonville Bancorp, Inc.

We consent to the use of our report dated November 16, 1999, on the consolidated
financial statements of Jacksonville Bancorp, Inc. and subsidiaries as of
September 30, 1999 and 1998, and for each of the years in the three-year period
ended September 30, 1999, in Jacksonville Bancorp, Inc.'s Form 10-K for the year
ended September 30, 1999.

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

Tyler, Texas
December 23, 1999

<TABLE> <S> <C>

<ARTICLE> 9
<MULTIPLIER> 1,000

<S>                             <C>
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                          SEP-30-1999
<PERIOD-START>                             OCT-01-1998
<PERIOD-END>                               SEP-30-1999
<CASH>                                           2,996
<INT-BEARING-DEPOSITS>                           3,572
<FED-FUNDS-SOLD>                                     0
<TRADING-ASSETS>                                     0
<INVESTMENTS-HELD-FOR-SALE>                     44,694
<INVESTMENTS-CARRYING>                          11,657
<INVESTMENTS-MARKET>                            11,536
<LOANS>                                        217,479
<ALLOWANCE>                                      1,212
<TOTAL-ASSETS>                                 290,392
<DEPOSITS>                                     215,209
<SHORT-TERM>                                     7,500
<LIABILITIES-OTHER>                              5,962
<LONG-TERM>                                     27,500
                                0
                                          0
<COMMON>                                            27
<OTHER-SE>                                      34,192
<TOTAL-LIABILITIES-AND-EQUITY>                 290,392
<INTEREST-LOAN>                                 17,092
<INTEREST-INVEST>                                3,103
<INTEREST-OTHER>                                   270
<INTEREST-TOTAL>                                20,465
<INTEREST-DEPOSIT>                               9,488
<INTEREST-EXPENSE>                              10,711
<INTEREST-INCOME-NET>                            9,754
<LOAN-LOSSES>                                       60
<SECURITIES-GAINS>                                   0
<EXPENSE-OTHER>                                  5,876
<INCOME-PRETAX>                                  5,506
<INCOME-PRE-EXTRAORDINARY>                       5,506
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                     3,638
<EPS-BASIC>                                       1.65
<EPS-DILUTED>                                     1.60
<YIELD-ACTUAL>                                    7.81
<LOANS-NON>                                        544
<LOANS-PAST>                                         0
<LOANS-TROUBLED>                                   338
<LOANS-PROBLEM>                                    882
<ALLOWANCE-OPEN>                                 1,170
<CHARGE-OFFS>                                     (18)
<RECOVERIES>                                         0
<ALLOWANCE-CLOSE>                                1,212
<ALLOWANCE-DOMESTIC>                             1,212
<ALLOWANCE-FOREIGN>                                  0
<ALLOWANCE-UNALLOCATED>                              0


</TABLE>



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