<PAGE>   1

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-K

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

                 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998

                                      OR

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

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

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

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

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

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

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

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



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



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

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


<PAGE>   2

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

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

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

                      DOCUMENTS INCORPORATED BY REFERENCE

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

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

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


<PAGE>   3




PART I

ITEM 1.          BUSINESS.

GENERAL

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

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

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

MARKET AREA

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

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


<PAGE>   4

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

LENDING ACTIVITIES

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

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

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




                                       2
<PAGE>   5

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

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

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

BUSINESS AND CONSUMER LOANS:

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

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

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

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






                                       3
<PAGE>   6


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

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

BUSINESS AND CONSUMER LOANS:

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

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

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

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

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

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






                                       4
<PAGE>   7

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

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

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

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

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


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

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





                                       5
<PAGE>   8

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

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

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

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

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

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

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

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

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

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



                                       6
<PAGE>   9

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

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

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

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

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


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


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

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

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





                                       7
<PAGE>   10

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

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

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

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

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

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





                                       8
<PAGE>   11

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

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

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

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

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

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

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

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



                                       9
<PAGE>   12

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

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

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

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

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

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

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

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

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


                                       10
<PAGE>   13

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

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

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

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

         Rider (new paragraph):

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

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




                                       11
<PAGE>   14

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

ASSET QUALITY

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

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

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

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

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

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

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

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

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

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

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

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



                                       12
<PAGE>   15

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

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

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

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

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



                                       13
<PAGE>   16

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

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

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

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

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

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

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

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

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

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

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

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

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

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



                                       14
<PAGE>   17

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

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

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

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

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

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

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



                                       15
<PAGE>   18

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

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

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

                                         1998                1997                 1996               1995             1994

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

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

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

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

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

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

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

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

Provision for losses on loans              35                   110                 100                   25                18

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

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

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

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

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

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

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






                                       16
<PAGE>   19


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

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

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

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

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

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

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







                                       17
<PAGE>   20

MORTGAGE-BACKED SECURITIES

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

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

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

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

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

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

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

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


                                       18
<PAGE>   21

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

INVESTMENT ACTIVITIES

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






                                       19
<PAGE>   22

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

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

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

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

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

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

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

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






                                       20
<PAGE>   23

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

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

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

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

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

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

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

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

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

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

INTEREST-BEARING DEPOSITS

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





                                       21
<PAGE>   24

SOURCES OF FUNDS

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

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

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

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

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

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

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

                                                     1998                     1997                        1996

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

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

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

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

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

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

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

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

Transaction accounts:

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

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

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



                                       22
<PAGE>   25

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

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

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

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

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

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

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

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

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


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

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

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

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



                                       23
<PAGE>   26

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

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

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

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

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

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

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






                                       24
<PAGE>   27

                                   REGULATION

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

THE COMPANY AND IHC

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

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

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

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



                                       25
<PAGE>   28

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

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

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

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

REGULATION OF THE BANK

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

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

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

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


                                       26
<PAGE>   29

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

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

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

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

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

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



                                       27
<PAGE>   30

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

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

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

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

                                                         1998
                                                         ----

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

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

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

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






                                       28
<PAGE>   31

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

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

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

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

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

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

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

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

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


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






                                       29
<PAGE>   32

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

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

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

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

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

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

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



                                       30
<PAGE>   33

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

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

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

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


                                       31
<PAGE>   34

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

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

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

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

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



                                       32
<PAGE>   35

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

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

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

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

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

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




                                       33
<PAGE>   36

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

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

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

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



                                       34
<PAGE>   37

ITEM 2. PROPERTIES.

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

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

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

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

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

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

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

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

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

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


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

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





                                       35
<PAGE>   38

ITEM 3.  LEGAL PROCEEDINGS.

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

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

         Not applicable.

PART II.

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

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

ITEM 6.  SELECTED FINANCIAL DATA.

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

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

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

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

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

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

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

         Not applicable.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

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

ITEM 11. EXECUTIVE COMPENSATION.

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

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

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





                                       36
<PAGE>   39

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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

PART IV.

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

         (a)    Documents filed as part of this Report

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

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

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

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

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

                Notes to Consolidated Financial Statements

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








                                       37
<PAGE>   40

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

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

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

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

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

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

(1) Management contract or compensatory plan or arrangement.






                                       38
<PAGE>   41

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

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

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

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

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






                                       39
<PAGE>   42

                                   SIGNATURES

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

                                        JACKSONVILLE BANCORP, INC.

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

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


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


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


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


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






                                       40
<PAGE>   43

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


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


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

                                 END OF DOCUMENT







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