<PAGE>   1
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-K

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

                  FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999

                                      OR

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

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

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

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

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

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

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

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

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


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

                             Yes X    No
                                ---     ---


                                       -1-
<PAGE>   2
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

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

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

                      DOCUMENTS INCORPORATED BY REFERENCE

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

(1) Portions of the Annual Report to Stockholders for the year ended September
30, 1999 are incorporated into Part II, Items 5 through 8 of this Form 10-K.

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


                                       -2-
<PAGE>   3
PART I

ITEM 1.          BUSINESS.

GENERAL

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

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

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

MARKET AREA

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

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


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

LENDING ACTIVITIES

     At September 30, 1999, Jacksonville's net loan portfolio totaled $216.3
million representing approximately 74.5% of Jacksonville's $290.4 million of
total assets at that date. The principal lending activity of Jacksonville is the
origination of single-family residential loans. At September 30, 1999,
approximately 99% of Jacksonville's single-family residential loan portfolio
consisted of conventional loans with the remaining single-family residential
loans either insured by the Federal Housing Administration ("FHA") or partially
guaranteed by the Department of Veterans Affairs ("VA"). At September 30, 1999,
Jacksonville's single-family residential loan portfolio totaled $164.7 million,
representing approximately 72.9% of Jacksonville's total loans, before net
items, at that date. Jacksonville held $12.0 million in commercial real estate
loans at that date, representing 5.3% of total loans, before net items. Of the
commercial real estate loans, $3.5 million, or 29.1%, were secured by real
estate acquired in satisfaction of debts previously contracted or by
improvements on such properties. In addition to these loans secured by real
estate acquired in satisfaction of debts previously contracted, Jacksonville
originated $4.8 million in new commercial loans during fiscal 1999. The only
other significant areas of lending activity by Jacksonville are construction
loans, land loans, and consumer loans which, as of September 30, 1999,
represented $21.2 million, or 9.4%, $3.2 million, or 1.4% and $24.0 million, or
10.6% of total loans. Home equity loans in the amount of $15.5 million are
included in the single family portfolio.

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

     At September 30, 1999, Jacksonville's limit on loans-to-one borrower was
$5.0 million, and its five largest loans or groups of loans-to-one borrower,
including related entities, aggregated $1.4 million, $1.3 million, $1.1 million,
$993,000, and $912,000. The first loan for $1.4 million was a commercial real
estate loan to finance the construction of a national chain motel. The second
loan for $1.3 million was a loan to develop a residential subdivision. The $1.1
million loan was for two commercial buildings, while the $993,000 loan was for
commercial real estate with residential real estate as additional collateral.
The $912,000 loan was for multiple town house units. All of these loans are
secured primarily by residential and nonresidential real estate located in
Cherokee County and surrounding counties in East Texas.


                                       -4-
<PAGE>   5
     LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of Jacksonville's loan portfolio by type of loan at the dates indicated.

<TABLE>
<CAPTION>
                                                                             SEPTEMBER 30,
                                     -------------------------------------------------------------------------------
                                                  1999                     1998                         1997
                                     --------------------------   -------------------------   ----------------------
                                     AMOUNT           %           AMOUNT            %         AMOUNT         %
                                     ------------   -----------   ------------    ---------   -----------  ---------
                                      (Dollars in Thousands)
<S>                                  <C>            <C>             <C>            <C>         <C>         <C>
MORTGAGE LOANS:

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

BUSINESS AND CONSUMER LOANS:

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

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

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


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

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

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

BUSINESS AND CONSUMER LOANS:

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

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

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

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


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

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


                                       -6-
<PAGE>   7
     CONTRACTUAL PRINCIPAL REPAYMENTS. The following table sets forth certain
information at September 30, 1999, regarding the dollar amount of loans maturing
in Jacksonville's portfolio, based on the contractual terms to maturity, before
giving effect to net items. Demand loans, loans having no stated schedule of
repayments and no stated maturity and overdrafts are reported as due in one
year.

<TABLE>
<CAPTION>
                                                                                DUE 3-5       DUE 5-10      DUE 10-15
                                                                                 YEARS         YEARS          YEARS
                                 DUE BEFORE      DUE BEFORE     DUE BEFORE       AFTER         AFTER          AFTER
                                   9/30/00         9/30/01        9/30/02       9/30/99       9/30/99        9/30/99
                                ------------    ------------   ------------    ---------     ----------    ------------

                                                                      (In Thousands)

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


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

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



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

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


                                       -7-
<PAGE>   8
     The following table sets forth the dollar amount of all loans, before net
items, due after one year from September 30, 1999 which have fixed interest
rates or which have floating or adjustable interest rates.

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

                                                                  (In Thousands)

<S>                                        <C>                  <C>                        <C>
Single-family residential(1)                    $110,977                $53,607               $164,584
Multi-family residential                             485                    332                    817
Commercial real estate                             6,357                  5,450                 11,807
Construction                                           0                      0                      0
Land                                               1,117                  2,048                  3,165
Commercial business                                    6                      0                      6
Consumer                                          23,062                      0                 23,062
                                                 -------                 ------                -------
  Total                                        $ 142,004                $61,437               $203,441
                                                 =======                 ======                =======
</TABLE>

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

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

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

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

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

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

     Jacksonville originates both fixed- and adjustable-rate residential real
estate loans as market conditions dictate. Prior to fiscal 1999 Jacksonville
followed a policy of selling approximately 95% of its loans secured by first
mortgage liens on single-family residences ("residential first mortgage loans")
with fixed rates and terms greater than 15 years to third parties while
retaining all of its variable-rate loans. However, during 1999 management
elected


                                       -8-
<PAGE>   9
to portfolio a greater percentage of its fixed rate mortgage product because of
increased interest rates. When loans are sold to others, except to Federal Home
Loan Mortgage Corporation ("FHLMC"), servicing of the loans is usually released
to the buyers. At September 30, 1999, $82.4 million in loans were being serviced
for others, primarily the FHLMC. See Note 5 to the Consolidated Financial
Statements. While Jacksonville has utilized various indices to adjust its
adjustable-rate mortgages ("ARMs") portfolio, each index would qualify such
loans for securitization under FHLMC guidelines. Adjustable-rate loans are
currently indexed to an index of U.S. Treasury obligations whose maturity
matches the interest adjustment period for the corresponding loan and have their
interest rates readjusted every one to five years. At September 30, 1999, $102.0
million or 45.2% of Jacksonville's total loans, before net items, were
fixed-rate single-family residential loans, and $62.7 million or 27.8% of such
total loans were adjustable-rate single-family residential mortgage loans. Of
these adjustable mortgages, $26.1 million, or 41.6%, have interest rates
adjustable in one year, and the remainder adjust at periods greater than one
year up to five years.

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

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

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

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


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


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

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

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

     SINGLE-FAMILY RESIDENTIAL LOANS. The primary lending activity of
Jacksonville is the origination of loans secured by first mortgage liens on
single-family residences. Jacksonville also offers second mortgage loans on such
properties including home improvement and home equity


                                       -9-
<PAGE>   10
loans. At September 30, 1999, $164.7 million or 72.9% of Jacksonville's total
loan portfolio, before net items, consisted of single-family residential loans.

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

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

     Jacksonville is aware that there are inherent risks in originating
fixed-rate residential first mortgage loans for its portfolio, especially during
periods of historically low interest rates, but recognizes the need to respond
to market demand for fixed-rate loans and to generate income from any
origination fees, where applicable, for such loans. To address these concerns,
in October 1987 Jacksonville began a policy of selling substantially all of the
fixed-rate residential first mortgage loans that it originates to a large
mortgage banking company with operations throughout the United States. While
Jacksonville continues to maintain its loan sales relationship with the mortgage
banking company, a substantial majority of its loan sales since July 1993 have
been to FHLMC with servicing retained by Jacksonville. Since July 1993,
Jacksonville has sold $124.6 million of loans to FHLMC and has retained the
servicing on all of these loans. Since that same date, Jacksonville has sold
$32.8 million of loans to the mortgage banking company. During fiscal 1999,
Jacksonville sold $18.5 million of loans to FHLMC and $5.4 million to the
mortgage banking company. Loan sales were down primarily as a result of
Jacksonville electing to portfolio more of its loan originations because of
interest rates increases.

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

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


                                      -10-
<PAGE>   11
largely determined by the demand for each in a competitive environment. As
interest rates have fluctuated since November 1981, the demand for fixed- and
adjustable-rate loans has changed as Jacksonville's customers have preferred
adjustable rates in a high interest rate environment and fixed-rate loans as
interest rates lowered. In order to continue to increase and then to maintain a
high percentage of adjustable-rate residential first mortgage loans,
Jacksonville has offered various forms of adjustable-rate loans combined with a
policy of selling most 30 year fixed-rate loans from its portfolio. As a result,
at September 30, 1999, $62.7 million, or 27.8%, of the single-family residential
loans in Jacksonville's loan portfolio, before net items, consisted of
adjustable-rate loans.

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

     Due to the generally lower rates of interest prevailing in recent periods,
Jacksonville's ability to originate adjustable-rate residential first mortgage
loans has decreased as consumer preference for fixed-rate loans has increased.
As a result, even as interest rates have fluctuated in recent years, adjustable
rate loans represented 5.6%, 3.1%, and 10.7% of Jacksonville's total
originations of single-family residential loans during the years ended September
30, 1999, 1998, and 1997, respectively.

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

     Jacksonville also makes home improvement loans which amounted to $2.5
million as of September 30, 1999. These loans are secured by either first or
second liens on single-family residences. Second mortgage loans on single-family
residences made by Jacksonville are generally secured by properties on which
Jacksonville holds the first mortgage lien. Effective January 1, 1998, Texas law
permitted home equity lending and at September 30, 1999 there was a balance of
$15.5 million in home equity loans.

     COMMERCIAL MORTGAGE LOANS. At September 30, 1999, $12.0 million, or 5.3%,
of Jacksonville's total loan portfolio, before net items, consisted of loans
secured by existing commercial real estate. Of these commercial mortgage loans,
$3.5 million, or 29.1%, represented loans secured by real estate acquired in
satisfaction of debts previously contracted or by improvements on such
properties. Jacksonville currently originates a limited number of commercial
mortgage loans. Commercial mortgage loan originations for the years ended
September 30, 1999, 1998 and 1997 were, respectively, $4.8 million, $983,000
million, and $1.08 million.

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

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


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

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

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

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

     CONSTRUCTION LOANS. At September 30, 1999, construction loans totaled $21.2
million or 9.4% of the total loan portfolio, before net items.

     Jacksonville makes construction loans to individuals for the construction
of their residences. During recent years, it expanded its construction lending
activities to include lending to developers for the construction of
single-family residences. Because Jacksonville views construction loans as
involving greater risk than permanent single-family residential loans, it
applies stricter underwriting standards to them. Construction loan originations
increased during the year ended September 30, 1999 to $23.4 million from $20.1
million during fiscal 1998.

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

     HOME EQUITY LOANS - At September 30, 1999 the principal balance on home
equity loans totaled $15.5 million. Loans are secured by the homestead property,
and may not exceed 80% of the appraised value of the property based on either
the current market value as set forth by the County Appraisal District or by a
new appraisal done by a qualified person. These loans are usually in a second
lien position, but can be a first lien either through paying off the existing
first lien or by there not being any existing liens on the property at the time
the home equity loan is made. These loans are typically made for a term of 20
years or less. These loans are usually at a slightly higher rate of interest
than most first lien loans and have fewer closing cost, making them very
attractive for both consumer and Jacksonville.

     LAND LOANS. As of September 30, 1999, land loans totaled $3.2 million or
1.4% of the total loan portfolio, before net items. As of the date, Jacksonville
had 100 land loans in its loan portfolio, over 90% of which were utilized for
ranching, agricultural or residential


                                      -12-
<PAGE>   13
purposes. Jacksonville does not make land loans for speculative purposes. With
limited exceptions, Jacksonville's underwriting guidelines require land loans to
have a loan-to-land value ratio of 80% and a term of 20 years or less. The
average balance of Jacksonville's land loans, as of September 30, 1999, was
approximately $32,000.

     CONSUMER LOANS. At September 30, 1999, consumer loans totaled $24.0 million
or 10.6% of the total loan portfolio, before net items, and consisted primarily
of loans secured by deposits, loans secured by vehicles, personal real estate
loans and loans to purchase personal property. Loans secured by deposits total
$2.2 million at September 30, 1999. A loan secured by a deposit at Jacksonville
is structured to have a term that ends on the same date as the maturity date of
the certificate securing it or if secured by a statement savings account has a
one-year term with a hold on withdrawals that would result in the balance being
lower than the loan balance. Typically these loans require quarterly payments of
interest only. Jacksonville also makes loans to individuals for future home
sites and for additional property adjacent to their existing residence. Although
under Texas law such loans may have a term of up to 20 years, the average term
of Jacksonville's personal real estate loans was substantially less than 20
years as of September 30, 1999. All of these loans are secured by the purchased
land, but because these loans are typically for $40,000 or less they are not
underwritten in the same manner as the Bank's other mortgage loans. Jacksonville
relies on the general creditworthiness of the borrower and uses tax valuations
or limited appraisals to determine the value of the property. In some cases a
title search is obtained from a title insurance company rather than a title
policy. At September 30, 1999, the bank had 336 personal real estate loans with
an average balance of $16,000. Jacksonville's vehicle loan portfolio totaled
$12.4 million at September 30, 1999. Jacksonville makes both new and used
vehicle loans. Most all used vehicle loans are originated at higher interest
rates than those rates on new vehicle loans. The Bank does not purchase vehicle
loans from dealers. The term for vehicle loans is typically six months to five
years with monthly payments of principal and interest.

     MULTI-FAMILY AND COMMERCIAL BUSINESS LOANS. At September 30, 1999, $819,000
or .4%, and $6,000, or .0%, of Jacksonville's total loan portfolio, before net
items, consisted of multi-family loans and commercial business loans,
respectively. While Jacksonville has the authority, up to applicable
limitations, to engage in the business of making both multi-family and
commercial business loans, its policy has been to confine its primary lending
activities to other types of lending. Of the nine multi-family loans in
Jacksonville's loan portfolio as of September 30, 1999, the largest loan had a
principal amount of $351,000 which represented 42.9% of the multi-family loan
portfolio. As of September 30, 1999, Jacksonville had only one commercial
business loan with a principal balance of $6,000.

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

     The charging of points, in most cases, were limited during fiscal 1999
because of market conditions and strong competition in the one-to-four family
residential loans in the East Texas market. Most financial institutions charged
no points on these loan products; however, primarily in low principal
residential mortgages and commercial loans, Jacksonville continued to charge a
loan fee.

     In accordance with SFAS No. 91, which deals with the accounting for
non-refundable fees and costs associated with originating or acquiring loans,
Jacksonville's loan origination fees and certain related direct loan origination
costs are offset, and the resulting net amount is deferred and amortized as
interest income over the contractual life of the related loans as an adjustment
to the yield of such loans, adjusted for estimated prepayments based on
Jacksonville's historical prepayment experience. At September 30, 1999,
Jacksonville had $496,000 of loan fees which had been deferred and are being
recognized as income over the estimated maturities of the related loans.


                                      -13-
<PAGE>   14
     Loan fees received are accounted for substantially in accordance with FASB
Statement No. 91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases." Loan fees
and certain direct loan origination costs are deferred, and the net fee is
recognized as an adjustment to interest income over the contractual life of the
loans. Jacksonville has not deferred direct costs related to short-term loans
for which no origination fees are charged. Management considers this departure
to be immaterial considering the short-term nature of these loans. Commitment
fees and costs relating to commitments whose likelihood of exercise is remote
are recognized over the commitment period on a straight-line basis. If the
commitments subsequently exercised during the commitment period, the remaining
unamortized commitment fee at the time of exercise is recognized over the life
of the loan as an adjustment of yield. See Note [2] to the Consolidated
Financial Statements.


                                      -14-
<PAGE>   15
ASSET QUALITY

     DELINQUENT LOANS. The following table sets forth information concerning
delinquent loans at September 30, 1999, in dollar amount and as a percentage of
Jacksonville's total loan portfolio, before net items. The amounts presented
represent the total outstanding principal balances of the related loans, rather
than the actual payment amounts which are past due.

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

                                   AMOUNT      PERCENTAGE     AMOUNT     PERCENTAGE     AMOUNT     PERCENTAGE
                               -----------  ---------------  ---------  ------------  ----------- ------------
                                                              (Dollars in Thousands)

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

  30-59 days                      $1,261         34.5%        $    -            -%      $ 754         20.7%
  60-89 days                         437         12.0              -            -
  90 days and over                   435         11.9              -            -
                                   -----         ----          ------       -----       -----         -----
    Total delinquent loans        $2,133         58.4%        $    -            -%      $ 754         20.7%
                                   =====         ====          ======       =====         ===         ====



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

                                  AMOUNT     PERCENTAGE     AMOUNT      PERCENTAGE      AMOUNT     PERCENTAGE
                                 ---------  -----------    ----------  -----------    ----------  ------------
                                                            (Dollars in Thousands)

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

  30-59 days                      $   -            - %        $    -            -%      $ 577         15.8%
  60-89 days                          -            -               -            -          76          2.1
  90 days and over                    -            -               -            -         109          3.0
                                   ----         ----           -----         ----         ---         ----

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


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

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

                                  (Dollars in Thousands)

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

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

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


     NON-PERFORMING ASSETS. All loans are reviewed on a regular basis and are
placed on a non-accrual status when, in the opinion of management, the
collection of additional interest is


                                      -15-
<PAGE>   16
deemed insufficient to warrant further accrual. Jacksonville does not accrue
interest on loans past due 90 days or more except when the estimated value of
the collateral and collection efforts were deemed sufficient to ensure full
recovery. Uncollectible interest on loans that are contractually past due is
charged off or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income equal to
all interest previously accrued, and income is subsequently recognized only to
the extent cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments is restored
or until management accepts a payment that results in a cure of the 90-day
delinquency. In such cases, the loan is returned to accrual status.

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

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

     REO is recorded at the lower of unpaid principal balance of the loan plus
acquisition costs or fair value, as determined by an appraisal of the property
obtained at acquisition. Costs relating to development and improvement of
property are capitalized, whereas costs relating to holding the property are
expensed. Valuations are periodically performed by management and an allowance
for losses is established by a charge to operations if the carrying value of a
property exceeds its estimated net realizable value. Jacksonville develops an
asset plan for each parcel of REO that it holds for more than six months. The
plan includes specific marketing strategies, a consideration of necessary
improvements and an estimate of the expected holding period and asking price. As
a result of the general improvement in economic conditions in Jacksonville's
market area and through the implementation of the REO Policy, Jacksonville's REO
amounted to $346,000, $531,000, and $526,000 as of September 30, 1999, 1998, and
1997 respectively.

     Generally, a transfer of REO is recognized by Jacksonville as a sale for
accounting purposes upon consummation of the transaction unless Jacksonville
retains some type of continuing involvement in the property without a transfer
of the risks and rewards of ownership to the buyer or, under some circumstances,
if it has financed the sale of the REO. In the latter case, in order for a sale
to be recognized, a buyer must, among other things, demonstrate his commitment
to the property by making adequate initial and continuing investments. The
percentage of sales price viewed as an adequate initial investment level varies
with the type of loan, but a generally acceptable percentage of the sales price
is between 10% to 25% for commercial real estate and 5% for a single-family
primary residence. REO sales financed by Jacksonville in which a buyer's initial
investment is less than what is considered an adequate initial investment level
under the REO Policy are carried on Jacksonville's books as REO sold by the
deposit method until the buyer has an adequate level of equity. As of September
30, 1999, Jacksonville had no REO sold by the deposit method.


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

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

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

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

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

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

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

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

Total non-performing assets and
  troubled debt restructurings as
  a percentage of total assets               .42%        .60%        .66%       1.03%        1.51%
                                             ===         ===         ===        ====         ====
</TABLE>


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

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

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

     At September 30, 1999, management was not aware of any additional loans
with possible credit problems which caused it to have doubts as to the ability
of the borrowers to comply with present loan repayment terms and which in
management's view may result in the future inclusion of such items in the non-
performing asset categories.

     The interest income that would have been recorded during fiscal 1999, 1998,
and 1997 if Jacksonville's non-accruing loans at the end of such periods had
been current in accordance with their terms during such periods were
approximately $26,000, $48,000, and $63,000, respectively. Jacksonville has not
committed to lend additional funds to debtors whose loans have been modified.
See Note [5] to the Consolidated Financial Statements. During the year ended
September 30, 1999, no interest income was actually recorded on any loans after
they were placed on non-accrual status.


                                      -17-
<PAGE>   18
     CLASSIFIED ASSETS. Federal regulations require that each insured depositing
institution classify its assets on a regular basis. In addition, in connection
with examinations of insured institutions, federal examiners have authority to
identify problem assets and, if appropriate, classify them. There are three
classifications for problem assets: "substandard," "doubtful" and "loss."
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. Another category
designated "special mention" also must be established and maintained for assets
which do not currently expose an insured institution to a sufficient degree of
risk to warrant classification as substandard, doubtful or loss. Assets
classified as substandard or doubtful require the institution to establish
general allowances for loan losses. If an asset or portion thereof is classified
loss, the insured institution must either establish specific allowances for loan
losses in the amount of 100% of the portion of the asset classified loss, or
charge-off such amount. General loss allowances established to cover possible
losses related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses do not qualify as regulatory capital. Federal
examiners may disagree with an insured institution's classifications and amounts
reserved.

     Jacksonville's classified assets at September 30, 1999 consisted of $67,000
of assets classified as special mention, $1.5 million of assets classified as
substandard, and none classified as doubtful or loss. All of the assets
classified special mention were single-family residential loans. Of assets
classified substandard, $346,000, or 23.0%, were non residential real estate
parcels acquired as real estate owned, $960,000, or 63.8%, were single-family
residential loans. The remaining balance of $198,000 was in consumer loans and
repossessed autos.


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

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

<S>                               <C>            <C>              <C>
Classification:
  Special mention                  $   67           $  245           $   60
  Substandard                       1,504            1,681            1,923
  Doubtful                              -               -                -
  Loss(1)                               -               -                -
                                    -----            -----            -----
    Total classified assets        $1,571           $1,926           $1,983
                                    =====            =====            =====
</TABLE>


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

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

     Allowance for Loan Losses. It is management's policy to maintain an
allowance for estimated losses on loans based upon an assessment of past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay and current economic conditions.
For fiscal 1999 non-performing loans decreased to $544,000 while net charge-offs
for the period totaled $18,000. The Company's level of net loans outstanding
increased $25.1 million which included an increase of 16.3% in consumer loans.
Overall economic conditions remained stable for the market area and credit
quality for the applicants showed no material change. Upon consideration of such
factors, Jacksonville determined that $60,000 in provisions for loan losses were
appropriate primarily because of the increase in the loan portfolio. Although
management believes that it uses the best information available to make such
determinations, future adjustments to allowances may be necessary, and net
earnings could be significantly affected, if circumstances differ substantially
from the assumptions used in making the initial determinations. Currently, the
allowance for loan losses is formally reevaluated on a quarterly basis.

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


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

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

                                         1999                1998                 1997               1996             1995

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

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

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

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

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

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

Recoveries                                 --                    --                  --                   --                32

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

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

Provision for losses on loans              60                    35                 110                  100                25

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

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

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

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

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


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


                                      -20-
<PAGE>   21
     The following table presents the allocation of the allowance for loan
losses to the total amount of loans in each category listed at the dates
indicated.

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

                                 --------------------------    --------------------------   -------------------------
                                               % OF LOAN                      % OF LOAN                 % OF LOAN
                                                 IN EACH                        IN EACH                   IN EACH
                                                 CATEGORY                       CATEGORY                  CATEGORY
                                                 TO TOTAL                       TO TOTAL                  TO TOTAL
                                     AMOUNT       LOANS            AMOUNT        LOANS          AMOUNT      LOANS
                                   ----------  -------------    ------------   ----------   ------------  ---------
                                                                  (Dollars in Thousands)

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

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


<CAPTION>
                                                           SEPTEMBER 30,
                                       -----------------------------------------------------
                                                 1996                        1995
                                       -------------------------      -----------------------
                                                    % OF LOANS                 % OF LOANS
                                                      IN EACH                    IN EACH
                                                      CATEGORY                   CATEGORY
                                                        TO                         TO
                                                       TOTAL                      TOTAL
                                         AMOUNT        LOANS         AMOUNT       LOANS
                                       ----------- -------------    --------    -----------
                                         (Dollars in Thousands)      (Dollars in Thousands)

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


MORTGAGE-BACKED SECURITIES

     Jacksonville has invested in a portfolio of mortgage-backed securities
which are insured or guaranteed by the FHLMC, FNMA or the GNMA. Mortgage-backed
securities increase the quality of Jacksonville's assets by virtue of the
guarantees that back them, are more liquid than individual mortgage loans and
may be used to collateralize borrowings or other obligations of Jacksonville. In
addition, at September 30, 1999, $8.7 million of Jacksonville's mortgage-backed
securities consist of pools of adjustable-rate mortgages. Mortgage-backed
securities of this type serve to reduce the interest rate risk associated with
changes in interest rates.


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

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

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

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


     At September 30, 1999, Jacksonville's mortgage-backed securities had a book
value and estimated market value of $38.5 million and $37.6 million,
respectively. Of the $38.5 million portfolio, $254,000 was scheduled to mature
in five years or less; $6.0 million was scheduled to mature in over five years
but less than ten years; and $32.2 million was scheduled to mature after ten
years. Due to prepayments of the underlying loans, the actual maturities of
mortgage-backed securities generally are substantially less than the scheduled
maturities.

     All mortgage-backed securities in the portfolio qualify for regulatory
liquidity under state savings bank regulations. Of the $38.5 million of mortgage
backed securities on September 30, 1999, $29.8 million consisted of fixed rate
and $8.7 million were adjustable rate securities. Of Jacksonville's total
investment in mortgage-backed securities at September 30, 1999, $15.9 million
consisted of FNMA certificates, $4.6 million consisted of GNMA certificates and
$3.4 million consisted of FHLMC certificates and $14.6 million in Private Label
mortgage backed certificates. See Note [4] to the Consolidated Financial
Statements for additional information.

     During fiscal 1999 Jacksonville continued a limited wholesale growth
strategy involving leveraged investing wherein Jacksonville used Federal Home
Loan Bank advances to purchase mortgage backed securities. This transaction was
conceived to compliment Jacksonville's interest rate position and is just
slightly longer in duration than the balance sheet as a whole. Diversified FHLB
advances were employed to insure adequate funding if rates go up or down.
Mortgage-backed securities with different terms were used to diversify assets.
By diversifying, Jacksonville was insulated against any one asset's poor
performance because of secular trends in the market. Before entering the
leverage transactions, Jacksonville reviewed a model presenting a worst case
scenario which shocked the assets and liabilities 300 basis points. After a
complete study and approval by the Board, Jacksonville borrowed $15 million from
the FHLB with staggered maturities to purchase mortgage backed securities.

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


                                      -22-
<PAGE>   23
period for premiums and discounts can significantly affect the yield of the
mortgage-backed security, and these assumptions are reviewed periodically to
reflect actual prepayments. Although prepayments of underlying mortgages depend
on many factors, including the type of mortgages, the coupon rate, the age of
mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates, the
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates generally is the most significant determinant
of the rate of prepayments. During periods of falling mortgage interest rates,
if the coupon rate of the underlying mortgages exceeds the prevailing market
interest rates offered for mortgage loans, refinancing generally increases and
accelerates the prepayment of the underlying mortgages and the related security.
Under such circumstances, Jacksonville may be subject to reinvestment risk
because to the extent that Jacksonville's mortgage-backed securities amortize or
prepay faster than anticipated, Jacksonville may not be able to reinvest the
proceeds of such repayments and prepayments at a comparable rate.

INVESTMENT ACTIVITIES

     Jacksonville's investment securities portfolio is managed in accordance
with a written Investment Policy adopted by the Board of Directors and
administered by the Investment Committee which consists of one outside Director,
the President and the Executive Vice President. The members of the Investment
Committee are: Dr. Joe Tollett, Jerry Chancellor and Bill W. Taylor. There is no
investment limit for investments in U.S. Treasury obligations and FHLB
obligations having maturities of ten years or less and in other U.S. federal
agency or federally sponsored agency obligations, including, but not limited to
FHLMC, FNMA, GNMA and the Student Loan Marketing Association, municipal
obligations rated AAA, AA, A or BBB or issued by a public housing agency and
backed by the full faith and credit of the U.S. government having maturities of
30 years or less. In addition, there are no investment limits on bankers
acceptances of 12 months or less and federal funds of 360 days or less. Up to
$100,000 per bank may be invested in commercial bank certificates of deposit
with maturities up to one year. Other investments must be approved by the Board
of Directors. At September 30, 1999, Jacksonville had U.S. Government agency
held-to-maturity securities with an amortized cost of $7.0 million and an
estimated market value of $6.9 million. See note [3] to the Consolidated
Financial Statement for further information. At September 30, 1999, Jacksonville
held U.S. Government Agency securities as available-for-sale with an amortized
cost of $12.0 million and an estimated market value of $11.7 million.


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

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

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

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

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

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

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

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

     At September 30, 1999, $3.0 million or 16% of total investment securities
excluding mortgage backed securities, held by Jacksonville were scheduled to
mature in one year or less and had a weighted average yield of 5.49%. Of the
remaining investment securities, $14.8 million was scheduled to mature after one
year through five years and $1.0 million was scheduled to mature six years
through ten years.


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

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

                                                             (Dollars in Thousands)

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

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

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

AVAILABLE FOR SALE

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

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


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


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

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

                               (Dollars in Thousands)

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

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

AVAILABLE FOR SALE

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


INTEREST-BEARING DEPOSITS


                                      -25-
<PAGE>   26
     As of September 30, 1999 Jacksonville also had demand deposit accounts in
the FHLB of Dallas of $3.6 million as compared to $7.8 million as of September
30, 1998. In order to comply with a policy adopted by its Board of Directors,
Jacksonville's deposits in FDIC-insured institutions are limited to $100,000 per
bank in certificates of deposit with a maximum maturity of one year. As of
September 30, 1999, Jacksonville had no certificates of deposit.

SOURCES OF FUNDS

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

     DEPOSITS. Jacksonville's deposits are attracted principally from within
Jacksonville's primary market area through the offering of a broad selection of
deposit instruments, including demand and NOW accounts, money market accounts,
passbook savings accounts, and term certificate accounts. Included among these
deposit products are individual retirement account certificates of approximately
$20.3 million at September 30, 1999.

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

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

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


                                      -26-
<PAGE>   27
     The following table sets forth the dollar amount of deposits in the various
types of deposit programs offered by Jacksonville at the dates indicated.

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

                                                     1999                     1998                        1997

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

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

                                                                          (Dollars in Thousands)

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

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

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

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

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

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

Transaction accounts:

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

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

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


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

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

                                                             (In Thousands)

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

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

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


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

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

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

                                                               (In Thousands)

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



     The following table sets forth the maturities of Jacksonville's
certificates of deposit having principal amounts of $100,000 or more at
September 30, 1999.

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

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


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

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

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



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


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

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

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

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


     BORROWINGS. Until fiscal 1998 and fiscal 1999 wherein management elected to
implement a wholesale growth strategy using FHLB advances Jacksonville had not
frequently borrowed from the FHLB of Dallas. It obtains advances from the FHLB
of Dallas upon the security of the common stock it owns in that bank and certain
of its residential mortgage loans, provided certain standards related to
creditworthiness have been met. Such advances are made pursuant to several
credit programs, each of which has its own interest rate and range of
maturities. Such advances are generally available to meet seasonal and other
withdrawals of deposit accounts and to permit increased lending. At September
30, 1999, Jacksonville had $35.0 million in advances from the FHLB of Dallas.

     The Company's ESOP also borrowed funds from Jacksonville IHC for the
purchase of shares of the Company's Common Stock issued in connection with the
Conversion. As of September 30, 1999, the outstanding balance of that loan was
$1.1 million.

     SUBSIDIARIES. Jacksonville currently owns 100% of the capital stock of J.
S. & L. Corporation ("JS&L") which was established in December 1979. JS&L is
self sufficient due to income from investments, interest from residential notes
receivable and lease income. Since its original charter, JS&L's main activity
has been the servicing of purchased residential first and second lien notes. The
portfolio includes 23 loans ranging in size from $1,000 to $105,000, most of
which were purchased at a discount. For most of the second lien notes purchased,
Jacksonville holds the first lien note. For the years ended September 30, 1999
and September 30, 1998, JS&L earned $31,000 and $37,000, respectively. JS&L now
invests in investments permissible for Jacksonville, leases computer equipment,
and originates and buys first and second liens. JS&L purchases first and second
lien notes pursuant to a written mortgage loan underwriting policy adopted by
JS&L's board of directors. In addition to these activities, during 1999 the
Federal Deposit Insurance Corporation gave approval for the Company through its
subsidiary, JS&L, to enter into a proposed residential real estate development
in Hallsville, Texas, a community near Longview, Texas. The project involved
acquisition and development of a 66 acre tract of land for single-family homes.
JS&L entered into a real estate development and management agreement with
Lagniappe Development Co., a Longview, Texas developer and Coldwell
Bankers/Lenhart Properties, Inc., a real estate broker/agent, to develop and
sell 70 residential lots to be sold to builders and individuals for home
construction. JS&L executed a development loan through its parent, Jacksonville
on February 25, 1999 in the amount of $1,500,000. At September 30, 1999, draws
against the interim loan totaled $637,814 and the development was in Phase II of
the project, utility construction. The project is expected to be completed by
late spring 2000. JS&L has received contingency contracts to acquire 25 lots
from area builders.

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

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


                                      -29-
<PAGE>   30
                                   REGULATION

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

THE COMPANY AND IHC

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

     FEDERAL ACTIVITIES RESTRICTIONS. If the Director of the OTS determines that
there is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings institution (i.e., a
savings association or savings bank), the Director may impose such restrictions
as are deemed necessary to address such risk, including limiting (I) payment of
dividends by the savings institution; (ii) transactions between the savings
institution and its affiliates; and (iii) any activities of the savings
institution that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings institution.
Notwithstanding the foregoing, as applied to the Company and to IHC, if the
savings institution subsidiary of such a holding company fails to meet the
Qualified Thrift Lender ("QTL") test, then such unitary holding company also
becomes subject to the activities restrictions applicable to multiple savings
and loan holding companies and, unless the savings institution requalifies as a
QTL within one year thereafter, must register as, and become subject to the
restrictions applicable to, a bank holding company.

     RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (I) control of any other savings institution or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5% of the voting shares of a savings institution or holding company
thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may acquire control of any savings institution, other than
a subsidiary savings institution, or of any other savings and loan holding
company.

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

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


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

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

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

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

REGULATION OF THE BANK

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

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


                                      -31-
<PAGE>   32
     The description of statutory provisions and regulations applicable to
savings banks set forth in this Form 10-K does not purport to be a complete
description of such statutes and regulations and their effects on the Bank.
Furthermore, the Bank cannot predict what other new regulatory requirements
might be imposed in the future.

     LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company of
a savings institution (such as the Company and IHC) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (I) limit the extent to which the
savings institution or its subsidiaries may engage in covered transactions with
any one affiliate to an amount equal to 10% of such institution's capital stock
and surplus, and contain an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar transactions. In
addition to the restrictions imposed by Sections 23A and 23B, no savings
institution may (I) loan or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings institution.

     In addition, Sections 22(h) and (g) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a savings institution (a "principal
stockholder"), and certain affiliated interests of each of them, may not exceed,
together with all other outstanding loans to such person and affiliated
interests, the savings institution's loans to one borrower limit (generally
equal to 15% of the institution's unimpaired capital and surplus). Section 22(h)
also requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons and also requires prior board approval for certain
loans. In addition, the aggregate amount of extensions of credit by a savings
institution to all insiders cannot exceed the institution's unimpaired capital
and surplus. Furthermore, Section 22(g) places additional restrictions on loans
to executive officers. At September 30, 1999, the Bank was in compliance with
the above restrictions.

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

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

     TIER 1 LEVERAGE CAPITAL RATIO. FDIC regulations establish a minimum 3.0%
ratio of Tier 1 capital to total assets for the most highly-rated
state-chartered, FDIC-supervised banks, with an additional cushion of at least
100 to 200 basis points for all other state-chartered, FDIC-supervised banks,
which effectively imposes a minimum Tier 1 capital ratio for such other banks of
between 4.0% to 5.0%. Under FDIC regulations, highly-rated banks are those that
the FDIC determines are not anticipating or experiencing significant growth and
have well


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

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

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

     At September 30, 1999, the Bank's Tier 1 capital to risk-weighted assets
ratio was 19.00%. On the same date, the Bank's total risked-based capital
percentage was 19.72%.

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

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

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

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

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

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


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


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

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

                                                                       (Dollars in thousands)

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


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

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

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


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


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

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

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


                                      -34-
<PAGE>   35
 .27% for undercapitalized SAIF-member institutions with substantial supervisory
concerns. At September 30, 1999, the Bank was categorized as well capitalized.

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

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

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

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

     REGULATORY CAPITAL REQUIREMENTS. The FDIA requires the Federal banking
agencies to revise their risk-based capital guidelines to, among other things,
take adequate account of interest rate risk. The Federal banking agencies
continue to consider modification of the capital requirements applicable to
banking organizations. In August 1995, the Federal banking agencies amended
their risk-based capital guidelines to provide that the banking agencies will
include in their evaluations of a bank's capital adequacy an assessment of the
bank's exposure to declines in the economic value of the bank's capital due to
changes in interest rates. The agencies also issued a proposed policy statement
that describes the process that the agencies will use to measure and assess the
exposure of a bank's capital to changes in interest rates. The agencies stated
that after they and the banking industry gain sufficient experience with the
measurement process, the agencies would issue proposed regulations for
establishing explicit charges against capital to account for interest rate risk.

     The FDIA also requires the FDIC and the other Federal banking agencies to
revise their risk-based capital standards, with appropriate transition rules, to
ensure that they take into account concentration of credit risk and the risks of
nontraditional activities and to ensure that such standards reflect the actual
performance and expected risk of loss of multifamily mortgages, of which the
Bank had $819,000 at September 30, 1999. In December 1995, the FDIC and the
other Federal banking agencies promulgated final amendments to their respective
risk-based capital requirements which would explicitly identify concentration of
credit risk and certain


                                      -35-
<PAGE>   36
risks arising from nontraditional activities, and the management of such risks
as important factors to consider in assessing an institution's overall capital
adequacy. The FDIC may now require higher minimum capital ratios based on
certain circumstances, including where the institution has significant risks
from concentration of credit or certain risks arising from nontraditional
activities.

     The Federal banking agencies have agreed to adopt for regulatory purposes
Statement 115, which, among other things, generally adds a new element to
stockholders' equity under generally accepted accounting principles by including
net unrealized gains and losses on certain securities. In December 1994, the
FDIC issued final amendments to its regulatory capital requirements which would
require that the net amount of unrealized losses from available-for-sale equity
securities with readily determinable fair values be deducted for purposes of
calculating the Tier 1 capital ratio. All other net unrealized holding gains
(losses) on available-for-sale securities are excluded from the definition of
Tier 1 capital. At September 30, 1999, the Bank had $44.7 million of securities,
available-for-sale, with $801,000 of aggregate net unrealized loss thereon.

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

     Finally, each Federal banking agency is required to prescribe standards for
the employment contracts and other compensation arrangements of executive
officers, employees, directors and principal stockholders of insured depository
institutions that would prohibit compensation and benefits and arrangements that
are excessive or that could lead to a material financial loss for the
institution. In February 1996, the FDIC adopted final regulations regarding the
payment of severance and indemnification to management officials and other
affiliates of insured institutions ("institution affiliated parties" or "IAPs").
The limitations


                                      -36-
<PAGE>   37
on severance or "golden parachute" payments apply to "troubled" institutions
which seek to enter into contracts with IAPs. A golden parachute payment is
generally considered to be any payment to an IAP which is contingent on the
termination of that person's employment and is received when the insured
institution is in a troubled condition. The definition of golden parachute
payment does not include payment pursuant to qualified retirement plans,
non-qualified bona fide deferred compensation plans, nondiscriminatory severance
pay plans, other types of common benefit plans, state statutes and death
benefits. Certain limited exceptions to the golden parachute payment prohibition
are provided for in cases involving the hiring of an outside executive,
unassisted changes of control and where the FDIC provides written permission to
make such payment. The limitations on indemnification payments apply to all
insured institutions, their subsidiaries and affiliated holding companies.
Generally, this provision prohibits such entities from indemnifying an IAP for
that portion of the costs sustained with regard to a civil or administrative
enforcement action commenced by any Federal banking agency which results in a
final order or settlement pursuant to which the IAP is assessed a civil monetary
penalty, removed from office, prohibited from participating in the affairs of an
insured institution or required to cease and desist from taking certain
affirmative actions. Nevertheless, institutions or holding companies may
purchase commercial insurance to cover such expenses (except for judgments or
penalties) and the institutions or holding company may advance legal expenses to
the IAP if its board of directors makes certain specific findings and the IAP
agrees in writing to reimburse the institution if it is ultimately determined
that the IAP violated a law, regulation or other fiduciary duty.

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

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

     In May 1995, the FDIC and other Federal banking agencies promulgated final
revisions to their regulations concerning the CRA. The revised regulations
generally are intended to provide clearer guidance to financial institutions on
the nature and extent of their obligations under the CRA and the methods by
which the obligations will be assessed and enforced. Among other things, the
revised regulations substitute for the current process-based assessment factors
a new evaluation system that would rate institutions based on their actual
performance in meeting community credit needs. In particular, the revised system
will evaluate the degree to which an institution is performing under tests and
standards judged in the context of information about the institution, its
community, its competitors and its peers with respect to (I) lending, (ii)
service delivery systems and (iii) community development. The revised
regulations also specify that an institution's CRA performance will be
considered in an institution's expansion (e.g.,


                                      -37-
<PAGE>   38
branching) proposals and may be the basis for approving, denying or conditioning
the approval of an application. Management of the Bank currently is unable to
predict the effects of the regulations under the CRA as recently adopted.

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

     QUALIFIED THRIFT LENDER TEST. For the Company to qualify as a savings and
loan holding company, the Bank is required to meet a QTL test set forth under
Section 10(m) of the Home Owners Loan Act, as amended, ("HOLA"). Under Section
2303 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996, a
savings institution can comply with the QTL test set forth in the HOLA and
implementing regulations or by qualifying as a domestic building and loan
association as defined in Section 7701(a)(19) of the Code. The QTL test set
forth in HOLA requires that a depository institution must have at least 65% of
its portfolio assets (which consist of total assets less intangibles, properties
used to conduct the savings institution's business and liquid assets not
exceeding 20% of total assets) in qualified thrift investments on a monthly
average basis in nine of every 12 months. Loans and mortgage-backed securities
secured by domestic residential housing, as well as certain obligations of the
FDIC and certain other related entities may be included in qualifying thrift
investments without limit. Certain other housing-related and non-residential
real estate loans and investments, including loans to develop churches, nursing
homes, hospitals and schools, and consumer loans and investments in subsidiaries
engaged in housing-related activities may also be included. Qualifying assets
for the QTL test include investments related to domestic residential real estate
or manufactured housing, the book value of property used by an institution or
its subsidiaries for the conduct of its business, an amount of residential
mortgage loans that the institution or its subsidiaries sold within 90 days of
origination, shares of stock issued by any FHLB and shares of stock issued by
the FHLMC or the FNMA. The Bank was in compliance with the QTL test as of
September 30, 1999, with in excess of 98% of its assets invested in qualified
thrift investments.

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

     FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of Dallas,
which is one of 12 regional FHLBs that administers the home financing credit
function of savings institutions and commercial banks. Each FHLB serves as a
source of liquidity for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by its Board of Directors. As of September
30, 1999, the Bank's advances from the FHLB of Dallas amounted to $35.0 million
or 13.7% of its total liabilities.

     As a member, the Bank is required to purchase and maintain stock in the
FHLB of Dallas in an amount equal to the greater of 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of total advances.


                                      -38-
<PAGE>   39
At September 30, 1999, the Bank had $2.0 million in FHLB stock, which was in
compliance with this requirement.

     The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. These contributions also could have an adverse effect on the
value of FHLB stock in the future. For the year ended September 30, 1999,
dividends paid by the FHLB of Dallas to the Bank totaled $98,000.

     FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all depository
institutions to maintain reserves against their transaction accounts (primarily
NOW and Super NOW checking accounts) and non-personal time deposits. At
September 30, 1999, the Bank was in compliance with such requirements.

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

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

ITEM 2. PROPERTIES.

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


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

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

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

                                                              (In Thousands)

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

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

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

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

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

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

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

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

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

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

ITEM 3.  LEGAL PROCEEDINGS.

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

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

         Not applicable.

PART II.

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

         The information required herein is incorporated by reference from page
43 of the Company's 1999 Annual Report to Stockholders, which is included herein
as Exhibit 13 ("Annual Report").

ITEM 6.  SELECTED FINANCIAL DATA.


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

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

         The information required herein is incorporated by reference from pages
         4 to 17 of the Company's 1999 Annual Report.

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

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

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The information required herein is incorporated by reference from pages
         F-1 to F-24 of Company's 1999 Annual Report.

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

         Not applicable.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

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

ITEM 11. EXECUTIVE COMPENSATION.

         The information required herein is incorporated by reference from pages
         11 to 17 of the Company's Proxy Statement.

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

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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

PART IV.

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

         (a)    Documents filed as part of this Report

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

                Consolidated Statements of Financial Condition at September 30,
                1999 and 1998

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

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

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

                Notes to Consolidated Financial Statements

                (2)    All schedules for which provision is made in the
                applicable accounting regulations of the Securities and Exchange
                Commission are omitted because of the absence of


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


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

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

              <C>                <S>
                   3.1           Articles of Incorporation*
                   3.2           Bylaws*
                   4.1           Specimen Common Stock Certificate*
                 10.1(a)         1994 Stock Incentive Plan**(1)
                 10.1(b)         1994 Directors' Stock Option Plan**(1)
                 10.1(c)         1994 Management Recognition Plan***(1)
                 10.1(d)         1996 Management Recognition Plan***(1)
                 10.1(e)         1996 Stock Option Plan**(1)
                 10.1(f)         Employee Stock Ownership Plan*(1)
                 10.1(g)         Acquisition Agreement by and among Jacksonville
                                 Bancorp, Inc., Jacksonville IHC, Inc., and
                                 Jacksonville Savings and Loan Association****
                  10.2           1996 Management Recognition Plan***(1)
                  10.6           Employment Agreement by and among Jacksonville
                                 Bancorp, Inc., Jacksonville Savings and Loan
                                 Association and Jerry M. Chancellor
                                 (representative of a similar agreement entered
                                 into with Bill W. Taylor)*(1)
                   13            1999 Annual Report to Stockholders specified
                                 portion (p.1 to 46) of the Registrant's Annual
                                 Report to Stockholders for the year ended September
                                 30, 1999
                   23            Consent of Independent Auditors
                   27            Financial Data Schedule
</TABLE>
       (1) Management contract or compensatory plan or arrangement.

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

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

       ***Incorporated herein by reference to the Registrant's Form 10-K filed
as of December 28, 1998.

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

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

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

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

        3.   On September 16, 1999, the Company filed a current report on Form
             8-K announcing approval to repurchase 5% stock buyback.

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

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


                                      -43-
<PAGE>   44
                                   SIGNATURES

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

                                        JACKSONVILLE BANCORP, INC.

DECEMBER 23, 1999                             By:/s/ Jerry M. Chancellor
                                                 -------------------------------
                                                 Jerry M. Chancellor
                                                 Chief Executive Officer

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

/s/ Jerry M. Chancellor                               DECEMBER 23, 1999
- ----------------------------------------------------
Jerry M. Chancellor, Director and Chief Executive
  Officer (Principal Executive Officer)


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


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


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


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


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


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


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



                                      -44-