<PAGE>   1
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                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, 1997
                                      OR

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

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

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

                 TEXAS                                          75-2632781    
     ------------------------------                         ------------------
      (State or other jurisdiction                           (I.R.S. Employer
   of incorporation or organization)                      Identification Number)
                                                          
      COMMERCE AND NECHES STREETS                         
         JACKSONVILLE, TEXAS                                     75766         
     -----------------------------                        ---------------------
               (Address)                                        (Zip Code)

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

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

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

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

Indicate by check mark whether the Registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes   X   No 
                                         ---     ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of 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 12, 1997, the aggregate value of the 2,069,298 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
172,221 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 $39,058,019.  This figure is based on the closing price
of $18 7/8 per share of the Registrant's Common Stock on December 12, 1997.

Number of shares of Common Stock outstanding as of December 12, 1997: 2,443,568

                      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, 1997 are incorporated into Part II, Items 5 through 8 of this Form 10-K.

(2)  Portions of the definitive proxy statement for the 1997 Annual Meeting of
Stockholders are incorporated into Part III, Items 10 through 13 of this Form
10-K.
<PAGE>   2
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 and consumer loans.  With limited exceptions, Jacksonville
has restricted commercial real estate lending activity to loans secured by real
estate acquired in satisfaction of debts previously contracted or by
improvements thereon.  In 1994 Jacksonville established a consumer loan
department to promote development of this type of lending.  In addition,
Jacksonville invests in United States government and federal agency securities
and government-guaranteed mortgage-backed securities.

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

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

MARKET AREA

         Jacksonville's market area consists of Cherokee County and surrounding
counties in East Texas.  The labor force of Cherokee County has evolved from
agriculture to manufacturing and service industries.  The components of the
area's economic base have consisted of manufacturing, mining, agriculture,
retail and tourism.  Jacksonville is the largest city in Cherokee County and
its principal activity is manufacturing.  There are 75 manufacturing concerns
in Jacksonville.  Industries represented are plastic manufacturing and plastic
injected molding, oil (reflecting the heritage of East Texas as the center of
the Texas oil country), timber, cattle and bedding plant.  Slowdowns in the
petroleum industry had a material negative impact on the area's economy in the
early 1980s which was compounded by defense-related cutbacks.  However, the
area's
<PAGE>   3
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 Health
Care, Inc., Astro Air, Zimmerman & Sons, Trane Corporation, Kelly-Springfield,
Carrier Air Conditioning, Tyler Pipe Industries, Marathon Le Tourneau, Eastman
Kodak, Powell Plant Farm, Texas Department of Corrections, Western Lithography
and Wal-Mart (a distribution center).  The market area is also served by the
University of Texas Hospital, Mother Frances Hospital, and Medical Center
Hospital.  These hospitals are also a major source of employment for the market
area.  Colleges and universities include the University of Texas at Tyler,
Stephen F. Austin University, Tyler Junior College, Texas College, Lon Morris
College, Jacksonville College, and Trinity Valley Junior College.  According to
reports from the Bureau of Labor Statistics, as of September 30, 1997, the
unemployment rate in Cherokee County and surrounding counties in East Texas was
estimated to be 4.2% as compared to 4.5% in 1996 and the estimated unemployment
rates for the United States during these periods were 4.7% and 5.0%
respectively.

LENDING ACTIVITIES

         GENERAL.  At September 30, 1997, Jacksonville's net loan portfolio
totaled $174.0 million representing approximately 74.4% of Jacksonville's
$233.9 million of total assets at that date.  The principal lending activity of
Jacksonville is the origination of single-family residential loans.  At
September 30, 1997, 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, 1997, Jacksonville's single-family residential
loan portfolio totaled $141.1 million, representing approximately 78.0% of
Jacksonville's total loans, before net items, at that date.  Jacksonville held
$9.5 million in commercial real estate loans at that date, representing 5.2% of
total loans, before net items.  Of the commercial real estate loans, $3.4
million, or  35.8%, were secured by real estate acquired in satisfaction of
debts previously contracted or by improvements on such properties.  Other than
these commercial real estate loans, Jacksonville has not actively pursued the
business of making commercial real estate loans since 1989.  The only other
significant areas of lending activity by Jacksonville are construction loans,
land loans and consumer loans which, as of September 30, 1997, represented
$10.8 million, or 5.97%, $3.4 million, or 1.9% and $14.9 million, or 8.2% of
Jacksonville's total loan portfolio, before net items.

         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, 1997, Jacksonville's limit on loans-to-one borrower
was $5.2 million, and its five largest loans or groups of loans-to-one
borrower, including related entities, aggregated $1.3 million, $1.2 million,
$905,000, $782,000, and $770,000.  The loan for $1.3 million was to a private
school and the loan for $1.2 million was to a church.  The group of loans
totaling 





                                       2
<PAGE>   4
$905,000 consisted of four loans secured by commercial real estate acquired in
satisfaction of debts previously contracted.  The two loans totaling $782,000
were loans secured by multiple income producing single family residences, and
the group of loans totaling $770,000 consisted of four construction loans on
single family residences.  All of these loans are secured primarily by
residential and nonresidential real estate located in Cherokee County and
surrounding counties in East Texas.





                                       3
<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,
                                                      -----------------------------------------------------
                                                                 1997                       1996          
                                                      -------------------------   -------------------------
                                                         AMOUNT          %          AMOUNT          %     
                                                      ------------    ---------   -----------    ----------
                                                                       (Dollars in Thousands)
                                                                                                          
                                                                                                          
 <S>                                                  <C>             <C>        <C>             <C>     
 MORTGAGE LOANS:                                                                                          
                                                       
   Single-family residential(1)                       $141,107         78.0%     $132,599         81.4%  
   Multi-family residential                              1,144           .7         1,268           .8   
   Commercial                                            9,492          5.2         8,604          5.3   
   Construction                                         10,799          5.9         6,996          4.3   
   Land                                                  3,446          1.9         4,395          2.7   
                                                         -----          ---       -------         ----   
      Total mortgage loans                            $165,988         91.7      $153,862         94.5%  
                                                       -------         ----       -------         ----   
                                                                                                         
 BUSINESS AND CONSUMER LOANS:                                                                            
                                                                                                         
   Commercial business                                $     76         --        $    219           .1   
   Consumer loans:                                                                                       
     Secured by deposits                                 2,127          1.2         2,290          1.4   
     Secured by vehicles                                 6,537          3.6         2,961          1.8   
     Personal real estate loans                          4,274          2.4         2,686          1.6   
     Other                                               1,983          1.1           922           .6   
                                                         -----          ---       -------        -----   
     Total consumer loans                               14,921          8.3         8,859          5.4   
                                                        ------          ---       -------        -----   
       Total business and consumer loans              $ 14,997          8.3      $  9,078          5.5   
                                                        ------          ---       -------        -----   
                                                                                                         
     Total loans                                       180,985        100.0%      162,940        100.0%  
                                                       -------        =====       -------        =====   
                                                                                                         
 Less:                                                                                                   
   Undisbursed portion of loans in                                                                       
    process                                           $  5,025                   $  2,956                
   Unearned discounts                                       62                         89                
   Net deferred loan origination fees                      662                        761                
   Unrealized losses on loans held for                                                                   
     sale                                                   --                         --                
   Allowance for loan losses                             1,192                      1,100                
                                                         -----                    -------                
                                                                                                         
      Net loans                                       $ 174,044                   $158,034                
                                                        =======                    =======                


<CAPTION>
                                                                                   SEPTEMBER 30,
                                                 ---------------------------------------------------------------------------------
                                                           1995                        1994                        1993
                                                 -----------------------    ------------------------    --------------------------
                                                    AMOUNT          %          AMOUNT           %          AMOUNT            %
                                                 -------------  --------    -------------   --------    --------------   ---------
                                                                               (Dollars in Thousands)

 <S>                                             <C>              <C>       <C>               <C>       <C>              <C>
 MORTGAGE LOANS:                                 
                                                 
   Single-family residential(1)                  $117,853          84.1%     $109,221(2)       86.7%    $112,063          86.7%
   Multi-family residential                         1,183            .8           735            .6          532           0.4
   Commercial                                       8,167           5.8         8,115           6.4        9,556           7.4
   Construction                                     4,312           3.1         1,668           1.3        1,367           1.1
   Land                                             3,754           2.7         3,156           2.5        2,972           2.3
                                                  -------          ----       -------         -----      -------         -----
      Total mortgage loans                       $135,269          96.5%     $122,895          97.5%    $126,490          97.9%
                                                  -------          ----       -------         -----      -------         ----- 
                                                 
 BUSINESS AND CONSUMER LOANS:                    
                                                 
   Commercial business                           $    232            .2      $    198            .2     $    234            .2
   Consumer loans:                               
     Secured by deposits                            1,922           1.4         1,972           1.6        1,840           1.4
     Secured by vehicles                              960            .6           332            .2           93            .1
     Personal real estate loans                     1,253            .9           514            .4          568            .4
     Other                                            526            .4           137            .1           81           --
                                                    -----           ---         -----            --        -----         -----
     Total consumer loans                           4,661           3.3         2,955           2.3        2,582           1.9
                                                    -----           ---         -----           ---        -----         -----
       Total business and consumer loans           $4,893           3.5      $  3,153           2.5     $  2,816           2.1
                                                    -----           ---         -----           ---       ------         -----
                                                 
     Total loans                                 $140,162         100.0%     $126,048         100.0%    $129,306         100.0%
                                                  -------         =====       -------         =====      -------         ===== 
                                                 
 Less:                                           
   Undisbursed portion of loans in               
    process                                      $  2,230                    $    799                   $  1,052
   Unearned discounts                                 106                         121                        169
   Net deferred loan origination fees                 893                         937                      1,059
   Unrealized losses on loans held for           
     sale                                              --                          58                         --
   Allowance for loan losses                        1,000                       1,000                        996
                                                  -------                     -------                    -------
                                                 
      Net loans                                  $135,933                    $123,133                   $126,030
                                                  =======                     =======                    =======
</TABLE>

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

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

(2)      Includes $1.2 million of loans held for sale.





                                      4
<PAGE>   6
         CONTRACTUAL PRINCIPAL REPAYMENTS.  The following table sets forth
certain information at September 30, 1997, 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    
                                    9/30/98         9/30/99        9/30/00       9/30/97       9/30/97        9/30/97   
                                 ------------    ------------   ------------    ---------     ----------    ------------
                                                                                                                        
                                                                       (In Thousands)                     

 <S>                             <C>               <C>            <C>           <C>           <C>             <C>       
 Single-family residential(1)    $   214           $  430         $  613        $2,746        $13,483         $66,619   
 Multi-family residential             --               --              9            --             87             908   
 Commercial                          231               43              6            67          2,600           5,158   
 Construction                     10,799               --             --            --             --              --   
 Land                                 63               47             35           180            740           2,250   
 Commercial business                  --               76             --            --             --              --   
 Consumer                          2,717              741          1,654         5,588          2,375           1,750   
                                   -----            -----         ------         -----         ------          ------   
     Total                       $14,024           $1,337         $2,317        $8,581        $19,285         $76,685   
                                  ======            =====          =====         =====         ======          ======   


<CAPTION>
                                     DUE MORE
                                      THAN 15
                                       YEARS
                                       AFTER
                                      9/30/97        TOTAL
                                    ----------   --------------

                                          (In Thousands)
                                 
 <S>                                 <C>           <C>
 Single-family residential(1)        $57,002       $141,107
 Multi-family residential                140          1,144
 Commercial                            1,387          9,492
 Construction                             --         10,799
 Land                                    131          3,446
 Commercial business                      --             76
 Consumer                                 96         14,921
                                       -----       --------
     Total                           $58,756       $180,985
                                      ======        =======
</TABLE>


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

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





                                      5
<PAGE>   7
         The following table sets forth the dollar amount of all loans, before
net items, due after one year from September 30, 1997, 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)                    $64,555                 $76,338               $140,893
 Multi-family residential                            602                     542                  1,144
 Commercial real estate                            2,903                   6,358                  9,261
 Construction                                         --                      --                     --
 Land                                                710                   2,673                  3,383
 Commercial business                                  76                      --                     76
 Consumer                                         12,204                      --                 12,204
                                                  ------                  ------                 ------
   Total                                         $81,050                 $85,911               $166,961
                                                  ======                  ======                =======
</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.
Except for certain small second mortgage loans of a minimal amount and personal
real estate loans, Jacksonville requires title insurance.  Hazard insurance is
also required on all improved secured property and flood insurance is required
on property located in a flood plain.

         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.  A loan
application file is first reviewed by Jacksonville's loan department and,
except for loans of $50,000 or less, then is submitted for approval to the Loan
and Executive Committee or Jacksonville's Board of Directors.  With the
exception of home improvement, consumer and land loans, the Loan and Executive
Committee is





                                       6
<PAGE>   8
responsible for approving all loans in excess of $50,000.  Loans of $50,000 and
under may be approved by two loan officers or by a branch manager and one loan
officer.  Home improvement, consumer and personal real estate loans over
$50,000 must be approved by two officers.  Certain loans, because of their
amount or because they do not meet one or more specified guidelines, must
receive direct approval of the Board of Directors.

         Jacksonville originates both fixed- and adjustable-rate residential
real estate loans as market conditions dictate.  In the current interest rate
environment, it follows a policy of selling approximately 95% of its loans
secured by first mortgage liens on single-family residences ("residential first
mortgage loans") with fixed rates and terms greater than 15 years to third
parties while retaining all of its variable-rate loans.  When loans are sold to
others, except to Federal Home Loan Mortgage Corporation ("FHLMC"), servicing
of the loans is usually released to the buyers.  At September 30, 1997, $62.0
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, 1997, $64.5 million or 35.7% of Jacksonville's total
loans, before net items, were fixed-rate single-family residential loans, and
$76.3 million or 42.2% of such loans were adjustable-rate single-family
residential mortgage loans.  Of these adjustable mortgages, $40.5 million, or
53.1%, have interest rates adjustable in one year, and the remainder adjust at
periods greater than one year up to five years.





                                       7
<PAGE>   9
         The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.



<TABLE>
<CAPTION>
                                                            YEAR ENDED SEPTEMBER 30,
                                              ---------------------------------------------------
              
                                                    1997              1996             1995
                                              ---------------    -------------     --------------
              
              <S>                                 <C>               <C>               <C>
              LOAN ORIGINATIONS:
                Single-family residential         $42,594           $45,113           $32,307
                Multi-family residential               --               658               200
                Land                                1,876             1,159               969
                Commercial                          1,079               697               795
                Construction                       10,126            11,707             6,730
                Commercial business                    --                --                71
                Consumer                           11,029             8,862             4,197
                                                   ------            ------             -----
                  Total loans originated           66,704            68,196            45,269
                Purchases                              --                --                --
                  Total loans originated
                    and purchased                  66,704            68,196            45,269
                                                   ------            ------            ------
              
              SALES AND LOAN PRINCIPAL
                REDUCTIONS:
                Loans sold                         22,311            21,848            13,817
                Loan principal
                  repayments                       25,948            23,955            19,374
                                                   ------            ------            ------
                  Total loans sold and
                    principal reductions           48,259            45,803            33,191
              
              
              Increase (decrease) due
                to other items, net(1)             (2,435)             (292)              722
                                                   ------            ------            ------
              
              
              Net increase (decrease)
                in loan portfolio                 $16,010           $22,101           $12,800
                                                   ======            ======            ======
</TABLE>

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

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





                                       8
<PAGE>   10
         SINGLE-FAMILY RESIDENTIAL LOANS.  The primary lending activity of
Jacksonville is the origination of loans secured by first mortgage liens on
single-family residences.  Jacksonville also offers second mortgage loans on
such properties.  At September 30, 1997, $141.1 million or 78.0% 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
origination fees 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 $83.1 million of loans to FHLMC and has retained the servicing on all
of these loans.  Since that same date, Jacksonville has sold only $23.4 million
of loans to the mortgage banking company.  During fiscal 1997, Jacksonville
sold $21.0 million of loans to FHLMC and $1.3 million to the mortgage banking
company.

         During the year ended September 30, 1997, Jacksonville originated
$42.6 million of single-family residential loans of which $38.7 million, or
90.8%, were fixed rate and $3.9 million, or 9.2%, were adjustable rate.  Of the
fixed-rate single-family residential loans





                                       9
<PAGE>   11
originated during the period, Jacksonville sold $21.0 million, or 49.4%, to
FHLMC.  The volume of single-family residential loans originated decreased by
5.5% from $45.1 million during fiscal 1996 as compared to $42.5 million during
fiscal 1997 and the percentage of sales of such originations increased from
48.3% in fiscal 1996 to 52.5% in fiscal 1997.  Jacksonville anticipates that it
will continue its policy of selling all or substantially all of its fixed-rate
residential first mortgage loan originations with terms of more than 15 years
as long as interest rates remain at current levels or lower and will reevaluate
this policy if there is a material and prolonged rise in interest rates.

         Since November 1980, Jacksonville has been offering adjustable-rate
loans in order to decrease the vulnerability of its operations to changes in
interest rates.  Interest rate adjustment periods range from one to five years.
The demand for adjustable-rate loans in Jacksonville's primary market area has
been a function of several factors, including the level of interest rates, the
expectations of changes in the level of interest rates and the difference
between the interest rates offered for fixed-rate loans and adjustable-rate
loans.  The relative amount of fixed-rate and adjustable-rate residential loans
that can be originated at any time is largely 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 fixed-rate loans from
its portfolio.  As a result, at September 30, 1997, $76.4 million, or 54.1%, 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 10.7%, 23.0% and 13.6% of
Jacksonville's total originations of single-family residential loans during the
years ended September 30, 1997, 1996 and 1995, respectively.





                                       10
<PAGE>   12
         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 $3.1
million as of September 30, 1997.  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.  Under Texas
law, the proceeds of a second mortgage loan must be used for home improvement
purposes or the payment of real estate taxes.  Effective January 1, 1998, Texas
law will permit home equity lending.

         COMMERCIAL MORTGAGE LOANS.  At September 30, 1997, $9.5 million, or
5.2%, of Jacksonville's total loan portfolio, before net items, consisted of
loans secured by existing commercial real estate.  Of these commercial mortgage
loans, $3.4 million, or 35.8%, represented loans secured by real estate
acquired in satisfaction of debts previously contracted or by improvements on
such properties.  Jacksonville currently originates few commercial mortgage
loans.  Commercial mortgage loan originations for the years ended September 30,
1997, 1996 and 1995 were, respectively, $1.08 million, $697,000 and $795,000.

         As of September 30, 1997, the commercial mortgage loans in
Jacksonville's portfolio not secured by real estate acquired in satisfaction of
debts previously contracted or improvements thereon totaled $6.1 million.
These loans have terms up to 30 years and have both fixed and adjustable rates.
At September 30, 1997, $4.9 million, or 80.3%, of the commercial mortgage loan
portfolio not secured by real estate acquired in satisfaction of debts
previously contracted consisted of adjustable-rate loans.

         The commercial mortgage loans originated since 1989 generally have
interest rates that adjust on a periodic basis in accordance with changes in a
designated index and have terms that range up to 30 years.  Because
substantially all commercial mortgage loans originated since 1989 are secured
by properties that were formerly real estate owned and by improvements on such
properties, Jacksonville's REO Disposition Committee has reviewed each loan
with senior management prior to Board of Director approval rather than
establishing general guidelines for its staff.  In order to help establish
asking prices for real estate owned, a valuation for each parcel is generally
established on an annual basis.  The valuation may take the form of an
appraisal, brokers opinion, letter appraisal, or similar document.  Where
appraisals are obtained, they generally are performed by an independent
appraiser designated by Jacksonville and are reviewed by management.  In
originating commercial mortgage loans, Jacksonville considers the quality of
the property, the credit of





                                       11
<PAGE>   13
the borrower, cash flow of the project, location of the real estate and the
quality of management involved with the property.

         As of September 30, 1997, there were two commercial mortgage loans
secured by former real estate owned properties with principal balances,
including funds utilized for improvements by the borrower on such properties,
in excess of $400,000.  These loans were performing in accordance with their
terms at September 30, 1997.

         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, 1997, construction loans totaled
$10.8 million or 5.9% of the total loan portfolio, before net items.

         Jacksonville makes construction loans to individuals for the
construction of their residences.  Recently, 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 decreased during the year ended September 30, 1997 to $10.1
million from $11.7 million during fiscal 1996.

         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 generally only made to existing
customers 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 match 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%.  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.





                                       12
<PAGE>   14
         LAND LOANS.  As of September 30, 1997, land loans totaled $3.4 million
or 1.9% of  the total loan portfolio, before net items.  As of the date,
Jacksonville had 141 land loans in its loan portfolio, over 90% of which were
utilized for ranching, agricultural or residential purposes.  Jacksonville does
not make land loans for speculative purposes.  With limited exceptions,
Jacksonville's underwriting guidelines require land loans to have a
loan-to-land value ratio of 80% and a term of 20 years or less.  The average
balance of Jacksonville's land loans, as of September 30, 1997, was
approximately $24,000.

         CONSUMER LOANS.  At September 30, 1997, consumer loans totaled $14.9
million or 8.3% of the total loan portfolio, before net items, and consisted
primarily of loans secured by deposits, loans secured by vehicles and personal
real estate loans.  Loans secured by deposits total $2.1 million at September
30, 1997.  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 homesites 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, 1997.  All of these loans are secured by the purchased
land, but because these loans are typically for $20,000 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 most cases a title search is obtained from a title insurance company rather
than a title policy.  At September 30, 1997, the Bank had 296 personal real
estate loans with an average balance of $14,000.  Jacksonville's vehicle loan
portfolio totalled $6.5 million at September 30, 1997.  A substantial majority
of Jacksonville's vehicle loans are for new vehicles but it also offers loans
for used vehicles.  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.  These loans are typically made to
Jacksonville customers of long standing.

         MULTI-FAMILY AND COMMERCIAL BUSINESS LOANS.  At September 30, 1997,
$1.1 million, or 0.7%, and $76,000, or .1%, of Jacksonville's total loan
portfolio, before net items, consisted of multi-family loans and commercial
business loans, respectively.  While Jacksonville has the authority, up to
applicable limitations, to engage in the business of making both multi-family
and commercial business loans, its policy has been to confine its primary
lending activities to other types of lending.  Of the ten multi-family loans in
Jacksonville's loan portfolio as of September 30, 1997, the largest loan had a
principal amount of $378,000 which represented 33.0% of the multi-family loan
portfolio.  As of September 30, 1997, the commercial business loan portfolio
consisted of six loans, the largest of which was a $76,000 loan to a retail
grocery store secured by its inventory.





                                       13
<PAGE>   15
         LOAN ORIGINATION AND OTHER FEES.  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.

         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,
1997, Jacksonville had $662,000 of loan fees which had been deferred and are
being recognized as income over the estimated maturities of the related loans.

         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>   16
ASSET QUALITY

         DELINQUENT LOANS.  The following table sets forth information
concerning delinquent loans at September 30, 1997, 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                      $2,809        1.55%        $    --          --%      $143          .08%      
   60-89 days                         349         .19              --          --          8           --       
   90 days and over                   448         .25              --          --        154          .09       
                                    -----        ----          ------       -----      -----        -----       
     Total delinquent loans        $3,606        1.99%        $    --          --%      $305          .17%      
                                    =====        ====          ======       =====        ===         ==== 



<CAPTION>
                                
                                       CONSTRUCTION                   LAND                     CONSUMER         
                                  ----------------------    -----------------------    ------------------------ 
                                                                                                                
                                   AMOUNT     PERCENTAGE     AMOUNT      PERCENTAGE      AMOUNT     PERCENTAGE  
                                  ---------  -----------    ----------  -----------    ----------  ------------ 
                                                             (Dollars in Thousands)                             

 <S>                              <C>             <C>       <C>             <C>          <C>          <C>       
 Loans delinquent for:                                                                                          
                                                                                                                
   30-59 days                       $  --          --%      $  2             --%         $101         .06%      
   60-89 days                          --         ---        197            .11            55         .03       
   90 days and over                    --          --         --             --            42         .02       
                                                              --             --           ---         ---       
     Total delinquent loans         $  --          --%      $199            .11%         $198         .11%      
                                   ======       =====        ===            ===           ===         ===       


<CAPTION>
                                
                                           TOTAL             
                                  ------------------------   
                                                             
                                    AMOUNT    PERCENTAGE     
                                  ---------- -------------   
                                                             
                                   (Dollars in Thousands)    
 <S>                               <C>         <C>
 Loans delinquent for:          
                                
   30-59 days                      $3,055      1.69%
   60-89 days                         609       .33
   90 days and over                   644       .36
                                    -----       ---
     Total delinquent loans        $4,308      2.38%
                                    =====      ==== 
</TABLE>





                                       15
<PAGE>   17
         NON-PERFORMING ASSETS.  All loans are reviewed on a regular basis and
are placed on a non-accrual status when, in the opinion of management, the
collection of additional interest is deemed insufficient to warrant further
accrual.  Jacksonville does not accrue interest on loans past due 90 days or
more except when the estimated value of the collateral and collection efforts
were deemed sufficient to ensure full recovery.  Uncollectible interest on
loans that are contractually past due is charged off or an allowance is
established based on management's periodic evaluation.  The allowance is
established by a charge to interest income equal to all interest previously
accrued, and income is subsequently recognized only to the extent cash payments
are received until, in management's judgment, the borrower's ability to make
periodic interest and principal payments is restored or until management
accepts a payment that results in a cure of the 90-day delinquency.  In such
cases, the loan is returned to accrual status.

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

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

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





                                       16
<PAGE>   18
implementation of the REO Policy, Jacksonville's REO amounted to $526,000, $1.1
million and $2.1 million as of September 30, 1997, 1996 and 1995 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, 1997, Jacksonville
had $438,000 of REO sold by the deposit method.





                                       17
<PAGE>   19
         The following table sets forth the amounts and categories of
Jacksonville's non-performing assets at the dates indicated.

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

                                           1997        1996        1995        1994       1993
                                        ----------   ---------   ---------   ---------  ----------
                                                            (Dollars in Thousands)

 <S>                                      <C>         <C>         <C>         <C>         <C>
 Non-accruing loans:
   Single-family residential(1)           $  448      $  465      $  534      $  163      $  399
   Multi-family residential                   --          --          --          --          --
   Commercial                                154          --           3          10           4
   Construction                               --          --          --          --          --
   Land                                       --         321          26         420         388
   Commercial business                        --          --          --          --          --
   Consumer                                   42          29          --           8           6
                                              --       -----      ------       -----      ------
     Total non-accruing loans                644         815         563         601         797

 Accruing loans 90 days or more
   delinquent                                 --          --          --          --          --
                                            ----       -----      ------      ------       -----
   Total non-performing loans                644         815         563         601         797
                                            ----       -----      ------      ------       -----

 Real estate owned(2)                        526       1,051       2,052       2,549       4,623
                                           -----       -----      ------       -----       -----
   Total non-performing assets            $1,170      $1,866      $2,615      $3,150      $5,420
                                           =====       =====       =====       =====       =====

 Troubled debt restructurings             $  383      $  387      $  391      $  395      $  406
                                           =====       =====       =====       =====       =====

 Total non-performing loans and
   troubled debt restructurings
   as a percentage of total net loans        .59%        .76%        .70%        .81%        .95%
                                             ===        ====        ====        ====        ==== 

 Total non-performing assets and
   troubled debt restructurings as
   a percentage of total assets              .66%       1.03%       1.51%       1.90%       3.07%
                                             ===        ====        ====        ====        ==== 
</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.





                                       18
<PAGE>   20
         At September 30, 1997, 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 1997,
1996 and 1995 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 $63,000, $52,000 and $89,000, 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, 1997, no interest income was actually recorded on any loans after
they were placed on non-accrual status.

         CLASSIFIED ASSETS.  Federal regulations require that each insured
depositing institution classify its assets on a regular basis.  In addition, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them.  There
are three classifications for problem assets: "substandard," "doubtful" and
"loss."  Substandard assets have one or more defined weaknesses and are
characterized by the 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, 1997 consisted of
$60,000 of assets classified as special mention, $1.9 million of assets
classified as substandard, and $0 classified as doubtful or loss.  All of the
assets classified special mention were single-family residential loans.  Of
assets classified substandard, $434,000, or 22.5%, were non residential real
estate parcels acquired as real estate owned, $743,000, or 38.6%, were
single-family residential loans, $481,000, or 25.0%, were commercial real
estate and land loans, and $183,000 or 9.5%, were single-family residences
acquired as real estate owned.





                                       19
<PAGE>   21
         The following table sets forth the Bank's classified assets at the
dates indicated.

<TABLE>
<CAPTION>
                                                           SEPTEMBER 30,
                                            --------------------------------------------
                                               1997             1996             1995
                                            -----------    --------------   ------------
                                                           (In thousands)

 <S>                                           <C>              <C>              <C>
 Classification:
   Special mention                             $   60           $   20           $   41
   Substandard                                  1,923            3,213            3,333
   Doubtful                                        --               --               --
   Loss(1)                                         --               --               --
                                                -----            -----            -----
     Total classified assets                   $1,983           $3,233           $3,374
                                                =====            =====            =====
</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 1997 non-performing loans reduced to $644,000 while net
charge-offs for the period increased $18,000.  The Company's level of net loans
outstanding increased $16 million which included an increase of 67% in consumer
loans.  Overall economic conditions remained stable for the market area and
credit quality for the applicants showed no material change.  Upon
consideration of such factors,  Jacksonville determined that $110,000 in
provisions for 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, 1997, Jacksonville's allowance for loan losses
amounted to $1.2 million compared to $1.1 million at September 30, 1996.





                                       20
<PAGE>   22
         The following table sets forth an analysis of Jacksonville's allowance
for loan losses during the periods indicated.

<TABLE>
<CAPTION>
                                                                         YEAR ENDED SEPTEMBER 30,                
                                     ---------------------------------------------------------------------------------------------
                                                                                                                 
                                          1997                1996                 1995               1994              1993
                                     ---------------     ---------------   ------------------    ---------------   ---------------
                                                                          (Dollars in Thousands)                 
                                                                                                                 
 <S>                                     <C>                 <C>                  <C>               <C>                <C>
 Total net loans outstanding             $174,044            $158,034             $135,933          $123,133           $126,030
                                          =======             =======              =======           =======            =======
 Average loans outstanding               $163,569            $145,021             $128,623          $122,051           $127,845
                                          =======             =======              =======           =======            =======
 Balance at beginning of                                                                                         
   period                                $  1,100            $  1,000             $  1,000          $    996           $    810
 Charge-offs(1)                               (18)                 --                  (57)              (24)              (155)
 Recoveries(1)                                 --                  --                   32                10                 16
                                          -------             -------             --------          --------            -------
 Net charge-offs                              (18)              1,000                  (25)              (14)              (139)
 Provision for losses on loans                110                 100                   25                18                325
                                              ---             -------             --------           -------            -------
 Balance at end of period                $  1,192            $  1,100             $  1,000          $  1,000           $    996
                                          =======             =======             ========           =======            =======
 Allowance for loan losses                                                                                       
   as a percent of total net                                                                                     
   loans outstanding                          .68%                .70%                 .74%              .81%               .79%
                                              ===               =====                 ====              ====                === 
 Ratio of net charge-offs to                                                                                     
   average loans outstanding                  .01%                 --%                 .02%              .01%               .11%
                                              ===               =====                  ===              ====                === 
</TABLE>

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

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





                                       21
<PAGE>   23
         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,                                    
                                        ----------------------------------------------------------------------------------
                                                    1997                       1996                       1995            
                                        --------------------------   -------------------------    ------------------------
                                                                                   % OF LOANS                             
                                                        % OF LOAN                    IN EACH                  % OF LOANS  
                                                         IN EACH                    CATEGORY                    IN EACH   
                                                         CATEGORY                      TO                      CATEGORY   
                                                         TO TOTAL                     TOTAL                    TO TOTAL   
                                            AMOUNT        LOANS        AMOUNT         LOANS        AMOUNT        LOANS    
                                        -------------  -----------   ------------  -----------    ---------  -------------
                                                                        (Dollars in Thousands)                            
                                                                                                                          
 <S>                                         <C>           <C>          <C>           <C>          <C>            <C>     
 Mortgage loans                              $1,027         86.2%       $1,025         93.2%       $  894          96.5%  
 Commercial business loans                       10           .8            20          1.8            30            .2   
 Consumer loans                                 155         13.0            55          5.0            76           3.3   
                                              -----         ----         -----        -----         -----         -----   
     Total allowance for loan losses         $1,192        100.0%       $1,100        100.0%       $1,000         100.0%  
                                              =====        =====         =====        =====         =====         =====   
<CAPTION>
                                                           SEPTEMBER 30,                    
                                        ----------------------------------------------------
                                                  1994                       1993           
                                        -------------------------  -------------------------
                                                     % OF LOANS                  % OF LOANS 
                                                       IN EACH                    IN EACH   
                                                      CATEGORY                    CATEGORY  
                                                         TO                          TO     
                                                        TOTAL                      TOTAL    
                                          AMOUNT        LOANS        AMOUNT        LOANS    
                                        ----------- -------------  ------------ ------------                                       
                                                        (Dollars in Thousands)              
                                                                                            
 <S>                                      <C>            <C>         <C>            <C>     
 Mortgage loans                           $  900          97.5%      $  927          97.9%  
 Commercial business loans                    42            .2           --            .2   
 Consumer loans                               58           2.3           69           1.9   
                                           -----         -----        -----         -----   
     Total allowance for loan losses      $1,000         100.0%      $  996         100.0%  
                                           =====         =====        =====         =====   
</TABLE>





                                      22
<PAGE>   24
MORTGAGE-BACKED SECURITIES

         Jacksonville has invested in a portfolio of mortgage-backed securities
which are insured or guaranteed by the FHLMC 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, 1997, $16.5 million of Jacksonville's
mortgage-backed securities consist of pools of adjustable-rate mortgages.
Mortgage-backed securities of this type serve to reduce the interest rate risk
associated with changes in interest rates.

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

<TABLE>
<CAPTION>
                                                                   September 30,
                                                    --------------------------------------------

                                                      1997            1996              1995
                                                    ----------    -----------        -----------
                                                               (Dollars in Thousands)
 <S>                                                 <C>             <C>                <C>
 Mortgage-backed securities at
   beginning of period                               $12,107         $ 3,442             $2,995
 Purchases                                            11,372          10,927              1,002
 Sales                                                    --              --                 --
 Repayments                                           (2,262)         (2,262)              (555)
                                                      ------         -------             ------ 
 Mortgage-backed securities at end
   of period                                         $21,217         $12,107             $3,442
                                                      ======          ======             ======
 Weighted average yield
   at end of period                                     6.87%           7.06%              7.33%
                                                        ====            ====               ==== 
</TABLE>

         At September 30, 1997, Jacksonville's mortgage-backed securities had a
book value and estimated market value of $21.2 million and $21.3 million,
respectively.  Of the $21.2 million portfolio, $768,000 was scheduled to mature
in five years or less and $16.4 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.

         The $768,000 of mortgage-backed securities which were scheduled to
mature in five years or less at September 30, 1997 qualify for regulatory
liquidity and have fixed interest rates.  The remaining $20.4 million of
mortgage-backed securities at such date consisted of $3.9 million of fixed-rate
and $16.5 million of adjustable-rate securities.  Of Jacksonville's total
investment in mortgage-backed securities at September 30, 1997, $12.9 million
consisted of FNMA certificates, $1.1 million consisted of GNMA certificates and
$7.2 million consisted of FHLMC certificates.  See Note 4 to the Consolidated
Financial Statements for additional information.





                                       23
<PAGE>   25
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, 1997, Jacksonville had
U.S. Treasury notes and U.S. Government agency held-to-maturity securities with
an amortized cost of $22.5 million and an estimated market value of $22.5
million.  See note 3 to the Consolidated Financial Statement for further
information.  At September 30, 1997, Jacksonville held U.S. government
securities as available-for-sale with an amortized cost of $3.5 million and an
estimated market value of $3.5 million.





                                       24
<PAGE>   26
         The following table sets forth Jacksonville's investment securities at
the dates indicated.

<TABLE>
<CAPTION>
                                                                SEPTEMBER 30,
                                              --------------------------------------------------
                                                  1997              1996               1995
                                              --------------   --------------      -------------
                                                               (In thousands)

 <S>                                            <C>              <C>                <C>
 Available for sale(1):
  Mortgage-backed securities:
    FNMA Certificates                           $ 4,852           $    --            $    --
    FHLMC Certificates                            6,540                --                 --
  U.S. agency securities                          3,469             7,359              6,408
                                                 ------            ------             ------
       Total available for sale                  14,861             7,359              6,408
                                                 ------            ------             ------

 Held to maturity(1):
   Mortgage-backed securities:
     FNMA Certificates                            6,348             7,270                 --
     FHLMC certificates                           2,398             3,553              1,921
     GNMA certificates                            1,079             1,284              1,521
   U.S. Treasury notes                            6,492             8,980             12,492
   U.S. agency securities                        15,969            17,467             24,008
                                                 ------            ------             ------

      Total held to maturity                     32,286            38,554             39,942
                                                 ------            ------             ------

         Total investment securities            $47,147           $45,913            $46,350
                                                 ======            ======             ======
</TABLE>

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

(1)      Securities classified as available for sale were carried at fair value
         at September 30, 1997, 1996 and 1995.  Securities classified as
         held-to-maturity were carried at historical cost at all respective
         dates.

         At September 30, 1997, $10.0 million or 27.0% of investment securities
held by Jacksonville were scheduled to mature in one year or less and had a
weighted average yield of 5.19%.  Of the remaining investment securities, $14.9
million was scheduled to mature after one year through five years and 1.0
million was scheduled to mature after six years through ten years.





                                       25
<PAGE>   27
         The following table sets forth certain information regarding the
maturities of Jacksonville's investment securities at September 30, 1997.

<TABLE>
<CAPTION>
                                                                CONTRACTUALLY MATURING                                   
                              ------------------------------------------------------------------------------------------ 
                                          WEIGHTED              WEIGHTED                  WEIGHTED             WEIGHTED  
                                UNDER 1    AVERAGE      1-5      AVERAGE       6-10       AVERAGE   OVER 10     AVERAGE  
                                 YEAR       RATE       YEARS      RATE        YEARS         RATE     YEARS       RATE    
                              ---------- -----------  -------- ----------  ----------    --------- ---------  ---------- 
                                                                                                                         
                                                              (Dollars in Thousands)
 <S>                            <C>          <C>       <C>          <C>     <C>              <C>   <C>              <C>  

 HELD TO MATURITY                                                                                                        
 U.S. Treasury notes                                                                                                     
    and bills                    $3,496      5.18%     $ 2,996      5.98%    $   --           --%   $   --           --% 
                                                                                                                         
 U.S. agency securities           6,005      5.33        9,964      6.25         --           --        --           --  
                                 ------                  -----                -----                  -----               
    Total                        $9,501                $12,960               $   --                 $   --           --  
                                  =====                 ======                =====                  =====               
                                                                                                                         
 AVAILABLE FOR SALE                                                                                                      
 U.S. Treasury notes                 --        --           --        --         --           --        --           --  
    and bills                                                                                                            
 U.S. agency securities             500      3.65        1,994      6.19      1,000          7.0        --           --  
                                  -----                  -----                -----                  -----               
 Total                           $  500                $ 1,994               $1,000                 $   --               
                                  =====                  =====                =====                  =====               
 Unrealized loss on                                                                                                      
   securities available                                                                                                  
   for sale                                                                                                              
                                                                                                                         
     Total                                                                                                               
                                                                                                                         


<CAPTION>
                                         TOTAL
                                  --------------------
                              
                              
                                   AMOUNT     YIELD
                                 ---------  ---------

                               (Dollars in Thousands)
                              
 <S>                               <C>          <C>  
 HELD TO MATURITY                                    
 U.S. Treasury notes                                 
    and bills                      $ 6,492      5.50%
                                                     
 U.S. agency securities             15,969      5.70 
                                    ------           
    Total                          $22,461           
                                    ======           
                                                     
 AVAILABLE FOR SALE                                  
 U.S. Treasury notes                    --        -- 
    and bills                                        
 U.S. agency securities                 --        -- 
                                                     
 Total                             $ 3,494      6.45 
                                     =====           
 Unrealized loss on                                  
   securities available                              
   for sale                            (25)          
                                    -------          
     Total                         $25,930           
                                    ======           
</TABLE>

INTEREST-BEARING DEPOSITS

         As of September 30, 1997 Jacksonville also had demand deposit accounts
in the FHLB of Dallas of $2.8 million as compared to $2.4 million as of
September 30, 1996.  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, 1997, 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 $20.1 million at September 30, 1997.





                                      26
<PAGE>   28
Deposit account terms vary, with the principal differences being the minimum
balance required, the time periods the funds must remain on deposit and the
interest rate.

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

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

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

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

                                                      1997                    1996                         1995
                                             ----------------------  -------------------------   ----------------------------

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

                                                                           (Dollars in Thousands)

 <S>                                          <C>           <C>      <C>            <C>         <C>             <C>
 Certificate accounts:
 2.00 - 4.00%                                       --          --%  $  3,973         2.28%     $ 14,428          8.30%
 4.01 - 6.00%                                 $124,014       64.58     96,387        55.30        82,012         47.17
 6.01 - 8.00%                                   21,431       11.16     31,581        18.11        36,147         20.79
 8.01 - 10.00%                                     146         .08        139          .08           132           .08
                                               -------       -----    -------       ------       -------        ------

 Total certificate accounts                   $145,591       75.82%  $132,080        75.77%     $132,719         76.34%
                                               =======       =====    =======       ======       =======        ====== 

 Transaction accounts:

 Passbook savings                             $ 12,202        6.35%  $ 11,424         6.55%     $ 10,765          6.20%
 Money market                                   15,829        8.24     17,648        10.12        17,930         10.32
 Demand and NOW Accounts                        18,411        9.59     13,176         7.56        12,397          7.14
                                               -------       -----    -------       ------       -------        ------

 Total transaction accounts                   $ 46,442       24.18   $ 42,248        24.23%     $ 41,092         23.66%
                                               =======       =====    =======       ======       =======        ====== 

 Total deposits                               $192,033      100.00%  $174,328       100.00%     $173,811        100.00%
                                               =======      ======    =======       ======       =======        ====== 
</TABLE>





                                       27
<PAGE>   29
         The following table sets forth the savings activities of Jacksonville
during the periods indicated.

<TABLE>
<CAPTION>
                                                               SEPTEMBER 30,
                                        ---------------------------------------------------------
                                              1997                 1996                1995
                                        -----------------    -----------------   ----------------

                                                              (In Thousands)

 <S>                                         <C>                 <C>                 <C>
 Net increase (decrease)
     before interest credited                $11,162             $(4,111)            $10,889

 Interest credited                             6,543               4,628               3,579
                                              ------              ------              ------

 Net increase (decrease) in deposits         $17,705             $   517             $14,468
                                              ======              ======              ======
</TABLE>

         The following table shows the interest rate and maturity information
for Jacksonville's certificates of deposit at September 30, 1997.

<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>               <C>
 2.00 -   4.00%        $     --             $    --               $  --              $    --             $     --
 4.01 -   6.00%         114,604               9,396                  --                   14              124,014
 6.01 -   8.00%           7,203               4,107                  10               10,111               21,431
 8.01 -  10.00%              --                  --                  --                  146                  146
                        -------              ------                ----               ------              -------
                       $121,807             $13,503               $  10              $10,271             $145,591
                        =======              ======                ====               ======              =======
</TABLE>





                                       28
<PAGE>   30
         The following table sets forth the maturities of Jacksonville's
certificates of deposit having principal amounts of $100,000 or more at
September 30, 1997.

<TABLE>
<CAPTION>
         CERTIFICATES OF DEPOSIT MATURING IN
         QUARTER ENDING:
         --------------------------------------
                                                            (In thousands)
         
         <S>                                                      <C>
         December 31, 1997                                         $3,149
         March 31, 1998                                             3,995
         June 30, 1998                                              1,553
         September 30, 1998                                         2,870
         After September 30, 1998                                  11,624
                                                                  -------
         Total certificates of deposit
           with balances of $100,000
           or more                                                $23,191
                                                                   ======
</TABLE>



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

<TABLE>
<CAPTION>
                                                     YEAR ENDED SEPTEMBER 30,
                                          ------------------------------------------------
                                             1997              1996               1995
                                          ----------        ----------       -------------
                                                      (Dollars in Thousands)

 <S>                                         <C>               <C>              <C>
 Maximum balance                             $5,000            $4,000           $ 7,000
 Average balance                              2,846             1,098             2,750
 Weighted average interest
   rate of FHLB advances                       5.87%             5.71%             5.52%
</TABLE>





                                       29
<PAGE>   31
         The following table sets forth certain information as to
Jacksonville's long-term (terms to maturity in excess of 90 days) and
short-term (terms to maturity of 90 days or less) FHLB advances at the dates
indicated.



<TABLE>
<CAPTION>
                                                                   SEPTEMBER 30,
                                                  -------------------------------------------------
                                                     1997              1996               1995
                                                  ------------     ------------        ------------
                                                              (Dollars in Thousands)

 <S>                                                <C>               <C>                <C>
 FHLB long-term advances                              $2,000            $2,000           $    --
   Weighted average interest rate                       5.71%             5.71%               --%
                                                                                                 
 FHLB short-term advances                             $   --            $   --           $    --
   Weighted average interest rate                         --%               --%               --%
                                                                                                 
</TABLE>


         BORROWINGS.  While Jacksonville has not frequently borrowed from the
FHLB of Dallas, it may obtain advances from the FHLB of Dallas upon the
security of the common stock it owns in that bank and certain of its
residential mortgage loans, provided certain standards related to
creditworthiness have been met.  Such advances are made pursuant to several
credit programs, each of which has its own interest rate and range of
maturities.  Such advances are generally available to meet seasonal and other
withdrawals of deposit accounts and to permit increased lending.  At September
30, 1997, Jacksonville had $2 million 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, 1997, the outstanding balance of that loan was
$1.4 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 $115,000 in investments, interest
from residential notes receivable and rental income.  Its main activity is the
servicing of purchased residential first and second lien notes.  The portfolio
includes 32 loans ranging in size from $2,500 to $135,000, 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, 1997
and September 30, 1996, JS&L earned $44,000 and $34,800, respectively.  JS&L
now makes investments in investments permissible for Jacksonville, rents houses
and office space, and originates and buys first and second liens.  JS&L
purchases first and second lien notes pursuant to a written mortgage loan
underwriting policy adopted by JS&L's board of directors.  Total investment in
JS&L at September 30, 1997 was $823,000.  Total capital of JS&L at September
30, 1997 was $860,000 and, as of that date, JS&L has no outstanding
indebtedness to Jacksonville.





                                       30
<PAGE>   32
         EMPLOYEES.  Jacksonville and its subsidiary had 76 full-time employees
at September 30, 1997.  None of these employees is represented by a collective
bargaining agent, and Jacksonville believes that it enjoys good relations with
its personnel.

                                   REGULATION

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

THE COMPANY AND IHC

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

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

         If the Company or IHC were to acquire control of another savings
institution, other than through merger or other business combination with the
Bank, the Company and IHC would thereupon become a multiple savings and loan
holding company.  Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
institution meets the QTL test, as set forth below, the activities of the
Company and any





                                       31
<PAGE>   33
of its subsidiaries (other than the Bank or other subsidiary savings
institutions) would thereafter be subject to further restrictions.  No multiple
savings and loan holding company or subsidiary thereof which is not a savings
institution may commence or continue beyond a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof any
business activity, other than: (i) furnishing or performing management services
for a subsidiary savings institution; (ii) conducting an insurance agency or
escrow business; (iii) holding, managing, or liquidating assets owned by or
acquired from a subsidiary savings institution; (iv) holding or managing
properties used or occupied by a subsidiary savings institution; (v) acting as
trustee under deeds of trust; (vi) those activities authorized by regulation as
of March 5, 1987 to be engaged in by multiple savings and loan holding
companies; or (vii) unless the Director of the OTS by regulation prohibits or
limits such activities for savings and loan holding companies, those activities
authorized by the Federal Reserve Board as permissible for bank holding
companies.  The activities described in (i) through (vi) above may be engaged
in only after giving the OTS prior notice and being informed that the OTS does
not object to such activities. In addition, the activities described in (vii)
above also must be approved by the Director of the OTS prior to being engaged
in by a multiple savings and loan holding company.

         RESTRICTIONS ON ACQUISITIONS.  Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without prior
approval of the Director of the OTS, (i) control of any other savings
institution or savings and loan holding company or substantially all the assets
thereof or (ii) more than 5% of the voting shares of a savings institution or
holding company thereof which is not a 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 acquiror is authorized to acquire control of the
savings institution pursuant to the emergency acquisition provisions of the
FDIA, or (iii) the statutes of the state in which the institution to be
acquired is located specifically permit institutions to be acquired by the
state-chartered institutions or savings and loan holding companies located in
the state where the acquiring entity is located (or by a holding company that
controls such state-chartered savings institutions).

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





                                       32
<PAGE>   34
         TEXAS REGULATIONS.  Under the Texas Savings Bank Act ("TSBA"), each
registered holding company, such as the Company and IHC, is required to file
reports with the Department as required by the Texas Savings and Loan
Commissioner ("Commissioner") and is subject to such examination as the
Commissioner may prescribe.

REGULATION OF THE BANK

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

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

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

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





                                       33
<PAGE>   35
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, 1997, the Bank was in
compliance with the above restrictions.

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

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

         TIER 1 LEVERAGE CAPITAL RATIO.  FDIC regulations establish a minimum
3.0% ratio of Tier 1 capital to total assets for the most highly-rated
state-chartered, FDIC-supervised banks, with an additional cushion of at least
100 to 200 basis points for all other state-chartered, FDIC-supervised banks,
which effectively imposes a minimum Tier 1 capital ratio for such other banks
of between 4.0% to 5.0%.  Under FDIC regulations, highly-rated banks are those
that the FDIC determines are not anticipating or experiencing significant
growth and have well diversified risk, including no undue interest rate risk
exposure, excellent asset quality, high liquidity and good earnings.  At
September 30, 1997, the required Tier 1 leverage capital ratio for the Bank was
4.0% and its actual Tier 1 leverage capital ratio was 13.66%.





                                       34
<PAGE>   36
         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, 1997, the Bank's Tier 1 capital to risk-weighted
assets ratio was 25.41%.  On the same date, the Bank's total risked-based
capital percentage was 26.37%.





                                       35
<PAGE>   37
         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,
                                                          -------------------

                                                                 1997
                                                                 ----


                                                         Actual       Required
                                                         ------       --------
                   <S>                                   <C>            <C>
                   Leverage ratio (or tangible           13.66%         4.00%
                   capital requirement) (1):
                   Tier 1 capital to total assets

                   Tier 1 risk-based capital ratio       25.41          4.00
                   (or core capital
                   requirement)(1):
                   Tier 1 risk-based capital to
                   risk weighted assets

                   Total risk-based capital ratio:       26.37          8.00
                   Total risk-based capital risk to
                   risk weighted assets
</TABLE>


         Prior to July 2, 1997 Jacksonville Savings and Loan Association was
regulated by the Office of Thrift Supervision and was subject to capital
requirements as set forth by that regulatory agency.  The Association at
September 30, 1996 and 1995 exceeded all minimum capital requirements as set
forth by the Office of Thrift Supervision at those dates.





                                       36
<PAGE>   38
         The following table sets forth a reconciliation between the Bank's
stockholders' equity and each of its three regulatory capital requirements at
September 30, 1997.


<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           $        31,716       $        31,716         $       31,716
         Jacksonville Savings Bank, SSB
         Unrealized loss on securities
                 available-for-sale                            14                    14                     14
         Less nonallowable assets:
                 Deferred Charges                            (52)                  (52)                   (52)
         Plus allowances for loan
                 and lease losses                              --                    --                  1,192
                                                    ---------------       --------------         --------------
          Total regulatory capital                         31,678                31,678                 32,870
          Minimum required capital                          9,279                 4,986                  9,972
                                                    ---------------       --------------         --------------
          Excess regulatory capital               $        22,399       $        26,692         $       22,898
                                                    ===============       ==============         ==============
         
          Bank's regulatory capital
                  percentage (1)                           13.66%                25.41%                 26.37%
         
          Minimum regulatory capital
                  required percentage                       4.00%                 4.00%                  8.00%
                                                    ---------------       --------------         --------------
         
          Bank's regulatory capital
                  percentage in excess of
                  requirement                               9.66%                21.41%                 18.37%
                                                    ===============       ==============         ==============
</TABLE>

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


(1)  Tier 1 capital is computed as a percentage of total adjusted assets of
$232.0 million.  Risk-based capital is computed as a percentage of adjusted
risk-weighted assets of $124.6 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





                                       37
<PAGE>   39
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious threat to the FDIC.  The FDIC also has the authority to
initiate enforcement actions against savings institutions.

         The Bank currently pays deposit insurance premiums to the FDIC based
on a risk-based assessment system established by the FDIC for all SAIF-member
institutions. Under applicable regulations, institutions are assigned to one of
three capital groups based solely on the level of an institution's capital -
"well capitalized," "adequately capitalized" and "undercapitalized" - which are
defined in the same manner as the regulations establishing the prompt
corrective action system under Section 38 of the FDIA.  These three groups are
then divided into three subgroups which reflect varying levels of supervisory
concern, from those which are considered to be healthy to those which are
considered to be of substantial supervisory concern.  The matrix so created
results in nine assessment risk classifications with effective assessments
between .04% for well capitalized, healthy SAIF-member institutions to .27% for
undercapitalized SAIF-member institutions with substantial supervisory
concerns. At September 30, 1997, the Bank was categorized as well capitalized.

       On September 30, 1996, 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





                                       38
<PAGE>   40
method and is additionally be required to recapture (i.e. take into taxable
income) over a six year period, the excess of the balance of its bad debt
reserve as of December 31, 1995 over the balance of such reserve as of December
31, 1987 (if any).  Such recapture requirements can be suspended for each of
two successive taxable years beginning January 1, 1996, in which the Bank
originates a minimum amount of certain residential loans based upon the average
of the principal amounts of such loans made by the Bank during its six taxable
years preceding 1996.  At September 30, 1997, the Bank had fully recaptured
post-1987 tax bad debt reserves.

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

       The FDIA also requires the FDIC and the other Federal banking agencies
to revise their risk-based capital standards, with appropriate transition
rules, to ensure that they take into account concentration of credit risk and
the risks of nontraditional activities and to ensure that such standards
reflect the actual performance and expected risk of loss of multifamily
mortgages, of which the Bank had $1.14 million at September 30, 1997. In
December 1995, the FDIC and the other Federal banking agencies promulgated
final amendments to their respective risk-based capital requirements which
would explicitly identify concentration of credit risk and certain risks
arising from nontraditional activities, and the management of such risks as
important factors to consider in assessing an institution's overall capital
adequacy. The FDIC may now require higher minimum capital ratios based on
certain circumstances, including where the institution has significant risks
from concentration of credit or certain risks arising from nontraditional
activities.

       The Federal banking agencies have agreed to adopt for regulatory
purposes Statement 115, which, among other things, generally adds a new element
to stockholders' equity under generally accepted accounting principles by
including net unrealized gains and losses on certain securities.  In December
1994, the FDIC issued final amendments to its regulatory capital requirements
which would require that the net amount of unrealized losses from
available-for-sale equity securities with readily determinable fair values be
deducted for purposes of calculating the Tier 1 capital ratio.  All other net
unrealized holding gains (losses) on available-for-sale securities are excluded
from the definition of Tier 1 capital.  At September 30, 1997, the Bank had
$3.5 million of securities  available-for-sale with $31,000 of aggregate net
unrealized losses thereon.





                                       39
<PAGE>   41
       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 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





                                       40
<PAGE>   42
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





                                       41
<PAGE>   43
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., branching)
proposals and may be the basis for approving, denying or conditioning the
approval of an application.  Management of the Bank currently is unable to
predict the effects of the regulations under the CRA as recently adopted.

       QUALIFIED THRIFT LENDER TEST.  All savings institutions, including the
Bank, are required to meet a QTL test set forth under Section 10(m) of the Home
Owners Loan Act, as amended, ("HOLA") to avoid certain restrictions on their
operations.  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, 1997,
with 84.8% of its assets invested in qualified thrift investments.

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





                                       42
<PAGE>   44
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, 1997, the Bank's advances from the FHLB of Dallas amounted
to $2.0 million or 1.0% of its total liabilities.

       As a member, the Bank is required to purchase and maintain stock in the
FHLB of Dallas in an amount equal to the greater of 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of total advances.  At September 30, 1997, the
Bank had $1.8 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, 1997,
dividends paid by the FHLB of Dallas to the Bank totaled $105,000.

       FEDERAL RESERVE SYSTEM.  The Federal Reserve Board requires all
depository institutions to maintain reserves against their transaction accounts
(primarily NOW and Super NOW checking accounts) and non-personal time deposits.
At September 30, 1997, 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





                                       43
<PAGE>   45
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.





                                       44
<PAGE>   46
ITEM 2.              PROPERTIES.

At September 30, 1997, Jacksonville conducted its business from its main office
at Commerce & Neches Streets, Jacksonville, Texas, and five full-service
branches in Cherokee County and surrounding counties.

       Set forth below is certain information with respect to the office and
other properties of Jacksonville at September 30, 1997.

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

                                                               (In Thousands)
 <S>                                           <C>                   <C>                   <C>
 Main Office                                   Owned                  $486                 $75,051
 Commerce and Neches Streets
 Jacksonville, Texas

 Branch Office                                 Owned                   718                  54,857
 1015 North Church Street
 Palestine, Texas

 Branch Office                                 Owned                    70                  13,249
 107 East Fourth Street
 Rusk, Texas

 Branch Office                                 Owned                   437                  14,649
 1412 Judson Road
 Longview, Texas

 Branch Office                                 Owned                   466                  20,113
 617 South Palestine Street
 Athens, Texas

 Branch Office                                 Owned                 1,212                  14,114
 5620 Old Bullard Road
 Tyler, Texas
</TABLE>


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

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





                                       45
<PAGE>   47
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.

       On October 22, 1996, the Company held a special meeting of stockholders
at which stockholders approved the 1996 Stock Option Plan and the 1996
Management Recognition Plan.

PART II.


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

       The information required herein is incorporated by reference from page
42 of the Company's 1997 Annual Report to Stockholders, which is included
herein as Exhibit 13 ("Annual Report").

ITEM 6.              SELECTED FINANCIAL DATA.

       The information required herein is incorporated by reference from pages
5 and 6 of the Company's 1997 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
7 to 11 of the Company's 1997 Annual Report.

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

       The information required herein is incorporated by reference from pages
7 and 8 of the Company's 1997 Annual Report.

ITEM 8.              FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

       The information required herein is incorporated by reference from pages
F-1 to F-23 of Company's 1997 Annual Report.





                                       46
<PAGE>   48
ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
              FINANCIAL DISCLOSURE.

       Not applicable.

PART III.

ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

       The information required herein is incorporated by reference from pages
5 to 10 of the Company's definitive proxy statement, dated January 6, 1998,
("Proxy Statement").

ITEM 11.      EXECUTIVE COMPENSATION.

       The information required herein is incorporated by reference from pages
10 to 15 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
16 of the Company's Proxy Statement.

PART IV.

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

       (a)    Documents filed as part of this Report

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

              Independent Auditor's Report

              Consolidated Statements of Financial Condition at September 30,
              1997 and 1996

              Consolidated Statements of Earnings for the Years Ended September
              30, 1997, 1996 and 1995






                                       47
<PAGE>   49
              Consolidated Statements of Changes in Stockholders' Equity for
              the Years Ended September 30, 1997, 1996 and 1995

              Consolidated Statements of Cash Flows for the Years Ended
              September 30, 1997, 1996, and 1995

              Notes to Consolidated Financial Statements

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





                                       48
<PAGE>   50
       (3)    The following exhibits are filed as part of this Form 10-K and
              this list includes the Exhibit Index.

<TABLE>
<CAPTION>
                   No.                                 Exhibits
              ------------       ----------------------------------------
                 <S>             <C>
                   3.1           Articles of Incorporation*
                   3.2           Bylaws*
                   4.1           Specimen Common Stock Certificate*
                 10.1(a)         1994 Stock Incentive Plan**(1)
                 10.1(b)         1994 Directors' Stock Option Plan**(1)
                 10.1(c)         1994 Management Recognition Plan***(1)
                 10.1(d)         1996 Management Recognition Plan***(1)
                 10.1(e)         1996 Stock Option Plan**(1)
                 10.1(f)         Employee Stock Ownership Plan*(1)
                 10.1(g)         Acquisition Agreement by and among Jacksonville
                                 Bancorp, Inc., Jacksonville IHC, Inc., and
                                 Jacksonville Savings and Loan Association
                  10.2           1996 Management Recognition Plan*(1)
                  10.6           Employment Agreement by and among Jacksonville
                                 Bancorp, Inc., Jacksonville Savings and Loan
                                 Association and Jerry M. Chancellor (representative
                                 of a similar agreement entered into with Bill W.
                                 Taylor)*(1)
                   13            1997 Annual Report to Stockholders specified
                                 portion (p. 1 to 15) of the Registrant's Annual
                                 Report to Stockholders for the year ended September
                                 30, 1997
                   23            Consent of Independent Auditors
                   27            Financial Data Schedule
</TABLE>

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

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

       ***Incorporated herein by reference to the Registrant's Form 10-K filed
as of December 30, 1996.

       (b)    Reports on Form 8-K during the quarter ended September 30, 1997:





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

(1) Management contract or compensatory plan or arrangement.



                                       49
<PAGE>   51
              1.     On September 11, 1997, the Company filed a current report
                     on Form 8-K reporting the declaration of a $0.125 per
                     share dividend.

              2.     On August 7, 1997, the Company filed a current report on
                     Form 8-K reporting earnings in the quarter ended June 30,
                     1997.

              3.     On July 3, 1997, the Company filed a current report on
                     Form 8-K reporting the consummation of its conversion to a
                     Texas chartered savings bank.

       (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.





                                       50
<PAGE>   52
                                   SIGNATURES


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

                                        JACKSONVILLE BANCORP, INC.



December 22, 1997                             By:/s/ Jerry M. Chancellor      
                                                 -------------------------------
                                              Jerry M. Chancellor
                                              Chief Executive Officer


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



/s/ Jerry M. Chancellor                                        December 22, 1997
---------------------------------------------------
Jerry M. Chancellor, Director and Chief Executive
  Officer (Principal Executive Officer)



/s/ W. G. Brown                                                December 22, 1997
---------------------------------------------------
W. G. Brown, Chairman



/s/ Charles Broadway                                           December 22, 1997
---------------------------------------------------
Charles Broadway, Director



/s/ Ray W. Beall                                               December 22, 1997
---------------------------------------------------
Ray W. Beall, Director





                                       51
<PAGE>   53
/s/ Dr. Joe Tollet                                             December 22, 1997
---------------------------------------------------
Dr. Joe Tollet, Director



/s/ Bill W. Taylor                                             December 22, 1997
---------------------------------------------------
Bill W. Taylor, Director and
  Executive Vice President (Principal Financial
  and Accounting Officer)


/s/ Robert Brown                                               December 22, 1997
---------------------------------------------------
Robert Brown, Director





                                       52