##### 



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, 2003

OR

|  |  |                                                         
|- |  | --------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|  |  | SECURITIES EXCHANGE ACT OF 1934                         

For the transition period from  to

Commission file number 000-28070

JACKSONVILLE BANCORP, INC.

(Exact name of registrant as specified in its charter)


| |  |                                          |  |                       
| |  | ---------------------------------------- |  | ----------------------
| |  | TEXAS                                    |  | 75-2632781            
| |  |                                          |  |                       
| |  | (State or other jurisdiction             |  | (I.R.S. Employer      
| |  | of incorporation or organization)        |  | Identification Number)
| |  |                                          |  |                       
| |  | Commerce and Neches Streets              |  |                       
| |  | Jacksonville, Texas                      |  | 75766                 
| |  |                                          |  |                       
| |  | (Address of principal executive offices) |  | (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 o

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.





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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).

Yes o      No x

As of October 6, 2003, the aggregate market value of the 1,402,005 shares of
Common Stock of the Registrant held by non-affiliates on such date, was
approximately $38.1 million. This figure is based on the closing price of
$27.15 per share of the Registrants Common Stock on
March 31, 2003, the last
trading date of the Registrants second fiscal quarter. Although directors and
executive officers of the Registrant and certain of its employee benefit plans
were assumed to be affiliates of the Registrant for purposes of this
calculation, the classification is not to be interpreted as an admission of
such status.

Number of shares of Common Stock outstanding as of December 8, 2003: 1,806,465.

DOCUMENTS INCORPORATED BY REFERENCE

None.





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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 and
land development loans, land loans, consumer loans, home equity loans, and a
limited number of commercial real estate loans. After approval of equity
lending beginning January 1, 1998, Jacksonville established an equity loan
department. In addition, Jacksonville invests in United States government and
federal agency securities and mortgage-backed securities, including
collateralized mortgage obligations (C.M.O.). Jacksonville also has a small
portfolio of private-label C.M.Os.

On July 2, 1997, Jacksonville Savings and Loan Association converted from
a Texas chartered savings and loan association to a 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 (OTS)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
Jacksonvilles Employee Stock Ownership Plan.

On August 12, 2003 the Company entered into a definitive agreement with
Franklin Bank Corp., whereby Franklin Bank Corp., would acquire all of the
common stock of the Company. Under the terms of the agreement, Company
shareholders will receive $37.50 in cash for each share of stock they own. The
total cash consideration to be paid to the Company is approximately $72.5
million. The merger is subject to a number of conditions, including approval
by shareholders and various regulatory authorities. The merger is
expected to be consummated on December 30, 2003.

MARKET AREA

Jacksonvilles market area consists of Cherokee County and surrounding
counties in East Texas. The labor force of Cherokee County has evolved from
agriculture to manufacturing and service industries. The components of the
areas economic base have consisted of manufacturing, mining, agriculture,
retail and tourism. Jacksonville is the largest city in Cherokee County and the
principal business activity in the city is manufacturing. There are 80
manufacturing concerns in Jacksonville according to numbers supplied by the
Jacksonville Chamber of Commerce. Industries represented are plastic
manufacturing and plastic injected molding, oil (reflecting the heritage of
East Texas as the center of the Texas oil country), timber, cattle and bedding
plant. Slowdowns in the petroleum industry had a material negative impact on
the areas economy in the early 1980s which was compounded by defense-related
cutbacks. However, the areas economy has improved in recent years due to
further entrance of business in the market area and especially in Tyler and
Longview. In addition, the areas economic base has diversified into such
fields as health services, research and technology.

1



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Major companies in Jacksonvilles market area include Cardinal Health,
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 Lithotech
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, LeTourneau
University and Trinity Valley Junior College. According to reports from the
Bureau of Labor Statistics, as of September 30, 2003, the unemployment rate in
Cherokee County and surrounding counties in East Texas was estimated to be 5.0%
as compared to 5.4% in 2002 and the estimated unemployment rates for the United
States during these periods were 6.1% and 5.9% respectively.

LENDING ACTIVITIES

At September 30, 2003, Jacksonvilles net loan portfolio totaled $279.1
million representing approximately 59.1% of Jacksonvilles $472.2 million of
total assets at that date. The principal lending activity of Jacksonville is
the origination of single-family residential loans. At September 30, 2003,
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, 2003,
Jacksonvilles single-family residential loan portfolio totaled $197.0 million,
representing approximately 65.7% of Jacksonvilles total loans, before net
items, at that date. Jacksonville held $26.4 million in commercial real estate
loans at that date, representing 8.8% of total loans, before net items. Of the
commercial real estate loans, $532,000, or 2.0%, were secured by real estate
acquired in satisfaction of debts previously contracted or by improvements on
such properties. In addition to these loans secured by real estate acquired in
satisfaction of debts previously contracted, Jacksonville originated $11.1
million in new commercial real estate loans during fiscal 2003. Other
significant areas of lending activity by Jacksonville are construction and land
development loans, consumer loans and land loans, which, as of September 30,
2003, represented $50.0 million, or 16.7%, $18.7 million, or 6.3% and $6.1
million, or 2.0% of net loans. Home equity loans in the amount of $32.9 million
are included in the single family portfolio.

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

At September 30, 2003, Jacksonvilles limit on loans-to-one borrower was
$5.9 million, and its five largest loans or groups of loans-to-one borrower,
including related entities, aggregated $4.9 million, $4.9 million, $3.8
million, $3.7 million, and $2.5 million. The first group of loans totaling
$4.9 million consists of two loans for the development of single family
subdivisions, and twelve loans for the construction of a single family
residences. The second group of loans for $4.9 million consists of two loans
for the development of single family subdivisions, and four loans for the
construction of single family residences. The third group is made up of three
loans for the development of single family subdivisions, two loans for
commercial office buildings, five loans for the construction of single family
residences, and seven loans for the construction of 1-4 family residences. The
fourth largest loan totaling $3.6 million consists of one loan secured by
commercial real estate. The fifth largest group consists of four loans secured
by commercial real estate, one loan secured by a single family residence, one
loan secured by personal property, and one loan secured by stock.

2



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

|                             |                                          |                                   |   |                        |         |      |  |        |       |   |   |         |         |   |  |      |       |   |   |         |         |  |  |      |       |  
|---------------------------- | ---------------------------------------- | --------------------------------- | - | ---------------------- | ------- | ---- |  | ------ | ----- | - | - | ------- | ------- | - |  | ---- | ----- | - | - | ------- | ------- |  |  | ---- | ----- | -
|                             |                                          |                                   |   | September 30,         
|                             |                                          |                                   |   |                       
|                             |                                          |                                   |   | 2003                   |         | 2002 |  | 2001  
|                             |                                          |                                   |   |                        |         |      |  |       
|                             |                                          |                                   |   | Amount                 |         | %    |  | Amount |       | % |   | Amount  |         | %
|                             |                                          |                                   |   |                        |         |      |  |        |       |   |   |         |         |  
|                             |                                          |                                   |   | (Dollars in Thousands)
|MORTGAGE LOANS:              |                                          |                                   |   |                        |         |      |  |        |       |   |   |         |         |   |  |      |       |   |   |         |         |  |  |     
|                             | Single-family residential (1)            |                                   | $ | 196,972                |         |      |  | 65.7   | %     |   | $ | 189,459 |         |   |  | 67.8 | %     |   | $ | 181,563 |         |  |  | 68.4 | %    
|                             | Multi-family residential                 |                                   |   | 666                    |         |      |  | 0.2    |       |   |   | 1,042   |         |   |  | 0.4  |       |   |   | 454     |         |  |  | 0.2  |      
|                             | Commercial real estate                   |                                   |   | 26,448                 |         |      |  | 8.8    |       |   |   | 22,886  |         |   |  | 8.2  |       |   |   | 16,860  |         |  |  | 6.4  |      
|                             | Construction & land development          |                                   |   | 49,992                 |         |      |  | 16.7   |       |   |   | 40,804  |         |   |  | 14.6 |       |   |   | 39,917  |         |  |  | 15.0 |      
|                             | Land                                     |                                   |   | 6,132                  |         |      |  | 2.0    |       |   |   | 3,372   |         |   |  | 1.2  |       |   |   | 3,093   |         |  |  | 1.2  |      
|                             |                                          |                                   |   |                        |         |      |  |        |       |   |   |         |         |   |  |      |       |   |   |         |         |  |  |      |      
|                             |                                          | Total mortgage loans              |   | $                      | 280,210 |      |  |        | 93.4  | % |   | $       | 257,563 |   |  |      | 92.2  | % |   | $       | 241,887 |  |  |      | 91.2  | %
|                             |                                          |                                   |   |                        |         |      |  |        |       |   |   |         |         |   |  |      |       |   |   |         |         |  |  |      |      
|BUSINESS AND CONSUMER LOANS: |                                          |                                   |   |                        |         |      |  |        |       |   |   |         |         |   |  |      |       |   |   |         |         |  |  |     
|                             | Commercial business                      |                                   | $ | 786                    |         |      |  | 0.3    | %     |   | $ | 411     |         |   |  | 0.1  | %     |   | $ | 365     |         |  |  | 0.2  | %    
|                             | Consumer loans:                          |                                   |   |                        |         |      |  |        |       |   |   |         |         |   |  |      |       |   |   |         |         |  |  |      |      
|                             |                                          | Secured by deposits               |   |                        | 2,890   |      |  |        | 1.0   |   |   |         | 2,727   |   |  |      | 1.0   |   |   |         | 2,765   |  |  |      | 1.0   |  
|                             |                                          | Secured by vehicles               |   |                        | 9,124   |      |  |        | 3.0   |   |   |         | 10,498  |   |  |      | 3.8   |   |   |         | 11,475  |  |  |      | 4.3   |  
|                             |                                          | Personal real estate loans        |   |                        | 3,490   |      |  |        | 1.2   |   |   |         | 4,187   |   |  |      | 1.5   |   |   |         | 4,935   |  |  |      | 1.9   |  
|                             |                                          | Other                             |   |                        | 3,186   |      |  |        | 1.1   |   |   |         | 4,044   |   |  |      | 1.4   |   |   |         | 3,753   |  |  |      | 1.4   |  
|                             |                                          |                                   |   |                        |         |      |  |        |       |   |   |         |         |   |  |      |       |   |   |         |         |  |  |      |      
|                             |                                          | Total consumer loans              |   |                        | 18,690  |      |  |        | 6.3   |   |   |         | 21,456  |   |  |      | 7.7   |   |   |         | 22,928  |  |  |      | 8.6   |  
|                             |                                          |                                   |   |                        |         |      |  |        |       |   |   |         |         |   |  |      |       |   |   |         |         |  |  |      |      
|                             |                                          | Total business and
consumer loans |   |                        | 19,476  |      |  |        | 6.6   |   |   |         | 21,867  |   |  |      | 7.8   |   |   |         | 23,293  |  |  |      | 8.8   |  
|                             |                                          |                                   |   |                        |         |      |  |        |       |   |   |         |         |   |  |      |       |   |   |         |         |  |  |      |      
|                             |                                          | Total loans                       |   | $                      | 299,686 |      |  |        | 100.0 | % |   | $       | 279,430 |   |  |      | 100.0 | % |   | $       | 265,180 |  |  |      | 100.0 | %
|                             |                                          |                                   |   |                        |         |      |  |        |       |   |   |         |         |   |  |      |       |   |   |         |         |  |  |     
|Less:                        |                                          |                                   |   |                        |         |      |  |        |       |   |   |         |         |   |  |      |       |   |   |         |         |  |  |     
|                             | Undisbursed portion of loans in
process  |                                   | $ | 18,811                 |         |      |  |        |       |   | $ | 12,586  |         |   |  |      |       |   | $ | 17,041  |         |  |  |      |      
|                             | Unearned discounts                       |                                   |   | 12                     |         |      |  |        |       |   |   | 18      |         |   |  |      |       |   |   | 21      |         |  |  |      |      
|                             | Net deferred loan origination fees       |                                   |   | 432                    |         |      |  |        |       |   |   | 443     |         |   |  |      |       |   |   | 429     |         |  |  |      |      
|                             | Unrealized losses on loans held for
sale |                                   |   |                       |         |      |  |        |       |   |   |        |         |   |  |      |       |   |   |        |         |  |  |      |      
|                             | Allowance for loan losses                |                                   |   | 1,294                  |         |      |  |        |       |   |   | 1,292   |         |   |  |      |       |   |   | 1,257   |         |  |  |      |      
|                             |                                          |                                   |   |                        |         |      |  |        |       |   |   |         |         |   |  |      |       |   |   |         |         |  |  |     
|                             |                                          | Net loans                         |   | $                      | 279,137 |      |  |        |       |   |   | $       | 265,091 |   |  |      |       |   |   | $       | 246,432 |  |  |      |       |  
|                             |                                          |                                   |   |                        |         |      |  |        |       |   |   |         |         |   |  |      |       |   |   |         |         |  |  |     

|                             |                                          |                            |                                   |         |                        |         |      |      |        |      |   |         |         |         |  |      |       |      |  
|---------------------------- | ---------------------------------------- | -------------------------- | --------------------------------- | ------- | ---------------------- | ------- | ---- | ---- | ------ | ---- | - | ------- | ------- | ------- |  | ---- | ----- | ---- | -
|                             |                                          |                            |                                   |         | September 30,         
|                             |                                          |                            |                                   |         |                       
|                             |                                          |                            |                                   |         | 2000                   |         | 1999
|                             |                                          |                            |                                   |         |                        |         |     
|                             |                                          |                            |                                   |         | Amount                 |         | %    |      | Amount |      | %
|                             |                                          |                            |                                   |         |                        |         |      |      |        |      |  
|                             |                                          |                            |                                   |         | (Dollars in Thousands)
|MORTGAGE LOANS:              |                                          |                            |                                   |         |                        |         |      |      |        |      |   |         |         |         |  |     
|                             | Single-family residential (1)            |                            | $                                 | 171,041 |                        |         |      | 71.7 | %      |      | $ | 164,661 |         |         |  | 72.9 | %    
|                             | Multi-family residential                 |                            |                                   | 770     |                        |         |      | 0.3  |        |      |   | 819     |         |         |  | 0.4  |      
|                             | Commercial real estate                   |                            |                                   | 14,499  |                        |         |      | 6.1  |        |      |   | 12,000  |         |         |  | 5.3  |      
|                             | Construction and land development        |                            |                                   | 25,117  |                        |         |      | 10.5 |        |      |   | 21,171  |         |         |  | 9.4  |      
|                             | Land                                     |                            |                                   | 2,741   |                        |         |      | 1.1  |        |      |   | 3,172   |         |         |  | 1.4  |      
|                             |                                          |                            |                                   |         |                        |         |      |      |        |      |   |         |         |         |  |      |      
|                             |                                          |                            | Total mortgage loans              |         | $                      | 214,168 |      |      |        | 89.7 | % |         | $       | 201,823 |  |      |       | 89.4 | %
|                             |                                          |                            |                                   |         |                        |         |      |      |        |      |   |         |         |         |  |      |      
|BUSINESS AND CONSUMER LOANS: |                                          |                            |                                   |         |                        |         |      |      |        |      |   |         |         |         |  |     
|                             | Commercial business                      |                            | $                                 | 515     |                        |         |      | 0.2  | %      |      | $ | 6       |         |         |  |     | %    
|                             | Consumer loans:                          |                            |                                   |         |                        |         |      |      |        |      |   |         |         |         |  |      |      
|                             |                                          | Secured by deposits        |                                   |         | 2,350                  |         |      |      | 1.0    |      |   |         | 2,183   |         |  |      | 1.0   |     
|                             |                                          | Secured by vehicles        |                                   |         | 12,462                 |         |      |      | 5.2    |      |   |         | 12,414  |         |  |      | 5.4   |     
|                             |                                          | Personal real estate loans |                                   |         | 5,469                  |         |      |      | 2.3    |      |   |         | 5,399   |         |  |      | 2.4   |     
|                             |                                          | Other                      |                                   |         | 3,827                  |         |      |      | 1.6    |      |   |         | 4,019   |         |  |      | 1.8   |     
|                             |                                          |                            |                                   |         |                        |         |      |      |        |      |   |         |         |         |  |      |      
|                             |                                          | Total consumer loans       |                                   |         | 24,108                 |         |      |      | 10.1   |      |   |         | 24,015  |         |  |      | 10.6  |     
|                             |                                          |                            |                                   |         |                        |         |      |      |        |      |   |         |         |         |  |      |      
|                             |                                          |                            | Total business and consumer loans |         |                        | 24,623  |      |      |        | 10.3 |   |         |         | 24,021  |  |      |       | 10.6 |  
|                             |                                          |                            |                                   |         |                        |         |      |      |        |      |   |         |         |         |  |      |      
|                             |                                          | Total loans                |                                   | $       | 238,791                |         |      |      | 100.0  | %    |   | $       | 225,844 |         |  |      | 100.0 | %   
|                             |                                          |                            |                                   |         |                        |         |      |      |        |      |   |         |         |         |  |     
|Less:                        |                                          |                            |                                   |         |                        |         |      |      |        |      |   |         |         |         |  |     
|                             | Undisbursed portion of loans in process  |                            | $                                 | 10,224  |                        |         |      |      |        |      | $ | 7,835   |         |         |  |      |      
|                             | Unearned discounts                       |                            |                                   | 31      |                        |         |      |      |        |      |   | 34      |         |         |  |      |      
|                             | Net deferred loan origination fees       |                            |                                   | 455     |                        |         |      |      |        |      |   | 496     |         |         |  |      |      
|                             | Unrealized losses on loans held for
sale |                            |                                   |        |                        |         |      |      |        |      |   |        |         |         |  |      |      
|                             | Allowance for loan losses                |                            |                                   | 1,227   |                        |         |      |      |        |      |   | 1,212   |         |         |  |      |      
|                             |                                          |                            |                                   |         |                        |         |      |      |        |      |   |         |         |         |  |     
|                             |                                          | Net loans                  |                                   | $       | 226,854                |         |      |      |        |      |   | $       | 216,267 |         |  |      |       |     
|                             |                                          |                            |                                   |         |                        |         |      |      |        |      |   |         |         |         |  |     



---

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

3



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CONTRACTUAL PRINCIPAL REPAYMENTS. The following table sets forth certain
information at September 30, 2003, 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.

|                                  |       |   |                        |        |         |  |            |       |             |   |             |       |             |   |          |        |           |   |        |        |  |   |        |        | 
|--------------------------------- | ----- | - | ---------------------- | ------ | ------- |  | ---------- | ----- | ----------- | - | ----------- | ----- | ----------- | - | -------- | ------ | --------- | - | ------ | ------ |  | - | ------ | ------ | 
|                                  |       |   |                        |        |         |  | Due        |       |             |   |             |       | Due 3-5     |   | Due 5-10 |        | Due 10-15
|                                  |       |   | Due Before             |        | Before  |  | Due Before |       | Years after |   | Years after |       | Years after
|                                  |       |   | 9/30/04                |        | 9/30/05 |  | 9/30/06    |       | 9/30/03     |   | 9/30/03     |       | 9/30/03    
|                                  |       |   |                        |        |         |  |            |       |             |   |             |       |            
|                                  |       |   | (Dollars in Thousands)
|Single-family residential(1)      |       | $ | 1,085                  |        |         |  | 571        |       |             | $ | 628         |       |             | $ | 5,093    |        |           | $ | 27,873 |        |  | $ | 55,297 |       
|Multi-family residential          |       |   |                       |        |         |  |           |       |             |   |            |       |             |   |         |        |           |   | 252    |        |  |   |       |       
|Commercial real estate            |       |   | 664                    |        |         |  | 223        |       |             |   |            |       |             |   | 365      |        |           |   | 4,851  |        |  |   | 10,097 |       
|Construction and land development |       |   | 46,951                 |        |         |  | 3,041      |       |             |   |            |       |             |   |         |        |           |   |       |        |  |   |       |       
|Land                              |       |   | 1,522                  |        |         |  | 5          |       |             |   | 41          |       |             |   | 27       |        |           |   | 1,326  |        |  |   | 898    |       
|Commercial business               |       |   | 723                    |        |         |  | 63         |       |             |   |            |       |             |   |         |        |           |   |       |        |  |   |       |       
|Consumer                          |       |   | 3,543                  |        |         |  | 2,172      |       |             |   | 3,989       |       |             |   | 5,166    |        |           |   | 2,014  |        |  |   | 1,286  |       
|                                  |       |   |                        |        |         |  |            |       |             |   |             |       |             |   |          |        |           |   |        |        |  |   |        |       
|                                  | Total |   | $                      | 54,488 |         |  | $          | 6,075 |             |   | $           | 4,658 |             |   | $        | 10,651 |           |   | $      | 36,316 |  |   | $      | 67,578 | 
|                                  |       |   |                        |        |         |  |            |       |             |   |             |       |             |   |          |        |           |   |        |        |  |   |        |       

|                                  |       |   |                        |         |       |   |         |         | 
|--------------------------------- | ----- | - | ---------------------- | ------- | ----- | - | ------- | ------- | 
|                                  |       |   | Due More than          |         |       |   |        
|                                  |       |   | 15 Years after         |         |       |   |        
|                                  |       |   | 9/30/03                |         | Total
|                                  |       |   |                        |         |      
|                                  |       |   | (Dollars in Thousands)
|Single-family residential (1)     |       | $ | 106,425                |         |       | $ | 196,972 |        
|Multi-family residential          |       |   | 414                    |         |       |   | 666     |        
|Commercial real estate            |       |   | 10,248                 |         |       |   | 26,448  |        
|Construction and land development |       |   |                       |         |       |   | 49,992  |        
|Land                              |       |   | 2,313                  |         |       |   | 6,132   |        
|Commercial business               |       |   |                       |         |       |   | 786     |        
|Consumer                          |       |   | 520                    |         |       |   | 18,690  |        
|                                  |       |   |                        |         |       |   |         |        
|                                  | Total |   | $                      | 119,920 |       |   | $       | 299,686 | 
|                                  |       |   |                        |         |       |   |         |        



---

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

The following table sets forth the dollar amount of all loans, before net
items, due after one year from September 30, 2003 which have fixed interest
rates or which have floating or adjustable interest rates.

|                                  |       |   |                        |         |                  |   |             |        |  |   |         |         | 
|--------------------------------- | ----- | - | ---------------------- | ------- | ---------------- | - | ----------- | ------ |  | - | ------- | ------- | 
|                                  |       |   |                        |         |                  |   | Floating or |        |  |   |        
|                                  |       |   | Fixed Rates            |         | Adjustable-rates |   | Total      
|                                  |       |   |                        |         |                  |   |            
|                                  |       |   | (Dollars in Thousands)
|Single-family residential(1)      |       | $ | 155,065                |         |                  | $ | 40,822      |        |  | $ | 195,887 |        
|Multi-family residential          |       |   | 227                    |         |                  |   | 439         |        |  |   | 666     |        
|Commercial real estate            |       |   | 8,212                  |         |                  |   | 17,572      |        |  |   | 25,784  |        
|Construction and land development |       |   |                       |         |                  |   | 3,041       |        |  |   | 3,041   |        
|Land                              |       |   | 793                    |         |                  |   | 3,817       |        |  |   | 4,610   |        
|Commercial business               |       |   | 63                     |         |                  |   |            |        |  |   | 63      |        
|Consumer                          |       |   | 15,147                 |         |                  |   |            |        |  |   | 15,147  |        
|                                  |       |   |                        |         |                  |   |             |        |  |   |         |        
|                                  | Total |   | $                      | 179,507 |                  |   | $           | 65,691 |  |   | $       | 245,198 | 
|                                  |       |   |                        |         |                  |   |             |        |  |   |         |        



---

|(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

4



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##### 



clauses, which give Jacksonville the right to declare a
conventional loan immediately due and payable in the event, among other things,
that the borrower sells the real property subject to the mortgage and the loan
is not repaid.

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

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

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

Jacksonville originates both fixed- and adjustable-rate residential real
estate loans as market conditions dictate. Prior to fiscal 1999 Jacksonville
followed a policy of selling approximately 95% of its loans secured by first
mortgage liens on single-family residences (residential first mortgage loans)
with fixed rates and terms greater than 15 years to third parties while
retaining all of its variable-rate loans. However, during 2000 management
elected to portfolio a greater percentage of its fixed rate mortgage product
because of increased interest rates. During 2003 Jacksonville continued a
policy to sell a portion of the loans originated to the secondary market and
portfolio the balance. When loans are sold to others, except to the Federal
Home Loan Mortgage Corporation (FHLMC), servicing of the loans is usually
released to the buyers. At September 30, 2003, $91.2 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, most 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, 2003, $156.2 million
or 52.1% of Jacksonvilles total loans, before net items, were fixed-rate
single-family residential loans, and $40.8 million or 13.6% of such total loans
were adjustable-rate single-family residential mortgage loans. Of these
adjustable mortgages, $15.0 million, or 36.8%, have interest rates adjustable
in one year, and the remainder adjust at periods greater than one year up to
five years.

5



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

|                                                |                                   |                                           |        |                          |         |      |        |         |         |   |        |        |         | 
|----------------------------------------------- | --------------------------------- | ----------------------------------------- | ------ | ------------------------ | ------- | ---- | ------ | ------- | ------- | - | ------ | ------ | ------- | 
|                                                |                                   |                                           |        | Year Ended September 30,
|                                                |                                   |                                           |        |                         
|                                                |                                   |                                           |        | 2003                     |         | 2002 |        | 2001   
|                                                |                                   |                                           |        |                          |         |      |        |        
|                                                |                                   |                                           |        | (Dollars in Thousands)  
|LOAN ORIGINATIONS:                              |                                   |                                           |        |                          |         |      |        |         |         |   |        |       
|                                                | Single-family residential         |                                           | $      | 109,697                  |         |      | $      | 85,295  |         |   | $      | 70,931 |        
|                                                | Multi-family residential          |                                           |        | 109                      |         |      |        | 675     |         |   |        | 120    |        
|                                                | Land                              |                                           |        | 5,623                    |         |      |        | 1,447   |         |   |        | 590    |        
|                                                | Commercial real estate            |                                           |        | 11,069                   |         |      |        | 10,825  |         |   |        | 4,489  |        
|                                                | Construction and land development |                                           |        | 48,256                   |         |      |        | 45,659  |         |   |        | 45,536 |        
|                                                | Commercial business               |                                           |        | 501                      |         |      |        | 241     |         |   |        | 252    |        
|                                                | Consumer                          |                                           |        | 11,661                   |         |      |        | 11,725  |         |   |        | 11,944 |        
|                                                |                                   |                                           |        |                          |         |      |        |         |         |   |        |        |        
|                                                |                                   | Total loans originated                    |        |                          | 186,916 |      |        |         | 155,867 |   |        |        | 133,862 | 
|                                                | Purchases                         |                                           |        |                         |         |      |        |        |         |   |        |       |        
|                                                |                                   | Total loans originated and purchased      |        |                          | 186,916 |      |        |         | 155,867 |   |        |        | 133,862 | 
|                                                |                                   |                                           |        |                          |         |      |        |         |         |   |        |        |        
|SALES AND LOAN PRINCIPAL REDUCTIONS:            |                                   |                                           |        |                          |         |      |        |         |         |   |        |       
|                                                | Loans sold                        |                                           |        | 40,166                   |         |      |        | 39,208  |         |   |        | 20,933 |        
|                                                | Loan principal repayments         |                                           |        | 125,539                  |         |      |        | 102,306 |         |   |        | 86,377 |        
|                                                |                                   |                                           |        |                          |         |      |        |         |         |   |        |        |        
|                                                |                                   | Total loans sold and principal reductions |        |                          | 165,705 |      |        |         | 141,514 |   |        |        | 107,310 | 
|Increase (decrease) due to other items, net (1) |                                   |                                           | (955   | )                        |         |      | (103   | )       |         |   | (163   | )     
|                                                |                                   |                                           |        |                          |         |      |        |         |         |   |        |        |        
|Net increase (decrease) in loan portfolio       |                                   | $                                         | 20,256 |                          |         | $    | 14,250 |         |         | $ | 26,389 |       
|                                                |                                   |                                           |        |                          |         |      |        |         |         |   |        |        |        



---

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

SINGLE-FAMILY RESIDENTIAL LOANS. The primary lending activity of
Jacksonville is the origination of loans secured by first mortgage liens on
single-family residences. Jacksonville also offers second mortgage loans on
such properties including home improvement and home equity loans. At September
30, 2003, $197.0 million or 65.7% of Jacksonvilles total loan portfolio,
before net items, consisted of single-family residential loans.

The loan-to-value ratio, maturity and other provisions of the residential
first mortgage loans made by Jacksonville generally have reflected the policy
of making less than the maximum loan permissible under applicable regulations,
in accordance with sound lending practices, market conditions and underwriting
standards established by Jacksonville. All residential first mortgage loans,
except those made to facilitate the sale of such dwellings held as real estate
owned, are generally underwritten in conformance with current guidelines of the
FHLMC. Jacksonvilles lending policies on residential first mortgage loans
generally limit the maximum loan-to-value ratio to 97% of the lesser of the
appraised value or purchase price of the property and generally all residential
first mortgage loans in excess of an 80% loan-to-value ratio require private
mortgage insurance. Jacksonville makes a limited number of 100% loan to value
loans to those customers whose credit scores exceeded 700 with the requirement
of 30% private mortgage insurance coverage.

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

Jacksonville is aware that there are inherent risks in originating
fixed-rate residential first mortgage loans for its portfolio, especially
during periods of historically low interest rates, but recognizes the need to
respond to market demand for fixed-rate loans and to generate income from any
origination fees, where applicable, for such loans. To

6



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##### 



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 $212.5 million of loans to
FHLMC and has retained the servicing on all of these loans. Since that same
date, Jacksonville has sold $66.0 million of loans to the mortgage banking
company. During fiscal 2003, Jacksonville sold $33.3 million of loans to FHLMC
and $6.8 million to the mortgage banking company as compared to $29.0 million
of loans to FHLMC and $10.2 million to the mortgage banking company during
fiscal 2002. Loan sales were up primarily as a result of the increase in
originations during fiscal 2003.

During the year ended September 30, 2003, Jacksonville originated $109.7
million of single-family residential loans of which $95.9 million, or 87.4%,
were fixed rate and $13.8 million, or 12.6%, were adjustable rate. Of the
fixed-rate single-family residential loans originated during the period,
Jacksonville sold $33.3 million, or 34.7%, to FHLMC. The volume of
single-family residential loans originated increased by 28.6% from $85.3
million during fiscal 2002 as compared to $109.7 million during fiscal 2003 and
the percentage of sales of such originations decreased from 46.0% in fiscal
2002 to 36.6% in fiscal 2003. Single family loan originations increased in
fiscal 2003 primarily due to an increase in refinancing caused by lower
interest rates. During the year Jacksonville elected to portfolio a number of
its 15 and 30 year mortgage loan product. Jacksonville will reevaluate this
policy if there is a material and prolonged change in interest rates and may
elect to again sell most of its loan originations with terms of more than 15
years.

Since November 1980, Jacksonville has been offering adjustable-rate loans
in order to decrease the vulnerability of its operations to changes in interest
rates. Interest rate adjustment periods range from one to five years. The
demand for adjustable-rate loans in Jacksonvilles primary market area has been
a function of several factors, including the level of interest rates, the
expectations of changes in the level of interest rates and the difference
between the interest rates offered for fixed-rate loans and adjustable-rate
loans. The relative amount of fixed-rate and adjustable-rate residential loans
that can be originated at any time is 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 an effort
to originate and maintain a percentage of adjustable-rate residential first
mortgage loans, Jacksonville has offered various forms of adjustable-rate loans
combined with a policy of selling a portion of its 15 and 30 year fixed-rate
loans from its portfolio. As a result, at September 30, 2003, $40.8 million, or
20.7%, of the single-family residential loans in Jacksonvilles loan portfolio,
before net items, consisted of adjustable-rate loans.

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

Due to the generally lower rates of interest prevailing in prior 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 12.6%, 7.2%, and 3.7% of Jacksonvilles total
originations of single-family residential loans during the years ended
September 30, 2003, 2002, and 2001, respectively.

Adjustable-rate loans decrease the risks to Jacksonville 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

7



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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 $1.5
million as of September 30, 2003. 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.

HOME EQUITY LOANS. In recent years, Jacksonville has increased its
emphasis on the origination of home equity loans. Loans are secured by the
homestead property, and may not exceed 80% of the appraised value of the
property based on either the current market value as set forth by the County
Appraisal District or by a new appraisal prepared by a qualified person. These
loans are usually in a second lien position, but can be a first lien either
through paying off the existing first lien or by having no existing liens on
the property at the time the home equity loan is made. These loans are
typically made for a term of 20 years or less. These loans are usually at a
slightly higher rate of interest than most first lien loans and have lower
closing cost, making them very attractive for both the consumer and
Jacksonville. At September 30, 2003 Jacksonville had $32.9 million or 11.0 %
of the total loan portfolio, before net items, in home equity loans.

COMMERCIAL REAL ESTATE LOANS. At September 30, 2003, $26.4 million, or
8.8%, of Jacksonvilles total loan portfolio, before net items, consisted of
loans secured by existing commercial real estate. Of these commercial mortgage
loans, $532,000, or 2.0%, represented loans secured by real estate acquired in
satisfaction of debts previously contracted or by improvements on such
properties. Jacksonville currently originates a limited number of commercial
real estate loans. Commercial real estate loan originations for the years ended
September 30, 2003, 2002 and 2001 were respectively, $11.1 million, $10.8
million, and $4.5 million.

As of September 30, 2003, the commercial real estate loans in
Jacksonvilles portfolio not secured by real estate acquired in satisfaction of
debts previously contracted or improvements thereon totaled $25.9 million.
These loans have terms up to 30 years and have both fixed and adjustable rates.
At September 30, 2003, $17.9 million, or 69.0%, of the commercial real estate
loan portfolio not secured by real estate acquired in satisfaction of debts
previously contracted consisted of adjustable-rate loans.

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

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

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

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

CONSTRUCTION AND LAND DEVELOPMENT LOANS. At September 30, 2003,
construction and land development loans totaled $50.0 million or 16.7% of the
total loan portfolio, before net items.

8



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##### 



Jacksonville makes construction loans to individuals for the construction
of their residences. During recent years, it expanded its construction lending
activities to include lending to developers for the construction of
single-family subdivisions and residences. Because Jacksonville views
construction loans as involving greater risk than permanent single-family
residential loans, it applies stricter underwriting standards to them.
Construction and land development loan originations increased during the year
ended September 30, 2003 to $48.3 million from $45.7 million during fiscal
2002.

Construction and land development 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 and land
development loans are only made to individuals and to developers who have a
sound financial and operational reputation in the market area. The loans to
individuals are structured to be converted to permanent loans at the end of the
construction phase, which typically is six months but may be extended for 30-
or 60-day periods for good reason. Construction and land development loans have
rates and terms which generally exceed the non-construction loans then offered
by Jacksonville except that during the construction phase the borrower normally
only pays interest on the loan. Funds are released periodically pursuant to a
construction-completion schedule and only after an on-site inspection by an
employee or agent of Jacksonville. Jacksonville generally attempts to mitigate
the risks associated with construction lending by, among other things, lending
primarily in its market area and using low loan-to-value ratios in the
underwriting process. The maximum loan to value ratio is 80% except for a small
amount of loans that have private mortgage insurance. Construction and land
development 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.

LAND LOANS. As of September 30, 2003, land loans totaled $6.1 million or
2.0% of the total loan portfolio, before net items. As of that date,
Jacksonville had 95 land loans in its loan portfolio, over 90% of which were
utilized for ranching, agricultural or residential 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, 2003, was
approximately $65,000.

CONSUMER LOANS. At September 30, 2003, consumer loans totaled $18.7
million or 6.3% of the total loan portfolio, before net items, and consisted
primarily of loans secured by deposits, loans secured by vehicles, personal
real estate loans and loans to purchase personal property. Loans secured by
deposits total $2.9 million at September 30, 2003. A loan secured by a deposit
at Jacksonville is structured to have a term that ends on the same date as the
maturity date of the certificate securing it or if secured by a statement
savings account has a one-year term with a hold on withdrawals that would
result in the balance being lower than the loan balance. Typically these loans
require quarterly payments of interest only. Jacksonville also makes loans to
individuals for future home sites and for additional property adjacent to their
existing residence, and for small 1 to 4 family residences. 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, 2003. All of these loans are secured by the purchased land,
but because these loans are typically for $40,000 or less they are not
underwritten in the same manner as the Banks other mortgage loans.
Jacksonville relies on the general creditworthiness of the borrower and uses
tax valuations or limited appraisals to determine the value of the property. In
some cases a title search is obtained from a title insurance company rather
than a title policy. At September 30, 2003, the bank had 216 personal real
estate loans with an average balance of $16,000. Jacksonvilles vehicle loan
portfolio totaled $9.1 million at September 30, 2003. Jacksonville makes both
new and used vehicle loans. Most all used vehicle loans are originated at
higher interest rates than those rates on new vehicle loans. The Bank does not
purchase vehicle loans from dealers. The term for vehicle loans is typically
six months to five years with monthly payments of principal and interest.

MULTI-FAMILY AND COMMERCIAL BUSINESS LOANS. At September 30, 2003,
$666,000 or 0.2%, and $786,000, or 0.3%, 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 eight multi-family loans
in Jacksonvilles loan portfolio as of September 30, 2003, the largest loan had
a principal amount of $246,000 which represented 36.9% of the

9



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multi-family loan
portfolio. As of September 30, 2003, Jacksonville had 32 commercial business
loans, the largest having a balance of $224,000 which is secured by furniture
and inventory.

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

The charging of points, in most cases, was limited during fiscal 2003
because of market conditions and strong competition in the one-to-four family
residential loans in the East Texas market. Most financial institutions charged
no points on these loan products; however, primarily on low principal amount
residential mortgages and commercial loans, Jacksonville continued to charge a
loan fee.

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
commitment is subsequently exercised during the commitment period, the
remaining unamortized commitment fee at the time of exercise is recognized over
the life of the loan as an adjustment of yield. At September 30, 2003,
Jacksonville had $432,000 of loan fees which had been deferred and are being
recognized as income over the life of the related loans. See Note 2 to the
Consolidated Financial Statements.

ASSET QUALITY

DELINQUENT LOANS. The following table sets forth information concerning
delinquent loans at September 30, 2003, 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.

|                      |                  |                        |   |                        |       |              |  |                        |      |            |   |        |   |            |  |   |   |   |   |   |   |  |  |   |   |  
|--------------------- | ---------------- | ---------------------- | - | ---------------------- | ----- | ------------ |  | ---------------------- | ---- | ---------- | - | ------ | - | ---------- |  | - | - | - | - | - | - |  |  | - | - | -
|                      |                  |                        |   | Single-family          |       | Multi-family |  |                        |      |            |   |        |   |           
|                      |                  |                        |   | Residential            |       | Residential  |  | Commercial Real Estate
|                      |                  |                        |   |                        |       |              |  |                       
|                      |                  |                        |   | Amount                 |       | Percentage   |  | Amount                 |      | Percentage |   | Amount |   | Percentage
|                      |                  |                        |   |                        |       |              |  |                        |      |            |   |        |   |           
|                      |                  |                        |   | (Dollars in Thousands)
|Loans delinquent for: |                  |                        |   |                        |       |              |  |                        |      |            |   |        |   |            |  |   |   |   |   |   |   |  |  |  
|                      | 30-59 days       |                        | $ | 38                     |       |              |  | 2.1                    | %    |            | $ |       |   |            |  |  | % |   | $ |  |   |  |  |  | %
|                      | 60-89 days       |                        |   | 641                    |       |              |  | 35.1                   |      |            |   |       |   |            |  |  |   |   |   |  |   |  |  |  |  
|                      | 90 days and over |                        |   | 586                    |       |              |  | 32.0                   |      |            |   |       |   |            |  |  |   |   |   |  |   |  |  |  |  
|                      |                  |                        |   |                        |       |              |  |                        |      |            |   |        |   |            |  |   |   |   |   |   |   |  |  |   |  
|                      |                  | Total
delinquent
loans |   | $                      | 1,265 |              |  |                        | 69.2 | %          |   | $      |  |            |  |   |  | % |   | $ |  |  |  |   |  | %
|                      |                  |                        |   |                        |       |              |  |                        |      |            |   |        |   |            |  |   |   |   |   |   |   |  |  |   |  

10



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##### 



|                      |                  |                        |   |                        |   |            |  |          |   |            |   |        |     |            |  |     |     |   |   |     |     |  |  |      |      |  
|--------------------- | ---------------- | ---------------------- | - | ---------------------- | - | ---------- |  | -------- | - | ---------- | - | ------ | --- | ---------- |  | --- | --- | - | - | --- | --- |  |  | ---- | ---- | -
|                      |                  |                        |   | Construction           |   | Land       |  | Consumer
|                      |                  |                        |   |                        |   |            |  |         
|                      |                  |                        |   | Amount                 |   | Percentage |  | Amount   |   | Percentage |   | Amount |     | Percentage
|                      |                  |                        |   |                        |   |            |  |          |   |            |   |        |     |           
|                      |                  |                        |   | (Dollars in Thousands)
|Loans delinquent for: |                  |                        |   |                        |   |            |  |          |   |            |   |        |     |            |  |     |     |   |   |     |     |  |  |     
|                      | 30-59 days       |                        | $ |                       |   |            |  |         | % |            | $ | 65     |     |            |  | 3.6 | %   |   | $ | 106 |     |  |  | 5.8  | %   
|                      | 60-89 days       |                        |   |                       |   |            |  |         |   |            |   | 20     |     |            |  | 1.1 |     |   |   | 77  |     |  |  | 4.2  |     
|                      | 90 days and over |                        |   |                       |   |            |  |         |   |            |   | 94     |     |            |  | 5.1 |     |   |   | 202 |     |  |  | 11.0 |     
|                      |                  |                        |   |                        |   |            |  |          |   |            |   |        |     |            |  |     |     |   |   |     |     |  |  |      |     
|                      |                  | Total
delinquent
loans |   | $                      |  |            |  |          |  | %          |   | $      | 179 |            |  |     | 9.8 | % |   | $   | 385 |  |  |      | 21.0 | %
|                      |                  |                        |   |                        |   |            |  |          |   |            |   |        |     |            |  |     |     |   |   |     |     |  |  |      |     

|                      |                  |                        |   |                        |       |            |  |      |       |  
|--------------------- | ---------------- | ---------------------- | - | ---------------------- | ----- | ---------- |  | ---- | ----- | -
|                      |                  |                        |   | Total                 
|                      |                  |                        |   |                       
|                      |                  |                        |   | Amount                 |       | Percentage
|                      |                  |                        |   |                        |       |           
|                      |                  |                        |   | (Dollars in Thousands)
|Loans delinquent for: |                  |                        |   |                        |       |            |  |     
|                      | 30-59 days       |                        | $ | 209                    |       |            |  | 11.5 | %    
|                      | 60-89 days       |                        |   | 738                    |       |            |  | 40.4 |      
|                      | 90 days and over |                        |   | 882                    |       |            |  | 48.1 |      
|                      |                  |                        |   |                        |       |            |  |      |      
|                      |                  | Total delinquent loans |   | $                      | 1,829 |            |  |      | 100.0 | %
|                      |                  |                        |   |                        |       |            |  |      |      

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.

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

As the economy has improved in its market area in recent years,
Jacksonville has reduced 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. 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 Board of Directors.

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

11



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##### 



improvement in economic conditions in Jacksonvilles
market area and through the implementation of the REO
Policy, Jacksonvilles REO amounted to $218,000, $87,000, and $63,000 as of
September 30, 2003, 2002, and 2001 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, 2003, Jacksonville
had no REO sold and accounted for by the deposit method.

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

|                                                                                               |                             |                               |                          |       |                        |     |      |     |      |     |      |     |      |     |     |     |     |     |     |     |     |     | 
|---------------------------------------------------------------------------------------------- | --------------------------- | ----------------------------- | ------------------------ | ----- | ---------------------- | --- | ---- | --- | ---- | --- | ---- | --- | ---- | --- | --- | --- | --- | --- | --- | --- | --- | --- | 
|                                                                                               |                             |                               |                          |       | September 30,         
|                                                                                               |                             |                               |                          |       |                       
|                                                                                               |                             |                               |                          |       | 2003                   |     | 2002 |     | 2001 |     | 2000 |     | 1999
|                                                                                               |                             |                               |                          |       |                        |     |      |     |      |     |      |     |     
|                                                                                               |                             |                               |                          |       | (Dollars in Thousands)
|Non-accruing loans:                                                                            |                             |                               |                          |       |                        |     |      |     |      |     |      |     |      |     |     |     |     |     |     |    
|                                                                                               |                             | Single-family residential (1) |                          | $     | 586                    |     |      | $   | 407  |     |      | $   | 401  |     |     | $   | 338 |     |     | $   | 435 |    
|                                                                                               |                             | Multi-family residential      |                          |       |                       |     |      |     |     |     |      |     |     |     |     |     |    |     |     |     |    |    
|                                                                                               |                             | Commercial                    |                          |       |                       |     |      |     |     |     |      |     |     |     |     |     |    |     |     |     |    |    
|                                                                                               |                             | Construction                  |                          |       |                       |     |      |     |     |     |      |     |     |     |     |     |    |     |     |     |    |    
|                                                                                               |                             | Land                          |                          |       | 94                     |     |      |     | 104  |     |      |     | 89   |     |     |     |    |     |     |     |    |    
|                                                                                               |                             | Commercial business           |                          |       |                       |     |      |     |     |     |      |     |     |     |     |     |    |     |     |     |    |    
|                                                                                               |                             | Consumer                      |                          |       | 202                    |     |      |     | 183  |     |      |     | 134  |     |     |     | 134 |     |     |     | 109 |    
|                                                                                               |                             |                               |                          |       |                        |     |      |     |      |     |      |     |      |     |     |     |     |     |     |     |     |    
|                                                                                               |                             |                               | Total non-accruing loans |       |                        | 882 |      |     |      | 694 |      |     |      | 624 |     |     |     | 472 |     |     |     | 544 | 
|Accruing loans 90 days or more delinquent                                                      |                             |                               |                         |       |                        |     |     |     |      |     |     |     |      |     |    |     |     |     |    |    
|                                                                                               |                             |                               |                          |       |                        |     |      |     |      |     |      |     |      |     |     |     |     |     |     |     |     |    
|                                                                                               | Total non-performing loans  |                               |                          | 882   |                        |     |      | 694 |      |     |      | 624 |      |     |     | 472 |     |     |     | 544 |    
|                                                                                               |                             |                               |                          |       |                        |     |      |     |      |     |      |     |      |     |     |     |     |     |     |     |     |    
|Real estate owned (2)                                                                          |                             |                               | 218                      |       |                        |     | 87   |     |      |     | 63   |     |      |     | 124 |     |     |     | 346 |    
|                                                                                               |                             |                               |                          |       |                        |     |      |     |      |     |      |     |      |     |     |     |     |     |     |     |     |    
|                                                                                               | Total non-performing assets |                               | $                        | 1,100 |                        |     | $    | 781 |      |     | $    | 687 |      |     | $   | 596 |     |     | $   | 890 |    
|                                                                                               |                             |                               |                          |       |                        |     |      |     |      |     |      |     |      |     |     |     |     |     |     |     |     |    
|Troubled debt restructurings                                                                   |                             |                               |                         |       |                        | $   | 310  |     |      | $   | 320  |     |      | $   | 328 |     |     | $   | 338 |    
|                                                                                               |                             |                               |                          |       |                        |     |      |     |      |     |      |     |      |     |     |     |     |     |     |     |     |    
|Total non-performing loans and troubled
debt restructurings as a percentage of
total net loans |                             |                               | .32                      | %     |                        |     | .38  | %   |      |     | .41  | %   |      |     | .35 | %   |     |     | .41 | %  
|                                                                                               |                             |                               |                          |       |                        |     |      |     |      |     |      |     |      |     |     |     |     |     |     |     |     |    
|Total non-performing assets and troubled
debt restructurings as a percentage of
total
assets   |                             |                               | .23                      | %     |                        |     | .26  | %   |      |     | .29  | %   |      |     | .31 | %   |     |     | .42 | %  
|                                                                                               |                             |                               |                          |       |                        |     |      |     |      |     |      |     |      |     |     |     |     |     |     |    



---

|(1) |  | Includes first and second liens on single-family residences.                                                                               
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes real estate acquired by foreclosure, by deed in lieu of
foreclosure and deemed in-substance foreclosure net of specified reserves.

At September 30, 2003, 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 2003,
2002, and 2001 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 $61,000, $41,000, and $63,000, respectively. Jacksonville has not
committed to lend additional

12



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##### 



funds to debtors whose loans have been modified.
See Note 5 to the Consolidated Financial
Statements. During the year ended September 30, 2003, 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
depository 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, 2003 consisted of $2.2
million of assets classified as special mention, $2.7 million of assets
classified as substandard, and none classified as doubtful or loss. Of assets
classified substandard, $218,000, or 8.2%, were residential real estate parcels
acquired as real estate owned, $1,697,000, or 63.6%, were single-family
residential loans, and $336,000, or 12.6%, were commercial real estate loans.
The remaining balance of $402,000, or 15.1%, was in consumer loans and $17,000,
or 0.6%, in repossessed autos. Included in assets classified as special
mention is $1.7 million in loans in bankruptcy which are not delinquent.
Nondelinquent loans in bankruptcy were not classified as special mention for
fiscal years end 2002 and 2001.

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

|                |                 |                         |   |                        |       |      |   |       |       |  |   |       |       | 
|--------------- | --------------- | ----------------------- | - | ---------------------- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                |                 |                         |   | September 30,         
|                |                 |                         |   |                       
|                |                 |                         |   | 2003                   |       | 2002 |   | 2001 
|                |                 |                         |   |                        |       |      |   |      
|                |                 |                         |   | (Dollars in Thousands)
|Classification: |                 |                         |   |                        |       |      |   |       |       |  |   |      
|                | Special mention |                         | $ | 2,158                  |       |      | $ | 4     |       |  | $ | 58    |      
|                | Substandard     |                         |   | 2,670                  |       |      |   | 2,420 |       |  |   | 1,960 |      
|                | Doubtful        |                         |   |                       |       |      |   |      |       |  |   |      |      
|                | Loss            |                         |   |                       |       |      |   |      |       |  |   |      |      
|                |                 |                         |   |                        |       |      |   |       |       |  |   |       |      
|                |                 | Total
classified
assets |   | $                      | 4,828 |      |   | $     | 2,424 |  |   | $     | 2,018 | 
|                |                 |                         |   |                        |       |      |   |       |       |  |   |       |      

---

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 2003 non-performing loans increased to $882,000 while
net charge-offs for the period totaled $160,000. The Companys level of net
loans outstanding increased $14.0 million. 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 $162,000 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,

13



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##### 



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, 2003, Jacksonvilles allowance for loan losses amounted
to $ 1.3 million, an increase of $2,000 from September 30, 2002.

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

|                                                                      |                |   |                          |      |      |   |                        |     |      |   |         |     |   |   |         |     |   |   |         |     |  
|--------------------------------------------------------------------- | -------------- | - | ------------------------ | ---- | ---- | - | ---------------------- | --- | ---- | - | ------- | --- | - | - | ------- | --- | - | - | ------- | --- | -
|                                                                      |                |   | Year Ended September 30,
|                                                                      |                |   |                         
|                                                                      |                |   | 2003                     |      | 2002 |   | 2001                   |     | 2000 |   | 1999   
|                                                                      |                |   |                          |      |      |   |                        |     |      |   |        
|                                                                      |                |   |                          |      |      |   | (Dollars in Thousands) |     |      |   |        
|Total net loans outstanding                                           |                | $ | 279,137                  |      |      | $ | 265,091                |     |      | $ | 246,432 |     |   | $ | 226,854 |     |   | $ | 216,267 |    
|                                                                      |                |   |                          |      |      |   |                        |     |      |   |         |     |   |   |         |     |   |   |         |    
|Average loans outstanding                                             |                | $ | 275,397                  |      |      | $ | 260,454                |     |      | $ | 234,339 |     |   | $ | 222,200 |     |   | $ | 205,057 |    
|                                                                      |                |   |                          |      |      |   |                        |     |      |   |         |     |   |   |         |     |   |   |         |    
|Balance at beginning of period                                        |                | $ | 1,292                    |      |      | $ | 1,257                  |     |      | $ | 1,227   |     |   | $ | 1,212   |     |   | $ | 1,170   |    
|Charge-offs                                                           |                |   |                          |      |      |   |                        |     |      |   |         |     |   |   |         |     |   |   |         |    
|                                                                      | Consumer loans |   |                          | (161 | )    |   |                        | (70 | )    |   |         | (58 | ) |   |         | (54 | ) |   |         | (18 | )
|Recoveries                                                            |                |   | 1                        |      |      |   | 3                      |     |      |   | 3       |     |   |   |        |     |   |   |        |    
|                                                                      |                |   |                          |      |      |   |                        |     |      |   |         |     |   |   |         |     |   |   |         |    
|Net charge-offs                                                       |                |   | (160                     | )    |      |   | (67                    | )   |      |   | (55     | )   |   |   | (54     | )   |   |   | (18     | )  
|Provision for losses on loans                                         |                |   | 162                      |      |      |   | 102                    |     |      |   | 85      |     |   |   | 69      |     |   |   | 60      |    
|                                                                      |                |   |                          |      |      |   |                        |     |      |   |         |     |   |   |         |     |   |   |         |    
|Balance at end of period                                              |                | $ | 1,294                    |      |      | $ | 1,292                  |     |      | $ | 1,257   |     |   | $ | 1,227   |     |   | $ | 1,212   |    
|                                                                      |                |   |                          |      |      |   |                        |     |      |   |         |     |   |   |         |     |   |   |         |    
|Allowance for loan losses as
a percent of total net loans
outstanding |                |   | .46                      | %    |      |   | .49                    | %   |      |   | .51     | %   |   |   | .54     | %   |   |   | .56     | %  
|                                                                      |                |   |                          |      |      |   |                        |     |      |   |         |     |   |   |         |     |   |   |         |    
|Ratio of net charge-offs to
average loans outstanding                 |                |   | .06                      | %    |      |   | .03                    | %   |      |   | .02     | %   |   |   | .02     | %   |   |   | .01     | %  
|                                                                      |                |   |                          |      |      |   |                        |     |      |   |         |     |   |   |         |     |   |   |         |    

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.

|                          |                                 |   |                        |       |       |  |             |       |       |   |        |       |             |  |      |       |   |   |             |       |  |  |      |       |  
|------------------------- | ------------------------------- | - | ---------------------- | ----- | ----- |  | ----------- | ----- | ----- | - | ------ | ----- | ----------- |  | ---- | ----- | - | - | ----------- | ----- |  |  | ---- | ----- | -
|                          |                                 |   | September 30,         
|                          |                                 |   |                       
|                          |                                 |   | 2003                   |       | 2002  |  | 2001       
|                          |                                 |   |                        |       |       |  |            
|                          |                                 |   |                        |       |       |  | % of Loan   |       |       |   |        |       | % of Loan   |  |      |       |   |   | % of Loan  
|                          |                                 |   |                        |       |       |  | in Each     |       |       |   |        |       | in Each     |  |      |       |   |   | in Each    
|                          |                                 |   |                        |       |       |  | Category to |       |       |   |        |       | Category to |  |      |       |   |   | Category to
|                          |                                 |   |                        |       |       |  | Total       |       |       |   |        |       | Total       |  |      |       |   |   | Total      
|                          |                                 |   | Amount                 |       | Loans |  | Amount      |       | Loans |   | Amount |       | Loans      
|                          |                                 |   |                        |       |       |  |             |       |       |   |        |       |            
|                          |                                 |   | (Dollars in Thousands)
|Mortgage loans            |                                 | $ | 1,074                  |       |       |  | 83.0        | %     |       | $ | 1,097  |       |             |  | 84.9 | %     |   | $ | 997         |       |  |  | 79.3 | %    
|Commercial business loans |                                 |   | 25                     |       |       |  | 1.9         |       |       |   |       |       |             |  |     |       |   |   |            |       |  |  |     |      
|Consumer loans            |                                 |   | 195                    |       |       |  | 15.1        |       |       |   | 195    |       |             |  | 15.1 |       |   |   | 260         |       |  |  | 20.7 |      
|                          |                                 |   |                        |       |       |  |             |       |       |   |        |       |             |  |      |       |   |   |             |       |  |  |      |      
|                          | Total allowance for loan losses |   | $                      | 1,294 |       |  |             | 100.0 | %     |   | $      | 1,292 |             |  |      | 100.0 | % |   | $           | 1,257 |  |  |      | 100.0 | %
|                          |                                 |   |                        |       |       |  |             |       |       |   |        |       |             |  |      |       |   |   |             |       |  |  |      |      

|                          |                                 |   |                        |       |       |  |             |       |       |   |     |       |             |  |      |       |  
|------------------------- | ------------------------------- | - | ---------------------- | ----- | ----- |  | ----------- | ----- | ----- | - | --- | ----- | ----------- |  | ---- | ----- | -
|                          |                                 |   | September 30,         
|                          |                                 |   |                       
|                          |                                 |   | 2000                   |       | 1999 
|                          |                                 |   |                        |       |      
|                          |                                 |   |                        |       |       |  | % of Loans  |       |       |   |     |       | % of Loan  
|                          |                                 |   |                        |       |       |  | in Each     |       |       |   |     |       | in Each    
|                          |                                 |   |                        |       |       |  | Category to |       |       |   |     |       | Category to
|                          |                                 |   |                        |       |       |  | Total       |       |       |   |     |       | Total      
|                          |                                 |   | Amount                 |       | Loans |  | Amount      |       | Loans
|                          |                                 |   |                        |       |       |  |             |       |      
|                          |                                 |   | (Dollars in Thousands)
|Mortgage loans            |                                 | $ | 962                    |       |       |  | 78.4        | %     |       | $ | 957 |       |             |  | 79.0 | %    
|Commercial business loans |                                 |   |                       |       |       |  |            |       |       |   |    |       |             |  |     |      
|Consumer loans            |                                 |   | 265                    |       |       |  | 21.6        |       |       |   | 255 |       |             |  | 21.0 |      
|                          |                                 |   |                        |       |       |  |             |       |       |   |     |       |             |  |      |      
|                          | Total allowance for loan losses |   | $                      | 1,227 |       |  |             | 100.0 | %     |   | $   | 1,212 |             |  |      | 100.0 | %
|                          |                                 |   |                        |       |       |  |             |       |       |   |     |       |             |  |      |      

14



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MORTGAGE-BACKED SECURITIES

Jacksonville has invested in a portfolio of mortgage-backed securities
which are insured or guaranteed by the FHLMC, FNMA or the GNMA.
Mortgage-backed securities increase the quality of Jacksonvilles assets by
virtue of the guarantees that back them, are more liquid than individual
mortgage loans and may be used to collateralize borrowings or other obligations
of Jacksonville. In addition, at September 30, 2003, $75.8 million of
Jacksonvilles mortgage-backed securities consist of pools of adjustable-rate
mortgages. Mortgage-backed securities of this type serve to reduce the interest
rate risk associated with rising interest rates.

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

|                                                            |           |   |                        |         |      |   |        |         |   |   |        |         |  
|----------------------------------------------------------- | --------- | - | ---------------------- | ------- | ---- | - | ------ | ------- | - | - | ------ | ------- | -
|                                                            |           |   | September 30,         
|                                                            |           |   |                       
|                                                            |           |   | 2003                   |         | 2002 |   | 2001  
|                                                            |           |   |                        |         |      |   |       
|                                                            |           |   | (Dollars in Thousands)
|Mortgage-backed securities at beginning of period - at cost |           | $ | 89,391                 |         |      | $ | 58,543 |         |   | $ | 33,777 |        
|                                                            | Purchases |   |                        | 91,254  |      |   |        | 67,527  |   |   |        | 46,965  |  
|                                                            | Sales     |   |                        |        |      |   |        |        |   |   |        |        |  
|                                                            | Repayment |   |                        | (72,633 | )    |   |        | (36,679 | ) |   |        | (22,199 | )
|                                                            |           |   |                        |         |      |   |        |         |   |   |        |        
|Mortgage-backed securities at end of period - at cost       |           | $ | 108,012                |         |      | $ | 89,391 |         |   | $ | 58,543 |        
|                                                            |           |   |                        |         |      |   |        |         |   |   |        |        
|Weighted average yield at end of period                     |           |   | 3.83                   | %       |      |   | 4.81   | %       |   |   | 6.42   | %      
|                                                            |           |   |                        |         |      |   |        |         |   |   |        |        

At September 30, 2003, Jacksonvilles mortgage-backed securities had an
amortized cost value and estimated market value of $108.0 million and $107.4
million, respectively. Of the $108.0 million portfolio, $2.7 million was
scheduled to mature in five years or less; $8.3 million was scheduled to mature
in over five years but less than ten years; and $97.1 million was scheduled to
mature after ten years. Due to prepayments of the underlying loans, the actual
maturities of mortgage-backed securities generally are substantially less than
the scheduled maturities.

All mortgage-backed securities in the portfolio qualify for regulatory
liquidity under Texas state savings bank regulations. Of the $108.0 million of
mortgage backed securities on September 30, 2003, $32.2 million consisted of
fixed rate and $75.8 million were adjustable rate securities. Of Jacksonvilles
total investment in mortgage-backed securities at September 30, 2003, $7.8
million consisted of FNMA certificates, $885,000 consisted of GNMA certificates
and $33.7 million consisted of FHLMC certificates and $65.7 million in C.M.O.
certificates. See Note 4 to the Consolidated Financial Statements for
additional information.

The actual maturity of a mortgage-backed security may be less than its
stated maturity due to prepayments of the underlying mortgages. Prepayments
that are faster than anticipated may shorten the life of the security and
adversely affect its yield to maturity. The yield is based upon the interest
income and the amortization
of any premium or discount related to the mortgage-backed security. In
accordance with generally accepted accounting principles, premiums and
discounts are amortized over the estimated lives of the loans, which decrease
and increase interest income, respectively. The prepayment assumptions used to
determine the amortization period for premiums and discounts can significantly
affect the yield of the mortgage-backed security, and these assumptions are
reviewed periodically to reflect actual prepayments. Although prepayments of
underlying mortgages depend on many factors, including the type of mortgages,
the coupon rate, the age of mortgages, the geographical location of the
underlying real estate collateralizing the mortgages and general levels of
market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is
the most significant determinant of the rate of prepayments. During periods of
falling mortgage interest rates, if the coupon rate of the underlying mortgages
exceeds the prevailing market interest rates offered for mortgage loans,
refinancing generally increases and accelerates the prepayment of the
underlying mortgages and the related security. Under such circumstances,
Jacksonville may be subject to reinvestment risk because to the extent that
Jacksonvilles mortgage-backed securities amortize or prepay faster than
anticipated, Jacksonville may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate.

15



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Interest rates declined during 2003. Should they continue to decline or
remain the same, the Companys interest income will be adversely impacted since
the Company will be unable to replace maturing securities with new securities
of comparable yields.

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, the Executive Vice President, the Senior Vice
President and the First Vice President. The members of the Investment Committee
are: Robert Brown, Jerry Chancellor and Bill W. Taylor, Jerry Hammons and Chan
Campsey. 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, 2003, Jacksonville had
U.S. Government agency held-to-maturity securities with an amortized cost of
$2.5 million and an estimated market value of $2.6 million. See Note 3 to the
Consolidated Financial Statement for further information. At September 30,
2003, Jacksonville held U.S. Government Agency securities as available-for-sale
with an amortized cost of $46.0 million and an estimated market value of $46.0
million.

The following table sets forth Jacksonvilles investment and
mortgage-backed securities at the dates indicated.

|                        |                             |                                                 |  |                        |         |      |  |        |         |  |  |        |        | 
|----------------------- | --------------------------- | ----------------------------------------------- |  | ---------------------- | ------- | ---- |  | ------ | ------- |  |  | ------ | ------ | 
|                        |                             |                                                 |  | September 30,         
|                        |                             |                                                 |  |                       
|                        |                             |                                                 |  | 2003                   |         | 2002 |  | 2001  
|                        |                             |                                                 |  |                        |         |      |  |       
|                        |                             |                                                 |  | (Dollars in Thousands)
|Available for sale (1): |                             |                                                 |  |                        |         |      |  |        |         |  |  |       
|                        | Mortgage-backed securities  |                                                 |  |                        |         |      |  |        |         |  |  |        |       
|                        |                             | CMO Certificates                                |  | $                      | 65,338  |      |  | $      | 10,808  |  |  | $      | 29,023 | 
|                        |                             | FNMA Certificates                               |  |                        | 2,961   |      |  |        | 29,936  |  |  |        | 9,575  | 
|                        |                             | FHLMC Certificates                              |  |                        | 30,808  |      |  |        | 9,584   |  |  |        | 2,689  | 
|                        |                             | GNMA Certificates                               |  |                        | 711     |      |  |        | 1,709   |  |  |        | 2,968  | 
|                        | U.S. agency securities      |                                                 |  | 45,944                 |         |      |  | 29,208 |         |  |  | 14,273 |       
|                        |                             |                                                 |  |                        |         |      |  |        |         |  |  |       
|                        |                             | Total available for sale                        |  |                        | 145,762 |      |  |        | 81,245  |  |  |        | 58,528 | 
|                        |                             |                                                 |  |                        |         |      |  |        |         |  |  |       
|Held to maturity(1):    |                             |                                                 |  |                        |         |      |  |        |         |  |  |       
|                        | Mortgage-backed securities: |                                                 |  |                        |         |      |  |        |         |  |  |        |       
|                        |                             | CMO Certificates                                |  |                        |        |      |  |        | 22,636  |  |  |        | 10,016 | 
|                        |                             | FNMA Certificates                               |  |                        | 4,824   |      |  |        | 10,142  |  |  |        | 3,523  | 
|                        |                             | FHLMC Certificates                              |  |                        | 2,456   |      |  |        | 4,627   |  |  |        | 695    | 
|                        |                             | GNMA Certificates                               |  |                        | 181     |      |  |        | 283     |  |  |        | 369    | 
|                        | U.S. agency securities      |                                                 |  | 2,515                  |         |      |  | 8,006  |         |  |  | 4,500  |       
|                        |                             |                                                 |  |                        |         |      |  |        |         |  |  |       
|                        |                             | Total held to maturity                          |  |                        | 9,976   |      |  |        | 45,694  |  |  |        | 19,103 | 
|                        |                             |                                                 |  |                        |         |      |  |        |         |  |  |       
|                        |                             | Total investment and mortgage-backed securities |  | $                      | 155,738 |      |  | $      | 126,939 |  |  | $      | 77,631 | 
|                        |                             |                                                 |  |                        |         |      |  |        |         |  |  |       

(1)  Securities classified as available for sale were carried at fair value
at September 30, 2003, 2002, and 2001. Securities classified as
held-to-maturity were carried at historical cost at all respective dates.

At September 30, 2003, $10.0 million or 20.6% of total investment
securities excluding mortgage backed securities, held by Jacksonville were
scheduled to mature in one year or less and had a weighted average yield of
2.00%. Included in the amount is $10.0 million invested in an adjustable rate
mortgage fund with a yield of 2.0%. Of the remaining investment securities,
$5.0 million was scheduled to mature after one year through five years,

16



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$30.5 million was scheduled to mature six years through ten years, and $3.0
million scheduled to mature in over ten years.

The following table sets forth certain information regarding the
maturities of Jacksonvilles investment securities at September 30, 2003.

|                                                 |       |       |       |                        |       |         |      |          |  |         |       |       |       |          |      |                        |  |         |        |          |        |  |      |   |  |          |       |       |       |  |      |   |  | 
|------------------------------------------------ | ----- | ----- | ----- | ---------------------- | ----- | ------- | ---- | -------- |  | ------- | ----- | ----- | ----- | -------- | ---- | ---------------------- |  | ------- | ------ | -------- | ------ |  | ---- | - |  | -------- | ----- | ----- | ----- |  | ---- | - |  | 
|                                                 |       |       |       | Contractually Maturing
|                                                 |       |       |       |                       
|                                                 |       |       |       |                        |       |         |      | Weighted |  |         |       |       |       | Weighted |      |                        |  |         |        | Weighted |        |  |      |   |  | Weighted
|                                                 |       |       |       | Under 1                |       | Average |      | 1-5      |  | Average |       | 6-10  |       | Average  |      | Over 10                |  | Average
|                                                 |       |       |       | Year                   |       | Yield   |      | Years    |  | Yield   |       | Years |       | Yield    |      | Years                  |  | Yield  
|                                                 |       |       |       |                        |       |         |      |          |  |         |       |       |       |          |      |                        |  |        
|                                                 |       |       |       |                        |       |         |      |          |  |         |       |       |       |          |      | (Dollars in Thousands) |  |         |        |          |        |  |      |   |  |          |       |      
|HELD TO MATURITY                                 |       |       |       |                        |       |         |      |          |  |         |       |       |       |          |      |                        |  |         |        |          |        |  |      |   |  |          |       |       |       |  |      |  
|U.S. agency securities                           |       | $     |      |                        |       |         |     | %        |  | $       | 1,015 |       |       |          | 5.08 | %                      |  | $       | 1,500  |          |        |  | 4.48 | % |  | $        |      |       |       |  |     | %
|                                                 |       |       |       |                        |       |         |      |          |  |         |       |       |       |          |      |                        |  |         |        |          |        |  |      |   |  |          |       |       |       |  |      |  
|                                                 | Total |       | $     |                       |       |         |      |          |  |         | $     | 1,015 |       |          |      |                        |  |         | $      | 1,500    |        |  |      |   |  |          | $     |      |       |  |      |   | 
|                                                 |       |       |       |                        |       |         |      |          |  |         |       |       |       |          |      |                        |  |         |        |          |        |  |      |   |  |          |       |       |       |  |      |  
|AVAILABLE FOR SALE                               |       |       |       |                        |       |         |      |          |  |         |       |       |       |          |      |                        |  |         |        |          |        |  |      |   |  |          |       |       |       |  |      |  
|U.S. agency securities                           |       | $     | 9,991 |                        |       |         | 2.00 | %        |  | $       | 3,998 |       |       |          | 4.59 | %                      |  | $       | 28,982 |          |        |  | 4.44 | % |  |          | 2,989 |       |       |  | 5.63 | %
|                                                 |       |       |       |                        |       |         |      |          |  |         |       |       |       |          |      |                        |  |         |        |          |        |  |      |   |  |          |       |       |       |  |      |  
|                                                 | Total |       | $     | 9,991                  |       |         |      |          |  |         | $     | 3,998 |       |          |      |                        |  |         | $      | 28,982   |        |  |      |   |  |          | $     | 2,989 |       |  |      |   | 
|                                                 |       |       |       |                        |       |         |      |          |  |         |       |       |       |          |      |                        |  |         |        |          |        |  |      |   |  |          |       |       |       |  |      |  
|Unrealized gain on
securities available
for sale |       |       | (62   | )                      |       |         |      |          |  |         | 63    |       |       |          |      |                        |  |         | (35    | )        |        |  |      |   |  |          | 18    |       |       |  |      |  
|                                                 |       |       |       |                        |       |         |      |          |  |         |       |       |       |          |      |                        |  |         |        |          |        |  |      |   |  |          |       |       |       |  |      |  
|                                                 |       | Total |       | $                      | 9,929 |         |      |          |  |         |       | $     | 4,061 |          |      |                        |  |         |        | $        | 28,947 |  |      |   |  |          |       | $     | 3,007 |  |      |   |  | 
|                                                 |       |       |       |                        |       |         |      |          |  |         |       |       |       |          |      |                        |  |         |        |          |        |  |      |   |  |          |       |       |       |  |      |  

|                                                        |       |       |        |                        |        |       |      |   |  | 
|------------------------------------------------------- | ----- | ----- | ------ | ---------------------- | ------ | ----- | ---- | - |  | 
|                                                        |       |       |        | Total                 
|                                                        |       |       |        |                       
|                                                        |       |       |        | Amount                 |        | Yield
|                                                        |       |       |        |                        |        |      
|                                                        |       |       |        | (Dollars in Thousands)
|HELD TO MATURITY                                        |       |       |        |                        |        |       |      |  
|U.S. agency securities                                  |       | $     | 2,515  |                        |        |       | 4.72 | %
|                                                        |       |       |        |                        |        |       |      |  
|                                                        | Total |       | $      | 2,515                  |        |       |      |   | 
|                                                        |       |       |        |                        |        |       |      |  
|AVAILABLE FOR SALE                                      |       |       |        |                        |        |       |      |  
|U.S. agency securities                                  |       | $     | 45,960 |                        |        |       | 4.00 | %
|                                                        |       |       |        |                        |        |       |      |  
|                                                        | Total |       | $      | 45,960                 |        |       |      |   | 
|                                                        |       |       |        |                        |        |       |      |  
|Unrealized gain (loss) on
securities available
for sale |       |       | (16    | )                      |        |       |      |  
|                                                        |       |       |        |                        |        |       |      |  
|                                                        |       | Total |        | $                      | 45,944 |       |      |   |  | 
|                                                        |       |       |        |                        |        |       |      |  

INTEREST-BEARING DEPOSITS

As of September 30, 2003, Jacksonville also had demand deposit accounts in
the FHLB of Dallas of $9.9 million. 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 five years. As of September 30, 2003 Jacksonville had 8
certificates of deposits totaling $793,000.

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 $25.3 million at September 30, 2003.

17



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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.

|                           |                         |   |               |        |            |  |        |       |            |   |                        |        |            |  |        |       |   |   |         |         |  |  |        |       |  
|-------------------------- | ----------------------- | - | ------------- | ------ | ---------- |  | ------ | ----- | ---------- | - | ---------------------- | ------ | ---------- |  | ------ | ----- | - | - | ------- | ------- |  |  | ------ | ----- | -
|                           |                         |   | September 30,
|                           |                         |   |              
|                           |                         |   | 2003          |        | 2002       |  | 2001  
|                           |                         |   |               |        |            |  |       
|                           |                         |   | Amount        |        | Percentage |  | Amount |       | Percentage |   | Amount                 |        | Percentage
|                           |                         |   |               |        |            |  |        |       |            |   |                        |        |           
|                           |                         |   |               |        |            |  |        |       |            |   | (Dollars in Thousands) |        |            |  |        |       |   |   |        
|Certificate accounts:      |                         |   |               |        |            |  |        |       |            |   |                        |        |            |  |        |       |   |   |         |         |  |  |        |      
|                           | 1.00 - 2.00%            |   | $             | 64,178 |            |  |        | 16.50 | %          |   |                        |       |            |  |        |      |   |   |         |        |  |  |        |      |  
|                           | 2.01 - 3.00%            |   |               | 68,903 |            |  |        | 17.72 |            |   | $                      | 57,122 |            |  |        | 16.14 | % |   |         |        |  |  |        |      |  
|                           | 3.01 - 4.00%            |   |               | 66,546 |            |  |        | 17.11 |            |   |                        | 92,726 |            |  |        | 26.20 |   |   | $       | 12,639  |  |  |        | 4.86  | %
|                           | 4.01 - 6.00%            |   |               | 39,889 |            |  |        | 10.26 |            |   |                        | 71,803 |            |  |        | 20.29 |   |   |         | 112,483 |  |  |        | 43.21 |  
|                           | 6.01 - 8.00%            |   |               | 11,965 |            |  |        | 3.07  |            |   |                        | 22,792 |            |  |        | 6.44  |   |   |         | 65,107  |  |  |        | 25.01 |  
|                           | 8.01 - 10.00%           |   |               |       |            |  |        |      |            |   |                        | 77     |            |  |        | .02   |   |   |         | 136     |  |  |        | .05   |  
|                           |                         |   |               |        |            |  |        |       |            |   |                        |        |            |  |        |       |   |   |         |         |  |  |        |      
|Total certificate accounts |                         | $ | 251,481       |        |            |  | 64.66  | %     |            | $ | 244,520                |        |            |  | 69.09  | %     |   | $ | 190,365 |         |  |  | 73.13  | %    
|                           |                         |   |               |        |            |  |        |       |            |   |                        |        |            |  |        |       |   |   |         |         |  |  |        |      
|Transaction accounts:      |                         |   |               |        |            |  |        |       |            |   |                        |        |            |  |        |       |   |   |         |         |  |  |        |      
|                           | Passbook savings        |   | $             | 17,829 |            |  |        | 4.59  | %          |   | $                      | 16,864 |            |  |        | 4.77  | % |   | $       | 12,965  |  |  |        | 4.98  | %
|                           | Money Market            |   |               | 58,798 |            |  |        | 15.12 |            |   |                        | 37,600 |            |  |        | 10.62 |   |   |         | 16,067  |  |  |        | 6.17  |  
|                           | Demand and NOW Accounts |   |               | 60,787 |            |  |        | 15.63 |            |   |                        | 54,912 |            |  |        | 15.52 |   |   |         | 40,907  |  |  |        | 15.72 |  
|                           |                         |   |               |        |            |  |        |       |            |   |                        |        |            |  |        |       |   |   |         |         |  |  |        |      
|Total transaction accounts |                         | $ | 137,414       |        |            |  | 35.34  | %     |            | $ | 109,376                |        |            |  | 30.91  | %     |   | $ | 69,939  |         |  |  | 26.87  | %    
|                           |                         |   |               |        |            |  |        |       |            |   |                        |        |            |  |        |       |   |   |         |         |  |  |        |      
|Total deposits             |                         | $ | 388,895       |        |            |  | 100.00 | %     |            | $ | 353,896                |        |            |  | 100.00 | %     |   | $ | 260,304 |         |  |  | 100.00 | %    
|                           |                         |   |               |        |            |  |        |       |            |   |                        |        |            |  |        |       |   |   |         |         |  |  |        |      

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

|                                                 |  |                        |        |      |  |      |        |  |  |   |        | 
|------------------------------------------------ |  | ---------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                                 |  | September 30,         
|                                                 |  |                       
|                                                 |  | 2003                   |        | 2002 |  | 2001
|                                                 |  |                        |        |      |  |     
|                                                 |  | (Dollars in Thousands)
|Net increase (decrease) before interest
credited |  | $                      | 27,312 |      |  | $    | 84,645 |  |  | $ | 31,111 | 
|Interest credited                                |  |                        | 7,687  |      |  |      | 8,947  |  |  |   | 8,427  | 
|                                                 |  |                        |        |      |  |      |        |  |  |   |        | 
|Net increase (decrease) in deposits              |  | $                      | 34,999 |      |  | $    | 93,592 |  |  | $ | 39,538 | 
|                                                 |  |                        |        |      |  |      |        |  |  |   |        | 

18



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The following table shows the interest rate and maturity information for
Jacksonvilles certificates of deposit at September 30, 2003.

|              |  |               |         |           |  |                        |        |         |  |       |        |  |  |   |        |  |  |   |         | 
|------------- |  | ------------- | ------- | --------- |  | ---------------------- | ------ | ------- |  | ----- | ------ |  |  | - | ------ |  |  | - | ------- | 
|              |  | Maturity Date
|              |  |              
|              |  | One Year      |         | Over      |  | Over                   |        | Over    |  |       |        | 
|Interest Rate |  | Or less       |         | 1-2 Years |  | 2-3 Years              |        | 3 Years |  | Total
|              |  |               |         |           |  |                        |        |         |  |      
|              |  |               |         |           |  | (Dollars in Thousands) |        |         |  |      
|1.00 - 2.00%  |  | $             | 49,508  |           |  | $                      | 14,628 |         |  | $     | 41     |  |  |   |       |  |  | $ | 64,177  | 
|2.01 - 3.00%  |  |               | 49,435  |           |  |                        | 8,764  |         |  |       | 9,191  |  |  | $ | 1,509  |  |  |   | 68,899  | 
|3.01 - 4.00%  |  |               | 37,577  |           |  |                        | 9,455  |         |  |       | 5,733  |  |  |   | 13,782 |  |  |   | 66,547  | 
|4.01 - 6.00%  |  |               | 8,232   |           |  |                        | 4,464  |         |  |       | 735    |  |  |   | 26,459 |  |  |   | 39,890  | 
|6.01 - 8.00%  |  |               | 10,833  |           |  |                        | 456    |         |  |       | 650    |  |  |   | 29     |  |  |   | 11,968  | 
|8.01 - 10.00% |  |               |        |           |  |                        |       |         |  |       |       |  |  |   |       |  |  |   |        | 
|              |  |               |         |           |  |                        |        |         |  |       |        |  |  |   |        |  |  |   |         | 
|              |  | $             | 155,585 |           |  | $                      | 37,767 |         |  | $     | 16,350 |  |  | $ | 41,779 |  |  | $ | 251,481 | 
|              |  |               |         |           |  |                        |        |         |  |       |        |  |  |   |        |  |  |   |         | 

The following table sets forth the maturities of Jacksonvilles
certificates of deposit having principal amounts of $100,000 or more at
September 30, 2003.

Certificates of Deposit Maturing in Quarter Ending:

|                                                                |  |                        |        | 
|--------------------------------------------------------------- |  | ---------------------- | ------ | 
|                                                                |  | (Dollars in Thousands)
|December 31, 2003                                               |  | $                      | 13,609 | 
|March 31, 2004                                                  |  |                        | 11,198 | 
|June 30, 2004                                                   |  |                        | 7,374  | 
|September 30, 2004                                              |  |                        | 7,311  | 
|After September 30, 2004                                        |  |                        | 31,564 | 
|                                                                |  |                        |        | 
|Total certificates of deposit with balances of
$100,000 or more |  | $                      | 71,056 | 
|                                                                |  |                        |        | 

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

|                                                |  |                          |        |      |  |      |        |   |  |   |        |  
|----------------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                |  | Year Ended September 30,
|                                                |  |                         
|                                                |  | 2003                     |        | 2002 |  | 2001
|                                                |  |                          |        |      |  |     
|                                                |  | (Dollars in Thousands)  
|Maximum balance                                 |  | $                        | 34,500 |      |  | $    | 62,000 |   |  | $ | 49,000 |  
|Average balance                                 |  |                          | 27,053 |      |  |      | 36,730 |   |  |   | 45,505 |  
|Weighted average interest
rate of FHLB advances |  |                          | 4.72   | %    |  |      | 4.97   | % |  |   | 5.51   | %

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.

|                         |                                |   |                        |      |      |   |        |      |   |   |        |      |  
|------------------------ | ------------------------------ | - | ---------------------- | ---- | ---- | - | ------ | ---- | - | - | ------ | ---- | -
|                         |                                |   | September 30,         
|                         |                                |   |                       
|                         |                                |   | 2003                   |      | 2002 |   | 2001  
|                         |                                |   |                        |      |      |   |       
|                         |                                |   | (Dollars in Thousands)
|FHLB long-term advances  |                                | $ | 31,108                 |      |      | $ | 25,129 |      |   | $ | 34,108 |     
|                         | Weighted average interest rate |   |                        | 4.19 | %    |   |        | 5.16 | % |   |        | 5.33 | %
|FHLB short-term advances |                                |   |                       |      |      |   |       |      |   | $ | 14,000 |     
|                         | Weighted average interest rate |   |                        |     | %    |   |        |     | % |   |        | 3.43 | %

BORROWINGS. The Company obtains advances from the FHLB of Dallas upon the
security of the common stock it owns in that bank and certain of its
residential mortgage loans, provided certain standards related to
creditworthiness have been met. Such advances are made pursuant to several
credit programs, each of which has its own interest rate and range of
maturities. Such advances are generally available to meet seasonal and other

19



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withdrawals of deposit accounts and to permit increased lending. At September
30, 2003, Jacksonville had $31.1 million in advances from the FHLB of Dallas,
as compared to $25.1 million at September 30, 2002.

Borrowings from the Federal Home Loan Bank of Dallas are an important
source of funding for Jacksonville and are subject to limitations imposed by
the FHLB of Dallas. In general, the FHLB of Dallas limits borrowing to 50% of
a members total assets, subject to collateral availability. At September 30,
2003, Jacksonvilles borrowing limit was $239.9 million , of which $31.1
million was due to the FHLB of Dallas at that date, leaving a total remaining
line of credit with the FHLB of Dallas of $208.8 million at that date. The
Company had sufficient mortgage assets to collateralize the remaining line on
September 30, 2003.

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, 2003, the outstanding balance of that loan was
$840,000.

COMPETITION. The Company faces significant competition for real estate
loans, principally from mortgage banking companies, other savings institutions,
commercial banks and credit unions. Factors which affect competition generally
include the general and local economic conditions, current interest rate levels
and volatility in the mortgage markets. The Company also faces significant
competition in attracting deposits. Its most direct competition for deposits
has historically come from commercial banks and other savings institutions
located in its market area. The Company faces additional significant
competition for investors funds from other financial intermediaries. The
Company competes for deposits principally by offering depositors a variety of
deposit programs, convenient branch locations, hours and other services. The
Company does not rely upon any individual group or entity for a material
portion of its deposits.

Federal legislation in recent years has eliminated many of the
distinctions between commercial banks and savings institutions and holding
companies and allowed bank holding companies to acquire savings institutions.
Such legislation has generally resulted in an increase in the competition
encountered by savings institutions and has resulted in a decrease in both the
number of savings institutions and the aggregate size of the savings industry.

SUBSIDIARIES. Jacksonville currently owns 100% of the capital stock of
JS&L Corporation (JS&L) which was established in December 1979. JS&L is self
sufficient due to income from investments, interest from residential notes
receivable and lease income. Since its original charter, JS&Ls main activity
has been the servicing of purchased residential first and second lien notes.
The portfolio includes 9 loans ranging in size from $2,000 to $49,000, some 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, 2003 and September 30, 2002, JS&L had a net profit of $27,000 and
a net loss of $14,000, respectively. JS&L now invests in investments
permissible for Jacksonville, leases computer equipment, and originates and
buys first and second liens. JS&L purchases first and second lien notes
pursuant to a written mortgage loan underwriting policy adopted by JS&Ls board
of directors. In addition to these activities, during 1999 the Federal Deposit
Insurance Corporation gave approval for the Company through its subsidiary,
JS&L, to enter into a proposed residential real estate development in
Hallsville, Texas, a community near Longview, Texas. The project involved
acquisition and development of a 66 acre tract of land for single-family homes.
JS&L executed a development loan through its parent, Jacksonville on February
25, 1999 in the amount of $1,500,000. At September 30, 2003, the interim loan
balance totaled $649,000. There are currently 20 houses completed or under
construction in the subdivision.

Total investment in JS&L at September 30, 2003 was $1.0 million. Total
capital of JS&L at September 30, 2003 was $1.0 million.

Jacksonville IHC, Inc. holds all the issued and outstanding stock of
Jacksonville Savings Bank, SSB, a wholly owned subsidiary of the Company. In
addition to holding all the issued and outstanding shares of Jacksonville,
IHCs only other business activity was to loan funds to Jacksonvilles Employee
Stock Ownership Plan.

20



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EMPLOYEES. Jacksonville and its subsidiary had 116 full-time employees at
September 30, 2003. 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

SARBANES-OXLEY ACT OF 2002. On July 30, 2002, the President signed into
law the Sarbanes-Oxley Act of 2002 implementing legislative reforms intended to
address corporate and accounting fraud. In addition to the establishment of a
new accounting oversight board which will enforce auditing, quality control and
independence standards and will be funded by fees from all publicly traded
companies, the bill restricts provision of both auditing and consulting
services by accounting firms. To ensure auditor independence, any non-audit
services being provided to an audit client will require preapproval by the
companys audit committee members. In addition, the audit partners must be
rotated. The bill requires chief executive officers and chief financial
officers, or their equivalent, to certify to the accuracy of periodic reports
filed with the SEC, subject to civil and criminal penalties if they knowingly
or willfully violate this certification requirement. In addition, under the
Act, counsel will be
required to report evidence of a material violation of the securities laws or a
breach of fiduciary duty by a company to its chief executive officer or its
chief legal officer, and, if such officer does not appropriately respond, to
report such evidence to the audit committee or other similar committee of the
board of directors or the board itself.

Longer prison terms will also be applied to corporate executives who
violate Federal securities laws, the period during which certain types of suits
can be brought against a company or its officers has been extended, and bonuses
issued to top executives prior to restatement of a companys financial
statements are now subject to disgorgement if such restatement was due to
corporate misconduct. Executives are also prohibited from insider trading
during retirement plan blackout periods, and loans to company executives are
restricted. In addition, a provision directs that civil penalties levied by
the SEC as a result of any judicial or administrative action under the Act be
deposited to a fund for the benefit of harmed investors. The Federal Accounts
for Investor Restitution (FAIR) provision also requires the SEC to develop
methods of improving collection rates. The legislation accelerates the time
frame for disclosures by public companies as they must immediately disclose any
material changes in their financial condition or operations. Directors and
executive officers must also provide information for most changes in ownership
in a companys securities within two business days of the change.

The Act also increases the oversight of, and codifies certain requirements
relating to audit committees of public companies and how they interact with the
companys registered public accounting firm (RPAF). Audit committee
members must be independent and are barred from accepting consulting, advisory
or other compensatory fees from the issuer. In addition, companies must
disclose whether at least one member of the committee is a financial expert
(as such term will be defined by the SEC) and if not, why not. Under the Act,
a RPAF is prohibited from performing statutorily mandated audit services for a
company if such companys chief executive officer, chief financial officer,
comptroller, chief accounting officer or any person serving in equivalent
positions has been employed by such firm and participated in the audit of such
company during the one-year period preceding the audit initiation date. The
Act also prohibits any officer or director of a company or any other person
acting under their direction from taking any action to fraudulently influence,
coerce, manipulate or mislead any independent public or certified accountant
engaged in the audit of the companys financial statements for the purpose of
rendering the financial statements materially misleading. The Act also
requires the SEC to prescribe rules requiring inclusion of an internal control
report and assessment by management in the annual report to shareholders. The
Act requires the RPAF that issues the audit report to attest to and report on
managements assessment of the companys internal controls. In addition, the
Act requires that each financial report required to be prepared in accordance
with (or

21



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reconciled to) generally accepted accounting principles and filed with
the SEC reflect all material correcting adjustments that are identified by a
RPAF in accordance with generally accepted accounting principles and the rules
and regulations of the SEC.

THE COMPANY AND IHC

REGULATIONS. After Jacksonville converted to a Texas-chartered savings
bank, the Company continued to be subject to regulation as a savings and loan
holding company under the Home Owners Loan Act, as amended (HOLA), instead
of being subject to regulation as a bank holding company under the Bank Holding
Company Act of 1956 because the Bank made an election under Section 10(l) of
HOLA to be treated as a savings association for purposes of Section 10(e) of
HOLA. As a result, the Company and IHC are registered unitary savings and loan
holding companies and are subject to OTS, Federal Deposit Insurance Corporation
(FDIC) and the Texas Savings and Loan Department (the 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. Generally, there are only limited
restrictions on the activities of a unitary savings and loan holding company,
such as the Company, which applied to become or was a unitary savings and loan
holding company prior to May 4, 1999 and its non-savings institution
subsidiaries. Under the recently enacted Gramm-Leach-Bliley Act of 1999 (the
GLBA), however, companies which applied to the OTS after May 4, 1999 to
become unitary savings and loan holding companies will be restricted to
engaging in those activities traditionally permitted to multiple savings and
loan holding companies. 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 above rules as to permissible business activities of
grandfathered unitary savings and loan holding companies under the GLBA, if the
savings institution subsidiary of such a holding company fails to meet the
Qualified Thrift Lender (QTL) test, then such unitary holding company also
becomes subject to the activities
restrictions applicable to multiple savings and loan holding companies and,
unless the savings institution requalifies as a QTL within one year thereafter,
must register as, and become subject to the restrictions applicable to, a bank
holding company.

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

22



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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 acquirer is authorized to acquire control of the
savings institution pursuant to the emergency acquisition provisions of the
FDIA, or (iii) the statutes of the state in which the institution to be
acquired is located specifically permit institutions to be acquired by the
state-chartered institutions or savings and loan holding companies located in
the state where the acquiring entity is located (or by a holding company that
controls such state-chartered savings institutions).

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

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

REGULATION OF THE BANK

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

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

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

23



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

In addition, Sections 22(h) and (g) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer
and to a greater than 10% stockholder of a savings institution (a principal
stockholder), and certain affiliated interests of each of them, may not
exceed, together with all other outstanding loans to such person and affiliated
interests, the savings institutions loans to one borrower limit (generally
equal to 15% of the institutions unimpaired capital and surplus). Section
22(h) also requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons and also requires prior board approval for
certain loans. In addition, the aggregate amount of extensions of credit by a
savings institution to all insiders cannot exceed the institutions unimpaired
capital and surplus. Furthermore, Section 22(g) places additional restrictions
on loans to executive officers. At September 30, 2003, 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, 2003, the required Tier 1 leverage capital ratio requirement for
the Bank was 4.00% and its actual Tier 1 leverage capital ratio was 8.11%.

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

24



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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, 2003, the Banks Tier 1 capital to risk-weighted assets
ratio was 16.17%. On the same date, the Banks total risked-based capital
percentage was 16.71%.

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

|                                                                   |                                                       |  |                     |       |                     |  |        |      |          |  |  |       |   |  |  |      |  
|------------------------------------------------------------------ | ----------------------------------------------------- |  | ------------------- | ----- | ------------------- |  | ------ | ---- | -------- |  |  | ----- | - |  |  | ---- | -
|                                                                   |                                                       |  | As of September 30, |       | As of September 30,
|                                                                   |                                                       |  |                     |       |                    
|                                                                   |                                                       |  | 2003                |       | 2002               
|                                                                   |                                                       |  |                     |       |                    
|                                                                   |                                                       |  | Actual              |       | Required            |  | Actual |      | Required
|                                                                   |                                                       |  |                     |       |                     |  |        |      |         
|Leverage ratio (or tangible capital requirement) (1):              |                                                       |  |                     |       |                     |  |        |      |          |  |  |       |   |  |  |     
|                                                                   | Tier 1 capital to total assets                        |  |                     | 8.11  | %                   |  |        | 4.00 | %        |  |  | 7.61  | % |  |  | 4.00 | %
|Tier 1 risk-based capital ratio (or core capital
requirement) (1): |                                                       |  |                     |       |                     |  |        |      |          |  |  |       |   |  |  |     
|                                                                   | Tier 1 risk-based capital to risk weighted assets     |  |                     | 16.17 |                     |  |        | 4.00 |          |  |  | 13.23 |   |  |  | 4.00 |  
|Total risk-based capital ratio:                                    |                                                       |  |                     |       |                     |  |        |      |          |  |  |       |   |  |  |     
|                                                                   | Total risk-based capital risk to risk weighted assets |  |                     | 16.71 |                     |  |        | 8.00 |          |  |  | 13.77 |   |  |  | 8.00 |  

25



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The following table sets forth a reconciliation between the Banks
stockholders equity and each of its three regulatory capital requirements at
September 30, 2003.

|                                                              |                                                               |   |                        |        |            |   |            |        |       |   |        |        |  
|------------------------------------------------------------- | ------------------------------------------------------------- | - | ---------------------- | ------ | ---------- | - | ---------- | ------ | ----- | - | ------ | ------ | -
|                                                              |                                                               |   |                        |        |            |   | Tier 1     |        | Total
|                                                              |                                                               |   | Tier 1                 |        | Risk-based |   | Risk-based
|                                                              |                                                               |   | Capital                |        | Capital    |   | Capital   
|                                                              |                                                               |   |                        |        |            |   |           
|                                                              |                                                               |   | (Dollars in Thousands)
|Total stockholders equity for Jacksonville Savings
Bank, SSB |                                                               | $ | 42,375                 |        |            | $ | 42,375     |        |       | $ | 42,375 |       
|Addunrealized loss on securities available-for-sale           |                                                               |   | 392                    |        |            |   | 392        |        |       |   | 392    |       
|Less nonallowable assets:                                     |                                                               |   |                        |        |            |   |            |        |       |   |        |       
|                                                              | Disallowed goodwill and other disallowed intangible goods     |   |                        | (3,410 | )          |   |            | (3,410 | )     |   |        | (3,410 | )
|                                                              | Principally equity investment in subsidiary                   |   |                        | (1,046 | )          |   |            | (1,046 | )     |   |        | (1,046 | )
|Plus allowances for loan and lease losses                     |                                                               |   |                       |        |            |   |           |        |       |   | 1,294  |       
|                                                              |                                                               |   |                        |        |            |   |            |        |       |   |        |       
|                                                              | Total regulatory capital                                      |   |                        | 38,311 |            |   |            | 38,311 |       |   |        | 39,605 |  
|                                                              | Minimum required capital                                      |   |                        | 18,891 |            |   |            | 9,479  |       |   |        | 18,958 |  
|                                                              |                                                               |   |                        |        |            |   |            |        |       |   |        |       
|                                                              | Excess regulatory capital                                     |   | $                      | 19,420 |            |   | $          | 28,832 |       |   | $      | 20,647 |  
|                                                              |                                                               |   |                        |        |            |   |            |        |       |   |        |       
|                                                              | Banks regulatory capital percentage (1)                      |   |                        | 8.1    | %          |   |            | 16.2   | %     |   |        | 16.7   | %
|                                                              | Minimum regulatory capital required percentage                |   |                        | 4.0    | %          |   |            | 4.0    | %     |   |        | 8.0    | %
|                                                              |                                                               |   |                        |        |            |   |            |        |       |   |        |       
|                                                              | Banks regulatory capital percentage in excess of
requirement |   |                        | 4.1    | %          |   |            | 12.2   | %     |   |        | 8.7    | %
|                                                              |                                                               |   |                        |        |            |   |            |        |       |   |        |       



---



|(1) |  | Tier 1 capital is computed as a percentage of total adjusted assets of
$472.3 million. Risk-based capital is computed as a percentage of adjusted
risk-weighted assets of $237.0 million.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

The Bank currently pays deposit insurance premiums to the FDIC based on a
risk-based assessment system established by the FDIC for all SAIF-member
institutions. Under applicable regulations, institutions are assigned to one of
three capital groups based solely on the level of an institutions capital -
well capitalized, adequately capitalized and undercapitalized  which are
defined in the same manner as the regulations establishing the prompt
corrective action system under Section 38 of the FDIA. These three groups are
then divided into three subgroups which reflect varying levels of supervisory
concern, from those which are considered to be healthy to those which are
considered to be of substantial supervisory concern. The matrix so created
results in nine assessment risk classifications with effective assessments
between .04% for well capitalized, healthy SAIF-member institutions to .27% for
undercapitalized SAIF-member institutions with substantial supervisory
concerns. At September 30, 2003, the Bank was categorized as well capitalized.

The FDIA provides 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.

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

26



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regard to this deduction, and with additional modifications and reduced by the
amount of any permitted addition to the non-qualifying reserve.

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

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

The FDIA also requires the FDIC and the other Federal banking agencies to
revise their risk-based capital standards, with appropriate transition rules,
to ensure that they take into account concentration of credit risk and the
risks of nontraditional activities and to ensure that such standards reflect
the actual performance and expected risk of loss of multifamily mortgages, of
which the Bank had $666,000 at September 30, 2003. 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 Federal banking agencies have agreed to adopt, for regulatory
purposes, SFSA 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, 2003, the Bank had
$146.6 million of securities, available-for-sale, with $515,000 of aggregate
net unrealized loss thereon, net of taxes.

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

27



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##### 



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 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

28



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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.

Under current CRA regulations issued by the FDIC and other Federal banking
agencies, institutions are rated based on their actual performance in meeting
community credit needs. In particular, the agencies 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 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. As of the date of its most recent
regulatory examination, the bank was rated satisfactory with respect to its
CRA compliance.

QUALIFIED THRIFT LENDER TEST. For the Company to qualify as a savings and
loan holding company, the Bank is required to meet a QTL test set forth under
Section 10(m) of the Home Owners Loan Act, as amended, (HOLA). Under Section
2303 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996, a
savings institution can comply with the QTL test set forth in the HOLA and
implementing regulations or by qualifying as a domestic building and loan
association as defined in Section 7701(a)(19) of the Internal Revenue 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, 2003,
with in excess of 86% of its assets invested in qualified thrift investments.

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

FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of Dallas,
which is one of 12 regional FHLBs that administers the home financing credit
function of savings institutions and commercial banks. Each FHLB serves as a
source of liquidity for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of
the FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by its Board of Directors. As of September
30, 2003, the Banks advances from the FHLB of Dallas amounted to $31.1
million or 7.3% 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

29



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obligations at
the beginning of each year or 5% of total advances. At September 30, 2003, the
Bank had $3.3 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, 2003,
dividends paid by the FHLB of Dallas to the Bank totaled $78,000.

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, 2003, 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 interest-earning assets. The amount
of funds necessary to satisfy this requirement has not had a material affect on
the Banks operations.

TEXAS SAVINGS BANK LAW. To qualify as a Texas Savings Bank, Jacksonville
must qualify under and continue to meet the asset test of Section 7701(a)(19),
Internal Revenue Code of 1986, relating to domestic savings and loan
associations. A Texas savings bank may make a loan or investment or engage in
an activity permitted under state law for a bank or savings and loan
association or under federal law for a federal savings and loan association,
savings bank, or national bank if the financial institutions principal office
is located in this state. A savings bank may make commercial loans up to 50% of
the savings banks total assets. A savings bank must maintain in its portfolio
not less than 15 percent of the savings banks deposits from its local service
area in: (1) first and second lien residential mortgage loans or foreclosed
residential mortgage loans originated in the savings banks local service area;
(2) home improvement loans; (3) interim residential construction loans; (4)
mortgage-backed securities secured by loans in the savings banks local service
area; and (5) loans for community reinvestment. The loans to one borrower rules
for a 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.

FEDERAL TAXATION

GENERAL. The Bank is subject to Federal income taxation in the same
general manner as other corporations with some exceptions, including
particularly the reserve for bad debts discussed below. The following
discussion of Federal taxation is intended only to summarize certain pertinent
Federal income tax matters and is not a comprehensive description of the tax
rules applicable to the Bank.

30



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METHOD OF ACCOUNTING. For Federal income tax purposes, the Bank currently
reports its income and expenses on the accrual method of accounting, uses a tax
year ending September 30, and files a consolidated Federal income tax return
with the Company and affiliated entities.

BAD DEBT RESERVES. The Company uses the experience method of computing
reserves for bad debts for Federal income tax purposes. The bad debt deduction
allowable under this method is available to small banks with assets less than
$500 million.

The Bank has been audited by the IRS or the statute of limitations has
expired with respect to consolidated Federal income tax returns through the
year ended September 30, 1998. With respect to years examined by the IRS,
either all deficiencies have been satisfied or sufficient reserves have been
established to satisfy asserted deficiencies. In the opinion of management, any
examination of still open returns would not result in a deficiency which could
have a material adverse effect on the financial condition of the Bank.

TEXAS TAXATION. The Bank is subject to a state franchise tax which is
based on the greater of .25 percent of its capital or 4 1⁄2 percent of its
earned surplus for the year.

31



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ITEM 2. PROPERTIES.

At September 30, 2003, the Company conducted its business from its main
office at Commerce & Neches Streets, Jacksonville, Texas, and eight
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, 2003.

|                                                                            |  |                        |  |                |       |          |  |   |        |  |  | 
|--------------------------------------------------------------------------- |  | ---------------------- |  | -------------- | ----- | -------- |  | - | ------ |  |  | 
|Description/                                                                |  | Leased/                |  | Net Book Value |       |          |  |  
|Address                                                                     |  | Owned                  |  | Of Property    |       | Deposits
|                                                                            |  |                        |  |                |       |         
|                                                                            |  | (Dollars in Thousands)
|Main Office
Commerce and Neches Street
Jacksonville, Texas                  |  | Owned                  |  | $              | 769   |          |  | $ | 94,161 | 
|Branch Office
1015 North Church Street
Palestine, Texas                     |  | Owned                  |  |                | 1,449 |          |  |   | 77,104 | 
|Branch Office
107 East Fourth Street
Rusk, Texas                            |  | Owned                  |  |                | 79    |          |  |   | 14,588 | 
|Branch Office
1412 Judson Road
Longview, Texas                              |  | Owned                  |  |                | 467   |          |  |   | 33,697 | 
|In-Store Branch Office
Wal-Mart Supercenter
515 E. Loop 281
Longview, Texas |  | Leased                 |  |                | 143   |          |  |   | 6,428  | 
|Branch Office
617 South Palestine Street
Athens, Texas                      |  | Owned                  |  |                | 442   |          |  |   | 42,898 | 
|Branch Office
5620 Old Bullard Road
Tyler, Texas                            |  | Owned                  |  |                | 844   |          |  |   | 53,301 | 
|Branch Office
2507 University Blvd.
Tyler, Texas                            |  | Owned                  |  |                | 1,126 |          |  |   | 13,508 | 
|Branch Office
121 S. Market St.
Carthage, Texas                             |  | Owned                  |  |                | 297   |          |  |   | 53,210 | 



---

In addition, the Company through its J S&L subsidiary has an investment of
$1.2 million at September 30, 2003, in developed residential housing lots.

32



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ITEM 3. LEGAL PROCEEDINGS.

The Company 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 the Company.

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

Not applicable.

PART II.

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

Shares of Jacksonville Bancorp, Inc.s common stock are traded under the
symbol JXVL on the NASDAQ National Market System. At December 18, 2002, the
Company had 321 registered holders of common stock, not including persons or
entities whose stock is held in nominee or street name through various
brokerage firms or banks.

The following table sets forth the reported high and low sale prices of a
share of the Companys common stock as reported by NASDAQ and cash dividends
paid per share of common stock during the periods indicated.

|                                 |  |      |       |     |  |          |       |  |  |  |       | 
|-------------------------------- |  | ---- | ----- | --- |  | -------- | ----- |  |  |  | ----- | 
|                                 |  | HIGH |       | LOW |  | DIVIDEND
|                                 |  |      |       |     |  |         
|Quarter ended December 31, 2001  |  |      | 20.85 |     |  |          | 18.10 |  |  |  | 0.125 | 
|Quarter ended March 31, 2002     |  |      | 24.00 |     |  |          | 20.05 |  |  |  | 0.125 | 
|Quarter ended June 30, 2002      |  |      | 26.30 |     |  |          | 22.90 |  |  |  | 0.125 | 
|Quarter ended September 30, 2002 |  |      | 27.20 |     |  |          | 22.75 |  |  |  | 0.125 | 
|Quarter ended December 31, 2002  |  |      | 30.30 |     |  |          | 24.80 |  |  |  | 0.125 | 
|Quarter ended March 31, 2003     |  |      | 30.14 |     |  |          | 26.55 |  |  |  | 0.15  | 
|Quarter ended June 30, 2003      |  |      | 31.54 |     |  |          | 27.00 |  |  |  | 0.15  | 
|Quarter ended September 30, 2003 |  |      | 37.46 |     |  |          | 28.45 |  |  |  | 0.15  | 

For equity compensation plan information, See Note 15 to the Consolidated
Financial Statements.

33



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ITEM 6. SELECTED FINANCIAL DATA.

SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

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

|                                             |  |              |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|-------------------------------------------- |  | ------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                             |  | September 30
|                                             |  |             
|                                             |  | 2003         |         | 2002 |  | 2001 |         | 2000 |  | 1999
|                                             |  |              |         |      |  |      |         |      |  |     
|SELECTED FINANCIAL CONDITION AND
OTHER DATA: |  |              |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Total assets                                 |  | $            | 472,232 |      |  | $    | 425,250 |      |  | $    | 350,994 |  |  | $ | 301,467 |  |  | $ | 290,392 | 
|Cash and cash equivalents                    |  |              | 18,998  |      |  |      | 15,352  |      |  |      | 13,639  |  |  |   | 7,521   |  |  |   | 6,568   | 
|Investment securities                        |  |              | 48,460  |      |  |      | 37,214  |      |  |      | 18,773  |  |  |   | 22,017  |  |  |   | 18,711  | 
|Mortgage-backed securities                   |  |              | 107,279 |      |  |      | 89,725  |      |  |      | 58,858  |  |  |   | 32,727  |  |  |   | 37,640  | 
|Loans receivable, net                        |  |              | 279,137 |      |  |      | 254,091 |      |  |      | 246,432 |  |  |   | 226,854 |  |  |   | 216,267 | 
|Foreclosed real estate, net                  |  |              | 218     |      |  |      | 87      |      |  |      | 63      |  |  |   | 124     |  |  |   | 346     | 
|Deposits                                     |  |              | 388,895 |      |  |      | 353,896 |      |  |      | 260,304 |  |  |   | 220,766 |  |  |   | 215,209 | 
|Borrowings                                   |  |              | 31,108  |      |  |      | 25,129  |      |  |      | 48,108  |  |  |   | 41,000  |  |  |   | 35,000  | 
|Stockholders equity                         |  |              | 43,657  |      |  |      | 39,209  |      |  |      | 35,984  |  |  |   | 34,089  |  |  |   | 34,219  | 
|Full-service offices                         |  |              | 9       |      |  |      | 9       |      |  |      | 8       |  |  |   | 8       |  |  |   | 7       | 

|                              |                                                         |   |                          |        |      |   |        |        |      |   |        |        |  |   |        |        |  |   |        |       | 
|----------------------------- | ------------------------------------------------------- | - | ------------------------ | ------ | ---- | - | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ----- | 
|                              |                                                         |   | Year Ended September 30,
|                              |                                                         |   |                         
|                              |                                                         |   | 2003                     |        | 2002 |   | 2001   |        | 2000 |   | 1999  
|                              |                                                         |   |                          |        |      |   |        |        |      |   |       
|SELECTED OPERATING DATA:      |                                                         |   |                          |        |      |   |        |        |      |   |        |        |  |   |        |        |  |   |        |      
|Total interest income         |                                                         | $ | 26,704                   |        |      | $ | 28,066 |        |      | $ | 24,231 |        |  | $ | 22,350 |        |  | $ | 20,465 |      
|Total interest expense        |                                                         |   | 11,710                   |        |      |   | 13,811 |        |      |   | 14,041 |        |  |   | 12,328 |        |  |   | 10,711 |      
|                              |                                                         |   |                          |        |      |   |        |        |      |   |        |        |  |   |        |        |  |   |        |      
|                              | Net interest income                                     |   |                          | 14,994 |      |   |        | 14,255 |      |   |        | 10,190 |  |   |        | 10,022 |  |   |        | 9,754 | 
|Provision for losses on loans |                                                         |   | 162                      |        |      |   | 102    |        |      |   | 86     |        |  |   | 69     |        |  |   | 60     |      
|                              |                                                         |   |                          |        |      |   |        |        |      |   |        |        |  |   |        |        |  |   |        |      
|                              | Net interest income after provision for
losses on loans |   |                          | 14,832 |      |   |        | 14,153 |      |   |        | 10,104 |  |   |        | 9,953  |  |   |        | 9,694 | 
|Non-interest income           |                                                         |   | 3,051                    |        |      |   | 2,567  |        |      |   | 2,379  |        |  |   | 1,740  |        |  |   | 1,687  |      
|Non-interest expense          |                                                         |   | 9,128                    |        |      |   | 7,672  |        |      |   | 6,616  |        |  |   | 6,209  |        |  |   | 5,876  |      
|                              |                                                         |   |                          |        |      |   |        |        |      |   |        |        |  |   |        |        |  |   |        |      
|Income before income taxes    |                                                         |   | 8,755                    |        |      |   | 9,049  |        |      |   | 5,867  |        |  |   | 5,484  |        |  |   | 5,505  |      
|Income taxes                  |                                                         |   | 2,975                    |        |      |   | 3,073  |        |      |   | 1,990  |        |  |   | 1,813  |        |  |   | 1,867  |      
|                              |                                                         |   |                          |        |      |   |        |        |      |   |        |        |  |   |        |        |  |   |        |      
|Net income                    |                                                         | $ | 5,780                    |        |      | $ | 5,976  |        |      | $ | 3,877  |        |  | $ | 3,671  |        |  | $ | 3,638  |      
|                              |                                                         |   |                          |        |      |   |        |        |      |   |        |        |  |   |        |        |  |   |        |      
|Earnings per share            |                                                         |   |                          |        |      |   |        |        |      |   |        |        |  |   |        |        |  |   |        |      
|                              | Basic                                                   |   | $                        | 3.38   |      |   | $      | 3.48   |      |   | $      | 2.18   |  |   | $      | 1.87   |  |   | $      | 1.65  | 
|                              | Diluted                                                 |   |                          | 3.16   |      |   |        | 3.30   |      |   |        | 2.06   |  |   |        | 1.82   |  |   |        | 1.60  | 
|Dividends Payout Ratio        |                                                         |   | 17.88                    | %      |      |   | 14.30  | %      |      |   | 23.19  | %      |  |   | 26.35  | %      |  |   | 30.07  | %    

|                                                                                           |  |                                        |        |      |  |      |        |      |  |      |        |   |  |  |        |   |  |  |        |  
|------------------------------------------------------------------------------------------ |  | -------------------------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | - |  |  | ------ | - |  |  | ------ | -
|                                                                                           |  | At or For the Year Ended September 30,
|                                                                                           |  |                                       
|                                                                                           |  | 2003                                   |        | 2002 |  | 2001 |        | 2000 |  | 1999
|                                                                                           |  |                                        |        |      |  |      |        |      |  |     
|SELECTED OPERATING RATIOS(1):                                                              |  |                                        |        |      |  |      |        |      |  |      |        |   |  |  |        |   |  |  |        |  
|Return on average assets                                                                   |  |                                        | 1.28   | %    |  |      | 1.50   | %    |  |      | 1.20   | % |  |  | 1.25   | % |  |  | 1.33   | %
|Return on average equity                                                                   |  |                                        | 13.67  |      |  |      | 16.02  |      |  |      | 10.94  |   |  |  | 10.90  |   |  |  | 10.82  |  
|Average equity to average assets                                                           |  |                                        | 9.39   |      |  |      | 9.39   |      |  |      | 11.98  |   |  |  | 11.42  |   |  |  | 12.88  |  
|Equity to assets at end of period                                                          |  |                                        | 9.24   |      |  |      | 9.22   |      |  |      | 10.25  |   |  |  | 11.31  |   |  |  | 11.78  |  
|Interest rate spread(2)                                                                    |  |                                        | 3.22   |      |  |      | 3.41   |      |  |      | 2.85   |   |  |  | 3.08   |   |  |  | 3.23   |  
|Net interest margin(2)                                                                     |  |                                        | 3.46   |      |  |      | 3.72   |      |  |      | 3.31   |   |  |  | 3.56   |   |  |  | 3.72   |  
|Non-performing loans and troubled debt
restructurings to total loans at end of
period(3)   |  |                                        | .32    |      |  |      | .38    |      |  |      | .41    |   |  |  | .35    |   |  |  | .41    |  
|Non-performing assets and troubled debt
restructurings to total assets at end of
period(3) |  |                                        | .23    |      |  |      | .26    |      |  |      | .29    |   |  |  | .31    |   |  |  | .42    |  
|Average interest-earning assets to average
interest-bearing liabilities                    |  |                                        | 116.64 |      |  |      | 112.66 |      |  |      | 111.00 |   |  |  | 111.08 |   |  |  | 111.90 |  
|Net interest income after provision for loan
losses to total noninterest expense           |  |                                        | 162.49 |      |  |      | 184.49 |      |  |      | 152.72 |   |  |  | 160.30 |   |  |  | 164.98 |  

(See footnotes on following page.)

34



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---

|(1) |  | With the exception of end of period ratios, all ratios are based on
average monthly balances during the periods and are annualized where
appropriate.                                                                                                                                                                                                                                                             
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average rate on
interest-bearing liabilities. Net interest margin represents net interest
income as a percentage of average interest-earning assets.                                                                                                                                
|   
|(3) |  | Non-performing loans consist of non-accrual loans and accruing loans that
are contractually past due 90 days or more; non-performing assets consist
of non-performing loans and real estate acquired by foreclosure, deed in
lieu thereof or deemed in substance foreclosure; and troubled debt
restructurings consist of restructured debt in accordance with Statement
of Financial Accounting Standards No. 15.

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

GENERAL

The Company, through IHC, Jacksonville and JS&L, is primarily engaged in
attracting deposits from the general public and using those and other available
sources of funds to originate loans secured by single-family residences located
in Cherokee County and surrounding counties in East Texas. To a lesser extent,
Jacksonville also originates construction loans, land loans, consumer loans,
and home equity loans. It also has a significant amount of investments in
mortgage-backed securities, including collateralized mortgage obligations, and
federal agency obligations.

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

ASSET AND LIABILITY MANAGEMENT

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

The lending activities of savings associations have historically
emphasized long-term, fixed-rate loans secured by single-family residences, and
the primary source of funds of such institutions has been deposits and, more
recently, FHLB advances. The deposit accounts and advances of savings
associations generally bear interest rates that reflect market rates and
largely mature or are subject to repricing within a short period of time. This
factor, in

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combination with substantial investments in long-term, fixed-rate
loans, has historically caused the income earned by savings associations on
their loan portfolios to adjust more slowly to changes in interest rates than
their cost of funds.

Jacksonville originates both fixed- and variable-rate residential real
estate loans as market conditions dictate. Jacksonvilles residential mortgage
loan portfolio, as of September 30, 2003 consisted of 21% of adjustable or
floating rate loans. In order to meet its customers demands for fixed-rate
loans during periods of lower interest rates, Jacksonville follows a policy of
selling to third parties a high percentage of the fixed-rate loans it
originates while retaining its variable-rate loans. The mixture of
originations for sale and originations for portfolio varies depending on the
general mix of interest-earning assets Jacksonville then currently holds in its
portfolio and other factors such as market fees for loan sales and the overall
interest-rate environment. Jacksonville has a policy to
retain a large portion of its fixed-rate residential first mortgage loans with
terms of 15 years or less and to sell a majority of those fixed rate mortgages
with terms in excess of 15 years.

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

SAFE HARBOR STATEMENT

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

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2002 the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections as of April 2002. This statement rescinds SFAS No. 4 and 64,
Reporting Gains and Losses from Extinguishment of Debt and Extinguishment of
Debt Made to Satisfy Sinking-Fund Retirements, respectively, and restricts the
classification of early extinguishment of debt as an extraordinary item to the
provisions of APB Opinion No. 30, Reporting the Results of
Operations-Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. This statement also amends
SFAS No. 13, Accounting for Leases, to eliminate the inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. Finally, this Statement makes various
technical corrections to existing pronouncements that are not considered
substantive. The Company has adopted the provisions of this statement for the
year ended September 30, 2003 and does not expect the adoption to have a
material impact on the companys financial position, results of operations or
cash flows.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146 provides guidance on
the recognition and measurement of liabilities for cost associated with exit or
disposal activities. SFAS No. 146 is effective for exit or disposal activities
that are initiated after December 31, 2002. The Company has adopted the
provisions of this statement for the year ended September 30, 2003 and

36



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does not
expect the adoption to have a material impact on the companys financial
position, results of operations or cash flows.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure. This statement amends
SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. This statement also amends
the disclosure requirements of SFAS No. 123 to require the inclusion in the
financial statements and the method of accounting for stock-based employee
compensation and the effect of the method on reported results. This statement
is effective for fiscal years ending December 15, 2002. The implementation of
this statement is not expected to have a material impact on the Companys
financial position, results of operations or cash flows.

In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies financial accounting and reporting for derivative instruments and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. This statement requires that contracts with
comparable characteristics be accounted for similarly. In particular, this
statement clarifies under what circumstances a contract with an initial net
investment meets the characteristics of a derivative discussed in paragraph
6(b) of Statement 133, clarifies when a derivative contains a
financing component, and amends the definition of an underlying investment to
conform it to language used in FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. This statement is effective
for contracts entered into or modified after June 30, 2003. The provisions of
this statement should be applied prospectively. Management believes the
implementation of this statement will not have a material impact on the
companys financial position, results of operations or cash flows.

In November 2002, the FASB issued Financial Accounting Standards Board
Interpretation (FIN) No. 45, Guarantors Guarantees of Indebtedness of
Others, and Interpretation of FASB Statements No. 5, 57, and 107 and Rescission
of FASB Interpretation No. 34 (FIN 45). FIN 45 elaborates on the disclosure
to be made by a guarantor in its interim and annual financial statements about
its obligations under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002, and were implemented in the Companys financial statements for the year
ended September 30, 2003. Implementation of FIN 45 did not have a material
impact on the Companys financial position, results of operations or cash
flows.

37



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CHANGES IN FINANCIAL CONDITION FOR 2003 AND 2002

ASSETS

Total assets of the Company increased $47.0 million to $472.2 million at
September 30, 2003 from $425.3 million at September 30, 2002. This increase
was primarily due to increases in cash on hand and in banks, investments,
mortgage-backed securities, loans receivable and assets classified as other
assets. The growth in assets was funded by a $35.0 million net increase in
deposits and a $6.0 million increase in advances from the FHLB. Retained
earnings increased $4.7 million or 14.7% from $32.3 million at September 30,
2002 to $37.1 million at September 30, 2003. The discussion that follows
focuses on major changes in asset mix during the year.

Cash and Cash Equivalents.Cash and cash equivalents, which consist of
interest-bearing and noninterest-bearing deposits and cash on hand, increased
by $3.6 million to $19.0 million at September 30, 2003 compared to $15.4
million at September 30, 2002. The increase of $3.6 million was primarily due
to an increase in cash on hand and an increase in deposits at the Federal Home
Loan Bank of Dallas. These increased balances are intended to be utilized to
fund new loan originations as well as purchases of investment and mortgage-back
securities in the future.

Investment Securities.

(1)  Held-to-maturity - At September 30, 2003 the Company had investment
securities, classified as held-to-maturity, of $2.5 million compared to $8.0
million at September 30, 2002.

(2)  Available-for-sale - Investments, available-for-sale, increased $16.7
million from $29.2 million at September 30, 2002 to $45.9 million at September
30, 2003.

The net increase in investment securities can be primarily attributed to
the investment of funds received from the deposit growth during the year,
rather than an increase in estimated market value of investment securities
available-for-sale.

Mortgage-backed Securities (Includes Collateralized Mortgage Obligations).

(1)  Held-to-maturity - During the year, held-to-maturity mortgage-backed
securities decreased from $37.7 million at September 30, 2002 to $7.5 million
at September 30, 2003.

(2)  Available-for-sale - Available-for-sale certificates increased from
$52.0 million at September 30, 2002 to $99.8 million at September 30, 2003.

This net increase in mortgage-backed securities can also be attributed to
the investment of funds received from the deposit growth during the year,
rather than an increase in estimated market value of mortgage-backed securities
available-for-sale.

Loans Receivable, Net.Loans receivable, net, increased $14.0 million or
5.3% to $279.1 million at September 30, 2003 compared to $265.1 million for the
comparable period in 2002. The increase was primarily due to an increase in
single-family residential loans of $7.5 million or 4.0%, an increase in
commercial real estate loans of $3.6 million or 15.6%, an increase in
construction and land development loans of $9.2 million or 22.3%, and an
increase in land loans of $2.8 million or 86.5%, offset by a decrease in
consumer loans of $2.4 million or 10.9%. Loans receivable, net, amounted to
59.1% of total assets at September 30, 2003 compared to 62.3% of total assets
at September 30, 2002.

Premises and Equipment.Premises and equipment increased $255,000 from
$5.4 million at September 30, 2002 to $5.6 million at September 30, 2003.

38



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Stock in Federal Home Loan Bank.Federal Home Loan Bank stock represents
an equity interest in the FHLB that does not have a readily determinable fair
value (for purposes of Federal Accounting Standards Board Statement No. 115)
because its ownership is restricted and it lacks a market. It can be sold only
to the FHLB or to another member institution. It is carried at cost. Both
cash and stock dividends are received on FHLB stock and are reported as income.
The stock dividends are redeemable at par value. At September 30, 2003,
Federal Home Loan Bank stock amounted to $3.3 million compared to $3.2 million
at September 30, 2002. The increase was primarily a result of the FHLBs
requirement to hold stock based on the level of the Banks outstanding
advances.

Investment in Real Estate.The Company reported $1.0 million in
investment in real estate at September 30, 2003, a decrease of $170,000 from
the $1.2 million reported at September 30, 2002. There are currently twenty
houses completed or under construction in the Hallsville subdivision. Nine lots
were sold during fiscal 2003.

Intangible Assets.Intangible assets totaled $3.3 million at September
30, 2003. Intangible assets consisted primarily of goodwill and core base
deposit intangibles associated with the Carthage branch acquisition.

Other Assets.Other assets at September 30, 2003 totaled $1.3 million
compared to $945,000 for the comparable period in 2002.

LIABILITIES AND STOCKHOLDERS EQUITY

General.The Companys primary funding sources include deposits, FHLB
advances and stockholders equity. The discussion that follows focuses on the
major changes in this mix during fiscal 2003.

Deposits.Total deposits increased by $35.0 million to $388.9 million at
September 30, 2003 compared to $353.9 million at September 30, 2002. During
the year ended September 30, 2003 NOW accounts grew by $5.9 million which was
an increase of 10.7% from the September 30, 2002 balance of $54.9 million.
Certificates of deposit comprise the largest component of the deposit
portfolio, and these accounts totaled $251.5 million at fiscal year end.
Certificates of deposits amounted to 64.7% of the Companys total deposits at
September 30, 2003 compared to 69.1% at the comparable period in 2002. Total
deposits funded 82.4% of total assets at September 30, 2003 compared to 83.2%
at September 30, 2002.

Federal Home Loan Bank Advances.The Company uses advances from the FHLB
of Dallas as an additional source of funds to meet loan demand. At September
30, 2003, the outstanding amount of these borrowings was $31.1 million, which
is a $6.0 million increase from the $25.1 million outstanding at September 30,
2002. At September 30, 2003 advances funded 6.6% of total assets compared to
5.9% at September 30, 2002.

Equity.At September 30, 2003, total stockholders equity amounted to
$43.7 million or 9.2% of assets compared to $39.2 million or 9.2% of assets at
September 30, 2002. The increase of $4.4 million is primarily due to net
income of $5.8 million, proceeds from the exercise of stock options of
$405,000, by the release of ESOP shares of $188,000, partially offset by an
increase of $891,000 in unrealized gain on securities and the payment of cash
dividends of $1.0 million during the fiscal year ended September 30, 2003.

CHANGES IN FINANCIAL CONDITION FOR 2002 AND 2001

ASSETS

Total assets of the Company increased $74.3 million to $425.3 million at
September 30, 2002 from $351.0 million at September 30, 2001. This increase
was primarily due to increases in investments, mortgage-backed securities,
loans receivable and intangible assets, net, offset by decreases in assets
classified as other assets. The growth in assets was funded by a $93.6 million
net increase in deposits offset by a $23.0 million decrease in

39



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##### 



advances from
the FHLB. The Company repurchased $2.3 million of its common stock, on the
open market, during the year ended September 30, 2002, increasing its common
shares held in treasury from 869,560 shares at September 30, 2001 to 976,745
shares at September 30, 2002. Retained earnings increased $5.1 million or
18.8% from $27.2 million at September 30, 2001 to $32.3 million at September
30, 2002. The discussion that follows focuses on major changes in asset mix
during the year.

Cash and Cash Equivalents.Cash and cash equivalents, which consist of
interest-bearing and noninterest-bearing deposits and cash on hand, increased
by $1.7 million to $15.4 million at September 30, 2002 compared to $13.6
million at September 30, 2001. The increase of $1.7 million was primarily due
to an increase in cash on hand associated with the Carthage branch acquisition
and an increase in deposits at the Federal Home Loan Bank of Dallas. These
increased balances are intended to be utilized to fund new loan originations as
well as purchases of investment and mortgage-back securities in the future.

Investment Securities.

(1)  Held-to-maturity - At September 30, 2002 the Company had investment
securities, classified as held-to-maturity, of $8.0 million compared to $4.5
million at September 30, 2001.

(2)  Available-for-sale - Investments, available-for-sale, increased $14.9
million from $14.3 million at September 30, 2001 to $29.2 million at September
30, 2002.

The increase in investment securities can be primarily attributed to the
investment of funds received from the deposit growth during the year, rather
than an increase in estimated market value of investment securities
available-for-sale.

Mortgage-backed Securities (Includes Collateralized Mortgage Obligations).

(1)  Held-to-maturity - During the year, held-to-maturity mortgage-backed
securities increased from $14.6 million at September 30, 2001 to $37.7 million
at September 30, 2002.

(2)  Available-for-sale - Available-for-sale certificates increased from
$44.3 million at September 30, 2001 to $52.0 million at September 30, 2002.

This increase in mortgage-backed securities can also be attributed to the
investment of funds received from the deposit growth during the year, rather
than an increase in estimated market value of mortgage-backed securities
available-for-sale.

Loans Receivable, Net.Loans receivable, net, increased $18.7 million or
7.6% to $265.1 million at September 30, 2002 compared to $246.4 million for the
comparable period in 2001. The increase was primarily due to an increase in
single-family residential loans of $7.9 million or 4.3% and an increase in
commercial real estate loans of $6.0 million or 35.7%, offset by a decrease in
consumer loans of $1.5 million or 6.4%. Loans receivable, net, amounted to
62.3% of total assets at September 30, 2002 compared to 70.2% of total assets
at September 30, 2001.

Premises and Equipment.Premises and equipment increased $579,000 from
$4.8 million at September 30, 2001 to $5.4 million at September 30, 2002 due
primarily to the acquisition of the Carthage branch facilities.

Stock in Federal Home Loan Bank.Federal Home Loan Bank stock represents
an equity interest in the FHLB that does not have a readily determinable fair
value (for purposes of Federal Accounting Standards Board Statement No. 115)
because its ownership is restricted and it lacks a market. It can be sold only
to the FHLB or to another member institution. It is carried at cost. Both
cash and stock dividends are received on FHLB stock and are

40



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##### 



reported as income.
The stock dividends are redeemable at par value. At September 30, 2002,
Federal Home Loan Bank stock amounted to $3.2 million compared to $2.6 million
at September 30, 2001. The increase was primarily a result of the FHLBs
requirement to hold stock based on the level of the Banks outstanding
advances. The Bank had purchased additional stock during the year during a
period of higher borrowings and chose not to redeem the excess stock upon
repayment of the advances.

Investment in Real Estate.The Company reported $1.2 million in
investment in real estate at September 30, 2002, an increase of $36,000 from
the $1.2 million reported at September 30, 2001. There are currently twelve
houses completed or under construction in the Hallsville subdivision. Five lots
were sold during fiscal 2002.

Intangible Assets.Intangible assets totaled $3.5 million at September
30, 2002. Intangible assets consisted primarily of goodwill and core base
deposit intangibles associated with the Carthage branch acquisition.

Other Assets.Other assets at September 30, 2002 totaled $945,000
compared to $1.3 million for the comparable period in 2001. This decrease is
due primarily to a reduction in a receivable related to the proceeds of
$500,000 due from a called investment security received shortly after the end
of fiscal 2001.

LIABILITIES AND STOCKHOLDERS EQUITY

General.The Companys primary funding sources include deposits, FHLB
advances and stockholders equity. The discussion that follows focuses on the
major changes in this mix during fiscal 2002.

Deposits.Total deposits increased by $93.6 million to $353.9 million at
September 30, 2002 compared to $260.3 million at September 30, 2001. During
the year ended September 30, 2002 NOW accounts and checking accounts grew by
$14.0 million which was an increase of 34.2% from the September 30, 2001
balance of $40.9 million. Certificates of deposit comprise the largest
component of the deposit portfolio, and these accounts totaled $244.5 million
at fiscal year end. Certificates of deposits amounted to 69.1% of the
Companys total deposits at September 30, 2002 compared to 73.1% at the
comparable period in 2001. Total deposits funded 83.2% of total assets at
September 30, 2002 compared to 74.2% at September 30, 2001.

Federal Home Loan Bank Advances.The Company uses advances from the FHLB
of Dallas as an additional source of funds to meet loan demand. At September
30, 2002 the outstanding amount of these
borrowings was $25.1 million, which is a $23.0 million decrease from the $48.1
million outstanding at September 30, 2001. At September 30, 2002 advances
funded 5.9% of total assets compared to 13.7% at September 30, 2001.

Equity.At September 30, 2002, total stockholders equity amounted to
$39.2 million or 9.2% of assets compared to $36.0 million or 10.3% of assets at
September 30, 2001. The increase of $3.2 million is primarily due to increases
in net income of $6.0 million, employee and management awards of $86,000,
partially offset by the repurchase of 107,185 shares of common stock totaling
$2.3 million; a decrease of $25,000 in unrealized gain on securities; and the
payment of cash dividends of $855,000 during the fiscal year ended September
30, 2002.

41



---



##### 



AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID

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

|                                                                        |                                  |                                            |  |           |   |         |         |          |         |      |        |         |        |          |        |      |      |   |         |         |         |   |        |        |        |  |        |      |      |  
|----------------------------------------------------------------------- | -------------------------------- | ------------------------------------------ |  | --------- | - | ------- | ------- | -------- | ------- | ---- | ------ | ------- | ------ | -------- | ------ | ---- | ---- | - | ------- | ------- | ------- | - | ------ | ------ | ------ |  | ------ | ---- | ---- | -
|                                                                        |                                  |                                            |  | September |   |         |         |          |         |      |        |         |        |          |        |      |      |   |         |         |         |   |        |        |        |  |        |     
|                                                                        |                                  |                                            |  | 30, 2003  |   | 2003    |         | 2002    
|                                                                        |                                  |                                            |  |           |   |         |         |         
|                                                                        |                                  |                                            |  | Yield/    |   | Average |         |          |         |      |        | Yield/  |        | Average  |        |      |      |   |         | Yield/ 
|                                                                        |                                  |                                            |  | Rate      |   | Balance |         | Interest |         | Rate |        | Balance |        | Interest |        | Rate
|                                                                        |                                  |                                            |  |           |   |         |         |          |         |      |        |         |        |          |        |     
|INTEREST-EARNING ASSETS:                                                |                                  |                                            |  |           |   |         |         |          |         |      |        |         |        |          |        |      |      |   |         |         |         |   |        |        |        |  |        |     
|                                                                        | Loans receivable(1)              |                                            |  | 6.89      | % |         | $       | 275,397  |         |      | $      | 20,842  |        |          |        | 7.57 | %    |   | $       | 260,454 |         |   | $      | 21,902 |        |  |        | 8.41 | %   
|                                                                        | Mortgage-backed
securities       |                                            |  | 3.83      |   |         |         | 94,628   |         |      |        | 3,571   |        |          |        | 3.77 |      |   |         | 80,031  |         |   |        | 4,520  |        |  |        | 5.65 |     
|                                                                        | Investment securities            |                                            |  | 4.05      |   |         |         | 48,290   |         |      |        | 2,071   |        |          |        | 4.29 |      |   |         | 29,806  |         |   |        | 1,354  |        |  |        | 4.54 |     
|                                                                        | Other interest-earning
assets(2) |                                            |  | 1.53      |   |         |         | 14,539   |         |      |        | 221     |        |          |        | 1.52 |      |   |         | 12,725  |         |   |        | 290    |        |  |        | 2.28 |     
|                                                                        |                                  |                                            |  |           |   |         |         |          |         |      |        |         |        |          |        |      |      |   |         |         |         |   |        |        |        |  |        |     
|Total interest-earning assets                                           |                                  |                                            |  |           |   |         | 432,854 |          |         | $    | 26,705 |         |        |          | 6.17   | %    |      |   | 383,016 |         |         | $ | 28,066 |        |        |  | 7.33   | %   
|                                                                        |                                  |                                            |  |           |   |         |         |          |         |      |        |         |        |          |        |      |      |   |         |         |         |   |        |        |        |  |        |     
|Non-interest-earning assets                                             |                                  |                                            |  |           |   |         | 17,670  |          |         |      |        |         |        |          |        |      |      |   | 14,402  |         |         |   |        |        |        |  |        |     
|                                                                        |                                  |                                            |  |           |   |         |         |          |         |      |        |         |        |          |        |      |      |   |         |         |         |   |        |        |        |  |        |     
|                                                                        |                                  | Total assets                               |  |           |   |         |         | $        | 450,524 |      |        |         |        |          |        |      |      |   |         | $       | 397,418 |   |        |        |        |  |        |      |      |  
|                                                                        |                                  |                                            |  |           |   |         |         |          |         |      |        |         |        |          |        |      |      |   |         |         |         |   |        |        |        |  |        |     
|INTEREST-BEARING LIABILITIES:                                           |                                  |                                            |  |           |   |         |         |          |         |      |        |         |        |          |        |      |      |   |         |         |         |   |        |        |        |  |        |     
|                                                                        | Transaction accounts             |                                            |  | 1.00      | % |         | $       | 119,666  |         |      | $      | 1,630   |        |          |        | 1.36 | %    |   | $       | 91,574  |         |   | $      | 1,792  |        |  |        | 1.96 | %   
|                                                                        | Time deposits                    |                                            |  | 3.05      |   |         |         | 251,437  |         |      |        | 8,804   |        |          |        | 3.50 |      |   |         | 225,410 |         |   |        | 10,193 |        |  |        | 4.52 |     
|                                                                        |                                  |                                            |  |           |   |         |         |          |         |      |        |         |        |          |        |      |      |   |         |         |         |   |        |        |        |  |        |     
|                                                                        |                                  | Total
deposits                             |  |           |   |         |         |          | 371,103 |      |        |         | 10,434 |          |        |      | 2.81 |   |         |         | 316,984 |   |        |        | 11,985 |  |        |      | 3.78 |  
|                                                                        |                                  |                                            |  |           |   |         |         |          |         |      |        |         |        |          |        |      |      |   |         |         |         |   |        |        |        |  |        |     
|                                                                        | Borrowings                       |                                            |  | 4.19      |   |         |         | 26,170   |         |      |        | 1,277   |        |          |        | 4.88 |      |   |         | 35,772  |         |   |        | 1,826  |        |  |        | 5.10 |     
|                                                                        |                                  |                                            |  |           |   |         |         |          |         |      |        |         |        |          |        |      |      |   |         |         |         |   |        |        |        |  |        |     
|                                                                        |                                  | Total
interest-bearing
liabilities         |  |           |   |         |         |          | 397,273 |      |        | $       | 11,711 |          |        |      | 2.95 | % |         |         | 352,756 |   |        | $      | 13,811 |  |        |      | 3.92 | %
|                                                                        |                                  |                                            |  |           |   |         |         |          |         |      |        |         |        |          |        |      |      |   |         |         |         |   |        |        |        |  |        |     
|Non-interest-bearing liabilities                                        |                                  |                                            |  |           |   |         | 10,947  |          |         |      |        |         |        |          |        |      |      |   | 7,359   |         |         |   |        |        |        |  |        |     
|                                                                        |                                  |                                            |  |           |   |         |         |          |         |      |        |         |        |          |        |      |      |   |         |         |         |   |        |        |        |  |        |     
|                                                                        |                                  | Total
liabilities                          |  |           |   |         |         |          | 408,220 |      |        |         |        |          |        |      |      |   |         |         | 360,115 |   |        |        |        |  |        |      |      |  
|                                                                        |                                  |                                            |  |           |   |         |         |          |         |      |        |         |        |          |        |      |      |   |         |         |         |   |        |        |        |  |        |     
|Stockholders Equity                                                    |                                  |                                            |  |           |   |         | 42,304  |          |         |      |        |         |        |          |        |      |      |   | 37,303  |         |         |   |        |        |        |  |        |     
|                                                                        |                                  |                                            |  |           |   |         |         |          |         |      |        |         |        |          |        |      |      |   |         |         |         |   |        |        |        |  |        |     
|                                                                        |                                  | Total
liabilities
and
stockholders
equity |  |           |   |         |         | $        | 450,524 |      |        |         |        |          |        |      |      |   |         | $       | 397,418 |   |        |        |        |  |        |      |      |  
|                                                                        |                                  |                                            |  |           |   |         |         |          |         |      |        |         |        |          |        |      |      |   |         |         |         |   |        |        |        |  |        |     
|Net interest income; interest rate
spread                               |                                  |                                            |  |           |   |         |         |          |         | $    | 14,994 |         |        |          | 3.22   | %    |      |   |         |         |         | $ | 14,255 |        |        |  | 3.41   | %   
|                                                                        |                                  |                                            |  |           |   |         |         |          |         |      |        |         |        |          |        |      |      |   |         |         |         |   |        |        |        |  |        |     
|Net interest margin(3)                                                  |                                  |                                            |  |           |   |         |         |          |         |      |        |         |        |          | 3.46   | %    |      |   |         |         |         |   |        |        |        |  | 3.72   | %   
|                                                                        |                                  |                                            |  |           |   |         |         |          |         |      |        |         |        |          |        |      |      |   |         |         |         |   |        |        |        |  |        |     
|Average interest-earning assets to average
interest bearing liabilities |                                  |                                            |  |           |   |         |         |          |         |      |        |         |        |          | 109.00 | %    |      |   |         |         |         |   |        |        |        |  | 108.58 | %   
|                                                                        |                                  |                                            |  |           |   |         |         |          |         |      |        |         |        |          |        |      |      |   |         |         |         |   |        |        |        |  |        |     

|                                                                        |                                  |                                            |         |         |         |          |        |        |        |        |        |      |      |  
|----------------------------------------------------------------------- | -------------------------------- | ------------------------------------------ | ------- | ------- | ------- | -------- | ------ | ------ | ------ | ------ | ------ | ---- | ---- | -
|                                                                        |                                  |                                            |         | 2001   
|                                                                        |                                  |                                            |         |        
|                                                                        |                                  |                                            |         | Average |         |          |        |        |        | Yield/
|                                                                        |                                  |                                            |         | Balance |         | Interest |        | Rate  
|                                                                        |                                  |                                            |         |         |         |          |        |       
|INTEREST-EARNING ASSETS:                                                |                                  |                                            |         |         |         |          |        |        |        |        |        |     
|                                                                        | Loans receivable(1)              |                                            | $       | 234,339 |         |          | $      | 19,772 |        |        |        | 8.44 | %   
|                                                                        | Mortgage-backed securities       |                                            |         | 42,633  |         |          |        | 2,735  |        |        |        | 6.42 |     
|                                                                        | Investment securities            |                                            |         | 19,758  |         |          |        | 1,257  |        |        |        | 6.36 |     
|                                                                        | Other interest-earning assets(2) |                                            |         | 11,044  |         |          |        | 467    |        |        |        | 4.23 |     
|                                                                        |                                  |                                            |         |         |         |          |        |        |        |        |        |     
|Total interest-earning assets                                           |                                  | $                                          | 307,774 |         |         | $        | 24,231 |        |        |        | 7.87   | %   
|                                                                        |                                  |                                            |         |         |         |          |        |        |        |        |        |     
|Non-interest-earning assets                                             |                                  |                                            | 14,776  |         |         |          |        |        |        |        |        |     
|                                                                        |                                  |                                            |         |         |         |          |        |        |        |        |        |     
|                                                                        |                                  | Total assets                               |         | $       | 322,520 |          |        |        |        |        |        |      |      |  
|                                                                        |                                  |                                            |         |         |         |          |        |        |        |        |        |     
|INTEREST-BEARING LIABILITIES:                                           |                                  |                                            |         |         |         |          |        |        |        |        |        |     
|                                                                        | Transaction accounts             |                                            | $       | 59,350  |         |          | $      | 1,384  |        |        |        | 2.33 | %   
|                                                                        | Time deposits                    |                                            |         | 176,071 |         |          |        | 10,151 |        |        |        | 5.77 |     
|                                                                        |                                  |                                            |         |         |         |          |        |        |        |        |        |     
|                                                                        |                                  | Total deposits                             |         |         | 235,421 |          |        |        | 11,535 |        |        |      | 4.90 |  
|                                                                        |                                  |                                            |         |         |         |          |        |        |        |        |        |     
|                                                                        | Borrowings                       |                                            |         | 44,480  |         |          |        | 2,506  |        |        |        | 5.63 |     
|                                                                        |                                  |                                            |         |         |         |          |        |        |        |        |        |     
|                                                                        |                                  | Total interest-bearing liabilities         |         |         | 279,901 |          |        | $      | 14,041 |        |        |      | 5.02 | %
|                                                                        |                                  |                                            |         |         |         |          |        |        |        |        |        |     
|Non-interest-bearing liabilities                                        |                                  |                                            | 7,194   |         |         |          |        |        |        |        |        |     
|                                                                        |                                  |                                            |         |         |         |          |        |        |        |        |        |     
|                                                                        |                                  | Total liabilities                          |         |         | 287,095 |          |        |        |        |        |        |      |      |  
|                                                                        |                                  |                                            |         |         |         |          |        |        |        |        |        |     
|Stockholders Equity                                                    |                                  |                                            | 35,425  |         |         |          |        |        |        |        |        |     
|                                                                        |                                  |                                            |         |         |         |          |        |        |        |        |        |     
|                                                                        |                                  | Total liabilities and stockholders equity |         | $       | 322,520 |          |        |        |        |        |        |      |      |  
|                                                                        |                                  |                                            |         |         |         |          |        |        |        |        |        |     
|Net interest income; interest rate speed                                |                                  |                                            |         |         |         | $        | 10,190 |        |        |        | 2.85   | %   
|                                                                        |                                  |                                            |         |         |         |          |        |        |        |        |        |     
|Net interest margin(3)                                                  |                                  |                                            |         |         |         |          |        |        |        |        | 3.31   | %   
|                                                                        |                                  |                                            |         |         |         |          |        |        |        |        |        |     
|Average interest-earning assets to average interest bearing
liabilities |                                  |                                            |         |         |         |          |        |        |        |        | 111.00 | %   
|                                                                        |                                  |                                            |         |         |         |          |        |        |        |        |        |     



---

|(1) |  | Includes non-accrual loans which do not significantly impact the
average.             
|--- |  | --------------------------------------------------------------------------------------
|   
|(2) |  | Consists primarily of interest-bearing deposits.                                      
|   
|(3) |  | Net interest margin is net interest income divided by average
interest-earning assets.

42



---



##### 



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

|                              |                                            |                               |   |                          |        |               |   |            |       |          |   |        |        |            |   |        |      |   |   |       |       |  |   |       |       | 
|----------------------------- | ------------------------------------------ | ----------------------------- | - | ------------------------ | ------ | ------------- | - | ---------- | ----- | -------- | - | ------ | ------ | ---------- | - | ------ | ---- | - | - | ----- | ----- |  | - | ----- | ----- | 
|                              |                                            |                               |   | Year Ended September 30,
|                              |                                            |                               |   |                         
|                              |                                            |                               |   | 2003 vs. 2002            |        | 2002 vs. 2001
|                              |                                            |                               |   |                          |        |              
|                              |                                            |                               |   | Increase                 |        |               |   |            |       | Increase |   |        |        |           
|                              |                                            |                               |   | (Decrease)               |        | Total         |   | (Decrease) |       | Total   
|                              |                                            |                               |   | Due to                   |        | Increase      |   | Due to     |       | Increase
|                              |                                            |                               |   |                          |        |               |   |            |       |         
|                              |                                            |                               |   | Rate                     |        | Volume        |   | (Decrease) |       | Rate     |   | Volume |        | (Decrease)
|                              |                                            |                               |   |                          |        |               |   |            |       |          |   |        |        |           
|                              |                                            |                               |   | (Dollars in Thousands)  
|INTEREST-EARNING ASSETS:      |                                            |                               |   |                          |        |               |   |            |       |          |   |        |        |            |   |        |      |   |   |       |       |  |   |      
|                              | Loans                                      |                               | $ | (2,486                   | )      |               | $ | 1,600      |       |          | $ | (886   | )      |            | $ | (66    | )    |   | $ | 2,196 |       |  | $ | 2,130 |      
|                              | Mortgage-backed securities                 |                               |   | (2,107                   | )      |               |   | 1,158      |       |          |   | (949   | )      |            |   | (185   | )    |   |   | 1,970 |       |  |   | 1,785 |      
|                              | Investment securities                      |                               |   | (71                      | )      |               |   | 613        |       |          |   | 542    |        |            |   | (125   | )    |   |   | 222   |       |  |   | 97    |      
|                              | Other interest-earning assets              |                               |   | (121                     | )      |               |   | 52         |       |          |   | (69    | )      |            |   | (264   | )    |   |   | 87    |       |  |   | (177  | )    
|                              |                                            |                               |   |                          |        |               |   |            |       |          |   |        |        |            |   |        |      |   |   |       |       |  |   |      
|                              |                                            | Total interest-earning assets |   | $                        | (4,785 | )             |   | $          | 3,423 |          |   | $      | (1,362 | )          |   | $      | (640 | ) |   | $     | 4,475 |  |   | $     | 3,835 | 
|                              |                                            |                               |   |                          |        |               |   |            |       |          |   |        |        |            |   |        |      |   |   |       |       |  |   |      
|INTEREST-BEARING LIABILITIES: |                                            |                               |   |                          |        |               |   |            |       |          |   |        |        |            |   |        |      |   |   |       |       |  |   |      
|                              | Deposits                                   |                               | $ | (4,643                   | )      |               | $ | 3,092      |       |          | $ | 1,551  |        |            | $ | (870   | )    |   | $ | 1,320 |       |  | $ | 450   |      
|                              | Other borrowings                           |                               |   | (77                      | )      |               |   | (472       | )     |          |   | (549   | )      |            |   | (221   | )    |   |   | (459  | )     |  |   | (680  | )    
|                              |                                            |                               |   |                          |        |               |   |            |       |          |   |        |        |            |   |        |      |   |   |       |       |  |   |      
|                              | Total interest-bearing liabilities         |                               | $ | (4,720                   | )      |               | $ | 2,620      |       |          | $ | (2,100 | )      |            | $ | (1,091 | )    |   | $ | 861   |       |  | $ | (230  | )    
|                              |                                            |                               |   |                          |        |               |   |            |       |          |   |        |        |            |   |        |      |   |   |       |       |  |   |      
|                              | Increase (decrease) in
net interest income |                               |   |                          |        |               |   |            |       |          | $ | 738    |        |            |   |        |      |   |   |       |       |  | $ | 4,065 |      
|                              |                                            |                               |   |                          |        |               |   |            |       |          |   |        |        |            |   |        |      |   |   |       |       |  |   |      

|                              |                                            |                               |   |                          |     |          |   |            |       |  |   |       |       | 
|----------------------------- | ------------------------------------------ | ----------------------------- | - | ------------------------ | --- | -------- | - | ---------- | ----- |  | - | ----- | ----- | 
|                              |                                            |                               |   | Year Ended September 30,
|                              |                                            |                               |   |                         
|                              |                                            |                               |   | 2001 vs. 2000           
|                              |                                            |                               |   |                         
|                              |                                            |                               |   | Increase                 |     |          |   |           
|                              |                                            |                               |   | (Decrease)               |     | Total   
|                              |                                            |                               |   | Due to                   |     | Increase
|                              |                                            |                               |   |                          |     |         
|                              |                                            |                               |   | Rate                     |     | Volume   |   | (Decrease)
|                              |                                            |                               |   |                          |     |          |   |           
|                              |                                            |                               |   | (Dollars in Thousands)  
|INTEREST-EARNING ASSETS:      |                                            |                               |   |                          |     |          |   |            |       |  |   |      
|                              | Loans                                      |                               | $ | 194                      |     |          | $ | 1,021      |       |  | $ | 1,215 |      
|                              | Mortgage-backed securities                 |                               |   | (173                     | )   |          |   | 461        |       |  |   | 288   |      
|                              | Investment securities                      |                               |   | 152                      |     |          |   | 27         |       |  |   | 179   |      
|                              | Other interest-earning assets              |                               |   | (48                      | )   |          |   | 247        |       |  |   | 199   |      
|                              |                                            |                               |   |                          |     |          |   |            |       |  |   |      
|                              |                                            | Total interest-earning assets |   | $                        | 125 |          |   | $          | 1,756 |  |   | $     | 1,881 | 
|                              |                                            |                               |   |                          |     |          |   |            |       |  |   |      
|INTEREST-BEARING LIABILITIES: |                                            |                               |   |                          |     |          |   |            |       |  |   |      
|                              | Deposits                                   |                               | $ | 479                      |     |          | $ | 998        |       |  | $ | 1,477 |      
|                              | Other borrowings                           |                               |   | (103                     | )   |          |   | 339        |       |  |   | 236   |      
|                              |                                            |                               |   |                          |     |          |   |            |       |  |   |      
|                              | Total interest-bearing liabilities         |                               | $ | 376                      |     |          | $ | 1,337      |       |  | $ | 1,713 |      
|                              |                                            |                               |   |                          |     |          |   |            |       |  |   |      
|                              | Increase (decrease) in
net interest income |                               |   |                          |     |          |   |            |       |  | $ | 168   |      
|                              |                                            |                               |   |                          |     |          |   |            |       |  |   |      

43



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COMPARISON OF RESULTS OF OPERATIONS FOR YEARS ENDED SEPTEMBER 30, 2003 AND
SEPTEMBER 30, 2002

General.Jacksonvilles net income of $5.8 million for the year ended
September 30, 2003 compared to $6.0 million for the year ended September 30,
2002, a $195,000 or 3.3% decrease. Total interest income decreased from $28.1
million for the year ended September 30, 2002 to $26.7 million for fiscal 2003,
total interest expense decreased from $13.8 million to $11.7 million for the
comparable periods resulting in a net interest income before provision for
losses on loans of $15.0 million, a decrease of $738,000.

Non-interest income increased to $3.1 million during fiscal 2003 from $2.6
million for the previous year, a $484,000 or 18.8% increase. Non-interest
expense increased from $7.7 million for fiscal 2002 to $9.1 million in 2003, a
19.0% increase.

While interest earning assets average balances increased during the year,
the yield on these assets decreased by 116 basis points from 7.33% in fiscal
2002 to 6.17% in fiscal 2003. The average paid on interest bearing liabilities
decreased 97 basis points from 3.92% in fiscal 2002 to 2.95% in fiscal 2003.
The interest rate spread decreased from 3.41% in fiscal 2002 to 3.22% in 2003.

Earnings per share amounted to $3.38 (basic) and $3.16 (diluted) for
fiscal 2003 as compared to $3.48 (basic) and $3.30 (diluted) in fiscal 2002.

Net Interest Income.Net interest income is determined by the interest
rate spread (i.e., the difference between the yield on interest-earning assets
and the rates paid on interest bearing liabilities) and changes in the average
amounts of interest-bearing assets and liabilities. Net interest income after
provision for losses increased by $678,000, or 4.8%, for the year ended
September 30, 2003 compared to the year ended September 30, 2002. This
increase was due to a $1.4 million decrease in total interest income which was
offset by a $2.1 million decrease in total interest expense.

Interest income on loans receivable decreased from $21.7 million in fiscal
2002 to $20.8 million in 2003. For the same periods mortgage backed securities
interest decreased from $4.5 million to $3.6 million and interest on investment
securities decreased from $1.5 million to $2.1 million. Other interest income
decreased $69,000.

The decrease in total interest income reflects a decrease in yields
primarily on mortgage-backed securities and on the loan portfolio.

The average balances of mortgage-backed securities and loan receivable
portfolios increased during the period reflecting some shift in portfolio mix
by management of Jacksonville as increased deposits were used to purchase
mortgage-backed securities, investment securities and to fund new loans.

Total
interest expense decreased $2.1 million from $13.8 million in fiscal
2002 to $11.7 million for the current fiscal year. This decrease was due to a
decrease of $1.6 million in interest paid on deposit accounts and a decrease in
interest on borrowings from $1.8 million in fiscal 2002 to $1.3 million in
2003. The average rate paid on deposits decreased from 3.78% in fiscal 2002
to 2.81% in fiscal 2003, while the average rate paid on borrowings decreased
from 5.10% to 4.88%.

Provision for Losses on Loans.A provision for loan losses is charged to
earnings to bring the total allowance to a level considered adequate by
management to absorb potential losses in the portfolio. Managements
determination of the adequacy of the allowance is based on periodic evaluations
of the loan portfolio considering past experience, current economic conditions,
volume, growth, composition of the loan portfolio and other relevant factors.
Jacksonvilles provision for loan losses increased from $102,000 for fiscal
2002 to $162,000 for fiscal 2003. The Company believes that the additional
loan loss reserves are prudent and warranted at this time due to the weakening
of the national economy and because of the increase in the loan portfolio.
Jacksonvilles allowance for losses amounted to $1.29 million at September 30,
2003 as compared to $1.29 million at September 30, 2002.

44



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Non-interest Income.The primary components of non-interest income are
comprised of service fees and deposit service charges, income from real estate
operations, net, other non-interest income and gain on sale of
securities. Total non-interest income amounted to $3.1 million for the year
ended September 30, 2003 compared to $2.6 million for fiscal 2002. Fee and
deposit service charge showed an increase of $367,000 for the current year over
the amount stated in fiscal 2002 of $2.3 million, a 15.8% increase primarily
attributable to Jacksonvilles checking account marketing strategies including
overdraft privileges and the increase in the level of demand and NOW accounts.
Real estate operations, net income increased from a loss of $31,000 in 2002 to
a gain of $106,000 for fiscal 2003. This increase is primarily contributed to
the sale of lots in the Hallsville Subdivision during the fiscal year end
September 30, 2003. Jacksonville recognized a loss on sale of securities of
$9,000 for the period ended September 30, 2003. Other non-interest income
decreased from $269,000 in 2002 to $258,000 in 2003.

Non-interest Expense.Non-interest expense includes salaries and employee
benefits, occupancy and equipment, deposit insurance premiums and other
non-interest expense. For the years ended September 30, 2003 and 2002,
non-interest expense totaled $9.1 million and $7.7 million, respectively. The
primary reason for the increase in non-interest expenses in fiscal 2003 was due
to a $1.2 million increase in compensation and employee benefits (see Note 12
to Consolidated financial Statements); a $56,000 increase in occupancy and
equipment; a $14,000 increase in amortization of intangible assets; an increase
in other non-interest expense of $174,000; and an increase in insurance expense
of $19,000.

Income Taxes.Income tax expense amounted to $3.0 million during the year
ended September 30, 2003, compared to $3.1 million in fiscal 2002. See Note 2
to Consolidated Financial Statements.

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2002 AND
SEPTEMBER 30, 2001

General.Jacksonvilles net income of $6.0 million for the year ended
September 30, 2002 compared to $3.9 million for the year ended September 30,
2001, a $2.1 million or 54.1% increase. While total interest income increased
from $24.2 million for the year ended September 30, 2001 to $28.1 million for
fiscal 2002, total interest expense decreased from $14.0 million to $13.8
million for the comparable periods resulting in a net interest income before
provision for losses on loans of $14.3 million, an increase of $4.1 million.

Non-interest income increased to $2.6 million during fiscal 2002 from $2.4
million for the previous year, a $188,000 or 7.9% increase. Non-interest
expense increased from $6.6 million for fiscal 2001 to $7.7 million in 2002, a
15.9% increase.

While interest earning assets average balances increased during the year,
the yield on these assets decreased by 54 basis points from 7.87% in fiscal
2001 to 7.33% in fiscal 2002. The average paid on interest bearing liabilities
decreased 110 basis points from 5.02% in fiscal 2001 to 3.92% in fiscal 2002.
The interest rate spread increased from 2.85% in fiscal 2001 to 3.41% in 2002.

Earnings per share amounted to $3.48 (basic) and $3.30 (diluted) for
fiscal 2002 as compared to $2.18 (basic) and $2.06 (diluted) in fiscal 2001.
The increase in earnings per share was due to an increase in net income and a
reduction in the weighted average number of shares outstanding due to the
Companys stock repurchases during fiscal 2002.

Net Interest Income.Net interest income is determined by the interest
rate spread (i.e., the difference between the yield on interest-earning assets
and the rates paid on interest bearing liabilities) and changes in the average
amounts of interest-bearing assets and liabilities. Net interest income
increased by $4.1 million, or 39.9%, for the year ended September 30, 2002
compared to the year ended September 30, 2001. This increase was due to a $3.8
million increase in total interest income and a $231,000 decrease in total
interest expense.

45



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Interest income on loans receivable increased from $19.8 million in fiscal
2001 to $21.9 million in 2002. For the same periods mortgage backed securities
interest increased from $2.7 million to $4.5 million and interest on investment
securities also increased from $1.3 million to $1.4 million. Other interest
income decreased $178,000.

The increase in total interest income reflects an increase in average
balances primarily on mortgage-backed securities and on loan portfolios.

The increases in the average balances of mortgage-backed securities and
loan receivable portfolios reflect some shift in portfolio mix by management of
Jacksonville as increased deposits were used to purchase mortgage-backed
securities, investment securities and to fund new loans.

Total interest expense decreased $231,000 from $14.0 million in fiscal
2001 to $13.8 million for the current fiscal year. This decrease was due to an
increase of $450,000 in interest paid on deposit accounts and a decrease in
interest on borrowings from $2.5 million in fiscal 2001 to $1.8 million in
2002. The average rate paid on deposits decreased from 4.9% in fiscal 2001 to
3.78% in fiscal 2002, while the average rate paid on borrowings decreased from
5.63% to 5.10%.

Provision for Losses on Loans.A provision for loan losses is charged to
earnings to bring the total allowance to a level considered adequate by
management to absorb potential losses in the portfolio. Managements
determination of the adequacy of the allowance is based on periodic evaluations
of the loan portfolio considering past experience, current economic conditions,
volume, growth, composition of the loan portfolio and other relevant factors.
Jacksonvilles provision for loan losses increased from $85,500 for fiscal 2001
to $102,000 for fiscal 2002. The Company believes that the additional loan
loss reserves are prudent and warranted at this time due to the weakening of
the national economy and because of the increase in loan portfolios.
Jacksonvilles allowance for losses amounted to $1.29 million at September 30,
2002 as compared to $1.26 million at September 30, 2001.

Non-interest Income.The primary components of non-interest income are
comprised of service fees and deposit service charges, income from real estate
operations, net, other non-interest income and gain on sale of securities.
Total non-interest income amounted to $2.6 million for the year ended September
30, 2002 compared to $2.4 million for fiscal 2001. Fee and deposit service
charge showed an increase of $379,000 for the current year over the amount
stated in fiscal 2001 of $1.9 million, a 19.4% increase primarily attributable
to Jacksonvilles checking account marketing strategies including overdraft
privileges and the increase in the level of demand and NOW accounts. Real
estate operations, net income decreased from $215,000 in 2001 to a loss of
$31,000 for fiscal 2002. This decrease is primarily contributed to the sale of
a large tract of repossessed real estate in fiscal 2001 and the expenses
associated with the Hallsville Subdivision during the fiscal year end September
30, 2002. Jacksonville recognized no gain on sale of securities for the period
ended September 30, 2002 while reporting $42,000 gain in this category for the
comparable period in 2001. Other non-interest income increased from $171,000
in 2001 to $269,000 in 2002.

Non-interest Expense.Non-interest expense includes salaries and employee
benefits, occupancy and equipment, deposit insurance premiums and other
non-interest expense. For the years ended September 30, 2002 and 2001,
non-interest expense totaled $7.7 million and $6.6 million, respectively. The
primary reason for the increase in non-interest expenses in fiscal 2002 was due
to a $412,000 increase in compensation and employee benefits; a $138,000
increase in occupancy and equipment; a $158,000 increase in amortization of
intangible assets; an increase in other non-interest expense of $332,000; and
an increase in insurance expense of $15,000.

Income Taxes.Income tax expense amounted to $3.1 million during the year
ended September 30, 2002, compared to $2.0 million in fiscal 2001. The increase
was due to an increase in earnings during fiscal 2002. See Note 2 to
Consolidated Financial Statements.

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LIQUIDITY AND CAPITAL RESOURCES

Jacksonville is required under applicable state regulations to maintain
specified levels of liquidity in an amount not less than 10% of its average
daily deposits for the most recently completed calendar quarter in cash and
readily marketable investments. At September 30, 2003 the Banks liquidity was
$175.7 million with a liquidity ratio of 44.9%.

Cash was generated by Jacksonvilles operating activities of $8.2 million
and $7.5 million during the years ended September 30, 2003 and 2002,
respectively, primarily as a result of net earnings of $5.8 million and $6.0
million, respectively. The adjustments to reconcile net earnings to net cash
provided by operations during the periods presented consisted primarily of the
provision for losses on loans, depreciation and amortization expense,
amortization of deferred loan origination fees and increases or decreases in
other assets and other liabilities.

The primary investing activity of Jacksonville is lending and purchases of
investment and mortgage-backed securities, which is funded with cash provided
from operations and financing activities, as well as proceeds from amortization
and prepayments on existing loans and proceeds from maturities of investment
securities and mortgage-backed securities. During the year ended September 30,
2003, Jacksonvilles investing activities used cash of $45.8 million,
principally as a result of net loan originations of $14.6 million; to purchase
mortgage backed securities totaling $91.3 million; to purchase investment
securities of $53.4 million; capital expenditures of $849,000; to purchase
stock in FHLB of $86,000; partially offset by proceeds on maturity of
investment securities of $31.9 million; principal paydown on MBS of $71.8
million; and proceeds from sale of foreclosed real estate of $601,000.

During the year ended September 30, 2002, Jacksonvilles investing
activities used cash of $73.5 million, principally as a result of net loan
originations of $18.8 million, to purchase mortgage backed securities totaling
$67.5 million; to purchase investment securities of $52.0 million; capital
expenditures of $1.2 million to purchase stock in FHLB of $555,000; to pay a
premium of $3.7 million for the acquisition of the Carthage, Texas branch;
partially offset by proceeds on maturity and sale of investment securities of
$33.6 million; principal paydown on MBS of $36.5 million; and proceeds from
sale of foreclosed real estate of $239,000.

During the year ended September 30, 2003, Jacksonvilles financing
activities generated cash of $41.3 million as a result of a net increase in
deposits of $35.0 million; an net increase of $15.5 million in advances from
FHLB; net proceeds from exercise of stock options of $405,000; a net increase
of $925,000 in advance payments by borrowers for property taxes and insurances;
offset by a $9.6 million payment on FHLB advances and the payment of dividends
in the amount of $1.0 million.

During the year ended September 30, 2002, Jacksonvilles financing
activities generated cash of $67.7 million as a result of a net increase in
deposits of $93.6 million; proceeds from the exercise of stock options of
$312,000; offset by a net decrease of $23.0 million in advances from FHLB; a
net decrease of $36,000 in advance payments by borrowers for property taxes and
insurances; the purchase of treasury stock in the amount of $2.3 million; and
the payment of dividends in the amount of $855,000.

At September 30, 2003, Jacksonville had $7.7 million of outstanding
commitments to originate residential real estate loans, $3.8 million to
originate other real estate loans, and no commitments to purchase investment
securities. At the same date, the total amount of certificates of deposit
which are scheduled to mature by September 30, 2004 are $155.6 million.
Jacksonville believes that it has adequate resources to fund commitments as
they arise and that it can adjust the rate on savings certificates to retain
deposits in changing interest rate environments. If Jacksonville requires
funds beyond its internal funding capabilities, it has sufficient mortgages to
pledge as collateral for advances from the FHLB of Dallas as an additional
source of funds.

Borrowings from the FHLB of Dallas are an important source of funding for
Jacksonville and are subject to limitations imposed by the FHLB of Dallas. In
general, the FHLB of Dallas limits borrowing to 50% of a members total assets,
subject to collateral availability. At September 30, 2003, Jacksonvilles
borrowing limit was $239.9 million, of which $31.1 million was due to the FHLB
of Dallas at that date, leaving a total remaining line of credit

47



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with the FHLB
of Dallas of $208.8 million at that date. The Company had sufficient mortgage
assets to collateralize the remaining line on September 30, 2003.

Jacksonville is required to maintain specified amounts of capital pursuant
to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA) and regulations promulgated by the FDIC thereunder. The capital
standards generally require the maintenance of regulatory capital sufficient to
meet a Tier 1 leveraged capital requirement, a Tier 1 risk-based capital
requirement and a total risk-based capital requirement. At September 30, 2003,
Jacksonvilles Tier 1 leveraged capital and Tier 1 risk-based capital totaled
$38.3 million or 8.11% of
adjusted total assets and 16.17% of risk-weighted assets, respectively. These
capital levels exceeded the minimum requirements at that date by approximately
$19.4 million and $28.8 million, respectively. Jacksonvilles total risk-based
capital was $39.6 million at September 30, 2003 or 16.71% of risk-weighted
assets which exceeded the current requirement of 8% of risk-weighted assets by
approximately $20.6 million.

IMPACT OF INFLATION AND CHANGING PRICES

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

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

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

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

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

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

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

To cope with these uncertainties, management gives careful attention to
its assumptions. For example, certain of the Banks interest-bearing deposit
products (NOW accounts, savings and money market deposits) have no contractual
maturity and based on historical experience have only a fractional sensitivity
to movements in market

48



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rates. Because management believes it has some control
with respect to the extent and timing of rates paid on non-maturity deposits,
certain assumptions based on historical experience are built into the model.
Another major assumption built into the model involves the ability customers
have to prepay loans, often without penalty. The risk of prepayment tends to
increase when interest rates fall. Since future prepayment behavior of loan
customers is uncertain, the resultant interest rate sensitivity of loan assets
cannot be determined exactly. The Bank utilizes market consensus prepayment
assumptions related to residential mortgages.

The Bank uses simulation analysis to measure the sensitivity of net
interest income over a specified time period (generally 1 year) under various
interest-rate scenarios using the assumptions discussed above. The Banks
policy on interest rate risk specifies that if interest rates were to shift
immediately up or down 200 basis points,
estimated net interest income should decline by less than 20%. Management
estimates, based on its simulation model, that an instantaneous 200 basis point
increase in interest rates at September 30, 2003, would result in a 6.7%
decrease in net interest income over the next twelve months, while a 200 basis
point decrease in rates would result in a 7.37% decrease in net interest income
over the next twelve months. In 2002, management estimated, based on its
simulation model, that an instantaneous 200 basis point increase in interest
rates at September 30, 2002, would result in a .39% increase in net interest
income over the next twelve months, while a 200 basis point decrease in rates
would result in less than a 8.7% decrease in net interest income over the next
twelve months. It should be emphasized that the results are highly dependent
on material assumptions such as those discussed above. It should also be noted
that the exposure of the Banks net interest income to gradual and/or modest
changes in interest rates is relatively small. At September 30, 2003 the Bank
was within the acceptable ranges set forth in the Banks Interest Rate Risk
policy.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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INDEPENDENT AUDITORS REPORT

The Board of Directors
Jacksonville Bancorp, Inc.

We have audited the accompanying consolidated statements of financial condition
of Jacksonville Bancorp, Inc. and subsidiaries, as of September 30, 2003 and
2002, and the related consolidated statements of earnings, stockholders
equity, and cash flows for each of the years in the three-year period ended
September 30, 2003.

These consolidated financial statements are the responsibility of the Companys
management. Our responsibility
is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with U. S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Jacksonville
Bancorp, Inc. and subsidiaries, as of September 30, 2003 and 2002, and the
results of their operations and cash flows for each of the years in the three
year period ended September 30, 2003, in conformity with U. S. generally
accepted accounting principles.

| |  |                                              
| |  | ---------------------------------------------
| |  | /s/ Henry & Peters, P.C.
HENRY & PETERS, P.C.

Tyler, Texas
November 4, 2003

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JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 2003 AND 2002

|                                     |                                                                                                                                                                             |                                                  |                            |                                                                                      |             |             |             |             |             |             |             | 
|------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------ | -------------------------- | ------------------------------------------------------------------------------------ | ----------- | ----------- | ----------- | ----------- | ----------- | ----------- | ----------- | 
|                                     |                                                                                                                                                                             |                                                  |                            |                                                                                      |             | 2003        |             | 2002       
|                                     |                                                                                                                                                                             |                                                  |                            |                                                                                      |             |             |             |            
|ASSETS                               |                                                                                                                                                                            
|                                     | Cash on hand and in banks                                                                                                                                                   |                                                  | $                          | 5,468,206                                                                            |             |             | $           | 3,957,183   |            
|                                     | Interest-bearing deposits                                                                                                                                                   |                                                  |                            | 13,530,135                                                                           |             |             |             | 11,395,212  |            
|                                     | Investment securities:                                                                                                                                                      |                                                  |                            |                                                                                      |             |             |             |             |            
|                                     |                                                                                                                                                                             |                                                  |                            | Held-to-maturity, approximate fair value of
$2,587,410 and $8,115,888, respectively  |             |             | 2,515,447   |             |             |             | 8,005,603   | 
|                                     |                                                                                                                                                                             |                                                  |                            | Available-for-sale, carried at fair value                                            |             |             | 45,944,389  |             |             |             | 29,208,330  | 
|                                     | Mortgage-backed securities:                                                                                                                                                 |                                                  |                            |                                                                                      |             |             |             |             |            
|                                     |                                                                                                                                                                             |                                                  |                            | Held-to-maturity, approximate fair value of
$7,619,381 and $37,735,916, respectively |             |             | 7,461,074   |             |             |             | 37,687,649  | 
|                                     |                                                                                                                                                                             |                                                  |                            | Available-for-sale, carried at fair value                                            |             |             | 99,817,919  |             |             |             | 52,037,400  | 
|                                     | Loans receivable, net                                                                                                                                                       |                                                  |                            | 279,136,721                                                                          |             |             |             | 265,090,618 |            
|                                     | Accrued interest receivable                                                                                                                                                 |                                                  |                            | 2,882,774                                                                            |             |             |             | 2,928,855   |            
|                                     | Foreclosed real estate, net                                                                                                                                                 |                                                  |                            | 218,171                                                                              |             |             |             | 87,006      |            
|                                     | Premises and equipment, net                                                                                                                                                 |                                                  |                            | 5,616,454                                                                            |             |             |             | 5,361,276   |            
|                                     | Stock in Federal Home Loan Bank of Dallas, at cost                                                                                                                          |                                                  |                            | 3,254,000                                                                            |             |             |             | 3,168,100   |            
|                                     | Investment in real estate                                                                                                                                                   |                                                  |                            | 1,041,320                                                                            |             |             |             | 1,211,730   |            
|                                     | Mortgage servicing rights                                                                                                                                                   |                                                  |                            | 671,616                                                                              |             |             |             | 652,331     |            
|                                     | Goodwill and other intangibles, net                                                                                                                                         |                                                  |                            | 3,342,422                                                                            |             |             |             | 3,514,562   |            
|                                     | Other assets                                                                                                                                                                |                                                  |                            | 1,331,175                                                                            |             |             |             | 944,536     |            
|                                     |                                                                                                                                                                             |                                                  |                            |                                                                                      |             |             |             |            
|                                     |                                                                                                                                                                             |                                                  | Total assets               |                                                                                      | $           | 472,231,823 |             |             | $           | 425,250,391 |            
|                                     |                                                                                                                                                                             |                                                  |                            |                                                                                      |             |             |             |            
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                                                            
|LIABILITIES                          |                                                                                                                                                                             |                                                  |                            |                                                                                      |             |             |             |            
|                                     | Deposits                                                                                                                                                                    |                                                  | $                          | 388,894,931                                                                          |             |             | $           | 353,896,248 |            
|                                     | Advances from Federal Home Loan Bank                                                                                                                                        |                                                  |                            | 31,107,711                                                                           |             |             |             | 25,129,010  |            
|                                     | Advances from borrowers for taxes and insurance                                                                                                                             |                                                  |                            | 4,948,710                                                                            |             |             |             | 4,023,222   |            
|                                     | Accrued expenses and other liabilities                                                                                                                                      |                                                  |                            | 3,623,276                                                                            |             |             |             | 2,993,354   |            
|                                     |                                                                                                                                                                             |                                                  |                            |                                                                                      |             |             |             |            
|                                     |                                                                                                                                                                             |                                                  | Total liabilities          |                                                                                      |             | 428,574,628 |             |             |             | 386,041,834 |            
|STOCKHOLDERS EQUITY                 |                                                                                                                                                                             |                                                  |                            |                                                                                      |             |             |             |            
|                                     | Preferred stock, no par value, 5,000,000 shares authorized; none issued                                                                                                     |                                                  |                            |                                                                                     |             |             |             |            |            
|                                     | Common stock, $.01 par value, 25,000,000 shares authorized;
2,777,210 and 2,738,569 shares issued;1,800,465 and 1,761,824
shares outstanding at 2003 and 2002, respectively |                                                  |                            | 27,772                                                                               |             |             |             | 27,386      |            
|                                     | Additional paid-in capital                                                                                                                                                  |                                                  |                            | 23,942,182                                                                           |             |             |             | 23,427,329  |            
|                                     | Retained earnings                                                                                                                                                           |                                                  |                            | 37,056,978                                                                           |             |             |             | 32,310,194  |            
|                                     | Accumulated other comprehensive income (loss),                                                                                                                              |                                                  |                            |                                                                                      |             |             |             |             |            
|                                     | unrealized gain (loss) on securities available for sale, net of tax                                                                                                         |                                                  |                            | (514,649                                                                             | )           |             |             | 376,658     |            
|                                     | Less:                                                                                                                                                                       |                                                  |                            |                                                                                      |             |             |             |             |            
|                                     |                                                                                                                                                                             | Treasury stock, at cost (976,745 shares)         |                            |                                                                                      | (16,015,455 | )           |             |             | (16,015,455 | )          
|                                     |                                                                                                                                                                             | Shares acquired by Employee Stock Ownership Plan |                            |                                                                                      | (839,633    | )           |             |             | (917,555    | )          
|                                     |                                                                                                                                                                             |                                                  |                            |                                                                                      |             |             |             |            
|                                     |                                                                                                                                                                             |                                                  | Total stockholders equity |                                                                                      |             | 43,657,195  |             |             |             | 39,208,557  |            
|                                     |                                                                                                                                                                             |                                                  |                            |                                                                                      |             |             |             |            
|                                     |                                                                                                                                                                             |                                                  |                            | Total liabilities and stockholders equity                                           |             | $           | 472,231,823 |             |             | $           | 425,250,391 | 
|                                     |                                                                                                                                                                             |                                                  |                            |                                                                                      |             |             |             |            

See accompanying notes to consolidated financial statements.

51



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##### 



JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001

|                              |                                                         |                           |              |            |            |           |           |            |            |           |           |            |            |           | 
|----------------------------- | ------------------------------------------------------- | ------------------------- | ------------ | ---------- | ---------- | --------- | --------- | ---------- | ---------- | --------- | --------- | ---------- | ---------- | --------- | 
|                              |                                                         |                           |              |            | 2003       |           | 2002      |            | 2001      
|                              |                                                         |                           |              |            |            |           |           |            |           
|INTEREST INCOME               |                                                         |                           |              |            |            |           |           |            |            |           |           |           
|                              | Loans receivable                                        |                           | $            | 20,842,116 |            |           | $         | 21,728,116 |            |           | $         | 19,772,106 |           
|                              | Mortgage-backed securities                              |                           |              | 3,570,788  |            |           |           | 4,519,882  |            |           |           | 2,734,813  |           
|                              | Investment securities                                   |                           |              | 2,070,816  |            |           |           | 1,528,161  |            |           |           | 1,257,104  |           
|                              | Other                                                   |                           |              | 220,539    |            |           |           | 289,784    |            |           |           | 467,352    |           
|                              |                                                         |                           |              |            |            |           |           |            |            |           |           |           
|                              |                                                         | Total interest income     |              |            | 26,704,259 |           |           |            | 28,065,943 |           |           |            | 24,231,375 |          
|INTEREST EXPENSE              |                                                         |                           |              |            |            |           |           |            |            |           |           |           
|                              | Deposits                                                |                           |              | 10,433,469 |            |           |           | 11,984,928 |            |           |           | 11,535,088 |           
|                              | Interest on borrowings                                  |                           |              | 1,277,025  |            |           |           | 1,825,706  |            |           |           | 2,506,155  |           
|                              |                                                         |                           |              |            |            |           |           |            |            |           |           |           
|                              |                                                         | Total interest expense    |              |            | 11,710,494 |           |           |            | 13,810,634 |           |           |            | 14,041,243 |          
|                              |                                                         |                           |              |            |            |           |           |            |            |           |           |           
|                              |                                                         | Net interest income       |              |            | 14,993,765 |           |           |            | 14,255,309 |           |           |            | 10,190,132 |          
|PROVISION FOR LOSSES ON LOANS |                                                         |                           | 162,000      |            |            |           | 101,688   |            |            |           | 85,500    |           
|                              |                                                         |                           |              |            |            |           |           |            |            |           |           |           
|                              | Net interest income after provision for
losses on loans |                           |              | 14,831,765 |            |           |           | 14,153,621 |            |           |           | 10,104,632 |           
|NONINTEREST INCOME            |                                                         |                           |              |            |            |           |           |            |            |           |           |           
|                              | Fee and deposit service charges                         |                           |              | 2,695,992  |            |           |           | 2,329,149  |            |           |           | 1,949,946  |           
|                              | Real estate operations, net                             |                           |              | 105,829    |            |           |           | (31,333    | )          |           |           | 215,182    |           
|                              | (Loss) gain on sale of securities                       |                           |              | (8,932     | )          |           |           |           |            |           |           | 42,411     |           
|                              | Other                                                   |                           |              | 257,996    |            |           |           | 269,214    |            |           |           | 171,377    |           
|                              |                                                         |                           |              |            |            |           |           |            |            |           |           |           
|                              |                                                         | Total noninterest income  |              |            | 3,050,885  |           |           |            | 2,567,030  |           |           |            | 2,378,916  |          
|NONINTEREST EXPENSE           |                                                         |                           |              |            |            |           |           |            |            |           |           |           
|                              | Compensation and benefits                               |                           |              | 5,867,313  |            |           |           | 4,674,496  |            |           |           | 4,262,859  |           
|                              | Occupancy and equipment                                 |                           |              | 996,591    |            |           |           | 940,610    |            |           |           | 802,974    |           
|                              | Amortization of intangibles                             |                           |              | 172,140    |            |           |           | 157,795    |            |           |           |           |           
|                              | Insurance expense                                       |                           |              | 130,209    |            |           |           | 111,680    |            |           |           | 96,532     |           
|                              | Other                                                   |                           |              | 1,961,570  |            |           |           | 1,787,173  |            |           |           | 1,454,245  |           
|                              |                                                         |                           |              |            |            |           |           |            |            |           |           |           
|                              |                                                         | Total noninterest expense |              |            | 9,127,823  |           |           |            | 7,671,754  |           |           |            | 6,616,610  |          
|                              |                                                         |                           |              |            |            |           |           |            |            |           |           |           
|INCOME BEFORE TAXES ON INCOME |                                                         |                           | 8,754,827    |            |            |           | 9,048,897 |            |            |           | 5,866,938 |           
|TAXES ON INCOME               |                                                         |                           |              |            |            |           |           |            |            |           |           |           
|                              | Current                                                 |                           |              | 2,972,724  |            |           |           | 2,955,548  |            |           |           | 1,544,085  |           
|                              | Deferred                                                |                           |              | 1,809      |            |           |           | 117,680    |            |           |           | 446,000    |           
|                              |                                                         |                           |              |            |            |           |           |            |            |           |           |           
|                              |                                                         | Total income tax expense  |              |            | 2,974,533  |           |           |            | 3,073,228  |           |           |            | 1,990,085  |          
|                              |                                                         |                           |              |            |            |           |           |            |            |           |           |           
|                              |                                                         |                           | Net earnings |            |            | 5,780,294 |           |            |            | 5,975,669 |           |            |            | 3,876,853 | 
|                              |                                                         |                           |              |            |            |           |           |            |            |           |           |           
|EARNINGS PER COMMON SHARE     |                                                         |                           |              |            |            |           |           |            |            |           |           |           
|                              | Basic                                                   |                           | $            | 3.38       |            |           | $         | 3.48       |            |           | $         | 2.18       |           
|                              |                                                         |                           |              |            |            |           |           |            |            |           |           |           
|                              | Diluted                                                 |                           | $            | 3.16       |            |           | $         | 3.30       |            |           | $         | 2.06       |           
|                              |                                                         |                           |              |            |            |           |           |            |            |           |           |           

See accompanying notes to consolidated financial statements.

52



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##### 



JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001



|                              |                                               |                                                                                            |                      |     |        |   |            |         |            |  |               |   |           |           |          |   |             |   |            |          |           |  | 
|----------------------------- | --------------------------------------------- | ------------------------------------------------------------------------------------------ | -------------------- | --- | ------ | - | ---------- | ------- | ---------- |  | ------------- | - | --------- | --------- | -------- | - | ----------- | - | ---------- | -------- | --------- |  | 
|                              |                                               |                                                                                            |                      |     |        |   |            |         |            |  |               |   |           |           |          |   | Accumulated |   |            |          |          
|                              |                                               |                                                                                            |                      |     |        |   |            |         | Additional |  | Compre-       |   | Other     |           |          |   |            
|                              |                                               |                                                                                            |                      |     | Common |   | Paid-in    |         | hensive    |  | Comprehensive |   | Retained 
|                              |                                               |                                                                                            |                      |     | Stock  |   | Capital    |         | Income     |  | Income (Loss) |   | Earnings 
|                              |                                               |                                                                                            |                      |     |        |   |            |         |            |  |               |   |          
|Balance at September 30, 2000 |                                               | $                                                                                          | 26,760               |     |        | $ | 22,742,784 |         |            |  |               |   |           | $         | (900,852 | ) |             | $ | 24,210,956 |         
|                              | Exercise of stock options (29,423
shares)     |                                                                                            |                      | 293 |        |   |            | 261,072 |            |  |               |   |           |           |          |  |             |   |            |         |          
|                              | ESOP shares released                          |                                                                                            |                      |    |        |   |            | 42,107  |            |  |               |   |           |           |          |  |             |   |            |         |          
|                              | Accrual of management
recognition plan awards |                                                                                            |                      |    |        |   |            |        |            |  |               |   |           |           |          |  |             |   |            |         |          
|                              | Comprehensive income:                         |                                                                                            |                      |     |        |   |            |         |            |  |               |   |           |           |          |   |             |   |            |          |          
|                              |                                               | Net earnings                                                                               |                      |     |       |   |            |         |           |  |               | $ | 3,876,853 |           |          |   |            |   |            |          | 3,876,853 | 
|                              |                                               | Other comprehensive income, net
of tax, unrealized gain on
securities available-for-sale   |                      |     |       |   |            |         |           |  |               |   | 1,302,167 |           |          |   | 1,302,167   |   |            |          |          | 
|                              |                                               |                                                                                            |                      |     |        |   |            |         |            |  |               |   |           |           |          |   |             |   |            |         
|                              |                                               |                                                                                            | Comprehensive income |     |        |   |            |         |            |  |               |   | $         | 5,179,020 |          |   |             |   |            |          |           |  | 
|                              |                                               |                                                                                            |                      |     |        |   |            |         |            |  |               |   |           |           |          |   |             |   |            |         
|                              | Dividends declared                            |                                                                                            |                      |    |        |   |            |        |            |  |               |   |           |           |          |  |             |   |            | (898,767 | )        
|                              | Purchase of 161,300 Treasury shares           |                                                                                            |                      |    |        |   |            |        |            |  |               |   |           |           |          |  |             |   |            |         |          
|                              |                                               |                                                                                            |                      |     |        |   |            |         |            |  |               |   |           |           |          |   |             |   |            |         
|Balance at September 30, 2001 |                                               |                                                                                            | 27,053               |     |        |   | 23,045,963 |         |            |  |               |   |           |           | 401,315  |   |             |   | 27,189,042 |         
|                              | Exercise of stock options (33,174
shares)     |                                                                                            |                      | 333 |        |   |            | 311,596 |            |  |               |   |           |           |          |  |             |   |            |         |          
|                              | ESOP shares released                          |                                                                                            |                      |    |        |   |            | 69,770  |            |  |               |   |           |           |          |  |             |   |            |         |          
|                              | Accrual of management
recognition plan awards |                                                                                            |                      |    |        |   |            |        |            |  |               |   |           |           |          |  |             |   |            |         |          
|                              | Comprehensive income:                         |                                                                                            |                      |     |        |   |            |         |            |  |               |   |           |           |          |   |             |   |            |          |          
|                              |                                               | Net earnings                                                                               |                      |     |       |   |            |         |           |  |               | $ | 5,975,669 |           |          |   |            |   |            |          | 5,975,669 | 
|                              |                                               | Other comprehensive income, net
of tax, unrealized (loss) on
securities available-for-sale |                      |     |       |   |            |         |           |  |               |   | (24,657   | )         |          |   | (24,657     | ) |            |          |          | 
|                              |                                               |                                                                                            |                      |     |        |   |            |         |            |  |               |   |           |           |          |   |             |   |            |         
|                              |                                               |                                                                                            | Comprehensive income |     |        |   |            |         |            |  |               |   | $         | 5,951,012 |          |   |             |   |            |          |           |  | 
|                              |                                               |                                                                                            |                      |     |        |   |            |         |            |  |               |   |           |           |          |   |             |   |            |         
|                              | Dividends declared                            |                                                                                            |                      |    |        |   |            |        |            |  |               |   |           |           |          |  |             |   |            | (854,517 | )        
|                              | Purchase of 107,185 Treasury shares           |                                                                                            |                      |    |        |   |            |        |            |  |               |   |           |           |          |  |             |   |            |         |          
|                              |                                               |                                                                                            |                      |     |        |   |            |         |            |  |               |   |           |           |          |   |             |   |            |         
|Balance at September 30, 2002 |                                               | $                                                                                          | 27,386               |     |        | $ | 23,427,329 |         |            |  |               |   |           | $         | 376,658  |   |             | $ | 32,310,194 |         
|                              |                                               |                                                                                            |                      |     |        |   |            |         |            |  |               |   |           |           |          |   |             |   |            |         

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                              |                                               |                                                                                            |                      |            |          |   |            |        |          |   |               |         |       |   |            |            |           |   | 
|----------------------------- | --------------------------------------------- | ------------------------------------------------------------------------------------------ | -------------------- | ---------- | -------- | - | ---------- | ------ | -------- | - | ------------- | ------- | ----- | - | ---------- | ---------- | --------- | - | 
|                              |                                               |                                                                                            |                      |            |          |   |            |        | Shares   |   | Shares        |         | Total
|                              |                                               |                                                                                            |                      |            | Treasury |   | Acquired   |        | Acquired |   | Stockholders
|                              |                                               |                                                                                            |                      |            | Stock    |   | by ESOP    |        | by MRP   |   | Equity       
|                              |                                               |                                                                                            |                      |            |          |   |            |        |          |   |              
|Balance at September 30, 2000 |                                               | $                                                                                          | (10,753,968          | )          |          | $ | (1,055,546 | )      |          | $ | (181,067      | )       |       | $ | 34,089,067 |           
|                              | Exercise of stock options (29,423
shares)     |                                                                                            |                      |           |          |   |            |       |          |   |               |        |       |   |            | 261,365    |          
|                              | ESOP shares released                          |                                                                                            |                      |           |          |   |            | 66,179 |          |   |               |        |       |   |            | 108,286    |          
|                              | Accrual of management
recognition plan awards |                                                                                            |                      |           |          |   |            |       |          |   |               | 167,138 |       |   |            | 167,138    |          
|                              | Comprehensive income:                         |                                                                                            |                      |            |          |   |            |        |          |   |               |         |       |   |            |            |          
|                              |                                               | Net earnings                                                                               |                      |            |         |   |            |        |         |   |               |         |      |   |            |            | 3,876,853 |  
|                              |                                               | Other comprehensive income, net
of tax, unrealized gain on
securities available-for-sale   |                      |            |         |   |            |        |         |   |               |         |      |   |            |            | 1,302,167 |  
|                              |                                               |                                                                                            | Comprehensive income |            |          |   |            |        |          |   |               |         |       |   |            |            |           |   | 
|                              | Dividends declared                            |                                                                                            |                      |           |          |   |            |       |          |   |               |        |       |   |            | (898,767   | )        
|                              | Purchase of 161,300 Treasury shares           |                                                                                            |                      | (2,921,652 | )        |   |            |       |          |   |               |        |       |   |            | (2,921,652 | )        
|                              |                                               |                                                                                            |                      |            |          |   |            |        |          |   |               |         |       |   |            |           
|Balance at September 30, 2001 |                                               |                                                                                            | (13,675,620          | )          |          |   | (989,367   | )      |          |   | (13,929       | )       |       |   | 35,984,457 |           
|                              | Exercise of stock options (33,174
shares)     |                                                                                            |                      |           |          |   |            |       |          |   |               |        |       |   |            | 311,929    |          
|                              | ESOP shares released                          |                                                                                            |                      |           |          |   |            | 71,812 |          |   |               |        |       |   |            | 141,582    |          
|                              | Accrual of management
recognition plan awards |                                                                                            |                      |           |          |   |            |       |          |   |               | 13,929  |       |   |            | 13,929     |          
|                              | Comprehensive income:                         |                                                                                            |                      |            |          |   |            |        |          |   |               |         |       |   |            |            |          
|                              |                                               | Net earnings                                                                               |                      |            |         |   |            |        |         |   |               |         |      |   |            |            | 5,975,669 |  
|                              |                                               | Other comprehensive income, net
of tax, unrealized (loss) on
securities available-for-sale |                      |            |         |   |            |        |         |   |               |         |      |   |            |            | (24,657   | )
|                              |                                               |                                                                                            | Comprehensive income |            |          |   |            |        |          |   |               |         |       |   |            |            |           |   | 
|                              | Dividends declared                            |                                                                                            |                      |           |          |   |            |       |          |   |               |        |       |   |            | (854,517   | )        
|                              | Purchase of 107,185 Treasury shares           |                                                                                            |                      | (2,339,835 | )        |   |            |       |          |   |               |        |       |   |            | (2,339,835 | )        
|                              |                                               |                                                                                            |                      |            |          |   |            |        |          |   |               |         |       |   |            |           
|Balance at September 30, 2002 |                                               | $                                                                                          | (16,015,455          | )          |          | $ | (917,555   | )      |          | $ |              |         |       | $ | 39,208,557 |           
|                              |                                               |                                                                                            |                      |            |          |   |            |        |          |   |               |         |       |   |            |           

See accompanying notes to consolidated financial statements.

53



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##### 



JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
CONTINUED



|                              |                                           |                                                                                            |                      |     |        |   |            |         |            |  |               |   |           |           |          |   |             |   |            |            |           |  | 
|----------------------------- | ----------------------------------------- | ------------------------------------------------------------------------------------------ | -------------------- | --- | ------ | - | ---------- | ------- | ---------- |  | ------------- | - | --------- | --------- | -------- | - | ----------- | - | ---------- | ---------- | --------- |  | 
|                              |                                           |                                                                                            |                      |     |        |   |            |         |            |  |               |   |           |           |          |   | Accumulated |   |            |            |          
|                              |                                           |                                                                                            |                      |     |        |   |            |         | Additional |  | Compre-       |   | Other     |           |          |   |            
|                              |                                           |                                                                                            |                      |     | Common |   | Paid-in    |         | hensive    |  | Comprehensive |   | Retained 
|                              |                                           |                                                                                            |                      |     | Stock  |   | Capital    |         | Income     |  | Income (Loss) |   | Earnings 
|                              |                                           |                                                                                            |                      |     |        |   |            |         |            |  |               |   |          
|Balance at September 30, 2002 |                                           | $                                                                                          | 27,386               |     |        | $ | 23,427,329 |         |            |  |               |   |           | $         | 376,658  |   |             | $ | 32,310,194 |           
|                              | Exercise of stock options (38,641 shares) |                                                                                            |                      | 386 |        |   |            | 404,733 |            |  |               |   |           |           |          |  |             |   |            |           |          
|                              | ESOP shares released                      |                                                                                            |                      |    |        |   |            | 110,120 |            |  |               |   |           |           |          |  |             |   |            |           |          
|                              | Comprehensive income:                     |                                                                                            |                      |     |        |   |            |         |            |  |               |   |           |           |          |   |             |   |            |            |          
|                              |                                           | Net earnings                                                                               |                      |     |       |   |            |         |           |  |               | $ | 5,780,294 |           |          |   |            |   |            |            | 5,780,294 | 
|                              |                                           | Other comprehensive income, net
of tax, unrealized (loss) on
securities available-for-sale |                      |     |       |   |            |         |           |  |               |   | (891,307  | )         |          |   | (891,307    | ) |            |            |          | 
|                              |                                           |                                                                                            |                      |     |        |   |            |         |            |  |               |   |           |           |          |   |             |   |            |           
|                              |                                           |                                                                                            | Comprehensive income |     |        |   |            |         |            |  |               |   | $         | 4,888,987 |          |   |             |   |            |            |           |  | 
|                              |                                           |                                                                                            |                      |     |        |   |            |         |            |  |               |   |           |           |          |   |             |   |            |           
|                              | Dividends declared                        |                                                                                            |                      |    |        |   |            |        |            |  |               |   |           |           |          |  |             |   |            | (1,033,510 | )        
|                              |                                           |                                                                                            |                      |     |        |   |            |         |            |  |               |   |           |           |          |   |             |   |            |           
|Balance at September 30, 2003 |                                           | $                                                                                          | 27,772               |     |        | $ | 23,942,182 |         |            |  |               |   |           | $         | (514,649 | ) |             | $ | 37,056,978 |           
|                              |                                           |                                                                                            |                      |     |        |   |            |         |            |  |               |   |           |           |          |   |             |   |            |           

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                              |                                           |                                                                                            |                      |   |          |   |          |        |          |   |               |   |       |   |            |            |           |   | 
|----------------------------- | ----------------------------------------- | ------------------------------------------------------------------------------------------ | -------------------- | - | -------- | - | -------- | ------ | -------- | - | ------------- | - | ----- | - | ---------- | ---------- | --------- | - | 
|                              |                                           |                                                                                            |                      |   |          |   |          |        | Shares   |   | Shares        |   | Total
|                              |                                           |                                                                                            |                      |   | Treasury |   | Acquired |        | Acquired |   | Stockholders
|                              |                                           |                                                                                            |                      |   | Stock    |   | by ESOP  |        | by MRP   |   | Equity       
|                              |                                           |                                                                                            |                      |   |          |   |          |        |          |   |              
|Balance at September 30, 2002 |                                           | $                                                                                          | (16,015,455          | ) |          | $ | (917,555 | )      |          | $ |              |   |       | $ | 39,208,557 |           
|                              | Exercise of stock options (38,641 shares) |                                                                                            |                      |  |          |   |          |       |          |   |               |  |       |   |            | 405,119    |          
|                              | ESOP shares released                      |                                                                                            |                      |  |          |   |          | 77,922 |          |   |               |  |       |   |            | 188,042    |          
|                              | Comprehensive income:                     |                                                                                            |                      |   |          |   |          |        |          |   |               |   |       |   |            |            |          
|                              |                                           | Net earnings                                                                               |                      |   |         |   |          |        |         |   |               |   |      |   |            |            | 5,780,294 |  
|                              |                                           | Other comprehensive income, net
of tax, unrealized (loss) on
securities available-for-sale |                      |   |         |   |          |        |         |   |               |   |      |   |            |            | (891,307  | )
|                              |                                           |                                                                                            | Comprehensive income |   |          |   |          |        |          |   |               |   |       |   |            |            |           |   | 
|                              | Dividends declared                        |                                                                                            |                      |  |          |   |          |       |          |   |               |  |       |   |            | (1,033,510 | )        
|                              |                                           |                                                                                            |                      |   |          |   |          |        |          |   |               |   |       |   |            |           
|Balance at September 30, 2003 |                                           | $                                                                                          | (16,015,455          | ) |          | $ | (839,633 | )      |          | $ |              |   |       | $ | 43,657,195 |           
|                              |                                           |                                                                                            |                      |   |          |   |          |        |          |   |               |   |       |   |            |           

See accompanying notes to consolidated financial statements.

54



---



##### 



JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001

|                                     |                                                                                       |                                       |                                                    |                                           |             |          |             |             |             |          |             |             |             |            |             |  
|------------------------------------ | ------------------------------------------------------------------------------------- | ------------------------------------- | -------------------------------------------------- | ----------------------------------------- | ----------- | -------- | ----------- | ----------- | ----------- | -------- | ----------- | ----------- | ----------- | ---------- | ----------- | -
|                                     |                                                                                       |                                       |                                                    |                                           |             | 2003     |             | 2002        |             | 2001    
|                                     |                                                                                       |                                       |                                                    |                                           |             |          |             |             |             |         
|CASH FLOWS FROM OPERATING ACTIVITIES |                                                                                       |                                       |                                                    |                                           |             |          |             |             |             |          |             |            
|                                     | Net income                                                                            |                                       | $                                                  | 5,780,294                                 |             |          | $           | 5,975,669   |             |          | $           | 3,876,853   |            
|                                     | Adjustments to reconcile net income to net cash
provided by operating activities:     |                                       |                                                    |                                           |             |          |             |             |             |          |             |             |            
|                                     |                                                                                       | Depreciation                          |                                                    |                                           | 508,434     |          |             |             | 484,585     |          |             |             | 339,770     |           
|                                     |                                                                                       | Amortization/accretion of securities  |                                                    |                                           | 780,302     |          |             |             | 135,524     |          |             |             | 146,516     |           
|                                     |                                                                                       | Amortization of intangibles           |                                                    |                                           | 172,140     |          |             |             | 157,795     |          |             |             |            |           
|                                     |                                                                                       | Provision for losses on loans         |                                                    |                                           | 162,000     |          |             |             | 101,688     |          |             |             | 85,500      |           
|                                     |                                                                                       | Loans originated for sale             |                                                    |                                           | (40,165,598 | )        |             |             | (39,208,136 | )        |             |             | (20,932,788 | )         
|                                     |                                                                                       | Loans sold                            |                                                    |                                           | 40,165,598  |          |             |             | 39,208,136  |          |             |             | 20,932,788  |           
|                                     |                                                                                       | Net loss (gain) on sale of securities |                                                    |                                           | 8,932       |          |             |             |            |          |             |             | (42,316     | )         
|                                     |                                                                                       | Net gain on sale of real estate       |                                                    |                                           | (213,582    | )        |             |             | (106,984    | )        |             |             | (346,095    | )         
|                                     |                                                                                       | Loss on disposal of assets            |                                                    |                                           | 85,772      |          |             |             |            |          |             |             |            |           
|                                     |                                                                                       | Accrual of MRP awards                 |                                                    |                                           |            |          |             |             | 13,929      |          |             |             | 167,138     |           
|                                     |                                                                                       | Release of ESOP shares                |                                                    |                                           | 188,042     |          |             |             | 141,582     |          |             |             | 108,286     |           
|                                     |                                                                                       | Change in assets and liabilities:     |                                                    |                                           |             |          |             |             |             |          |             |             |             |           
|                                     |                                                                                       |                                       | Decrease (increase) in other assets                |                                           |             | (137,429 | )           |             |             | 389,723  |             |             |             | (1,177,451 | )          
|                                     |                                                                                       |                                       | Increase in accrued expenses and other liabilities |                                           |             | 814,336  |             |             |             | 483,227  |             |             |             | 1,020,777  |            
|                                     |                                                                                       |                                       | Decrease in deferred income                        |                                           |             | (6,069   | )           |             |             | (15,729  | )           |             |             | (20,310    | )          
|                                     |                                                                                       |                                       | Increase (decrease) in mortgage servicing rights   |                                           |             | (19,285  | )           |             |             | (54,793  | )           |             |             | 27,967     |            
|                                     |                                                                                       |                                       | Decrease (increase) in accrued interest receivable |                                           |             | 46,081   |             |             |             | (201,999 | )           |             |             | (203,107   | )          
|                                     |                                                                                       |                                       |                                                    |                                           |             |          |             |             |             |          |             |            
|                                     |                                                                                       |                                       |                                                    | Net cash provided by operating activities |             |          | 8,169,968   |             |             |          | 7,504,217   |             |             |            | 3,983,528   |  
|CASH FLOWS FROM INVESTING ACTIVITIES |                                                                                       |                                       |                                                    |                                           |             |          |             |             |             |          |             |            
|                                     | Proceeds on maturity of investment securities                                         |                                       |                                                    | 31,936,460                                |             |          |             | 33,560,977  |             |          |             | 18,373,775  |            
|                                     | Proceeds from sale of investment securities                                           |                                       |                                                    | 10,000,000                                |             |          |             |            |             |          |             | 1,021,668   |            
|                                     | Proceeds from sale of premises and equipment                                          |                                       |                                                    |                                          |             |          |             | 171,140     |             |          |             |            |            
|                                     | Purchase of investment securities                                                     |                                       |                                                    | (53,375,000                               | )           |          |             | (52,030,000 | )           |          |             | (15,500,000 | )          
|                                     | Net principal payments/originations on loans                                          |                                       |                                                    | (14,551,210                               | )           |          |             | (18,812,416 | )           |          |             | (19,444,687 | )          
|                                     | Proceeds from sale of real estate                                                     |                                       |                                                    | 601,042                                   |             |          |             | 239,408     |             |          |             | 312,131     |            
|                                     | Purchase of mortgage-backed securities                                                |                                       |                                                    | (91,253,505                               | )           |          |             | (67,527,420 | )           |          |             | (46,965,170 | )          
|                                     | Principal paydowns on mortgage-backed securities                                      |                                       |                                                    | 71,784,102                                |             |          |             | 36,515,434  |             |          |             | 22,051,666  |            
|                                     | Capital expenditures                                                                  |                                       |                                                    | (849,384                                  | )           |          |             | (1,222,078  | )           |          |             | (276,063    | )          
|                                     | Purchase of stock in FHLB Dallas                                                      |                                       |                                                    | (85,900                                   | )           |          |             | (554,900    | )           |          |             | (456,700    | )          
|                                     | Premium on acquisition of Carthage branch                                             |                                       |                                                    |                                          |             |          |             | (3,672,357  | )           |          |             |            |            
|                                     | Investment in real estate                                                             |                                       |                                                    | (5,108                                    | )           |          |             | (153,352    | )           |          |             | (53,946     | )          
|                                     |                                                                                       |                                       |                                                    |                                           |             |          |             |             |             |          |             |            
|                                     |                                                                                       |                                       |                                                    | Net cash used in investing activities     |             |          | (45,798,503 | )           |             |          | (73,485,564 | )           |             |            | (40,937,326 | )
|CASH FLOWS FROM FINANCING ACTIVITIES |                                                                                       |                                       |                                                    |                                           |             |          |             |             |             |          |             |            
|                                     | Net increase in deposits                                                              |                                       |                                                    | 34,998,683                                |             |          |             | 93,592,321  |             |          |             | 39,537,683  |            
|                                     | Increase (decrease) in advance payments by
borrowers for property taxes and insurance |                                       |                                                    | 925,488                                   |             |          |             | (36,410     | )           |          |             | (14,285     | )          
|                                     | Advances from FHLB                                                                    |                                       |                                                    | 15,550,000                                |             |          |             | 31,000,000  |             |          |             | 43,000,000  |            
|                                     | Payment of FHLB advances                                                              |                                       |                                                    | (9,571,299                                | )           |          |             | (53,978,764 | )           |          |             | (35,892,226 | )          
|                                     | Proceeds from exercise of stock options                                               |                                       |                                                    | 405,119                                   |             |          |             | 311,929     |             |          |             | 261,365     |            
|                                     | Purchase of Treasury stock                                                            |                                       |                                                    |                                          |             |          |             | (2,339,835  | )           |          |             | (2,921,652  | )          
|                                     | Dividends paid                                                                        |                                       |                                                    | (1,033,510                                | )           |          |             | (854,517    | )           |          |             | (898,767    | )          
|                                     |                                                                                       |                                       |                                                    |                                           |             |          |             |             |             |          |             |            
|                                     |                                                                                       |                                       |                                                    | Net cash provided by financing activities |             |          | 41,274,481  |             |             |          | 67,694,724  |             |             |            | 43,072,118  |  
|                                     |                                                                                       |                                       |                                                    |                                           |             |          |             |             |             |          |             |            
|                                     |                                                                                       |                                       |                                                    | Net increase in cash and cash equivalents |             |          | 3,645,946   |             |             |          | 1,713,377   |             |             |            | 6,118,320   |  
|CASH AND CASH EQUIVALENTS            |                                                                                       |                                       |                                                    |                                           |             |          |             |             |             |          |             |            
|                                     | Beginning of year                                                                     |                                       |                                                    | 15,352,395                                |             |          |             | 13,639,018  |             |          |             | 7,520,698   |            
|                                     |                                                                                       |                                       |                                                    |                                           |             |          |             |             |             |          |             |            
|                                     | End of year                                                                           |                                       | $                                                  | 18,998,341                                |             |          | $           | 15,352,395  |             |          | $           | 13,639,018  |            
|                                     |                                                                                       |                                       |                                                    |                                           |             |          |             |             |             |          |             |            

See accompanying notes to consolidated financial statements.

55



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##### 



JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002

NOTE 1 - BASIS OF PRESENTATION



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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



| |  | INVESTMENT AND MORTGAGE-BACKED SECURITIES                                         
| |  | ----------------------------------------------------------------------------------
|
| |  | The Association classifies and accounts for debt and equity securities as follows:



| |  |  | HELD-TO-MATURITY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Debt and equity securities that management has the positive intent and ability to hold until maturity are classified as held-to-maturity and are carried at
their remaining unpaid principal balance, net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the
level interest yield method over the estimated remaining term of the underlying security.                                                                                                                                                                            
|
| |  |  | AVAILABLE-FOR-SALE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  |  | Debt and equity securities that will be held for indefinite periods of time, including securities that
may be sold in response to changes in market interest or prepayment rates, needs for liquidity and changes
in the availability of and the yield of alternative investments are classified as available-for-sale.
These assets are carried at market value. Market value is determined using published quotes as of the
close of business.
Unrealized gains and losses are excluded from earnings and reported net of tax as a separate
component of retained earnings until realized.
|
| |  |  | Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary
would result in write-downs of the individual securities to their fair value
and be included in the consolidated statement of earnings as realized
losses. No such write-downs have been included as realized losses have not
occurred.                                                                                                                                                                                                          
|
| |  |  | TRADING SECURITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  |  | Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at market value, with unrealized gains and losses
included in earnings.                                                                                                                                                                                                                                                                                                                                                  



| |  | PREMISES AND EQUIPMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Land is carried at cost. Buildings, leasehold improvements, and furniture,
fixtures, and equipment are carried at cost, less accumulated
depreciation and amortization. Buildings and furniture, fixtures and
equipment are depreciated using the straight-line method over the
estimated useful lives of the assets. The cost of leasehold improvements
is being amortized using the straight-line method over the terms of the
related leases.                                                                                       
|
| |  | FEDERAL INCOME TAXES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | The Company and its subsidiaries file a consolidated Federal income tax
return. The tax provision or benefit is
based on income or loss reported for financial statement purposes, and
differs from amounts currently payable or
refundable because certain revenues and expenses are recognized for
financial reporting purposes differently than
they are recognized for tax reporting purposes. The cumulative effects of
any temporary differences are reflected
as deferred income taxes using the liability method (see Note 11).

56



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##### 



JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
CONTINUED

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED



| |  | LOANS RECEIVABLE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Loans receivable are stated at unpaid principal balances, less the allowance
for loan losses, and net deferred loan origination fees and discounts.
Discounts on loans are recognized over the lives of the loans using the
interest method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Managements periodic evaluation
of the adequacy of the allowance is based on the Banks past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrowers ability to repay, estimated value of any underlying
collateral, and current economic conditions. Currently, the allowance for loan
losses is formally reevaluated on a quarterly basis. While management uses
available information to recognize losses on loans, further additions to the
allowance may be necessary based on changes in economic conditions. In
addition, various regulatory agencies as an integral part of their
examinations, periodically review the allowance for loan losses.
|
| |  | Uncollectible interest on loans that are contractually past due is charged-off
or an allowance is established based on managements periodic evaluation. The
allowance is established by a charge to interest income equal to all interest
previously accrued, and income is subsequently recognized only to the extent
cash payments are received until, in managements judgment, the borrowers
ability to make periodic interest and principal payments is back to normal, in
which case the loan is returned to accrual status.                                                                                                                                                                                                                                                                                                    
|
| |  | LOANS HELD-FOR-SALE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized by charges to earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | LOAN ORIGINATION AND COMMITMENT FEES AND RELATED COSTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Loan fees received are accounted for substantially in accordance with FASB
Statement No. 91, Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of Leases.
Loan fees and certain direct loan origination costs are deferred, and the
net fee is recognized as an adjustment to interest income over the
contractual life of the loans. Commitment fees and costs relating to
commitments whose likelihood of exercise is remote are recognized over
the commitment period on a straight-line basis. If the commitment is
subsequently exercised during the commitment period, the remaining
unamortized commitment fee at the time of exercise is recognized over the
life of the loan as an adjustment of yield.                                                    
|
| |  | REAL ESTATE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Real estate properties acquired through loan foreclosure are initially
recorded at the lower of cost (loan balance) or fair value, less
estimated costs of disposition, at the date of foreclosure. Investment
in real estate is recorded at cost. Costs relating to development and
improvement of property are capitalized, whereas costs relating to
holding property are expensed.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Valuations are periodically performed by management, and an allowance for
losses is established by a charge to operations if the carrying value of
a property exceeds its estimated net realizable value. Currently, all
major foreclosed real estate properties are formally reevaluated on a
quarterly basis to determine the adequacy of the allowance for losses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Gains on sale of real estate are accounted for in accordance with Statement
of Financial Accounting Standards
No. 66. When the borrowers initial cash down payment does not meet the
minimum requirements, the gain on sale is deferred and recorded on the
installment basis until such time as sufficient principal payments are
received to meet the minimum down payment requirements. Losses on sale
of real estate are recognized at the date of sale.                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | ESTIMATES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.                                                                                                                                                                                                                                                                                                                                                                          

57



---



##### 



JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
CONTINUED

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED



| |  | ESTIMATES - CONTINUED                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the
allowances for losses on loans and foreclosed real estate, management
obtains independent appraisals for significant properties.                                                                                                                                                                                                                                                                
|
| |  | MORTGAGE SERVICING RIGHTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | The cost of mortgage servicing rights is amortized in proportion to, and
over the period of, estimated net servicing revenues. Impairment of
mortgage servicing rights is assessed based on the estimated fair value
of those rights. Fair values are estimated using discounted cash flows
based on current market interest rates and market data regarding sales of
mortgage servicing rights. The Bank sells predominately single-family
first mortgage loans with simple risk characteristics and uses a single
stratum for purposes of measuring impairment. The amount of impairment
recognized is the amount by which the capitalized mortgage servicing
rights exceed their fair value.
|
| |  | EARNINGS PER SHARE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | The Company has adopted the provisions of Statement of Financial Accounting Standards No. 128, Earnings Per Share
(FAS 128). This statement provides for a basic EPS computation based upon weighted-average shares outstanding.
Shares issued to its Employee Stock Ownership Plan (ESOP) are accounted for in accordance with AICPA Statement of
Position 93-6. Diluted earnings per share considers the dilutive effect of stock options.

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

|                                                                            |                                                              |                                     |           |           |                           |      |           |           |           |      |           |           |           |      | 
|--------------------------------------------------------------------------- | ------------------------------------------------------------ | ----------------------------------- | --------- | --------- | ------------------------- | ---- | --------- | --------- | --------- | ---- | --------- | --------- | --------- | ---- | 
|                                                                            |                                                              |                                     |           |           | Years Ended September 30,
|                                                                            |                                                              |                                     |           |           |                          
|                                                                            |                                                              |                                     |           |           | 2003                      |      | 2002      |           | 2001     
|                                                                            |                                                              |                                     |           |           |                           |      |           |           |          
|Basic net earnings per share                                                |                                                              |                                     |           |           |                           |      |           |           |           |      |           |          
|                                                                            | Net income                                                   |                                     | $         | 5,780,294 |                           |      | $         | 5,975,669 |           |      | $         | 3,876,853 |          
|                                                                            | Weighted-average shares outstanding                          |                                     |           | 1,712,441 |                           |      |           | 1,717,933 |           |      |           | 1,777,226 |          
|                                                                            |                                                              |                                     |           |           |                           |      |           |           |           |      |           |          
|                                                                            |                                                              |                                     | Per share |           | $                         | 3.38 |           |           | $         | 3.48 |           |           | $         | 2.18 | 
|                                                                            |                                                              |                                     |           |           |                           |      |           |           |           |      |           |          
|Diluted net earnings per share                                              |                                                              |                                     |           |           |                           |      |           |           |           |      |           |          
|                                                                            | Net income                                                   |                                     | $         | 5,780,294 |                           |      | $         | 5,975,669 |           |      | $         | 3,876,853 |          
|                                                                            | Weighted-average shares outstanding
plus assumed conversions |                                     |           | 1,831,702 |                           |      |           | 1,813,391 |           |      |           | 1,879,008 |          
|                                                                            |                                                              |                                     |           |           |                           |      |           |           |           |      |           |          
|                                                                            |                                                              |                                     | Per share |           | $                         | 3.16 |           |           | $         | 3.30 |           |           | $         | 2.06 | 
|                                                                            |                                                              |                                     |           |           |                           |      |           |           |           |      |           |          
|Calculation of weighted average shares
outstanding plus assumed conversions |                                                              |                                     |           |           |                           |      |           |           |           |      |           |          
|                                                                            |                                                              | Weighted-average shares outstanding |           |           | 1,712,441                 |      |           |           | 1,717,933 |      |           |           | 1,777,226 |     
|                                                                            |                                                              | Effect of dilutive stock options    |           |           | 119,260                   |      |           |           | 95,458    |      |           |           | 101,782   |     
|                                                                            |                                                              |                                     |           |           |                           |      |           |           |           |      |           |          
|                                                                            |                                                              |                                     | 1,831,702 |           |                           |      | 1,813,391 |           |           |      | 1,879,008 |          
|                                                                            |                                                              |                                     |           |           |                           |      |           |           |           |      |           |          



| |  | STOCK-BASED COMPENSATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation,and as amended by Statement of Financial
Accounting Standards No. 148 encourages, but does not require companies
to record compensation cost for stock-based employee compensation plans
at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees,and related Interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted
market price of the companys stock at the date of the grant over the
amount an employee must pay to acquire the stock.

58



---



##### 



JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
CONTINUED

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED



| |  | GOODWILL AND OTHER INTANGIBLES                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Other intangible assets (core base deposits) are being amortized on the
straight-line method over a period of 8
years. Goodwill is not being amortized. On a periodic basis, management
performs an evaluations to determine
whether any impairment of the goodwill and intangibles has occurred; if
any such impairment is determined, a
write-down of the intangibles and goodwill is recorded. Intangible assets
are comprised of the following at
September 30:

|                                       |  |      |           |      |  |   |           | 
|-------------------------------------- |  | ---- | --------- | ---- |  | - | --------- | 
|                                       |  | 2003 |           | 2002
|                                       |  |      |           |     
|Goodwill                               |  | $    | 2,295,223 |      |  | $ | 2,295,223 | 
|Other intangibles, net of amortization |  |      | 1,047,199 |      |  |   | 1,219,339 | 
|                                       |  |      |           |      |  |   |           | 
|                                       |  | $    | 3,342,422 |      |  | $ | 3,514,562 | 
|                                       |  |      |           |      |  |   |           | 



| |  | COMPREHENSIVE INCOME                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income(FAS 130), establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The standard requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
|
| |  | CASH FLOWS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash equivalents. A summary of cash and
cash equivalents follows at September 30:                                                                                                                                                                                                                                                

|                               |                                                                                              |                           |            |            |            |      |            |         |            |   |            |           |            | 
|------------------------------ | -------------------------------------------------------------------------------------------- | ------------------------- | ---------- | ---------- | ---------- | ---- | ---------- | ------- | ---------- | - | ---------- | --------- | ---------- | 
|                               |                                                                                              |                           |            | 2003       |            | 2002 |            | 2001   
|                               |                                                                                              |                           |            |            |            |      |            |        
|Cash on hand and in banks      |                                                                                              | $                         | 5,468,206  |            |            | $    | 3,957,183  |         |            | $ | 2,803,804  |          
|Interest bearing deposits      |                                                                                              |                           | 13,530,135 |            |            |      | 11,395,212 |         |            |   | 10,835,214 |          
|                               |                                                                                              |                           |            |            |            |      |            |         |            |   |            |          
|                               |                                                                                              | Cash and cash equivalents |            | $          | 18,998,341 |      |            | $       | 15,352,395 |   |            | $         | 13,639,018 | 
|                               |                                                                                              |                           |            |            |            |      |            |         |            |   |            |          
|Supplemental disclosure:       |                                                                                              |                           |            |            |            |      |            |         |            |   |            |          
|                               | Cash paid for:                                                                               |                           |            |            |            |      |            |         |            |   |            |           |           
|                               |                                                                                              | Interest                  |            | $          | 11,716,923 |      |            | $       | 13,874,452 |   |            | $         | 14,003,149 | 
|                               |                                                                                              |                           |            |            |            |      |            |         |            |   |            |          
|                               |                                                                                              | Income taxes              |            | $          | 2,550,000  |      |            | $       | 2,355,000  |   |            | $         | 2,073,261  | 
|                               |                                                                                              |                           |            |            |            |      |            |         |            |   |            |          
|Non-cash operating activities: |                                                                                              |                           |            |            |            |      |            |         |            |   |            |          
|                               | Change in deferred taxes on net unrealized gains
and losses on securities available-for-sale |                           | $          | 427,555    |            |      | $          | 12,702  |            |   | $          | (670,813  | )         
|                               |                                                                                              |                           |            |            |            |      |            |         |            |   |            |          
|Non-cash investing activities: |                                                                                              |                           |            |            |            |      |            |         |            |   |            |          
|                               | Change in net unrealized gains and losses
on securities available-for-sale                   |                           | $          | (1,318,862 | )          |      | $          | (37,359 | )          |   | $          | 1,972,980 |           
|                               |                                                                                              |                           |            |            |            |      |            |         |            |   |            |          
|                               | Transfer from loans to real estate acquired
through foreclosure                              |                           | $          | 903,000    |            |      | $          | 127,000 |            |   | $          | 178,000   |           
|                               |                                                                                              |                           |            |            |            |      |            |         |            |   |            |          
|                               | Loans made relating to sale of foreclosed real estate                                        |                           | $          | 560,000    |            |      | $          | 75,500  |            |   | $          | 307,000   |           
|                               |                                                                                              |                           |            |            |            |      |            |         |            |   |            |          

59



---



##### 



JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
CONTINUED

NOTE 3 - INVESTMENT SECURITIES



| |  | The amortized cost and estimated market values of investments in debt securities are as follows as of
September 30, 2003:
| |  | -------------------------------------------------------------------------------------------------------------------------

|                       |  |                    |            |            |  |            |         |        |  |   |         |  |  |           |            | 
|---------------------- |  | ------------------ | ---------- | ---------- |  | ---------- | ------- | ------ |  | - | ------- |  |  | --------- | ---------- | 
|                       |  | Available-for-sale
|                       |  |                   
|                       |  |                    |            |            |  |            |         |        |  |   |         |  |  | Estimated
|                       |  | Amortized          |            | Unrealized |  | Unrealized |         | Market
|                       |  | Cost               |            | Gains      |  | Losses     |         | Value 
|                       |  |                    |            |            |  |            |         |       
|U.S. Agency securities |  | $                  | 45,959,592 |            |  | $          | 186,921 |        |  | $ | 202,124 |  |  | $         | 45,944,389 | 
|                       |  |                    |            |            |  |            |         |        |  |   |         |  |  |           |            | 

|                        |  |                  |           |            |  |            |        |        |  |   |     |  |  |           |           | 
|----------------------- |  | ---------------- | --------- | ---------- |  | ---------- | ------ | ------ |  | - | --- |  |  | --------- | --------- | 
|                        |  | Held-to-maturity
|                        |  |                 
|                        |  |                  |           |            |  |            |        |        |  |   |     |  |  | Estimated
|                        |  | Amortized        |           | Unrealized |  | Unrealized |        | Market
|                        |  | Cost             |           | Gains      |  | Losses     |        | Value 
|                        |  |                  |           |            |  |            |        |       
|U. S. Agency securities |  | $                | 2,515,447 |            |  | $          | 72,588 |        |  | $ | 625 |  |  | $         | 2,587,410 | 
|                        |  |                  |           |            |  |            |        |        |  |   |     |  |  |           |           | 



| |  | The amortized cost and estimated market values of investments in debt securities are as follows as of
September 30, 2002:
| |  | -------------------------------------------------------------------------------------------------------------------------

|                       |  |                    |            |            |  |            |         |        |  |   |       |  |  |           |            | 
|---------------------- |  | ------------------ | ---------- | ---------- |  | ---------- | ------- | ------ |  | - | ----- |  |  | --------- | ---------- | 
|                       |  | Available-for-sale
|                       |  |                   
|                       |  |                    |            |            |  |            |         |        |  |   |       |  |  | Estimated
|                       |  | Amortized          |            | Unrealized |  | Unrealized |         | Market
|                       |  | Cost               |            | Gains      |  | Losses     |         | Value 
|                       |  |                    |            |            |  |            |         |       
|U.S. Agency securities |  | $                  | 28,971,697 |            |  | $          | 241,648 |        |  | $ | 5,015 |  |  | $         | 29,208,330 | 
|                       |  |                    |            |            |  |            |         |        |  |   |       |  |  |           |            | 

|                        |  |                  |           |            |  |            |         |        |  |   |       |  |  |           |           | 
|----------------------- |  | ---------------- | --------- | ---------- |  | ---------- | ------- | ------ |  | - | ----- |  |  | --------- | --------- | 
|                        |  | Held-to-maturity
|                        |  |                 
|                        |  |                  |           |            |  |            |         |        |  |   |       |  |  | Estimated
|                        |  | Amortized        |           | Unrealized |  | Unrealized |         | Market
|                        |  | Cost             |           | Gains      |  | Losses     |         | Value 
|                        |  |                  |           |            |  |            |         |       
|U. S. Agency securities |  | $                | 8,005,603 |            |  | $          | 117,785 |        |  | $ | 7,500 |  |  | $         | 8,115,888 | 
|                        |  |                  |           |            |  |            |         |        |  |   |       |  |  |           |           | 



| |  | The scheduled maturities of securities at September 30, 2003 were as follows:
| |  | -----------------------------------------------------------------------------

|                           |  |                  |           |                    |  |           |           |        |  |   |            |           |  |   |            | 
|-------------------------- |  | ---------------- | --------- | ------------------ |  | --------- | --------- | ------ |  | - | ---------- | --------- |  | - | ---------- | 
|                           |  | Held-to-maturity |           | Available-for-sale
|                           |  | securities       |           | securities        
|                           |  |                  |           |                   
|                           |  |                  |           |                    |  | Estimated |           |        |  |   |            | Estimated
|                           |  | Amortized        |           | Market             |  | Amortized |           | Market
|                           |  | Cost             |           | Value              |  | Cost      |           | Value 
|                           |  |                  |           |                    |  |           |           |       
|Due in one year or less    |  | $                |          |                    |  | $         |          |        |  | $ | 9,991,068  |           |  | $ | 9,929,729  | 
|Due from one to five years |  |                  | 1,015,447 |                    |  |           | 1,074,910 |        |  |   | 3,997,600  |           |  |   | 4,060,630  | 
|Due from five to ten years |  |                  | 1,500,000 |                    |  |           | 1,512,500 |        |  |   | 28,981,714 |           |  |   | 28,947,150 | 
|Due after ten years        |  |                  |          |                    |  |           |          |        |  |   | 2,989,210  |           |  |   | 3,006,880  | 
|                           |  |                  |           |                    |  |           |           |        |  |   |            |           |  |   |            | 
|                           |  | $                | 2,515,447 |                    |  | $         | 2,587,410 |        |  | $ | 45,959,592 |           |  | $ | 45,944,389 | 
|                           |  |                  |           |                    |  |           |           |        |  |   |            |           |  |   |            | 



| |  | The scheduled maturities of securities at September 30, 2002 were as follows:
| |  | -----------------------------------------------------------------------------

|                           |  |                  |           |                    |  |           |           |        |  |   |            |           |  |   |            | 
|-------------------------- |  | ---------------- | --------- | ------------------ |  | --------- | --------- | ------ |  | - | ---------- | --------- |  | - | ---------- | 
|                           |  | Held-to-maturity |           | Available-for-sale
|                           |  | securities       |           | securities        
|                           |  |                  |           |                   
|                           |  |                  |           |                    |  | Estimated |           |        |  |   |            | Estimated
|                           |  | Amortized        |           | Market             |  | Amortized |           | Market
|                           |  | Cost             |           | Value              |  | Cost      |           | Value 
|                           |  |                  |           |                    |  |           |           |       
|Due in one year or less    |  | $                |          |                    |  | $         |          |        |  | $ | 10,499,722 |           |  | $ | 10,502,010 | 
|Due from one to five years |  |                  | 4,452,933 |                    |  |           | 4,528,750 |        |  |   | 3,497,715  |           |  |   | 3,553,060  | 
|Due from five to ten years |  |                  | 3,552,670 |                    |  |           | 3,587,138 |        |  |   | 12,974,260 |           |  |   | 13,153,260 | 
|Due after ten years        |  |                  |          |                    |  |           |          |        |  |   | 2,000,000  |           |  |   | 2,000,000  | 
|                           |  |                  |           |                    |  |           |           |        |  |   |            |           |  |   |            | 
|                           |  | $                | 8,005,603 |                    |  | $         | 8,115,888 |        |  | $ | 28,971,697 |           |  | $ | 29,208,330 | 
|                           |  |                  |           |                    |  |           |           |        |  |   |            |           |  |   |            | 

60



---



##### 



JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
CONTINUED

NOTE 4 - MORTGAGE-BACKED SECURITIES



| |  | The amortized cost and estimated market values of mortgage-backed securities are summarized as follows:
| |  | -------------------------------------------------------------------------------------------------------

|                   |  |                  |           |            |  |            |         |        |  |   |       |  |  |           |           | 
|------------------ |  | ---------------- | --------- | ---------- |  | ---------- | ------- | ------ |  | - | ----- |  |  | --------- | --------- | 
|                   |  | Held-to-maturity
|                   |  |                 
|                   |  |                  |           |            |  |            |         |        |  |   |       |  |  | Estimated
|September 30,      |  | Amortized        |           | Unrealized |  | Unrealized |         | Market
|2003               |  | Cost             |           | Gains      |  | Losses     |         | Value 
|                   |  |                  |           |            |  |            |         |       
|GNMA certificates  |  | $                | 181,184   |            |  | $          | 7,439   |        |  | $ | 8     |  |  | $         | 188,615   | 
|FHLMC certificates |  |                  | 2,455,534 |            |  |            | 38,436  |        |  |   | 5,746 |  |  |           | 2,488,224 | 
|FNMA certificates  |  |                  | 4,824,356 |            |  |            | 120,402 |        |  |   | 2,216 |  |  |           | 4,942,542 | 
|CMO certificates   |  |                  |          |            |  |            |        |        |  |   |      |  |  |           |          | 
|                   |  |                  |           |            |  |            |         |        |  |   |       |  |  |           |           | 
|                   |  | $                | 7,461,074 |            |  | $          | 166,277 |        |  | $ | 7,970 |  |  | $         | 7,619,381 | 
|                   |  |                  |           |            |  |            |         |        |  |   |       |  |  |           |           | 

|                   |  |                    |             |            |  |            |         |        |  |   |         |  |  |           |            | 
|------------------ |  | ------------------ | ----------- | ---------- |  | ---------- | ------- | ------ |  | - | ------- |  |  | --------- | ---------- | 
|                   |  | Available-for-sale
|                   |  |                   
|                   |  |                    |             |            |  |            |         |        |  |   |         |  |  | Estimated
|September 30,      |  | Amortized          |             | Unrealized |  | Unrealized |         | Market
|2003               |  | Cost               |             | Gains      |  | Losses     |         | Value 
|                   |  |                    |             |            |  |            |         |       
|GNMA certificates  |  | $                  | 704,225     |            |  | $          | 6,513   |        |  | $ |        |  |  | $         | 710,738    | 
|FHLMC certificates |  |                    | 31,214,836  |            |  |            | 20,795  |        |  |   | 427,901 |  |  |           | 30,807,730 | 
|FNMA certificates  |  |                    | 2,972,047   |            |  |            | 3,750   |        |  |   | 14,604  |  |  |           | 2,961,193  | 
|CMO certificates   |  |                    | 65,659,781  |            |  |            | 185,872 |        |  |   | 507,395 |  |  |           | 65,338,258 | 
|                   |  |                    |             |            |  |            |         |        |  |   |         |  |  |           |            | 
|                   |  | $                  | 100,550,889 |            |  | $          | 216,930 |        |  | $ | 949,900 |  |  | $         | 99,817,919 | 
|                   |  |                    |             |            |  |            |         |        |  |   |         |  |  |           |            | 

|                   |  |                  |            |            |  |            |         |        |  |   |         |  |  |           |            | 
|------------------ |  | ---------------- | ---------- | ---------- |  | ---------- | ------- | ------ |  | - | ------- |  |  | --------- | ---------- | 
|                   |  | Held-to-maturity
|                   |  |                 
|                   |  |                  |            |            |  |            |         |        |  |   |         |  |  | Estimated
|September 30,      |  | Amortized        |            | Unrealized |  | Unrealized |         | Market
|2002               |  | Cost             |            | Gains      |  | Losses     |         | Value 
|                   |  |                  |            |            |  |            |         |       
|GNMA certificates  |  | $                | 282,656    |            |  | $          | 8,168   |        |  | $ |        |  |  | $         | 290,824    | 
|FHLMC certificates |  |                  | 4,627,287  |            |  |            | 34,692  |        |  |   | 4,010   |  |  |           | 4,657,969  | 
|FNMA certificates  |  |                  | 10,141,953 |            |  |            | 78,901  |        |  |   | 4,361   |  |  |           | 10,216,493 | 
|CMO certificates   |  |                  | 22,635,753 |            |  |            | 51,660  |        |  |   | 116,783 |  |  |           | 22,570,630 | 
|                   |  |                  |            |            |  |            |         |        |  |   |         |  |  |           |            | 
|                   |  | $                | 37,687,649 |            |  | $          | 173,421 |        |  | $ | 125,154 |  |  | $         | 37,735,916 | 
|                   |  |                  |            |            |  |            |         |        |  |   |         |  |  |           |            | 

|                   |  |                    |            |            |  |            |         |        |  |   |        |  |  |           |            | 
|------------------ |  | ------------------ | ---------- | ---------- |  | ---------- | ------- | ------ |  | - | ------ |  |  | --------- | ---------- | 
|                   |  | Available-for-sale
|                   |  |                   
|                   |  |                    |            |            |  |            |         |        |  |   |        |  |  | Estimated
|September 30,      |  | Amortized          |            | Unrealized |  | Unrealized |         | Market
|2002               |  | Cost               |            | Gains      |  | Losses     |         | Value 
|                   |  |                    |            |            |  |            |         |       
|GNMA certificates  |  | $                  | 1,680,675  |            |  | $          | 28,615  |        |  | $ |       |  |  | $         | 1,709,290  | 
|FHLMC certificates |  |                    | 9,533,640  |            |  |            | 57,580  |        |  |   | 7,107  |  |  |           | 9,584,113  | 
|FNMA certificates  |  |                    | 29,764,912 |            |  |            | 214,286 |        |  |   | 43,536 |  |  |           | 29,935,662 | 
|CMO certificates   |  |                    | 10,724,118 |            |  |            | 93,254  |        |  |   | 9,037  |  |  |           | 10,808,335 | 
|                   |  |                    |            |            |  |            |         |        |  |   |        |  |  |           |            | 
|                   |  | $                  | 51,703,345 |            |  | $          | 393,735 |        |  | $ | 59,680 |  |  | $         | 52,037,400 | 
|                   |  |                    |            |            |  |            |         |        |  |   |        |  |  |           |            | 

61



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##### 



JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
CONTINUED

NOTE 4 - MORTGAGE-BACKED SECURITIES - CONTINUED



| |  | The scheduled maturities of mortgage-backed securities at September 30, 2003 were as follows:
| |  | ---------------------------------------------------------------------------------------------

|                           |  |                  |           |                    |  |           |           |        |  |   |             |           |  |   |            | 
|-------------------------- |  | ---------------- | --------- | ------------------ |  | --------- | --------- | ------ |  | - | ----------- | --------- |  | - | ---------- | 
|                           |  | Held-to-maturity |           | Available-for-sale
|                           |  | securities       |           | securities        
|                           |  |                  |           |                   
|                           |  |                  |           |                    |  | Estimated |           |        |  |   |             | Estimated
|                           |  | Amortized        |           | Market             |  | Amortized |           | Market
|                           |  | Cost             |           | Value              |  | Cost      |           | Value 
|                           |  |                  |           |                    |  |           |           |       
|Due in one year or less    |  | $                |          |                    |  | $         |          |        |  | $ |            |           |  | $ |           | 
|Due from one to five years |  |                  | 1,073,755 |                    |  |           | 1,100,562 |        |  |   | 1,581,445   |           |  |   | 1,618,728  | 
|Due from five to ten years |  |                  | 1,663,288 |                    |  |           | 1,698,742 |        |  |   | 6,596,254   |           |  |   | 6,622,932  | 
|Due after ten years        |  |                  | 4,724,031 |                    |  |           | 4,820,078 |        |  |   | 92,373,190  |           |  |   | 91,576,259 | 
|                           |  |                  |           |                    |  |           |           |        |  |   |             |           |  |   |            | 
|                           |  | $                | 7,461,074 |                    |  | $         | 7,619,382 |        |  | $ | 100,550,889 |           |  | $ | 99,817,919 | 
|                           |  |                  |           |                    |  |           |           |        |  |   |             |           |  |   |            | 



| |  | The scheduled maturities of mortgage-backed securities at September 30, 2002 were as follows:
| |  | ---------------------------------------------------------------------------------------------

|                           |  |                  |            |                    |  |           |            |        |  |   |            |           |  |   |            | 
|-------------------------- |  | ---------------- | ---------- | ------------------ |  | --------- | ---------- | ------ |  | - | ---------- | --------- |  | - | ---------- | 
|                           |  | Held-to-maturity |            | Available-for-sale
|                           |  | securities       |            | securities        
|                           |  |                  |            |                   
|                           |  |                  |            |                    |  | Estimated |            |        |  |   |            | Estimated
|                           |  | Amortized        |            | Market             |  | Amortized |            | Market
|                           |  | Cost             |            | Value              |  | Cost      |            | Value 
|                           |  |                  |            |                    |  |           |            |       
|Due in one year or less    |  | $                | 12,588,317 |                    |  | $         | 12,523,250 |        |  | $ | 5,430,080  |           |  | $ | 5,437,177  | 
|Due from one to five years |  |                  | 10,553,568 |                    |  |           | 10,575,445 |        |  |   | 5,831,498  |           |  |   | 5,939,448  | 
|Due from five to ten years |  |                  | 5,199,937  |                    |  |           | 5,242,318  |        |  |   | 9,423,762  |           |  |   | 9,530,633  | 
|Due after ten years        |  |                  | 9,345,827  |                    |  |           | 9,394,903  |        |  |   | 31,018,005 |           |  |   | 31,130,142 | 
|                           |  |                  |            |                    |  |           |            |        |  |   |            |           |  |   |            | 
|                           |  | $                | 37,687,649 |                    |  | $         | 37,735,916 |        |  | $ | 51,703,345 |           |  | $ | 52,037,400 | 
|                           |  |                  |            |                    |  |           |            |        |  |   |            |           |  |   |            | 

NOTE 5 - LOANS RECEIVABLE



| |  | Loans receivable at September 30 are summarized as follows:
| |  | -----------------------------------------------------------

|                                           |                                   |                                         |             |             |             |             |             |             |             |             | 
|------------------------------------------ | --------------------------------- | --------------------------------------- | ----------- | ----------- | ----------- | ----------- | ----------- | ----------- | ----------- | ----------- | 
|                                           |                                   |                                         |             |             | 2003        |             | 2002       
|                                           |                                   |                                         |             |             |             |             |            
|Mortgage loans (principally conventional): |                                   |                                         |             |             |             |             |             |            
|                                           | Single family residential         |                                         | $           | 196,972,497 |             |             | $           | 189,458,924 |            
|                                           | Multi-family residential          |                                         |             | 665,652     |             |             |             | 1,041,913   |            
|                                           | Commercial                        |                                         |             | 26,448,333  |             |             |             | 22,885,698  |            
|                                           | Construction and land development |                                         |             | 49,991,567  |             |             |             | 40,889,543  |            
|                                           | Land                              |                                         |             | 6,131,962   |             |             |             | 3,287,387   |            
|                                           |                                   |                                         |             |             |             |             |             |            
|                                           |                                   |                                         | 280,210,011 |             |             |             | 257,563,465 |            
|Business and Consumer loans:               |                                   |                                         |             |             |             |             |             |            
|                                           | Commercial business               |                                         |             | 786,429     |             |             |             | 411,046     |            
|                                           | Consumer:                         |                                         |             |             |             |             |             |             |            
|                                           |                                   | Secured by deposits                     |             |             | 2,889,701   |             |             |             | 2,727,024   |            
|                                           |                                   | Secured by vehicles                     |             |             | 9,123,718   |             |             |             | 10,497,495  |            
|                                           |                                   | Personal real estate loans              |             |             | 3,490,223   |             |             |             | 4,186,920   |            
|                                           |                                   | Other                                   |             |             | 3,185,532   |             |             |             | 4,044,167   |            
|                                           |                                   |                                         |             |             |             |             |             |            
|                                           |                                   |                                         | 19,475,603  |             |             |             | 21,866,652  |            
|                                           |                                   |                                         |             |             |             |             |             |            
|                                           |                                   | Total loans                             |             |             | 299,685,614 |             |             |             | 279,430,117 |            
|                                           | Less:                             |                                         |             |             |             |             |             |             |            
|                                           |                                   | Undisbursed portion of loans in process |             |             | (18,811,206 | )           |             |             | (12,585,628 | )          
|                                           |                                   | Unearned discounts                      |             |             | (11,628     | )           |             |             | (19,462     | )          
|                                           |                                   | Net deferred loan-origination fees      |             |             | (431,969    | )           |             |             | (442,708    | )          
|                                           |                                   | Allowance for loan losses               |             |             | (1,294,090  | )           |             |             | (1,291,701  | )          
|                                           |                                   |                                         |             |             |             |             |             |            
|                                           |                                   |                                         | Net loans   |             | $           | 279,136,721 |             |             | $           | 265,090,618 | 
|                                           |                                   |                                         |             |             |             |             |             |            

62



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##### 



JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
CONTINUED

NOTE 5 - LOANS RECEIVABLE - CONTINUED



| |  | The Bank at September 30 had mortgage loan commitments
outstanding substantially all of which are at rates to be
determined at closing (rates range from 4.5% to 9.5%) as
follows:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|              |  |      |            |      |  |   |           | 
|------------- |  | ---- | ---------- | ---- |  | - | --------- | 
|              |  | 2003 |            | 2002
|              |  |      |            |     
|Variable-rate |  | $    | 2,977,475  |      |  | $ | 1,073,570 | 
|Fixed-rate    |  |      | 8,552,148  |      |  |   | 7,282,131 | 
|              |  |      |            |      |  |   |           | 
|              |  | $    | 11,529,623 |      |  | $ | 8,355,701 | 
|              |  |      |            |      |  |   |           | 



| |  | The Bank had committed to sell a substantial portion of fixed-rate loans
when funded. 
| |  | --------------------------------------------------------------------------------------
|
| |  | Activity in the allowance for loan losses is summarized as follows as of September 30:

|                               |                             |   |           |          |      |   |           |         |   |   |           |         |  
|------------------------------ | --------------------------- | - | --------- | -------- | ---- | - | --------- | ------- | - | - | --------- | ------- | -
|                               |                             |   | 2003      |          | 2002 |   | 2001     
|                               |                             |   |           |          |      |   |          
|Balance at beginning of period |                             | $ | 1,291,701 |          |      | $ | 1,257,171 |         |   | $ | 1,227,480 |        
|                               | Provision charged to income |   |           | 162,000  |      |   |           | 101,688 |   |   |           | 85,500  |  
|                               | Charge-offs                 |   |           | (160,392 | )    |   |           | (70,009 | ) |   |           | (58,309 | )
|                               | Recoveries                  |   |           | 781      |      |   |           | 2,851   |   |   |           | 2,500   |  
|                               |                             |   |           |          |      |   |           |         |   |   |           |        
|Balance at end of period       |                             | $ | 1,294,090 |          |      | $ | 1,291,701 |         |   | $ | 1,257,171 |        
|                               |                             |   |           |          |      |   |           |         |   |   |           |        



| |  | At September 30, 2003 and 2002, in managements opinion, there were no
material loans which were impaired as defined by FASB Statement No. 114,
as amended by FASB Statement No. 118. However, the Bank did have
non-accrual loans, for which FASB Statement No. 114 does not apply, of
$882,000 and $694,000 at September 30, 2003 and 2002, respectively. The
Bank is not committed to lend additional funds to debtors whose loans
have been modified.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Loans to executive officers and directors totaled $697,000 and $680,000 at
September 30, 2003 and 2002, respectively.                                                                                                                                                                                                                                                                                                                                    
|
| |  | Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans are summarized as follows as of September 30:                                                                                                                                                                                                                                       

|                                                             |  |      |            |      |  |      |            |  |  |   |            | 
|------------------------------------------------------------ |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- | 
|                                                             |  | 2003 |            | 2002 |  | 2001
|                                                             |  |      |            |      |  |     
|Mortgage
loans underlying FHLMC    

pass-through securities |  | $    | 91,169,750 |      |  | $    | 91,865,674 |  |  | $ | 85,822,482 | 
|                                                             |  |      |            |      |  |      |            |  |  |   |            | 



| |  | Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $1,998,000 and $1,773,000, at September 30,
2003 and 2002, respectively.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 6 - REAL ESTATE



| |  | An analysis of the activity in the allowance for losses in real estate acquired in settlement of loans at
September 30 is as follows:
| |  | -------------------------------------------------------------------------------------------------------------------------------------

|                               |             |   |      |   |      |   |           |            |  
|------------------------------ | ----------- | - | ---- | - | ---- | - | --------- | ---------- | -
|                               |             |   | 2003 |   | 2002
|                               |             |   |      |   |     
|Balance at beginning of period |             | $ |     |   |      | $ | 1,210,523 |           
|Provisions for losses          |             |   |      |   |      |   |           |           
|                               | Charge-offs |   |      |  |      |   |           | (1,210,523 | )
|                               | Recoveries  |   |      |  |      |   |           |           |  
|                               |             |   |      |   |      |   |           |           
|Balance at end of period       |             | $ |     |   |      | $ |          |           
|                               |             |   |      |   |      |   |           |           

63



---



##### 



JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
CONTINUED

NOTE 7 - ACCRUED INTEREST RECEIVABLE



| |  | Accrued interest receivable at September 30 is summarized as follows:
| |  | ---------------------------------------------------------------------

|                           |  |      |           |      |  |   |           | 
|-------------------------- |  | ---- | --------- | ---- |  | - | --------- | 
|                           |  | 2003 |           | 2002
|                           |  |      |           |     
|Investment securities      |  | $    | 319,317   |      |  | $ | 289,955   | 
|Mortgage-backed securities |  |      | 505,306   |      |  |   | 517,997   | 
|Loans receivable           |  |      | 2,058,151 |      |  |   | 2,120,903 | 
|                           |  |      |           |      |  |   |           | 
|                           |  | $    | 2,882,774 |      |  | $ | 2,928,855 | 
|                           |  |      |           |      |  |   |           | 

NOTE 8 - PREMISES AND EQUIPMENT



| |  | Premises and equipment at September 30 consist of the following:
| |  | ----------------------------------------------------------------

|                                  |  |      |           |      |  |              |           |  |  |               |   | 
|--------------------------------- |  | ---- | --------- | ---- |  | ------------ | --------- |  |  | ------------- | - | 
|                                  |  |      |           |      |  |              |           |  |  | Estimated    
|                                  |  | 2003 |           | 2002 |  | Useful Lives
|                                  |  |      |           |      |  |             
|Land                              |  | $    | 1,040,614 |      |  | $            | 1,040,614 |  |  |               |  | 
|Building and improvements         |  |      | 5,390,159 |      |  |              | 4,806,351 |  |  | 5 to 40 years
|Furniture, fixtures and equipment |  |      | 3,526,317 |      |  |              | 3,458,836 |  |  | 3 to 15 years
|                                  |  |      |           |      |  |              |           |  |  |               |   | 
|                                  |  |      | 9,957,091 |      |  |              | 9,305,801 |  |  |               |   | 
|Less accumulated depreciation     |  |      | 4,340,637 |      |  |              | 3,944,525 |  |  |               |   | 
|                                  |  |      |           |      |  |              |           |  |  |               |   | 
|                                  |  | $    | 5,616,454 |      |  | $            | 5,361,276 |  |  |               |   | 
|                                  |  |      |           |      |  |              |           |  |  |               |   | 

NOTE 9 - DEPOSITS



| |  | Deposits at September 30 are summarized as follows:
| |  | ---------------------------------------------------

|                         |                  |   |             |            |         |  |        |       |         |   |             |            |  |  |        |       | 
|------------------------ | ---------------- | - | ----------- | ---------- | ------- |  | ------ | ----- | ------- | - | ----------- | ---------- |  |  | ------ | ----- | 
|                         |                  |   | 2003        |            | 2002   
|                         |                  |   |             |            |        
|                         |                  |   | Amount      |            | Percent |  | Amount |       | Percent
|                         |                  |   |             |            |         |  |        |       |        
|Transaction accounts:    |                  |   |             |            |         |  |        |       |         |   |             |            |  |  |        |      
|                         | Demand and NOW   |   | $           | 60,786,678 |         |  |        | 15.63 |         |   | $           | 54,911,883 |  |  |        | 15.52 | 
|                         | Money market     |   |             | 58,798,235 |         |  |        | 15.12 |         |   |             | 37,600,130 |  |  |        | 10.62 | 
|                         | Passbook savings |   |             | 17,828,971 |         |  |        | 4.59  |         |   |             | 16,864,434 |  |  |        | 4.77  | 
|                         |                  |   |             |            |         |  |        |       |         |   |             |            |  |  |        |      
|                         |                  |   | 137,413,884 |            |         |  | 35.34  |       |         |   | 109,376,447 |            |  |  | 30.91  |      
|                         |                  |   |             |            |         |  |        |       |         |   |             |            |  |  |        |      
|Certificates of deposit: |                  |   |             |            |         |  |        |       |         |   |             |            |  |  |        |      
|                         | 1% to 2%         |   |             | 64,177,793 |         |  |        | 16.50 |         |   |             |           |  |  |        |      | 
|                         | 2% to 3%         |   |             | 68,902,814 |         |  |        | 17.72 |         |   |             | 57,122,233 |  |  |        | 16.14 | 
|                         | 3% to 4%         |   |             | 66,546,521 |         |  |        | 17.11 |         |   |             | 92,725,673 |  |  |        | 26.20 | 
|                         | 4% to 5%         |   |             | 24,335,283 |         |  |        | 6.26  |         |   |             | 41,020,600 |  |  |        | 11.59 | 
|                         | 5% to 6%         |   |             | 15,554,158 |         |  |        | 4.00  |         |   |             | 30,782,798 |  |  |        | 8.70  | 
|                         | 6% to 7%         |   |             | 11,210,647 |         |  |        | 2.88  |         |   |             | 22,091,110 |  |  |        | 6.24  | 
|                         | 7% to 8%         |   |             | 753,831    |         |  |        | .19   |         |   |             | 700,570    |  |  |        | .20   | 
|                         | 8% to 9%         |   |             |           |         |  |        |      |         |   |             | 76,817     |  |  |        | .02   | 
|                         |                  |   |             |            |         |  |        |       |         |   |             |            |  |  |        |      
|                         |                  |   | 251,481,047 |            |         |  | 64.66  |       |         |   | 244,519,801 |            |  |  | 69.09  |      
|                         |                  |   |             |            |         |  |        |       |         |   |             |            |  |  |        |      
|                         |                  | $ | 388,894,931 |            |         |  | 100.00 |       |         | $ | 353,896,248 |            |  |  | 100.00 |      
|                         |                  |   |             |            |         |  |        |       |         |   |             |            |  |  |        |      



| |  | The aggregate amount of short-term jumbo certificates of deposit with a
minimum denomination of $100,000 was approximately $71,056,000 and
$63,765,000 at September 30, 2003 and 2002, respectively.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Scheduled maturities of certificates of deposit at September 30, 2003 were as follows:                                                                                                              

|                       |  |        |             |         |  |  |        | 
|---------------------- |  | ------ | ----------- | ------- |  |  | ------ | 
|Term to maturity       |  | Amount |             | Percent
|                       |  |        |             |        
|Within 12 months       |  | $      | 155,585,217 |         |  |  | 61.87  | 
|12 to 24 months        |  |        | 37,767,285  |         |  |  | 15.02  | 
|24 to 36 months        |  |        | 16,349,697  |         |  |  | 6.50   | 
|Greater than 36 months |  |        | 41,778,848  |         |  |  | 16.61  | 
|                       |  |        |             |         |  |  |        | 
|                       |  | $      | 251,481,047 |         |  |  | 100.00 | 
|                       |  |        |             |         |  |  |        | 

64



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##### 



JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
CONTINUED

NOTE 9 - DEPOSITS - CONTINUED



| |  | Interest expense on deposits for the years ended September 30 is summarized as follows:
| |  | ---------------------------------------------------------------------------------------

|                        |  |      |            |      |  |      |            |  |  |   |            | 
|----------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- | 
|                        |  | 2003 |            | 2002 |  | 2001
|                        |  |      |            |      |  |     
|Money Market            |  | $    | 1,299,229  |      |  | $    | 1,308,552  |  |  | $ | 837,343    | 
|Passbook savings        |  |      | 241,029    |      |  |      | 351,751    |  |  |   | 373,322    | 
|NOW                     |  |      | 89,293     |      |  |      | 131,318    |  |  |   | 173,798    | 
|Certificates of deposit |  |      | 8,803,918  |      |  |      | 10,193,307 |  |  |   | 10,150,625 | 
|                        |  |      |            |      |  |      |            |  |  |   |            | 
|                        |  | $    | 10,433,469 |      |  | $    | 11,984,928 |  |  | $ | 11,535,088 | 
|                        |  |      |            |      |  |      |            |  |  |   |            | 



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

NOTE 10 - BORROWINGS



| |  | Information related to Federal Home Loan Bank borrowings for the years
ended September 30 is provided in the
table below:
| |  | -------------------------------------------------------------------------------------------------------------------------

|                                                 |  |      |            |      |  |   |             |  
|------------------------------------------------ |  | ---- | ---------- | ---- |  | - | ----------- | -
|                                                 |  | 2003 |            | 2002
|                                                 |  |      |            |     
|Balance at end of period                         |  | $    | 31,107,711 |      |  | $ | 25,129,010  |  
|Average amount outstanding during the period     |  |      | 27,052,591 |      |  |   | 36,730,317  |  
|Maximum amount outstanding during the period     |  |      | 34,500,000 |      |  |   | 62,000,000  |  
|Weighted average interest rate during the period |  |      | 4.72       | %    |  |   | 4.97        | %
|Interest rates at end of period                  |  |      | 1.01%-6.20 | %    |  |   | 2.16% -6.20 | %



| |  | These borrowings are payable at maturity and may be subject to earlier
call by Federal Home Loan Bank.              
| |  | --------------------------------------------------------------------------------------------------------------------
|
| |  | Scheduled repayments and potential calls of
Federal Home Loan Bank borrowings at September 30,
2003 were as follows:

|              |  |          |            |          |  |   |   | 
|------------- |  | -------- | ---------- | -------- |  | - | - | 
|              |  | Maturing |            | Callable
|              |  |          |            |         
|Under 1 year  |  | $        | 13,700,000 |          |  | $ |  | 
|1 to 5 years  |  |          | 17,407,711 |          |  |   |   | 
|6 to 10 years |  |          |           |          |  |   |  | 
|Over 10 years |  |          |           |          |  |   |  | 
|              |  |          |            |          |  |   |   | 
|              |  | $        | 31,107,711 |          |  | $ |  | 
|              |  |          |            |          |  |   |   | 



| |  | The advances are collateralized by a blanket lien on first mortgage loans.
| |  | --------------------------------------------------------------------------

NOTE 11 - FEDERAL INCOME TAXES



| |  | The Company and its subsidiaries file a consolidated federal income tax
return.                                  
| |  | -----------------------------------------------------------------------------------------------------------------
| |  | .                                                                                                                
| |  | The provision for Federal income taxes differs from that computed at the
statutory corporate tax rate as follows:

|                                |                                                                                      |   |           |        |      |   |           |        |   |   |           |        |  
|------------------------------- | ------------------------------------------------------------------------------------ | - | --------- | ------ | ---- | - | --------- | ------ | - | - | --------- | ------ | -
|                                |                                                                                      |   | 2003      |        | 2002 |   | 2001     
|                                |                                                                                      |   |           |        |      |   |          
|Computed expected tax expense |                                                                                      | $ | 2,976,641 |        |      | $ | 3,076,625 |        |   | $ | 1,994,759 |       
|Adjustments:                    |                                                                                      |   |           |        |      |   |           |        |   |   |           |       
|                                | Other, principally increase in cash value
of insurance net of nondeductible expenses |   |           | (2,108 | )    |   |           | (3,397 | ) |   |           | (4,674 | )
|                                |                                                                                      |   |           |        |      |   |           |        |   |   |           |       
|                                |                                                                                      | $ | 2,974,533 |        |      | $ | 3,073,228 |        |   | $ | 1,990,085 |       
|                                |                                                                                      |   |           |        |      |   |           |        |   |   |           |       

65



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##### 



JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
CONTINUED

NOTE 11 - FEDERAL INCOME TAXES - CONTINUED



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

|                                                  |                      |   |          |       |      |   |         |         |  |   |         |         | 
|------------------------------------------------- | -------------------- | - | -------- | ----- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                                  |                      |   | 2003     |       | 2002 |   | 2001   
|                                                  |                      |   |          |       |      |   |        
|Deferred loan fees                                |                      | $ | 6,095    |       |      | $ | (5,678  | )       |  | $ | 5,472   |        
|FHLB stock dividends                              |                      |   | 26,710   |       |      |   | 29,975  |         |  |   | 46,751  |        
|Deferred compensation and other employee benefits |                      |   | (187,555 | )     |      |   | 25,762  |         |  |   | (30,966 | )      
|Deferred loan costs                               |                      |   | 22,517   |       |      |   | 33,952  |         |  |   | 7,362   |        
|Allowance for loan losses                         |                      |   | 25,928   |       |      |   | (16,132 | )       |  |   | 405,637 |        
|Amortization of intangibles                       |                      |   | 24,720   |       |      |   | 22,659  |         |  |   |        |        
|Book tax depreciation                             |                      |   | 83,394   |       |      |   | 27,142  |         |  |   | 11,744  |        
|                                                  |                      |   |          |       |      |   |         |         |  |   |         |        
|                                                  | Deferred tax expense |   | $        | 1,809 |      |   | $       | 117,680 |  |   | $       | 446,000 | 
|                                                  |                      |   |          |       |      |   |         |         |  |   |         |        



| |  | The components of the net deferred tax assets/liabilities (included in accrued expenses and other
liabilities) at September 30 were comprised of the following:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                 |                                                      |                                       |   |          |           |      |   |          |           | 
|-------------------------------- | ---------------------------------------------------- | ------------------------------------- | - | -------- | --------- | ---- | - | -------- | --------- | 
|                                 |                                                      |                                       |   | 2003     |           | 2002
|                                 |                                                      |                                       |   |          |           |     
|Deferred income tax assets:      |                                                      |                                       |   |          |           |      |   |         
|                                 | Deferred loan fees                                   |                                       | $ | 165,467  |           |      | $ | 171,562  |          
|                                 | Deferred compensation and other employee benefits    |                                       |   | 560,638  |           |      |   | 373,083  |          
|                                 | Deferred loan costs                                  |                                       |   |         |           |      |   | 22,517   |          
|                                 | Net unrealized loss on available-for-sale securities |                                       |   | 233,524  |           |      |   |         |          
|                                 |                                                      |                                       |   |          |           |      |   |         
|                                 |                                                      | Total deferred income tax assets      |   |          | 959,629   |      |   |          | 567,162   | 
|Deferred income tax liabilities: |                                                      |                                       |   |          |           |      |   |         
|                                 | Net unrealized gain on available-for-sale securities |                                       |   |         |           |      |   | 194,031  |          
|                                 | Allowance for loan losses                            |                                       |   | 513,177  |           |      |   | 487,249  |          
|                                 | FHLB stock dividends                                 |                                       |   | 354,823  |           |      |   | 328,113  |          
|                                 | Book/tax depreciation difference                     |                                       |   | 297,535  |           |      |   | 214,141  |          
|                                 | Intangible assets                                    |                                       |   | 47,379   |           |      |   | 22,659   |          
|                                 |                                                      |                                       |   |          |           |      |   |         
|                                 |                                                      | Total deferred income tax liabilities |   |          | 1,212,914 |      |   |          | 1,246,193 | 
|                                 |                                                      |                                       |   |          |           |      |   |         
|                                 | Net deferred income tax liabilities                  |                                       | $ | (253,285 | )         |      | $ | (679,031 | )        
|                                 |                                                      |                                       |   |          |           |      |   |         



| |  | Stockholders equity at September 30, 2003 and 2002, includes approximately
$3,000,000, for which deferred Federal income tax liability has not been
fully recognized. This amount represents an allocation of bad-debt
deductions for tax purposes only (base year bad debt reserve). Reduction
of amounts so allocated for purposes other than tax bad-debt losses would
create income for tax purposes only, which would be subject to the
then-current corporate income tax rate.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 12 - PENSION PLAN, THRIFT PLAN, DEFERRED COMPENSATION AND RETIREE MEDICAL
INSURANCE



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

66



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##### 



JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
CONTINUED

NOTE 12 - PENSION PLAN, THRIFT PLAN, DEFERRED COMPENSATION AND RETIREE MEDICAL
INSURANCE - CONTINUED



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



| |  |  | Actuarial present value of benefit obligations:
| |  |  | -----------------------------------------------

|                                                                     |                                         |           |           |         |           |      |           |         |           | 
|-------------------------------------------------------------------- | --------------------------------------- | --------- | --------- | ------- | --------- | ---- | --------- | ------- | --------- | 
|                                                                     |                                         |           |           | 2003    |           | 2002
|                                                                     |                                         |           |           |         |           |     
|                                                                     | Accumulated benefit obligation:         |           |           |         |           |      |           |         |          
|                                                                     |                                         | Vested    |           | $       | 1,714,754 |      |           | $       | 1,580,315 | 
|                                                                     |                                         | Nonvested |           |         | 28,386    |      |           |         | 42,915    | 
|                                                                     |                                         |           |           |         |           |      |           |        
|                                                                     |                                         |           | 1,743,140 |         |           |      | 1,623,230 |        
|                                                                     | Effect of projected future compensation |           |           | 423,767 |           |      |           | 346,481 |          
|                                                                     |                                         |           |           |         |           |      |           |        
|Projected benefit obligation for service rendered to date            |                                         |           | 2,166,907 |         |           |      | 1,969,711 |        
|Plan assets at fair value; primarily cash and short-term
investments |                                         |           | 2,773,885 |         |           |      | 2,466,352 |        
|                                                                     |                                         |           |           |         |           |      |           |         |           | 
|Plan assets in excess of projected benefit obligation                |                                         | $         | 336,586   |         |           | $    | 496,641   |        
|                                                                     |                                         |           |           |         |           |      |           |         |           | 



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

|                                                                |                                             |                     |          |      |         |      |          |      |        |   |          |      |        | 
|--------------------------------------------------------------- | ------------------------------------------- | ------------------- | -------- | ---- | ------- | ---- | -------- | ---- | ------ | - | -------- | ---- | ------ | 
|                                                                |                                             |                     |          | 2003 |         | 2002 |          | 2001
|                                                                |                                             |                     |          |      |         |      |          |     
|Service
cost - benefits earned during the year                  |                                             | $                   | 129,543  |      |         | $    | 117,539  |      |        | $ | 104,574  |     
|Interest cost on projected benefit obligation                   |                                             |                     | 140,849  |      |         |      | 112,213  |      |        |   | 101,612  |     
|Actual return on plan assets                                    |                                             |                     | (103,678 | )    |         |      | (139,637 | )    |        |   | (124,893 | )   
|Net amortization and deferral                                   |                                             |                     | (60,778  | )    |         |      | (9,725   | )    |        |   | (8,443   | )   
|                                                                |                                             |                     |          |      |         |      |          |      |        |   |          |     
|                                                                |                                             | Net pension expense |          | $    | 105,936 |      |          | $    | 80,390 |   |          | $    | 72,850 | 
|                                                                |                                             |                     |          |      |         |      |          |      |        |   |          |     
|Assumptions used to develop the net periodic
pension cost were: |                                             |                     |          |      |         |      |          |      |        |   |          |     
|                                                                | Discount rate                               |                     |          | 6.50 | %       |      |          | 6.50 | %      |   |          | 6.50 | %     
|                                                                | Expected long-term rate of return on assets |                     |          | 6.00 | %       |      |          | 6.00 | %      |   |          | 6.00 | %     
|                                                                | Rate on increase in compensation levels     |                     |          | 6.00 | %       |      |          | 5.00 | %      |   |          | 5.00 | %     



| |  | The Bank has a defined contribution thrift plan in effect for substantially
all employees. Compensation and benefits expense includes $66,019 in
2003, $58,233 in 2002, and $53,697 in 2001 for such plan. The thrift
plan permits employee contributions in the amount of 1% to 6% of
compensation. The Bank contributes for each thrift plan participant a
matching contribution equal to 50% of the participants contribution. In
addition to the required matching contributions, the Bank may contribute
an additional amount of matching contributions determined by the Board of
Directors at its discretion.                                                                                                                                                                                                                                                                                                                      
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In addition to the aforementioned benefit plans, the Bank has deferred
compensation arrangements with key officers and certain directors. The
deferred compensation is funded through life insurance contracts and
calls for annual payments for a period of ten years. The Bank funds the
cost of the insurance for the officers while the cost of directors
insurance is funded through a reduction in their normal directors fees.
Vesting occurs after specified years of service and payments begin upon
retirement. Expense reported in the statement of earnings under these
arrangements totaled approximately $101,000 in 2003 and 2002, and
$112,000 in 2001. At September 30, 2003 and 2002, the Bank had a
liability of $1,034,000, related to such arrangements. Additionally,
other assets include $851,000 and $793,000 at September 30, 2003 and
2002, respectively, in cash surrender value of life insurance contracts.

67



---



##### 



JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
CONTINUED

NOTE 12 - PENSION PLAN, THRIFT PLAN, DEFERRED COMPENSATION AND RETIREE MEDICAL
INSURANCE - CONTINUED



| |  | In November, 2002, the board of directors of the Bank adopted a resolution
whereby all employees who retire
after at least twenty-five years of continuous full-time service prior to
their sixty-fifth birthday will continue to be
provided group medical insurance until the earliest of (1) the day the
retiree becomes eligible for any other group
medical insurance as an employee, or (2) the first day of the calendar
month immediately following their sixty-fifth
birthday. Upon attainment of age 65, the Bank will continue to provide
the retiree medical insurance under either (1) the Banks group medical
insurance policy, or (2) through an individual Medicare supplement policy
until the day the retiree becomes eligible for any other group medical
insurance as an employee. The choice of
using the Banks group medical insurance policy or a Medicare supplement
policy will be at the sole discretion of
the Banks board of directors. Furthermore, if, in the sole judgement of
the Banks board of directors, continuing
to provide retiree medical insurance creates economic hardship for the
Bank, the board of directors has full
authority to terminate the medical insurance of retirees. In the event
medical insurance for retirees is terminated,
the Bank will give retirees as much notice as possible.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In connection with the adoption of the above resolution, the Bank, after
consultation with its actuaries, recorded a
liability for retiree insurance of approximately $633,000 and included
this amount in compensation and benefits
expense in the accompanying statement of earnings for the year ended
September 30, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | The above mentioned resolution related to retiree health insurance was adopted
in November, 2002; however, the Bank did not record the liability until the
fourth quarter of the fiscal year after consultation with and upon receipt of
information from its actuaries. Had this liability been recorded in the
quarter ended December 31, 2002, the amounts originally reported for that
quarter would be revised as follows (dollars in thousands except per share
amounts):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                           |         |   |          |     |         |   |         |     | 
|-------------------------- | ------- | - | -------- | --- | ------- | - | ------- | --- | 
|                           |         |   | As       |     | As     
|                           |         |   | Reported |     | Revised
|                           |         |   |          |     |        
|Total liabilities          |         | $ | 389,704  |     |         | $ | 390,121 |    
|Total stockholders equity |         |   | 40,640   |     |         |   | 40,223  |    
|Compensation and benefits  |         |   | 1,296    |     |         |   | 1,929   |    
|Earnings before tax        |         |   | 2,379    |     |         |   | 1,746   |    
|Federal income tax         |         |   | 814      |     |         |   | 598     |    
|Net earnings               |         |   | 1,565    |     |         |   | 1,148   |    
|Earnings per share:        |         |   |          |     |         |   |         |    
|                           | Basic   |   |          | .93 |         |   |         | .68 | 
|                           | Diluted |   |          | .86 |         |   |         | .63 | 



| |  | If the entire $633,000 charge would have been recorded in the three months
ended December 31, 2002, it would
have had a similar impact on the financial condition at March 31, 2003,
and June 30, 2003, and on the cumulative
results of operations for the six and nine months ended March 31, 2003 and
June 30, 2003.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 13 - EMPLOYEE STOCK OWNERSHIP PLAN



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

68



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##### 



JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
CONTINUED

NOTE 13 - EMPLOYEE STOCK OWNERSHIP PLAN - CONTINUED



| |  | In prior years the ESOP acquired 202,048 shares of Company stock through
borrowings from IHC. The Bank makes annual contributions to the ESOP
equal to the debt service, less dividends received on the unallocated
shares. The ESOP shares have been pledged as collateral for the loan.
As the loan is repaid, shares are released from collateral and committed
for allocation to active employees, based on the proportion of debt
service paid in the year. The shares pledged as collateral are reported
as stock acquired by the ESOP plan in the statement of financial
condition. As shares are released from collateral, the Bank reports
compensation expense equal to the average fair value of the shares over
the period in which the shares were earned. Also, the shares become
outstanding for earnings per share computations. Dividends on allocated
shares are recorded as a reduction of retained earnings, and dividends on
unallocated shares are recorded as a reduction of the loan and accrued
interest. ESOP compensation expense was $119,966, $85,900, and $53,878,
for the years ended September 30, 2003, 2002, and 2001, respectively. At
September 30, 2003 and 2002, 137,315 and 128,683 ESOP shares,
respectively, have been released for allocation, of which 130,838 and
122,206 were allocated to participants at September 30, 2003 and 2002,
respectively. Of the 130,838 allocated to participants at September 30,
2003, 16,163 shares have been distributed to participants who have
withdrawn from the plan. The fair value of the unallocated shares of
71,210 and 79,842 at September 30, 2003 and 2002, was approximately
$2,653,285 and $1,981,000, respectively.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 14 - MANAGEMENT RECOGNITION PLAN



| |  | In prior years, the Bank adopted a Management Recognition Plan (MRP) to provide
officers and employees with a proprietary interest in the Association as incentive
to contribute to its success. Compensation expense in the amount of the fair
market value of the common stock at the date of the grant to the officer or employee
was recognized pro rata over the period during which the shares are earned and payable.
MRP expense included in compensation and benefits in the accompanying consolidated
statements of earnings totaled $-0-, $13,929, and $167,000 for the years ended September
30, 2003, 2002, and 2001, respectively.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 15 - STOCK OPTION PLANS



| |  | Certain directors and officers have options to purchase shares of the
Companys common stock under its 1994, 1996 and 2001 Stock Incentive
Plans. The option price is the fair market value at the date of grant
and all shares have been granted and the options maximum term is ten
years. The option price ranges from $7.05 to $21.87 per share and the
options expire between March 2004 and March 2012. All available options
under the 1994 and 1996 plans have been granted and are fully vested.
Under the 2001 plan, 81,000 options have been granted and 9,000 remain
available for future awards.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | A summary of activity in the Companys stock incentive plans follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                                                                                        |                   |  |         |         |           |   |                  |           |   |   |       |       | 
|--------------------------------------------------------------------------------------- | ----------------- |  | ------- | ------- | --------- | - | ---------------- | --------- | - | - | ----- | ----- | 
|                                                                                        |                   |  | Number  |         | Aggregate |   | Weighted Average
|                                                                                        |                   |  | of      |         | Option    |   | Price           
|                                                                                        |                   |  | Shares  |         | Price     |   | Per Share       
|                                                                                        |                   |  |         |         |           |   |                 
|Options outstanding at September 30, 2001                                               |                   |  | 215,188 |         |           | $ | 2,366,094        |           |   | $ | 11.00 |      
|                                                                                        | Options granted   |  |         | 81,000  |           |   |                  | 1,771,470 |   |   |       | 21.87 | 
|                                                                                        | Options exercised |  |         | (33,174 | )         |   |                  | (311,929  | ) |   |       | 9.40  | 
|                                                                                        |                   |  |         |         |           |   |                  |           |   |   |       |      
|Options outstanding at September 30, 2002                                               |                   |  | 263,014 |         |           |   | 3,825,635        |           |   |   | 14.54 |      
|                                                                                        | Options granted   |  |         |        |           |   |                  |          |   |   |       |      | 
|                                                                                        | Options exercised |  |         | (38,641 | )         |   |                  | (405,119  | ) |   |       | 10.48 | 
|                                                                                        |                   |  |         |         |           |   |                  |           |   |   |       |      
|Options outstanding at September 30, 2003
(exercise price of $7.05 to $21.87 per share) |                   |  | 224,373 |         |           | $ | 3,420,516        |           |   | $ | 15.24 |      
|                                                                                        |                   |  |         |         |           |   |                  |           |   |   |       |      
|1994 option plan                                                                        |                   |  | 20,767  |         |           | $ | 146,436          |           |   | $ | 7.05  |      
|1996 option plan                                                                        |                   |  | 127,574 |         |           |   | 1,611,260        |           |   |   | 12.63 |      
|2001 option plan                                                                        |                   |  | 76,032  |         |           |   | 1,662,820        |           |   |   | 21.87 |      
|                                                                                        |                   |  |         |         |           |   |                  |           |   |   |       |      
|                                                                                        |                   |  | 224,373 |         |           | $ | 3,420,516        |           |   | $ | 15.24 |      
|                                                                                        |                   |  |         |         |           |   |                  |           |   |   |       |      
|Exercisable at September 30, 2003                                                       |                   |  | 169,170 |         |           | $ | 2,213,226        |           |   | $ | 13.08 |      
|                                                                                        |                   |  |         |         |           |   |                  |           |   |   |       |      

69



---



##### 



JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
CONTINUED

NOTE 15 - STOCK OPTION PLANS - CONTINUED



| |  | No compensation cost has been recognized in the accompanying statements of
operations for the Companys
stock option plans. Had compensation cost for the Companys stock options
plans been determined based on fair
values at the grant dates for awards under those plans consistent with the
method of SFAS No. 123, the
Companys net income would have been reduced on a proforma basis by
approximately $60,000 in 2003;
$60,000 in 2002; and $83,000 in 2001. Earning per share would have been
reduced by $.04 basic and $.03 diluted
in 2003; $.03 basic and diluted in 2002; and $.05 basic and $.04 diluted
in 2001. The foregoing proforma
amounts have been calculated using a binomial model and allocating
compensation cost and a straight-line basis
over the vesting period of the grant. The fair value of each option
grant for the 1996 (fully vested in 2001) plan
was estimated with the following weighted-average assumptions: dividend
yield of 3%; expected volatility of 20%;
risk-free interest rate of 6.6%; and expected life of 8 years. The fair
value of each option grant for the 2001 (fully
vested in 2006) plan was estimated with the following weighted average assumptions; dividend yield of 2.2%;
expected volatility of 25%; risk-free interest rate of 3.4%; and expected life of 6 years.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 16 - COMMITMENTS AND CONTINGENCIES



| |  | In the ordinary course of business, the Company and subsidiaries have
various outstanding commitments and contingent liabilities that are not
reflected in the accompanying consolidated financial statements. In
addition, the Company and subsidiaries are defendants in certain claims
and legal actions arising in the ordinary course of business. In the
opinion of management, after consultation with legal counsel, the
ultimate disposition of these matters is not expected to have a material
adverse effect on the consolidated financial position of the Company and
subsidiaries.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Bank is obligated under noncancelable operating leases for certain
computer equipment. Leases are generally short-term and the remaining
commitment at September 30, 2003, is not significant to the Companys
operations or financial condition.                                                                                                                                                                                                                                                                                                                                           
|
| |  | The Bank leases office space for a branch location under an operating lease expiring August 2007. Rent expense
was $30,000 for the years ended September 30, 2003 and 2002. The Bank has the option to extend the term of
this lease for up to two consecutive terms of five years. In the normal course of business, operating leases are
generally renewed or replaced by other leases.                                                                                                                                                                                                       

NOTE 17 - REGULATORY MATTERS



| |  | The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a
direct material effect on the Banks financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Banks assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Banks capital amounts and classification are also
subject to qualitative judgments by the regulators about components,
risk-weightings, and other factors.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I capital to average
assets (as defined). Management believes that, as of September 30, 2003
and 2002, the Bank met all capital adequacy requirements to which it is
subject.                                                                                                                                                                                                                                                                                                                                                                   

70



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##### 



JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
CONTINUED

NOTE 17 - REGULATORY MATTERS - CONTINUED

|                          |                    |                           |  |         |            |                    |  |                    |      |       |  |             |            |                   |  |  |     |   |  |                   |            |  |  |  |      |  
|------------------------- | ------------------ | ------------------------- |  | ------- | ---------- | ------------------ |  | ------------------ | ---- | ----- |  | ----------- | ---------- | ----------------- |  |  | --- | - |  | ----------------- | ---------- |  |  |  | ---- | -
|                          |                    |                           |  |         |            |                    |  |                    |      |       |  |             |            |                   |  |  |     |   |  | To Be Well       
|                          |                    |                           |  |         |            |                    |  |                    |      |       |  |             |            |                   |  |  |     |   |  | Capitalized Under
|                          |                    |                           |  |         |            |                    |  |                    |      |       |  | For Capital |            | Prompt Corrective
|                          |                    |                           |  | Actual: |            | Adequacy Purposes: |  | Action Provisions:
|                          |                    |                           |  |         |            |                    |  |                   
|                          |                    |                           |  | Amount  |            | Ratio              |  | Amount             |      | Ratio |  | Amount      |            | Ratio            
|                          |                    |                           |  |         |            |                    |  |                    |      |       |  |             |            |                  
|As of September 30, 2003: |                    |                           |  |         |            |                    |  |                    |      |       |  |             |            |                   |  |  |     |   |  |                   |            |  |  | 
|                          | Risk-based capital |                           |  |         |            |                    |  |                    |      |       |  |             |            |                   |  |  |     |   |  |                   |            |  |  |  |     
|                          |                    | (to risk-weighted assets) |  | $       | 39,605,000 |                    |  |                    | 16.7 | %     |  | $           | 18,958,000 |                   |  |  | 8.0 | % |  | $                 | 23,697,500 |  |  |  | 10.0 | %
|                          | Tier I capital     |                           |  |         |            |                    |  |                    |      |       |  |             |            |                   |  |  |     |   |  |                   |            |  |  |  |     
|                          |                    | (to risk-weighted assets) |  | $       | 38,311,000 |                    |  |                    | 16.2 | %     |  | $           | 9,479,000  |                   |  |  | 4.0 | % |  | $                 | 14,218,500 |  |  |  | 6.0  | %
|                          | Tier I capital     |                           |  |         |            |                    |  |                    |      |       |  |             |            |                   |  |  |     |   |  |                   |            |  |  |  |     
|                          |                    | (to average assets)       |  | $       | 38,311,000 |                    |  |                    | 8.1  | %     |  | $           | 18,891,280 |                   |  |  | 4.0 | % |  | $                 | 23,614,100 |  |  |  | 5.0  | %
|As of September 30, 2002: |                    |                           |  |         |            |                    |  |                    |      |       |  |             |            |                   |  |  |     |   |  |                   |            |  |  | 
|                          | Risk-based capital |                           |  |         |            |                    |  |                    |      |       |  |             |            |                   |  |  |     |   |  |                   |            |  |  |  |     
|                          |                    | (to risk-weighted assets) |  | $       | 33,167,000 |                    |  |                    | 13.8 | %     |  | $           | 19,273,520 |                   |  |  | 8.0 | % |  | $                 | 24,091,900 |  |  |  | 10.0 | %
|                          | Tier I capital     |                           |  |         |            |                    |  |                    |      |       |  |             |            |                   |  |  |     |   |  |                   |            |  |  |  |     
|                          |                    | (to risk-weighted assets) |  | $       | 31,875,000 |                    |  |                    | 13.2 | %     |  | $           | 9,636,760  |                   |  |  | 4.0 | % |  | $                 | 14,455,140 |  |  |  | 6.0  | %
|                          | Tier I capital     |                           |  |         |            |                    |  |                    |      |       |  |             |            |                   |  |  |     |   |  |                   |            |  |  |  |     
|                          |                    | (to average assets)       |  | $       | 31,875,000 |                    |  |                    | 7.6  | %     |  | $           | 16,754,960 |                   |  |  | 4.0 | % |  | $                 | 20,943,700 |  |  |  | 5.0  | %

NOTE 18 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK



| |  | The Company is party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
financial statements. The contractual amounts of those instruments
reflect the extent of involvement the Company has in particular classes
of financial instruments.                                                                                                                                                                                                                           
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Companys exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments and
conditional obligations as they do for on-balance-sheet instruments.
Unless noted otherwise, the Company generally requires collateral to
support financial instruments with credit risk.                                                                                                                                                                                                                                                                            
|
| |  | Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since the majority of the
commitments are expected to be funded, the total commitment amounts
represent future expected cash requirements. The Company evaluates each
customers credit worthiness on a case-by-case basis. The amount of
collateral obtained if deemed necessary by the Company upon extension of
credit is based in part on managements credit evaluation of the
counter-part. Collateral held varies, but consists principally of
residential real estate and deposits.

NOTE 19 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK



| |  | Although the Bank has a diversified loan portfolio, a significant portion of
its loans are secured by real estate. Repayment of these loans is in
part dependent upon the economic conditions in the market area. Part of
the risk associated with real estate loans has been mitigated, since much
of this group represents loans secured by residential dwellings that are
primarily owner-occupied. Losses on this type of loan have historically
been less than those on speculative and commercial properties. The
Banks loan policy requires appraisal prior to funding any real estate
loans and outlines the appraisal requirements on those renewing.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

71



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##### 



JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
CONTINUED

NOTE 20 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS



| |  | The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | CASH AND INTEREST-BEARING DEPOSITS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | INVESTMENT AND MORTGAGE-BACKED SECURITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | For securities held as investments, fair value equals quoted market price,
if available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | ACCRUED INTEREST                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | The carrying amounts of accrued interest approximates their fair values.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | LOANS RECEIVABLE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | For certain homogeneous categories of loans, such as residential mortgages,
fair value is estimated using the quoted market prices for securities
backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other types of loans is estimated by
discounting the future cash flows, using the current rates at which
similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturities.                                                                                                                                                                                                                      
|
| |  | DEPOSIT LIABILITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date.
The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining
maturities.                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | BORROWINGS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Rates currently available to the Bank for debt with similar terms and remaining maturities are used to
estimate fair value of existing debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS-OF-CREDIT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | At September 30, 2003 and 2002, the Bank had not issued any standby
letters-of-credit. Commitments to extend credit totaled $11,529,623 and
$8,355,701, at September 30, 2003 and 2002, respectively, and consisted
primarily of agreements to fund mortgage loans at the prevailing rates
based upon acceptable collateral. Fees charged for these commitments are
not significant to the operations or financial position of the Bank and
primarily represent a recovery of underwriting costs. The Company has
not been required to perform on any financial guarantees during the past
two years. The Company has not incurred any losses on its commitments in
the last three years.
|
| |  | The estimated fair values of the Companys financial instruments at September 30 are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|                       |                                    |                                 |             |             |           |       |             |             |  |       |             |             |           |   |             |             |  | 
|---------------------- | ---------------------------------- | ------------------------------- | ----------- | ----------- | --------- | ----- | ----------- | ----------- |  | ----- | ----------- | ----------- | --------- | - | ----------- | ----------- |  | 
|                       |                                    |                                 |             | 2003        |           | 2002 
|                       |                                    |                                 |             |             |           |      
|                       |                                    |                                 |             | Carrying    |           | Fair  |             | Carrying    |  | Fair 
|                       |                                    |                                 |             | Amount      |           | Value |             | Amount      |  | Value
|                       |                                    |                                 |             |             |           |       |             |             |  |      
|Financial assets:      |                                    |                                 |             |             |           |       |             |             |  |       |             |             |           |   |             |            
|                       | Cash and interest-bearing deposits |                                 | $           | 18,998,341  |           |       | $           | 18,998,341  |  |       | $           | 15,352,395  |           |   | $           | 15,352,395  | 
|                       |                                    |                                 |             |             |           |       |             |             |  |       |             |             |           |   |             |            
|                       | Investment securities              |                                 | $           | 48,459,836  |           |       | $           | 48,531,799  |  |       | $           | 37,213,933  |           |   | $           | 37,324,218  | 
|                       |                                    |                                 |             |             |           |       |             |             |  |       |             |             |           |   |             |            
|                       | Mortgage-backed securities         |                                 | $           | 107,278,993 |           |       | $           | 107,437,300 |  |       | $           | 89,725,049  |           |   | $           | 89,773,316  | 
|                       |                                    |                                 |             |             |           |       |             |             |  |       |             |             |           |   |             |            
|                       | Accrued interest receivable        |                                 | $           | 2,882,774   |           |       | $           | 2,882,774   |  |       | $           | 2,928,855   |           |   | $           | 2,928,855   | 
|                       |                                    |                                 |             |             |           |       |             |             |  |       |             |             |           |   |             |            
|                       | Loans                              |                                 | $           | 280,430,811 |           |       |             |             |  |       | $           | 266,382,319 |           |   |             |             | 
|                       |                                    | Less: Allowance for loan losses |             |             | 1,294,090 |       |             |             |  |       |             |             | 1,291,701 |   |             |             |  | 
|                       |                                    |                                 |             |             |           |       |             |             |  |       |             |             |           |   |             |            
|                       |                                    | $                               | 279,136,721 |             |           | $     | 285,517,745 |             |  | $     | 265,090,618 |             |           | $ | 274,550,684 |            
|                       |                                    |                                 |             |             |           |       |             |             |  |       |             |             |           |   |             |            
|Financial liabilities: |                                    |                                 |             |             |           |       |             |             |  |       |             |             |           |   |             |            
|                       | Deposits                           |                                 | $           | 388,894,931 |           |       | $           | 384,868,768 |  |       | $           | 353,896,248 |           |   | $           | 352,258,000 | 
|                       |                                    |                                 |             |             |           |       |             |             |  |       |             |             |           |   |             |            
|                       | Borrowings                         |                                 | $           | 31,107,711  |           |       | $           | 31,911,274  |  |       | $           | 25,129,010  |           |   | $           | 27,070,000  | 
|                       |                                    |                                 |             |             |           |       |             |             |  |       |             |             |           |   |             |            

72



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##### 



JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
CONTINUED

NOTE 21 - CONDENSED FINANCIAL STATEMENTS OF JACKSONVILLE BANCORP, INC. (PARENT
COMPANY ONLY)



| |  | Jacksonville Bancorp, Inc., was organized in December 1995, and began
operations on March 29, 1996, effective with the Reorganization. The
Companys condensed balance sheets as of September 30 and related
condensed statements of earnings for the years ended September 30 are as
follows:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                     |                                                  |                                                                               |              |                                            |         |            |            |            |         |            |            | 
|------------------------------------ | ------------------------------------------------ | ----------------------------------------------------------------------------- | ------------ | ------------------------------------------ | ------- | ---------- | ---------- | ---------- | ------- | ---------- | ---------- | 
|                                     |                                                  |                                                                               |              |                                            |         | 2003       |            | 2002      
|                                     |                                                  |                                                                               |              |                                            |         |            |            |           
|BALANCE SHEETS                       |                                                 
|ASSETS                               |                                                  |                                                                               |              |                                            |         |            |            |           
|                                     | Cash in Bank                                     |                                                                               | $            | 797,193                                    |         |            | $          | 1,722,535  |        
|                                     | Investment in subsidiary                         |                                                                               |              | 42,837,131                                 |         |            |            | 37,700,643 |        
|                                     | Other assets                                     |                                                                               |              | 312,691                                    |         |            |            | 20,007     |        
|                                     |                                                  |                                                                               |              |                                            |         |            |            |           
|                                     |                                                  |                                                                               | Total assets |                                            | $       | 43,947,015 |            |            | $       | 39,443,185 |           
|                                     |                                                  |                                                                               |              |                                            |         |            |            |           
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                  |                                                                               |              |                                            |         |            |            |           
|                                     | Other liabilities                                |                                                                               | $            | 19,750                                     |         |            | $          | 14,400     |        
|                                     | Dividends payable                                |                                                                               |              | 270,070                                    |         |            |            | 220,228    |        
|                                     | Stockholders equity                             |                                                                               |              | 43,657,195                                 |         |            |            | 39,208,557 |        
|                                     |                                                  |                                                                               |              |                                            |         |            |            |           
|                                     |                                                  |                                                                               |              | Total liabilities and stockholders equity |         | $          | 43,947,015 |            |         | $          | 39,443,185 | 
|                                     |                                                  |                                                                               |              |                                            |         |            |            |           
|STATEMENTS OF EARNINGS               |                                                 
|                                     | General and administrative expenses              |                                                                               | $            | 204,670                                    |         |            | $          | 205,312    |        
|                                     |                                                  |                                                                               |              |                                            |         |            |            |           
|                                     |                                                  | Loss before income taxes and equity in
undistributed
earnings of subsidiaries |              |                                            | 204,670 |            |            |            | 205,312 |           
|                                     | Income tax (benefit)                             |                                                                               |              | (69,589                                    | )       |            |            | (69,805    | )      
|                                     |                                                  |                                                                               |              |                                            |         |            |            |           
|                                     |                                                  | Loss before equity in earnings of subsidiaries                                |              |                                            | 135,081 |            |            |            | 135,507 |           
|                                     | Dividends from subsidiaries                      |                                                                               |              | 75,625                                     |         |            |            | 4,436,250  |        
|                                     | Equity in undistributed earnings of subsidiaries |                                                                               |              | 5,839,750                                  |         |            |            | 1,674,926  |        
|                                     |                                                  |                                                                               |              |                                            |         |            |            |           
|                                     |                                                  |                                                                               |              | Net earnings                               |         | $          | 5,780,294  |            |         | $          | 5,975,669  | 
|                                     |                                                  |                                                                               |              |                                            |         |            |            |           

NOTE 22 -  BRANCH ACQUISITION



| |  | Effective November 9, 2001, the Bank purchased a branch location in Carthage,
Texas, for a premium of approximately $3,672,000 including acquisition costs.
In connection with the acquisition, the Bank assumed deposit liabilities of
approximately $44,900,000, recorded loans of approximately $636,000 and
recorded premises and equipment of approximately $238,000.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 23 -  MERGER



| |  | On August 12, 2003, the Company entered into a definitive agreement with
Franklin Bank Corp. (Franklin)
whereby Franklin would acquire all of the common stock of the Company.
Under the terms of the merger
agreement, Company shareholders will receive $37.50 cash for each share of
stock they own. Additionally, all
outstanding Company stock options will be canceled in exchange for a
payment equal to the difference between
the per share option exercise price and $37.50. The total cash
consideration to be paid to Company shareholders
is expected to be approximately $72,500,000.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The merger is subject to a number of conditions, including approval by
shareholders and various regulatory
authorities, as well as other closing conditions. Both the Company and
Franklin have the right to terminate the
merger under limited circumstances. At September 30, 2003, the Company
had incurred approximately $300,000
in costs (principally legal and professional) related to the proposed
merger which have been deferred and included
in other assets pending completion of the merger.                                                                                         

73



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##### 



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

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES.

Our management evaluated, with the participation of our Chief Executive
Officer and Chief Financial Officer, the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of September 30, 2003. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SECs rules
and regulations and are operating in an effective manner.

No change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934)
occurred during the fourth fiscal quarter of fiscal 2003 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The following tables present information concerning each director and
executive officer and reflect his tenure as a director of the Company
(including service as a director of Jacksonville Savings Bank (Jacksonville
or the Bank)), his principal occupation during the past five years. Except
for Jerry Hammons and Barry Autry, each director has been a director of the
Company since its formation in 1996.

|                    |  |      |    |            |  |                                                                                                                                                                    |  |         |      | 
|------------------- |  | ---- | -- | ---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------- | ---- | 
|                    |  |      |    |            |  | Position with the Company and                                                                                                                                      |  |         |      | 
|                    |  |      |    |            |  | Principal Occupation During the Past                                                                                                                               |  | Company
|Name                |  | Age* |    | Five Years |  | Director Since                                                                                                                                                    
|                    |  |      |    |            |  |                                                                                                                                                                   
|Jerry M. Chancellor |  |      | 62 |            |  | Director, President and Chief
Executive Officer of the Company
and the Bank. Executive Vice
President (from 1983 until 1996) of
the Bank.                          |  |         | 1996 | 
|                    |  |      |    |            |  |                                                                                                                                                                    |  |         |      | 
|Bill W. Taylor      |  |      | 63 |            |  | Director, Chief Financial Officer
and Executive Vice President of the
Company and the Bank. Director and
Senior Vice President of the Bank
(from 1983 until 1996). |  |         | 1996 | 
|                   
|Dr. Joe
Tollett     |  |      | 76 |            |  | Director; Retired pediatrician.
Director of the Bank since 1973.                                                                                                   |  |         | 1996 | 
|                    |  |      |    |            |  |                                                                                                                                                                    |  |         |      | 
|Charles Broadway    |  |      | 70 |            |  | Director of the Company and
Director of the Bank since 1981.
President and Chief Executive
Officer of the Company and the Bank
until July 1, 1996.                 |  |         | 1996 | 
|                   

74



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##### 



|                |  |  |    |  |  |                                                                                                                                                                                                                  |  |  |      | 
|--------------- |  |  | -- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ---- | 
|Jerry Hammons   |  |  | 60 |  |  | Director of the Company; Director
of the Bank since January 1998.
Senior Vice President of
Jacksonville Savings Bank since
June 1996, First Vice President of
Jacksonville Savings Bank (from
1993 until 1996).  |  |  | 1999 | 
|                |  |  |    |  |  |                                                                                                                                                                                                                  |  |  |      | 
|Ray W. Beall    |  |  | 76 |  |  | Director, Retired, formerly senior
executive for Bealls Department
Stores.                                                                                                                                      |  |  | 1996 | 
|               
|Robert
F. Brown |  |  | 55 |  |  | Director; Vice Chairman of the
Board of the Company since December
1999; and Director of the Bank
since 1995. Chief Executive Officer
and Owner, Brown Lumber Industries,
Inc., Jacksonville, Texas, since
1994. |  |  | 1996 | 
|                |  |  |    |  |  |                                                                                                                                                                                                                  |  |  |      | 
|Barry Autry     |  |  | 42 |  |  | Director since January, 2003; Owner
of Autry Funeral Home                                                                                                                                                        |  |  | 2003 | 
|                |  |  |    |  |  |                                                                                                                                                                                                                  |  |  |      | 
|Chan Campsey    |  |  | 40 |  |  | First Vice President;
Vice-President Jacksonville Savings
Bank 1996-2002. Mr. Campsey is not
a director.                                                                                                         |  |  |      | 



---

|* |  | As of October 7, 2003.
|- |  | ----------------------

Audit Committee Financial Expert

The Companys board of directors has not determined that any member of its
audit committee is a financial expert as defined by the Securities and Exchange
Commission. No financial expert has been designated in view of the pending
acquisition of the Company by Franklin Bank Corp., which has stated in a public
filing on October 14, 2003, with the Securities and Exchange Commission that it
intends to appoint an additional independent director who will qualify as an
audit committee financial expert under the SEC rules implementing Section 407
of the Sarbanes-Oxley Act of 2002, although it has not yet selected that
additional director.

Audit Committee

The Company has a separate designated standing audit committee established
in accordance with section 3(a)(58)(A) of the Securities Exchange Act of 1934.
The audit committee of the Company currently consists of Messrs. Beall, Robert
F. Brown, Broadway, Autry and Dr. Tollett.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires the Companys officers,
directors and persons who own more than 10% of the Companys Common Stock to
file reports of ownership and changes in ownership with the SEC and the Nasdaq
National Market. Officers, directors and greater than 10% stockholders are
required by regulation to furnish the Company with copies of all forms they
file pursuant to Section 16(a) of the Exchange Act. The Company knows of no
person who owns 10% or more of the Companys Common Stock other than the
Companys ESOP. Based solely on review of the copies of such forms furnished
to the Company, or written representations from its officers and directors, the
Company believes that during the fiscal year ended September 30, 2003, the
Companys officers and directors complied in all respects with the reporting
requirements promulgated under Section 16(a) of the Exchange Act.

75



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##### 



Code of Ethics

The Company has not adopted a code of ethics that applies to its principal
executive officer or principal financial officer in view of its pending
acquisition by Franklin Bank Corp., since neither of those individuals will
occupy that position upon consummation of the acquisition.

ITEM 11. EXECUTIVE COMPENSATION.

Summary Compensation Table

The following table sets forth a summary of certain information concerning
the compensation awarded to or paid by Jacksonville for services rendered in
all capacities during the last three fiscal years to the President and Chief
Executive Officer of Jacksonville and any other executive officer of
Jacksonville who received salary and bonuses aggregating more than $100,000
during the last fiscal year.

|                            |                          |                             |      |        |      |       |         |                        |         |   |        |        |        |   |        |        |        | 
|--------------------------- | ------------------------ | --------------------------- | ---- | ------ | ---- | ----- | ------- | ---------------------- | ------- | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                            |                          |                             |      |        |      |       |         | Annual Compensation(1) |         |   |        |       
|                            |                          |                             |      | Fiscal |      |       |         | All Other             
|Name and Principal Position |                          | Year                        |      | Salary |      | Bonus |         | Compensation          
|                            |                          |                             |      |        |      |       |         |                       
|Jerry M. Chancellor         |                          |                             | 2003 |        |      | $     | 156,765 |                        |         | $ | 56,366 |        |        | $ | 29,812 | (2)   
|                            | President and Chief      |                             |      | 2002   |      |       |         | 136,320                |         |   |        | 42,886 |        |   |        | 23,578 |       
|                            |                          | Executive Officer           |      |        | 2001 |       |         |                        | 120,396 |   |        |        | 39,896 |   |        |        | 20,121 | 
|Bill W. Taylor              |                          |                             | 2003 |        |      | $     | 127,590 |                        |         | $ | 45,873 |        |        | $ | 21,803 | (3)   
|                            | Executive Vice President |                             |      | 2002   |      |       |         | 110,943                |         |   |        | 34,902 |        |   |        | 16,955 |       
|                            |                          | and Chief Financial Officer |      |        | 2001 |       |         |                        | 97,980  |   |        |        | 32,466 |   |        |        | 14,053 | 
|Jerry Hammons               |                          |                             | 2003 |        |      | $     | 111,306 |                        |         | $ | 40,022 |        |        | $ | 28,378 | (4)   
|                            | Senior Vice President    |                             |      | 2002   |      |       |         | 96,792                 |         |   |        | 30,450 |        |   |        | 24,311 |       
|                            |                          |                             |      |        | 2001 |       |         |                        | 85,485  |   |        |        | 28,329 |   |        |        | 21,381 | 



---

|(1) |  | Does not include amounts attributable to miscellaneous benefits received
by the named executive officer, including the payment of club membership
dues and automobile expenses. The costs to Jacksonville of providing such
benefits to the named executive officer during the year ended September
30, 2003 did not exceed the lesser of $50,000 or 10% of the total of
annual salary and bonus reported for such individual.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes (i) a premium of $4,602 paid to fund a deferred compensation
plan, (ii) a matching contribution of $6,394 from Jacksonville pursuant to
a defined contribution thrift plan and (iii) 672 shares allocated to Mr.
Chancellors account in the Companys ESOP which shares had a market value
of $18,816 at December 31, 2002, the date the shares were allocated, based
on a share price of $28.00.                   
|   
|(3) |  | Includes (i) a matching contribution of $5,204 from Jacksonville pursuant
to a defined contribution thrift plan and (ii) 595 shares allocated to Mr.
Taylors account in the
Companys ESOP which shares had a market value of $16,600 at December 31,
2002, the date the shares were allocated, based on a share price of
$28.00.                                                                                            
|   
|(4) |  | Includes (i) a premium of $9,614 paid to fund a deferred compensation
plan, (ii) a matching contribution of $4,540 from Jacksonville pursuant to
a defined contribution thrift plan and (iii) 595 shares allocated to Mr.                                                                                                                                                                                                     

76



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##### 



| |  | Hammons account in the Companys ESOP which shares had a market value of
$14,224 at December 31 , 2002, the date the shares were allocated, based
on a share price of $28.00.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Aggregated Option Exercises And Fiscal Year End Option Values

The following table sets forth certain information concerning exercises of
stock options and the numbers of options held at the end of the September 30,
2003 fiscal year and the value with respect thereto.

|                    |  |                    |        |          |  |             |        |             |  |                               |        |                                 |  |  |       |     |  |   |         |  |  |   |         | 
|------------------- |  | ------------------ | ------ | -------- |  | ----------- | ------ | ----------- |  | ----------------------------- | ------ | ------------------------------- |  |  | ----- | --- |  | - | ------- |  |  | - | ------- | 
|                    |  |                    |        |          |  |             |        |             |  | Number of Exercisable Options |        | Value of Exercisable Options at
|                    |  |                    |        |          |  |             |        |             |  | at Fiscal Year End            |        | Fiscal Year End(1)             
|                    |  |                    |        |          |  |             |        |             |  |                               |        |                                
|                    |  | Shares Acquired on |        | Value    |  |             |        |             |  | Not                           |        |                                 |  |  |       | Not
|Name                |  | Exercise           |        | Realized |  | Exercisable |        | Exercisable |  | Exercisable                   |        | Exercisable                    
|                    |  |                    |        |          |  |             |        |             |  |                               |        |                                
|Jerry M. Chancellor |  |                    |       |          |  |             |       |             |  |                               | 23,616 |                                 |  |  | 7,132 |     |  | $ | 548,812 |  |  | $ | 109,761 | 
|Bill W. Taylor      |  |                    | 12,317 |          |  |             | 86,835 |             |  |                               | 31,420 |                                 |  |  | 5,804 |     |  |   | 747,203 |  |  |   | 89,324  | 
|Jerry Hammons       |  |                    |       |          |  |             |       |             |  |                               | 20,351 |                                 |  |  | 5,064 |     |  |   | 500,623 |  |  |   | 77,935  | 



---

|(1) |  | Calculated by determining the difference between the per share market
price of the Common Stock underlying the options as of September 30, 2003
($37.26), and the exercise prices of $7.05, $12.625 and $21.87 of the
options granted pursuant to the 1994, 1996 and 2001 stock option plans,
respectively.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Employment Agreements

The Company has entered into employment agreements with Messrs.
Chancellor, Taylor and Hammons (the Executives). The employment agreements
provide each officer with a three-year term of employment subject to additional
one-year extensions at the discretion of the Board of Directors.

The employment agreements are terminable with or without cause by the
Company. The Executives have no right to compensation or other benefits
pursuant to the employment agreement for any period after voluntary termination
or termination by the Company for cause, disability, retirement or death.
However, in the event that (i) an Executive terminates his employment because
of failure of the Company to comply with any material provision of the
employment agreement or (ii) the employment agreement was terminated by an
Executive for Good Reason, as defined, an Executive would be entitled to 3.00
or 2.99 times, respectively, the average annual compensation, as defined, paid
to him by the Company during the five most recent taxable years ending during
the calendar year in which the notice of termination occurs or such portion of
such period in which the Executive served as an employee of the Company as well
as continued participation in employee benefit plans of the Company until the
expiration of the remaining term of employment. Good Reason is generally
defined in the employment agreements to include failure to comply with a
material portion of the agreements or the assignment by the Company to the
Executive of any duties which are materially inconsistent with the Executives
positions, duties, responsibilities and status with the Company prior to a
change of control of the Company.

The employment agreements provide that in the event that any of the
payments to be made thereunder or otherwise upon termination of employment by
the Executive following a change in control are deemed to constitute
excess parachute payments within the meaning of Section 280G of the
Code, then such payments and benefits received thereunder would be reduced, in
the manner determined by the Company, by the amount, if any, which is the
minimum necessary to result in no portion of the payments and benefits being
non-deductible by the Company for federal income tax purposes. Excess parachute
payments generally would be defined as payments in excess of three times the
recipients average annual compensation from the Company includable in the
recipients gross income during the most recent five taxable years ending
before the date on which a change in control of the Company or other triggering
events occurred (base amount). A recipient of excess parachute payments is
subject to a 20% excise tax on the amount by which such payments exceed the
base amount, in addition to regular income taxes, and

77



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payments in excess of the
base amount would not be deductible by the Company as compensation expense of
federal income tax purposes.

Although the above-described employment agreements could increase the cost
of any acquisition of control of the Company, management does not believe that
the terms thereof would have a significant anti-takeover effect.

Deferred Compensation Program

Jacksonville maintains a Deferred Compensation Program (the Program) to
provide certain directors and executive officers the option to defer a portion
of their annual compensation from Jacksonville to a later year or years. Under
the Program, each eligible individual may elect on or before the December 31
preceding each year to defer receipt of a specific amount of his compensation
to be received for services rendered to Jacksonville in the succeeding calendar
year. At the time of his initial election to defer compensation, the
participant may elect to receive his deferred compensation account (including
accumulated interest) at any specified time prior to the termination of his
employment with Jacksonville. Each deferred compensation agreement provides
for the distribution of the deferred compensation account in equal annual
installments over a ten-year period beginning on the first day of the calendar
month immediately following the month in which the participant terminates his
employment, elects to begin receiving installments, dies or is disabled. A
participant may elect in writing at any time prior to distribution of his
deferred compensation account to receive his installment payments over a
shorter period of time than ten years.

Directors Compensation

During the fiscal year ended September 30, 2003, each member of the Board
of Directors was paid $800 for each Board meeting of the Bank attended, until
February 2003 when the amount increased to $900 and $200 for each Company
meeting attended. Directors fees for meetings of the Company are deferred
until December of each year. Committee members otherwise do not receive any
fees for committee meetings.

Outside directors also received $275 per loan committee meeting. All
directors receive an annual directors fee of $2,000 as director of JS&L
Corporation, the wholly owned subsidiary of Jacksonville Savings Bank.

Compensation Committee Interlocks And Insider Participation

The Compensation Committee (Committee) of the Board of Directors, which
is comprised of Messrs. Chancellor, Taylor, Beall, Tollett and Robert F. Brown
reviews compensation and benefits and recommends to the Board of Directors
adjustments in such compensation. Neither Mr. Chancellor nor Mr. Taylor
participated or voted on his individual compensation. The report of the
Committee with respect to compensation for the Chief Executive Officer and all
other executive officers for 2003 is set forth below.

The purpose of the Compensation Committee is to assist the Board of
Directors in attracting and retaining qualified, competent management,
motivating executives to achieve a range of performance goals consistent with a
business plan approved by the Board of Directors, and ensuring that proposed
compensation and benefit programs are reasonable and consistent with industry
standards, management performance and shareholder interests.

Report of The Compensation Committee on Executive Compensation

The charter of the Committee is to assist the Company in carrying out its
responsibility to evaluate, initiate and oversee executive compensation
arrangements and shareholder-approved benefit plans. The overall goals of the
Committee are to assist the Company in attracting and retaining qualified
management and rewarding these individuals for performance goals that are
achieved.

The Compensation Committee annually evaluates the salary and bonuses paid
to the three executive officers of Jacksonville. Compensation reports of
institutions of comparable size and complexity of operations are reviewed in
setting compensation levels. The overall goal of the Committee is to assist the
Company in attracting and retaining

78



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##### 



qualified management. We feel the base
compensation paid to the executive officers is commensurate within the
financial institution marketplace.

Incentive bonuses were paid in November of 2002 to all employees of
Jacksonville for financial goals achieved in 2002. Bonuses in amounts of
$56,366, $45,873, and $40,022 were paid to Messrs. Chancellor, Taylor and
Hammons, respectively.

Following a review and approval by the Committee, all issues pertaining to
executive compensation were submitted to the full Board of Directors for their
approval. Neither Mr. Chancellor nor Mr. Taylor participated or voted on their
individual compensation packages.

|                    |  |                 |  |             
|------------------- |  | --------------- |  | ------------
|Jerry M. Chancellor |  | Dr. Joe Tollett |  | Ray W. Beall
|Bill W. Taylor      |  | Robert F. Brown |  |             

79



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##### 



Jacksonville Bancorp, Inc.

(Total Return Performance Graph)

|                           |  |               |        |          |  |          |        |          |  |          |        |          |  |  |        |  |  |  |        |  |  |  |        | 
|-------------------------- |  | ------------- | ------ | -------- |  | -------- | ------ | -------- |  | -------- | ------ | -------- |  |  | ------ |  |  |  | ------ |  |  |  | ------ | 
|                           |  | Period Ending
|                           |  |              
|Index                      |  | 09/30/98      |        | 09/30/99 |  | 09/30/00 |        | 09/30/01 |  | 09/30/02 |        | 09/30/03
|                           |  |               |        |          |  |          |        |          |  |          |        |         
|Jacksonville Bancorp, Inc. |  |               | 100.00 |          |  |          | 100.81 |          |  |          | 98.63  |          |  |  | 134.12 |  |  |  | 178.90 |  |  |  | 274.12 | 
|NASDAQ - Total US          |  |               | 100.00 |          |  |          | 162.62 |          |  |          | 217.87 |          |  |  | 89.20  |  |  |  | 70.04  |  |  |  | 107.27 | 
|SNL
<$500M Thrift Index    |  |               | 100.00 |          |  |          | 112.90 |          |  |          | 116.73 |          |  |  | 157.84 |  |  |  | 204.96 |  |  |  | 282.82 | 

80



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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table sets forth information as to the Common Stock
beneficially owned, as of October 6, 2003, by the only persons or entities
known to the Company to be the beneficial owners of more than 5% of the Common
Stock and by all directors and officers of the Company as a group.

|                                                                                                                     |  |                                 |         |                  |  |  |       |  
|-------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | ---------------- |  |  | ----- | -
|Name of Beneficial Owner                                                                                             |  | Amount
And Nature of Beneficial |         |                  |  | 
|or Number of Persons in Group                                                                                        |  | Ownership(1)                    |         | Percent of Class
|                                                                                                                     |  |                                 |         |                 
|Jacksonville Bancorp, Inc.
Employee Stock Ownership Plan Trust
Commerce and Neches Streets
Jacksonville, Texas 75766 |  |                                 | 185,885 | (2)              |  |  | 10.32 | %
|Athena Capital Management, Inc.
1250 Germantown Pike #105
Plymouth Meeting, Pennsylvania 19462                       |  |                                 | 125,822 | (3)              |  |  | 6.98  | %
|The Banc Funds Company, L.L.C.
208 South LaSalle Street
Chicago, Illinois 60604                                      |  |                                 | 141,800 | (4)              |  |  | 7.88  | %
|Dimensional Fund Advisors Inc.
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401                          |  |                                 | 91,600  | (5)              |  |  | 5.08  | %
|All directors and officers of the
Company as a group
(nine persons)                                                  |  |                                 | 398,260 | (6)              |  |  | 20.66 | %



---

|(1) |  | Pursuant to rules promulgated by the SEC under the Exchange Act, a person
or entity is considered to beneficially own shares of Common Stock if the
person or entity has or shares (i) voting power, which includes the power
to vote or to direct the voting of the shares, and/or (ii) investment
power, which includes the power to dispose or direct the disposition of
the shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Unless otherwise indicated, a person or entity has sole voting and sole
investment power with respect to the indicated shares. Shares which are
subject to stock options and which may be exercised before December 8,
2003 are deemed to be outstanding for the purpose of computing the
percentage of Common Stock beneficially owned by the directors and
officers of the Company as a group.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(2) |  | The Jacksonville Bancorp, Inc., Employee Stock Ownership Plan Trust
(Trust) was established pursuant to the Jacksonville Bancorp, Inc.,
Employee Stock Ownership Plan (ESOP) by an agreement between the Company
and Messrs. Broadway, Chancellor, Beall, and Dr. Tollett, who act as
trustees of the plan (Trustees). As of October 6, 2003, 114,675 shares
held in the Trust had been allocated to the accounts of participating
employees. Under the terms of the ESOP, the Trustees will generally vote
the allocated shares held in the ESOP in accordance with the instructions
of the participating
employees. Unallocated shares held in the ESOP will generally be voted in
the same ratio on any matter as those allocated shares for which
instructions are given, subject in each case to the fiduciary duties of
the ESOP Trustees and applicable law. Any allocated shares which either
abstain on the proposal or are not voted will be disregarded in
determining the percentage of stock voted for and against each proposal
by the participants and beneficiaries. The amount of Common Stock
beneficially owned by directors who serve as Trustees of the ESOP and by
all directors and executive officers as a group does not include the
unallocated shares held by the Trust.

81



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##### 



|(3) |  | Information obtained from Schedule 13G, dated January 23, 2003, with
respect to shares of Common Stock owned by Athena Capital Management,
Inc., an investment adviser registered under Section 203 of the Investment
Advisers Act of 1940 (Athena). Athena reports shared voting power and
shared dispositive power with respect to 125,822 shares of Common Stock.                                                             
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(4) |  | Information obtained from a Schedule 13G, dated February 13, 2003, filed
with the SEC with respect to shares of Common Stock beneficially owned by
The Banc Funds Company, L.L.C. (Banc Funds). The Schedule 13G states
that Banc Funds has sole voting power as to all 110,800 of these shares.
Banc Funds is controlled by Charles J. Moore who, as manager, has voting
and dispositive authority over the shares held thereby.
|   
|(5) |  | Information obtained from a Schedule 13G, dated February 13, 2003, filed
with the SEC with respect to shares of Common Stock beneficially owned by
Dimensional Fund Advisors Inc. (Dimensional). The Schedule 13G states
that Dimensional has sole voting and investment power as to all of these
shares. Dimensional disclaims beneficial ownership of these shares.                                                            
|   
|(6) |  | Includes in the case of all directors and officers of the Company as a
group, (i) options to purchase 127,651 shares of Company Common Stock
which may be exercised before
December 8, 2003; and (ii) 30,8645 shares of Common Stock allocated to
accounts in the Companys ESOP.                                                                                                                                                  

The following tables present information concerning each director and
executive officer, and directors and officers as a group, respecting the number
of shares of Common Stock beneficially owned by each such person as of October
6, 2003.

Common Stock Beneficially Owned as
of October 6, 2003(1)

|                                                                    |  |               |         |      |  |  |       |  
|------------------------------------------------------------------- |  | ------------- | ------- | ---- |  |  | ----- | -
|Name                                                                |  | No. Of Shares |         | %(2)
|                                                                    |  |               |         |     
|Jerry M. Chancellor                                                 |  |               | 63,615  | (3)  |  |  | 3.49  | %
|Bill W. Taylor                                                      |  |               | 80,330  | (4)  |  |  | 4.39  | %
|Dr. Joe Tollett                                                     |  |               | 44,175  | (5)  |  |  | 2.44  | %
|Charles Broadway                                                    |  |               | 72,193  | (6)  |  |  | 3.97  | %
|Jerry Hammons                                                       |  |               | 41,810  | (7)  |  |  | 2.30  | %
|Ray W. Beall                                                        |  |               | 21,418  | (8)  |  |  | 1.18  | %
|Robert F. Brown                                                     |  |               | 61,619  | (9)  |  |  | 3.42  | %
|Barry Autry                                                         |  |               | 140     |      |  |  | 0     | %
|All directors and officers of the
Company as a group
(nine persons) |  |               | 398,260 | (10) |  |  | 20.66 | %



|1. |  | Pursuant to rules promulgated by the Securities and Exchange Commission
(SEC) under the Securities Exchange Act of 1934, as amended (Exchange
Act), a person or entity is considered to beneficially own
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

82



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##### 





|    |  | shares of
Common Stock if the person or entity has or shares (i) voting power, which
includes the power to vote or to direct the voting of the shares, or (ii)
investment power, which includes the power to dispose or direct the
disposition of the shares. Unless otherwise indicated, a person or entity
has sole voting and sole investment power with respect to the indicated
shares.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|2.  |  | Each beneficial owners percentage ownership is determined by assuming
that options held by such person (but not those held by any other person)
and that are exercisable before December 8, 2003 have been exercised.                                                                                                                                                                      
|   
|3.  |  | Includes, in the case of Mr. Chancellor, 23,616 shares which may be
acquired upon the exercise of stock options that may be exercised before
December 8, 2003 and 9,378 shares allocated to his account in the ESOP.                                                                                                                                                                        
|   
|4.  |  | Includes, in the case of Mr. Taylor, 808 shares held jointly with Mr.
Taylors children, 383 shares held jointly with his wife, 31,420 shares
which may be acquired upon the exercise of stock options that may be
exercised before December 8, 2003 and 8,353 shares allocated to his
account in the ESOP.                                                                                 
|   
|5.  |  | Includes, in the case of Dr. Tollett, 1,294 shares held in trust with his
wife, 12,834 shares held by a limited partnership, 3,630 shares owned by
his wife, and 9,592 shares which may be acquired upon the exercise of
stock options that may be exercised before December 8, 2003.                                                                                                       
|   
|6.  |  | Includes, in the case of Mr. Broadway, 15,947 shares held jointly with
his wife, 17,885 shares which may be acquired upon the exercise of stock
options that may be exercised before December 8, 2003 and 1,548 shares
allocated to his account in the ESOP.                                                                                                                                
|   
|7.  |  | Includes, in the case of Mr. Hammons, 2,834 shares held jointly with his
wife, 1,200 shares held by his wife, 20,351 shares which may be acquired
upon the exercise of stock options that may be exercised before December
8, 2003 and 7,025 shares allocated to his account in the ESOP.                                                                                                   
|   
|8.  |  | Includes, in the case of Mr. Beall, 17,365 shares which may be acquired
upon the exercise of stock options that may be exercised before December
8, 2003.                                                                                                                                                                                                                                   
|   
|9.  |  | Includes, in the case of Mr. Brown, 7,462 shares held jointly with his
wife and 10,000 shares held in trust for his children, 1,950 shares held
by his wife, 18,084 shares held in a generation skip trust and 17,723
shares held by a company of which he is a 49.5% owner and 1,500 shares
which may be acquired upon the exercise of stock options before December
8, 2003.              
|   
|10. |  | Includes in the case of all directors and officers of the Company as a
group, (i) options to purchase 127,651 shares of Company Common Stock
which may be exercised before December 8, 2003; and (ii) 30,8645 shares of
Common Stock allocated to accounts in the Companys ESOP.                                                                                                           

83



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Equity Compensation Plan Information.The following table sets forth
certain information for all equity compensation plans and individual
compensation arrangements (whether with employees or non-employees, such as
directors), in effect as of September 30, 2003.

|                                                           |  |                                  |         |                     |  |                                       |       |  |  |  |       | 
|---------------------------------------------------------- |  | -------------------------------- | ------- | ------------------- |  | ------------------------------------- | ----- |  |  |  | ----- | 
|                                                           |  | Number of Shares to be issued    |         |                     |  |                                       |       |  |  | 
|                                                           |  | upon the Exercise of Outstanding |         | Weighted-Average    |  | Number of Shares Remaining Available 
|                                                           |  | Options,                         |         | Exercise Price of   |  | for Future Issuance (Excluding Shares
|Plan Category                                              |  | Warrants and Rights              |         | Outstanding Options |  | Reflected in the First Column)       
|                                                           |  |                                  |         |                     |  |                                      
|Equity Compensation Plans
Approved by Security Holders     |  |                                  | 224,373 |                     |  | $                                     | 15.24 |  |  |  | 9,000 | 
|Equity Compensation Plans Not
Approved by Security Holders |  |                                  |        |                     |  |                                       |      |  |  |  |      | 
|                                                           |  |                                  |         |                     |  |                                       |       |  |  |  |       | 
|Total                                                      |  |                                  | 224,373 |                     |  | $                                     | 15.24 |  |  |  | 9,000 | 
|                                                           |  |                                  |         |                     |  |                                       |       |  |  |  |       | 

Changes in Control

On August 12, 2003, the Company entered into an Agreement and Plan of
Merger (the Agreement)
with Franklin Bank Corp. and FBC Merger Corporation, a wholly-owned subsidiary
of Franklin Bank Corp., which sets forth the terms and conditions under which
(i) FBC Merger Corporation shall be merged with and into the Company, with the
Company as the surviving corporation (the Merger), (ii) immediately after
consummation of the Merger, BK2 Holdings, Inc. (BK2), a wholly-owned
subsidiary of Franklin Bank Corp., shall merge with Jacksonville IHC, Inc., a
wholly-owned subsidiary of the Company, with BK2 as the surviving corporation
(the Intermediate Holding Company Merger), and (iii) immediately after
consummation of the Merger, Franklin Bank, S.S.B. (Franklin Bank) shall merge
with Jacksonville Savings Bank, SSB, with Franklin Bank as the surviving bank
(the Bank Merger).

As a result of the Merger, the Companys shareholders will receive $37.50
per share in cash, without interest. The total consideration to be received by
the Companys shareholders will be approximately $72.5 million on a diluted
basis. The Agreement was unanimously approved by the Boards of Directors of
both organizations. The Merger is subject to regulatory approval, approval by
both of the Companys and the Franklin Bank Corp. shareholders, completion of
financing by Franklin Bank Corp. and other customary closing conditions. On
August 15, 2003, Franklin Bank Corp. filed a Registration Statement on Form S-1
with respect to the registration of $115 million of common stock.

The directors and executive officers of Jacksonville, who own in the
aggregate approximately 12% of the outstanding shares of common stock of
Jacksonville, have entered into voting agreements with Franklin Bank Corp.,
pursuant to which the directors and executive officers have agreed to vote in
favor of approval of the Agreement all of their shares of Jacksonville common
stock which they are entitled to vote.

The foregoing description of the Agreement is qualified in its entirety by
reference to the Agreement, a copy of which is included as Exhibit 2.1 to Form
8-K filed by the Company with the Securities and Exchange Commission on August
20, 2003.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

In accordance with applicable federal laws and regulations, the Bank
offers mortgage loans to its directors, officers and employees as well as
members of their immediate families for the financing of their primary
residences and certain other loans. These loans are generally made on
substantially the same terms as those prevailing at the time for comparable
transactions with non-affiliated persons. It is the belief of management that
these loans neither involve more than the normal risk of collectibility nor
present other unfavorable features.

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PART IV.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

|    |  |                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                   
|--- |  | ----------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Documents filed as part of this Report                                                                           
|    |  | (1)                                                                                                               |  | The following financial statements
appear in response to Item 8 hereof:                                                                                                                                                                                                                                           
|    |  |                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                   
|    |  | Independent Auditors Report                                                                                     
|    |  |                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                   
|    |  | Consolidated Statements of Financial Condition at September 30, 2003 and
2002                                    
|    |  |                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                   
|    |  | Consolidated Statements of Earnings for the Years Ended
September 30, 2003, 2002, and 2001                       
|    |  |                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                   
|    |  | Consolidated Statements of Changes in Stockholders Equity
for the Years Ended September 30, 2003, 2002, and 2001
|    |  |                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                   
|    |  | Consolidated Statements of Cash Flows for the Years Ended
September 30, 2003, 2002, and 2001                     
|    |  |                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                   
|    |  | 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.

85



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##### 



|    |  |                                                                                                     
|--- |  | ----------------------------------------------------------------------------------------------------
|(3) |  | The following exhibits are filed as
part of this Form 10-K and this list includes the
Exhibit Index.

|    |       |          |  |                                                                                                                                                    
|--- | ----- | -------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|No. |       | Exhibits
|    |       |         
|    | 2.1   |          |  | Acquisition Agreement by and Among Jacksonville Bancorp, Inc.
Jacksonville IHC, Inc. and Jacksonville Savings and Loan
Association*                
|    |       |          |  |                                                                                                                                                    
|    | 2.2   |          |  | Agreement and plan of merger among Jacksonville Bancorp, Inc.,
Franklin Bank Corp., and FBC Merger Corporation **                                  
|    |       |          |  |                                                                                                                                                    
|    | 3.1   |          |  | Articles of Incorporation***                                                                                                                       
|    |       |          |  |                                                                                                                                                    
|    | 3.2   |          |  | Bylaws***                                                                                                                                          
|    |       |          |  |                                                                                                                                                    
|    | 4.1   |          |  | Specimen Common Stock Certificate***                                                                                                               
|    |       |          |  |                                                                                                                                                    
|    | 10.1  |          |  | 1994 Stock Incentive Plan****                                                                                                                      
|    |       |          |  |                                                                                                                                                    
|    | 10.2  |          |  | 1994 Directors Stock Option Plan****                                                                                                              
|    |       |          |  |                                                                                                                                                    
|    | 10.3  |          |  | 1994 Management Recognition Plan*****                                                                                                              
|    |       |          |  |                                                                                                                                                    
|    | 10.4  |          |  | 1996 Management Recognition Plan*****                                                                                                              
|    |       |          |  |                                                                                                                                                    
|    | 10.5  |          |  | 1996 Stock Option Plan****                                                                                                                         
|    |       |          |  |                                                                                                                                                    
|    | 10.6  |          |  | Employee Stock Ownership Plan***                                                                                                                   
|    |       |          |  |                                                                                                                                                    
|    | 10.7  |          |  | 2001 Stock Option Plan******                                                                                                                       
|    |       |          |  |                                                                                                                                                    
|    | 10.8  |          |  | Employment Agreement by and among Jacksonville Bancorp, Inc.,
Jacksonville IHC, Inc., Jacksonville Savings Bank, SSB and Jerry M.
Chancellor*******
|    |       |          |  |                                                                                                                                                    
|    | 10.9  |          |  | Employment Agreement by and among Jacksonville Bancorp, Inc.,
Jacksonville IHC, Inc., Jacksonville Savings Bank, SSB and Bill W.
Taylor*******     
|    |       |          |  |                                                                                                                                                    
|    | 10.10 |          |  | Employment Agreement by and among Jacksonville Bancorp, Inc.,
Jacksonville IHC, Inc., Jacksonville Savings Bank, SSB and Jerry
Hammons*******      
|    |       |          |  |                                                                                                                                                    
|    | 10.11 |          |  | Employment Agreement by and among Jacksonville Bancorp, Inc.,
Jacksonville Savings Bank, SSB and Chan Campsey                                      
|    |       |          |  |                                                                                                                                                    
|    | 21    |          |  | Subsidiaries of Registrant                                                                                                                         
|    |       |          |  |                                                                                                                                                    
|    | 23    |          |  | Consent of Independent Auditors                                                                                                                    
|    |       |          |  |                                                                                                                                                    
|    | 31.1  |          |  | Section 302 Certification of Chief Executive Officer                                                                                               
|    |       |          |  |                                                                                                                                                    
|    | 31.2  |          |  | Section 302 Certification of Chief Financial Officer                                                                                               
|    |       |          |  |                                                                                                                                                    
|    | 32.1  |          |  | Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)                                
|    |       |          |  |                                                                                                                                                    
|    | 32.2  |          |  | Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)                                



---

|*       |  | Incorporated herein by reference to the Registrants Form
10-K filed as of December 29, 1997.                
|------- |  | -------------------------------------------------------------------------------------------------------------
|       
|**      |  | Incorporated herein by reference to the Registrants proxy
statement on Schedule 14A filed November 7, 2003. 
|       
|***     |  | 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.                
|       
|******  |  | Incorporated herein by reference to the Registrants proxy
statement on Schedule 14A filed December 21, 2001.
|       
|******* |  | Incorporated herein by reference to the Registrants Form 10-K
filed as of December 23, 2002.                

|    |  |                                                                                                                             |  | 
|--- |  | --------------------------------------------------------------------------------------------------------------------------- |  | 
|(b) |  | Reports on Form 8-K during the quarter ended September 30, 2003:                                                           
|    |  |                                                                                                                             |  | 
|    |  | 1. On July 24, 2003, the Company filed a
current report on Form 8-K reporting earnings for the
quarter ended June 30, 2003.

86



---



##### 



|    |    |                                                                                                                                                                   |  | 
|--- | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|    | 2. | On August 12, 2003, the Company filed
a current report on Form 8-K announcing acquisition
agreement between Jacksonville Bancorp, Inc. and
Franklin Bancorp, Inc.
|    |    |                                                                                                                                                                   |  | 
|    | 3. | On September 9, 2003, the Company
filed a current report on Form 8-K reporting the
declaration of a $0.15 per share dividend.                                    
|    |    |                                                                                                                                                                   |  | 
|(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.               |  | 

87



---



##### 



SIGNATURES

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

JACKSONVILLE BANCORP, INC.

|                  |  |     |  |                        
|----------------- |  | --- |  | -----------------------
|December 23, 2003 |  | 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

Jerry M. Chancellor, Director and Chief          |  | December 23, 2003
|Executive Officer (Principal Executive Officer)                           |  |                  
|                                                                          |  |                  
|/s/ Robert Brown

Robert Brown, Chairman                                  |  | December 23, 2003
|                                                                          |  |                  
|/s/ Dr. Joe Tollett

Dr. Joe Tollett, Vice-Chairman                       |  | December 21, 2003
|                                                                          |  |                  
|/s/ Charles Broadway

Charles Broadway, Director                          |  | December 23, 2003
|                                                                          |  |                  
|/s/ Ray W. Beall

Ray W. Beall, Director                                  |  | December 23, 2003
|                                                                          |  |                  
|/s/ Barry Autry

Barry Autry, Director                                    |  | December 23, 2003
|                                                                          |  |                  
|/s/ Bill W. Taylor

Bill W. Taylor, Director and Executive Vice President |  | December 23, 2003
|(Principal Financial and Accounting Officer)                              |  |                  
|                                                                          |  |                  
|/s/ Jerry Hammons

Jerry Hammons, Director/Senior Vice President          |  | December 23, 2003

88