<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934
For the fiscal year ended June 30, 1996
                          -------------
                                       or

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934
For the transition period from ______________ to __________________

                         Commission File Number 0-27142
                                                -------

                             L & B Financial, Inc.
                             ---------------------
             (Exact name of registrant as specified in its charter)

Texas                                           75-0591450
-------------------------------                 ----------------------
(State or other jurisdiction of                 (I.R.S. Employer
incorporation or organization)                  Identification number)

306 North Davis Street, Sulphur Springs, Texas       75482
----------------------------------------------    -----------
(Address)                                         (Zip Code)

Registrant's telephone number, including area code : (903) 885-2121
                                                     --------------

Securities registered pursuant to Section 12(b) of the Act: None
                                                            ----

Securities registered pursuant to Section 12(b) of the Act:

                     Common Stock, par value $.01 per share
                     --------------------------------------
                                (Title of Class)

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

Indicate by check mark if the 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 the Registrant's knowledge, in definitive proxy or information
statements incorporate by reference in Part III of this Form 10-K, or any
amendment to this         Form 10-K. [ ]

As of September 19, 1996, the aggregate value of the 1,495,435 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
88,690 shares held by all directors and officers of the Registrant as a group,
was approximately $25,142,001 (1,495,435 shares at $16.8125 per share)

                      DOCUMENTS INCORPORATED BY REFERENCE

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

(1) Portions of the Annual Report to Stockholders for the year ended June 30,
1996, are incorporated into Part II, Items 5 through 8 of this Form 10-K.

(2) Portions of the definitive proxy statement for the 1995 Annual Meeting of
Stockholders to be filed within 120 days of June 30, 1996 are incorporated into
Part III, Items 9 through 13 of this Form 10-K.

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

Exhibit 13 has been omitted and will be filed by amendment.
<PAGE>
 
                                 PART I

ITEM 1. BUSINESS
----------------

General
-------

        L&B Financial, Inc. ("L&B") was incorporated in the State of Texas in
November 1995, for the purpose of becoming a savings and loan holding company
for Loan and Building State Savings Bank (the "Bank").  On October 17, 1995, the
stockholders of the Bank approved a plan to reorganize the Bank into a holding
company form of ownership.  The reorganization was completed on November 13,
1995, on which date the Bank became the wholly-owned subsidiary of L&B, and the
shareholders of the Bank became shareholders of L&B.  Prior to the completion of
the reorganization, L&B had no material assets or liabilities and engaged in no
business activity.  Subsequent to the acquisition of the Bank, L&B has engaged
in no significant activity other than holding the stock of the Bank and engaging
in certain passive investment activities.  Accordingly, the information set
forth in this report, including the financial statements and related data,
relates primarily to the Bank.  L&B and the Bank are collectively referred to
herein as the "Corporation".

        The Bank is a state-chartered capital stock savings bank headquartered
in Sulphur Springs, Texas.  The Bank converted from mutual to stock form of
ownership on October 14, 1994 through the sale and issuance of 1,667,500 shares
of common stock at $10.00 per share, resulting in total net proceeds to the Bank
of approximately $16,000,000. The Bank was known as Sulphur Springs Loan and
Building Association until October 1995 when the stockholders voted to convert
to a state savings bank charter.  The Bank received regulatory approval and
converted in November of 1995.

        The business of the Corporation consists primarily of attracting
deposits from the general public and originating loans on residential properties
located in the northeast Texas counties of Hopkins, Camp, Franklin, Morris,
Titus and Bowie.  The Corporation also makes commercial real estate,
construction (both residential and commercial) and consumer loans and invests in
obligations of the federal government and its agencies and obligations of state
and local governments.  The Corporation's primary lending focus has been the
origination of longer term, adjustable-rate mortgage loans for its portfolio.
The Corporation originates fixed-rate mortgage loans through its mortgage
banking operations for sale into the secondary market.  The principal source of
funds for the Corporation's lending and investment activity include deposits
received from the general public, interest and principal repayments on loans
and, to a lesser extent, borrowing from the Federal Home Loan Bank of Dallas
("FHLB").  The Corporation's primary source of income is interest earned on
loans and investment securities.  The Corporation's principal expense is
interest paid on deposit accounts and borrowings and expenses incurred with
operating the Corporation.

        The Bank was originally chartered in 1890 and is subject to
examination and comprehensive regulation by the Texas Savings and Loan
Department (the "Department"), which is the Bank's chartering authority and
primary regulator.  The Bank is also regulated by the Federal Deposit Insurance
Corporation ("FDIC"), the administrator of the Savings Association Insurance
Fund, which provides the Bank's  deposit insurance coverage.  The Bank is also
subject to certain reserve requirements established by the Board of Governors of
the Federal Reserve System ("FRB") and a member of the FHLB.  For additional
information, see "Regulation".

        The Corporation's operations are conducted through its main office
located at 306 North Davis Street, Sulphur Springs, Texas, and five full service
branches located in Mt. Vernon, Mt. Pleasant, Daingerfield, Pittsburg and
Texarkana, Texas.  The Texarkana office was approved in the fall of 1995 and
opened in March 1996.  For additional information, see "Properties".

Selected Financial and Other Data
---------------------------------

        The information contained in the tables captioned "Selected
Consolidated Financial and Other Data" contained

                                       1
<PAGE>
 
in the Corporation's Annual Report to Stockholders for the Fiscal Year Ended
June 30, 1996 ("Annual Report") is attached hereto and incorporated herein by
reference.

Lending Activities
------------------

        GENERAL.  The Corporation's net loan portfolio totaled approximately
$66,352,000 at June 30, 1996, representing approximately 46.0% of total assets.
The principal lending activity of the Corporation is the origination of one-to-
four family residential mortgage loans.  As of June 30,1996, $40,619,000, or
58.5%, of the total loan portfolio consisted of loans secured by one-to-four
family residential property, of which 60.0%, or $24,403,000, were adjustable-
rate mortgage loans.  To a lesser extent, the Corporation originates other
mortgage loans secured by commercial real estate and multi-family residential
property, which totaled $12,616,000 and $5,228,000 at June 30, 1996.  The
Corporation also offers construction and land loans on single-family residential
property, multi-family residential property and commercial property.  Loans of
this type were $6,429,000, or 9.3% of the total loan portfolio at June 30, 1996.
Consumer loans are made as a service to our customers and consist of loans on
deposits, automobile loans, loans secured by other property and unsecured loans.
Consumer loans totaled $4,528,000 at June 30, 1996 and represented 6.5% of the
total loan portfolio outstanding at that date.

        Set forth below is the selected data relating to the composition of
the Corporation's loan portfolio by type of loan on the dates indicated (dollars
in thousands).
<TABLE>
<CAPTION>
 
                                                   At June 30,
                                                   -----------
                                            1996                1995
                                            ----                ----
                                     Amount       %      Amount       %
                                   ---------------------------------------
<S>                                 <C>        <C>      <C>        <C>
Real estate loans :
  One-to-four family residential     $40,619    58.52%   $38,353    61.13%
  Multi-family residential             5,228     7.53%     3,755     5.98%
  Commercial real estate              12,616    18.17%    11,611    18.50%
  Construction and land loans          6,429     9.26%     5,320     8.48%
                                   ---------------------------------------     
  Total real estate loans             64,892    93.48%    59,039    94.09%

Consumer and other loans:
  Loans secured by deposits            1,772     2.55%     1,576     2.51%
  Other loans (1)                      2,756     3.97%     2,133     3.40%
                                   ---------------------------------------
  Total consumer and other loans       4,528     6.52%     3,709     5.91%
                                   ---------------------------------------
  Total loans receivable              69,420   100.00%    62,748   100.00%

Less:
  Undisbursed loans in process        (2,230)             (2,248)
  Unearned discounts                     (82)               (260)
  Allowance for loan losses             (756)               (858)
                                   ---------------------------------------
Net loans receivable                 $72,488             $66,114
                                   =======================================
</TABLE>

(1)  Includes primarily automobile loans, mobile home loans and unsecured
     consumer loans.

The following table sets forth certain information at June 30, 1996 regarding
the dollar amount of loans maturing in the Corporation's loan portfolio based on
contractual terms to maturity (dollars in thousands).

                                       2
<PAGE>
 
<TABLE>
<CAPTION>
 
 
                                                    Due After
                                        Due            One         Due After
                                       Within      through Five      Five      Total
                                      One Year        Years          years
                                      ------------------------------------------------
<S>                                   <C>          <C>            <C>         <C>
One-to-four family residential        $  237         $2,695         $37,687   $40,619

Multi-family residential                   0            914           4,314     5,228

Commercial real estate                    54          1,924          10,638    12,616

Construction and land loans            4,475            395           1,559     6,429

Consumer and other loans               2,099          2,223             206     4,528
                                      -----------------------------------------------
Total                                 $6,865         $8,151         $54,404   $69,420
                                      ===============================================
</TABLE>

        Demand loans, having no stated schedule of repayments and no stated
maturity and overdrafts are reported as due within one year.  The table above
does not include any estimate of prepayments, which can significantly shorten
the average life of mortgage loans.  The actual average life of mortgage loans
is substantially less than the contractual term because of loan repayments and
the enforcement of due-on-sale clauses which gives the Corporation the right to
declare a loan immediately due and payable in the event, among other things,
that the borrower sells the real property subject to the loan and mortgage.
The average life of mortgage loans tends to increase when current mortgage loan
rates are substantially higher than rates on existing mortgage loans and,
conversely, decreases when current mortgage loan rates are substantially lower
than rates on existing mortgage loans.

        The following table sets forth the dollar amount of loans as of June
30, 1996 which have fixed rates of interest and which have adjustable rates of
interest (dollars in thousands).

<TABLE>
<CAPTION>
 
                                  Fixed Rate  Adjustable Rate    Total
                                 --------------------------------------
<S>                               <C>         <C>              <C>
One-to-four family residential     $16,216        $24,403       $40,619
                                                            
Multi-family residential             1,718          3,510         5,228
                                                            
Commercial real estate               4,089          8,527        12,616
                                                            
Construction and land loans          5,331          1,098         6,429
                                                            
Consumer and other loans             4,528              0         4,528
                                 --------------------------------------
Total                              $31,882        $37,538       $69,420
                                 ====================================== 
</TABLE>

        ONE-TO-FOUR FAMILY RESIDENTIAL LOANS.  The Corporation has
historically concentrated its lending activities on the origination of loans
secured by first mortgage liens on one-to-four family residences.  At June 30,
1996, the Corporation's one-to-four family residential loans totaled
$40,619,000, representing 58.5% of its total loan portfolio. As of such date the
average balance of the Corporation's one-to-four family mortgage loans was
approximately $38,000.

        Federal regulations permit a maximum loan-to-value ratio of 100% for
one-to-four family dwellings and 80% for all other real estate loans.  The
Corporation's lending policies, however, limit the maximum loan-to-value ratio
on one-to-four family real estate loans to 80% of the lesser of the appraised
value or the purchase price.  Any single-family real estate loan made in excess
of 80% is required to have private mortgage insurance, or additional collateral.
The Corporation generally originates one-to-four family loans that are less than
the maximum permissible under applicable regulations and in accordance with
sound lending practices, market conditions and applicable underwriting
standards. As a matter of policy, the Corporation typically does not make one-
to-four family mortgage loans in excess of $350,000.

                                       3
<PAGE>
 
        The Corporation offers fixed-rate, one-to-four family residential
loans with terms up to 30 years and adjustable-rate one-to-four family loans
with terms up to 25 years.  One-to-four family residential loans are amortized
on a monthly basis with principal and interest due each month.  All residential
mortgage loans customarily include "due-on-sale" clauses which are provisions
giving the Corporation 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.  Substantially all of the Corporation's one-to-four
family residential mortgage loans are "conventional" mortgage loans.  At June
30, 1996, the Corporation had $144,000 of loans insured by the Federal Housing
Administration or partially guaranteed by the Department of Veterans Affairs.

        The Corporation is aware of the risks inherent in originating fixed-
rate, one-to-four family residential loans for its portfolio but recognizes the
need to respond to the market demand of fixed-rate loans.  As a result, the
Corporation has emphasized 10-year and 15-year fixed-rate, one-to-four family
loans, both with minimal closing costs for inclusion in its loan portfolio.
Substantially all fixed-rate, one-to-four family mortgage loans with terms
greater than 15 years are originated and underwritten using secondary mortgage
market criteria for sale into the secondary mortgage market.  The sale of these
loans reduces the Corporation's exposure to interest rate risk.  At June 30,
1996,  the Corporation had $16,216,000 of fixed-rate, one-to-four family
mortgage loans.

        The Corporation offers adjustable-rate, one-to-four family mortgage
loans ("ARM's") in order to decrease the vulnerability of its operations to
changes in interest rates.  The demand for adjustable-rate loans in the
Corporation's primary market area is a function of several factors, including
the level of current market interest rates, expectations as to the future
direction of  movements in interest rates and the difference between the
interest rates offered for fixed-rate loan products with those available on
adjustable-rate loan products.  Customers generally prefer ARM's during periods
of relatively high interest rates and fixed-rate loans during periods of
relatively low interest rates.  The Corporation's residential ARM's are fully
amortizing loans with contractual maturities of up to 25 years.  Substantially
all of the ARM's in its portfolio have interest rates that adjust on an annual
basis in accordance with a designated index.  The Corporation currently offers
ARM's with either a 2% limit on the rate adjustment per period and a 5% limit on
the rate adjustment over the life of the loan or a 1% limit on the rate
adjustment per period and a 3% limit on the rate adjustment over the life of the
loan.  ARM's with the one and three caps have a higher initial interest rate.
The Corporation's underwriting standards for ARM's require that it assess a
potential borrower's ability to make principal and interest payments assuming a
2% increase in the interest rate from the rate at the time of origination.  The
Corporation's ARM's are not convertible into fixed-rate loans, are assumable
only with Bank approval, do not contain prepayment penalties and do not produce
negative amortization.  At June 30, 1996, the Corporation had $24,403,000 of
adjustable-rate, one-to-four family residential loans.

        COMMERCIAL REAL ESTATE AND MULTI-FAMILY RESIDENTIAL LOANS.  At June
30, 1996, $5,228,000, or 7.5% of the Corporation's total loan portfolio
consisted of loans secured by multi-family residential real estate, and
$12,616,000, or 18.2%, of the Corporation's total loan portfolio consisted of
loans secured by commercial real estate.  The Corporation's commercial real
estate loans include loans secured by churches, retirement homes, shopping
centers, small office buildings and family-type business establishments while
multi-family residential loans are secured primarily by small apartment
buildings.  At June 30, 1996, the Corporation's commercial and multi-family real
estate loans were secured by properties located in the Bank's primary market
areas with an average loan balance of approximately $162,000.  The largest loan
to any one borrower amounted to approximately $2,000,000.  In the aggregate,
commercial real estate loans and multi-family residential loans amounted to
25.7% of the Corporation's total loan portfolio at June 30, 1996, and management
currently anticipates that commercial real estate and multi-family residential
loans will continue to comprise a substantial portion of the loan portfolio in
the future.

        Commercial real estate and multi-family loans have terms of up to 25
years and loan-to-value ratios are limited to a maximum of 75%.  The loan-to-
value ratio and term to maturity are based upon the age of the applicable
structure, condition of repair and remaining economic life.  The Corporation
originates both fixed-rate and adjustable-rate commercial and multi-family real
estate loans.  At June 30, 1996, $12,037,000 of the Corporation's commercial
real estate and multi-family residential real estate loans had adjustable-rates
of interest.

                                       4
<PAGE>
 
        The Corporation requires appraisals of all properties securing
commercial and multi-family residential real estate loans. Depending upon the
size of the loan, appraisals are performed by either an in-house appraiser or an
independent fee appraiser designated by the Corporation. All appraisals are
reviewed by management. In originating multi-family residential and commercial
real estate loans, the Corporation considers the quality and location of the
real estate, the credit quality of the borrower, corporate cash flows and the
quality of management involved with the property. Commercial and multi-family
residential real estate loans to corporations require the personal guaranty of
the entity's controlling stockholders. Hazard insurance is required as well as
flood insurance if the property is located in a designated flood zone.

        The following table presents information as to the Corporation's
commercial and multi-family real estate lending portfolio as of June 30, 1996 by
type of project (dollars in thousands).
<TABLE>
<CAPTION>
 
                                                            Outstanding
                                           Number of     Principal Balance
                                             Loans
                                           -------------------------------
<S>                                        <C>           <C>
Shopping center                                3             $     900

Church                                        18                   943

Retirement home                                4                 2,836

Small retail                                  55                 7,655

Multi-family residential (1)                  24                 5,228

Office building                                6                   282
                                           --------------------------------
Total                                        110             $  17,844
                                           ================================
</TABLE>
(1) Primarily represents multi-family loans secured by small apartment
    buildings.


        CONSTRUCTION AND LAND LOANS.  The Corporation makes land loans
primarily to individuals for the acquisition of both improved and unimproved
land.  Construction loans are originated for the construction of residential and
commercial properties.  Residential construction loans are made to individuals
for the construction of their residence and to approved builders for the
construction of presold and unsold (speculative) properties. Although these
loans afford the Corporation the opportunity to achieve higher interest rates
and fees with shorter terms to maturity than do one-to-four family permanent
mortgage loans, construction financing is generally considered to involve a
higher degree of risk. The Corporation's risk of loss on a construction loan is
largely dependent upon the accuracy of the initial estimate of the property's
value at completion of construction or development and the estimated cost
(including interest) of construction.  If the estimate of value proves
inaccurate, the Corporation may be confronted at, or prior to, maturity of the
loan, with a projection of value which is insufficient to assure full repayment.
If the estimate of construction cost or salability of the property upon
completion of the project proves inaccurate, the Corporation may be required to
advance funds beyond the amount originally committed to permit completion of the
project.  Speculative construction loans carry more risk than other construction
loans originated by the Corporation because the payoff for the loan is dependent
upon the builder's ability to sell the property prior to the time the
construction loan is due.  The Corporation attempts to mitigate these risks by
among other things, working with builders with whom it has established
relationships and by generally limiting the number of unsold homes under
construction.  At June 30, 1996, construction and land loans amounted to
$6,429,000, or 9.3% of the Corporation's total loan portfolio.
 
        Construction and land loans are generally limited to the Bank's
primary lending area and generally have terms that do not exceed one year.
Construction loans are originated and closed separately from the permanent
financing on the structure, however, the borrower must have obtained a
commitment for permanent financing from the Corporation before the construction
loan is closed.  Construction loans are typically interest only.  Construction
loans are underwritten pursuant to the same general guidelines used for
originating permanent loans.  Loan disbursements occur

                                       5
<PAGE>
 
only after an inspection of the site has been made and documented by the Bank's
appraiser.

        CONSUMER LOANS.  Subject to the restrictions contained in federal and
state regulations, the Corporation is authorized to make loans for a wide
variety of personal, or consumer purposes.  The Corporation's consumer loan
portfolio consists primarily of loans secured by savings accounts, automobiles
and recreational vehicles.  As a service to our customers, the Corporation from
time to time will make an unsecured loan based on the financial strength of the
borrower.  Consumer loans totaled $4,528,000 and represented 6.5% of the total
loan portfolio at June 30, 1996.

        Loans secured by savings deposit accounts equaled to $1,772,000 and
represented 39.1% of the outstanding consumer loan portfolio at June 30, 1996.
The portion of these loans that are secured by certificates of deposit are
structured to mature on the same date as the maturity date of the certificate of
deposit securing them.  Loans secured by passbook accounts mature in six months.
Holds are placed on all deposit accounts that are pledged as collateral to
eliminate the possibility of withdrawals that would result in the pledged
deposit balance being lower than the loan balance.  Such loans are originated
for up to 90% of the account balance and typically require semi-annual payments
of interest only.

        Automobile loans, recreational vehicle loans and unsecured consumer
loans were $2,756,000 and represented 4.0% of total loans receivable at June 30,
1996.  For loans secured by automobiles, boats and recreational vehicles, the
Corporation retains the original certificate of title to the collateral until
the loan is paid in full.  Borrowers must provide proof of collision coverage
and any other applicable loss coverage as a condition of the loan.  A condition
report is required on all used auto, boat and recreational vehicle loans.  There
is a minimum loan amount of $1,000 for consumer loans.  The maximum loan amount
is determined by the published value of the collateral, such as NADA value for
an automobile, and applicable loan-to-value ratios.

        Consumer loans generally involve more credit risk than mortgage loans
because of the type and nature of the collateral.  Collection of consumer loans
is dependent upon the borrower's continuing financial stability, and thus are
more likely to be adversely affected by job loss, divorce, illness and personal
bankruptcy.  In many cases, the repossessed collateral for a defaulted consumer
loan will not provide an adequate source of repayment of the outstanding loan
balance because of improper repair and maintenance of the underlying security.
The remaining deficiency often does not warrant further substantial collection
efforts against the borrower.  The Corporation has attempted to limit these
greater risks generally associated with consumer lending by emphasizing loans
secured by savings accounts at the Corporation.

        ORIGINATION, PURCHASE AND SALE OF LOANS.  The mortgage lending
activities of the Corporation are subject to the written, non-discriminatory,
underwriting standards and loan origination procedures established by the
Corporation's Board of Directors and management.  Loan originations come
primarily from walk-in customers and begin with an initial interview with an
officer of the Bank for the purpose of obtaining a formal application.  Upon
receipt of a loan application from a perspective borrower, a credit report is
ordered to verify specific information relating to the applicant's employment,
income and credit standing. This information may be verified by personal
contacts with other reference sources.  An appraisal of the real estate intended
to secure the proposed loan is undertaken by a pre-approved, qualified,
independent appraiser.  As soon as the required information has been obtained
and the appraisal complete, the information is reviewed for compliance with
corporate underwriting standards.  Single-family residential loans up to $50,000
can be approved by a loan officer.  Loans in excess of $50,000 are submitted to
the President or the Board of Directors for review and approval.  The President
has the authority to approve residential mortgage loans up to $150,000.
Residential mortgage loans in excess of $150,000 require approval of the Board
of Directors.

        After a loan is approved, it is the Corporation's policy to record a
lien on the real estate securing the loan and to obtain a title insurance policy
which insures that the property is free of prior encumbrances.  Borrowers must
also obtain hazard insurance policies prior to closing.  Flood insurance is
required for properties located in an area designated as flood plain by the
Department of Housing and Urban Development.

                                       6
<PAGE>
 
        The Corporation originates both fixed-rate and adjustable-rate
mortgage loans.  Substantially all fixed-rate loans with terms in excess of
fifteen years are underwritten to secondary market guidelines and closed
pursuant to commitments to sell such loans in the secondary market as part of
the Corporation's asset/liability management program. Mortgage loans
underwritten for specific government programs, such as Farmers Home
Administration or the Veterans Administration, are sold "servicing released"
with the Corporation receiving compensation for the value of the servicing
rights sold and origination fees charged to the customer.  Conventional fixed-
rate mortgage loans are sold "servicing retained" with the Corporation receiving
25 basis points to service the loans.  All sales of conventional loans were cash
sales with no recourse provisions.  Governmental loans sold were cash sales with
the purchaser having the right to require the Corporation to repurchase the loan
if the loan defaults in the first twelve months.

        The Corporation has sold participation interests in large commercial
mortgage loans to other financial institutions to reduce the Corporation's
exposure to any one project.

        Historically, the Corporation has not been an active purchaser of
loans.  The Corporation did not purchase any loans during fiscal 1996, 1995,
1994.

        The following table sets forth certain information with respect to
loans originated, sold and repaid for the time periods indicated (dollars in
thousands).
<TABLE>
<CAPTION>
 
                                                Year Ended June 30,
                                        -------------------------------------
                                           1996         1995        1994
                                        -------------------------------------
<S>                                     <C>          <C>         <C>
Loan Originations:
   Single-family residential            $ 17,600     $  7,960    $ 11,645
   Multi-family residential                1,236        1,122         647
   Commercial real estate                  6,386        2,024       3,648
   Construction and land loans             7,630        6,780       4,211
   Consumer and other loans                5,657        4,080       2,464
                                        -------------------------------------
 Total loans originated                   38,509       21,966      22,615
                                        =====================================

Loans sold and principal repayments:
   Loans sold                             (8,652)      (3,846)     (9,427)
   Principal repayments                  (20,801)     (11,669)    (14,950)
                                        ------------------------------------- 
Total                                    (29,453)     (15,515)    (24,377)
                                        -------------------------------------
Decrease (increase) in other items           121         (246)         93
Net increase (decrease) in              
 loan portfolio                         $  9,177     $  6,205    $ (1,669)
                                        ===================================== 
</TABLE> 

        LOAN SERVICING ACTIVITIES. In addition to servicing loans held in its
portfolio, the Corporation services one-to-four family residential real estate
loans sold to the secondary market. The servicing portfolio consists of single-
family residential real estate loans sold to Federal National Mortgage
Corporation ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC").
Servicing includes collecting and remitting loan payments, accounting for
principal and interest, holding escrow funds for the payment of real estate
taxes and insurance premiums, contacting delinquent borrowers, supervising
foreclosures in the event of unremedied defaults and general administration of
the loans. The aggregate unpaid principal balance of loans serviced for others
at June 30, 1996 was $21,669,000.

        LOAN ORIGINATION AND OTHER FEES. In addition to interest earned on loans
and the fees charged in connection with closing a loan (closing costs), the
Corporation charges origination fees or "points" for originating longer term,
fixed-rate loans. Loan origination fees are usually a percentage of the
principal amount of the mortgage loan and typically range between .5% and 2%,
depending on the terms and conditions. The Corporation also offers loan products
that require no origination fees.

                                       7
<PAGE>
 
        Other fees charged and collected by the Corporation include late charges
applied to delinquent payments and fees collected in connection with loan
modifications. The Corporation charges a 5% late charge fee on payments
delinquent 15 days or more. The late charge is calculated as 5% of the
delinquent monthly principal and interest payment amount. The Corporation
charges certain fees for new loan originations, modification of existing loans
and loan assumptions where applicable. Late charges and other fees do not
constitute a material source of income.
 
        In 1988, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standard No. 91, "Accounting for Nonrefundable Fees and
Costs Associated with the Originating or Acquiring of Loans and Initial Direct
Costs of Leasing" ("SFAS 91") which requires the amortization of all loan fees
collected in excess of the Corporation's cost to originate that loan over the
life of the loan using the level yield method. Prior to the issuance of SFAS 91,
all loan fees were generally immediately recognized as income. As of June 30,
1996, the Corporation had net deferred loan fees of approximately $57,000.

        DELINQUENT LOANS. When a borrower fails to make a scheduled loan
payment, the Corporation contacts the customer in an effort to bring the loan
current. In general, contacts are made after a mortgage loan is more than 15
days past due. A delinquent notice is sent and a late charge imposed after the
mortgage loan payment is 15 days past due. If a delinquency on a mortgage loan
reaches 90 days and is not cured through the Corporation's normal collection
process, or an acceptable arrangement is not worked out with the borrower, the
Corporation will implement measures to remedy the default, including foreclosure
action or, in special circumstances, accepting a voluntary deed in lieu of
foreclosure from the borrower. Defaults are cured promptly in most cases .

        Consumer installment loans that are five days past due are sent a
delinquent notice. When an installment loan that is collateralized with real or
personal property becomes 90 days past due, title and possession of the property
is taken.

        The following table sets forth (dollars in thousands) information
concerning delinquent loans as of the dates indicated. The amounts presented
represent the total outstanding principal balances of the related loans rather
than the actual payment amounts past due.

<TABLE>
<CAPTION>
 
                                             June 30,
                                             --------
                          1996                 1995                  1994
                   -------------------------------------------------------------
                           % of Total           % of Total            % of Total
                   Amount     Loans      Amount    Loans      Amount     Loans
                   -------------------------------------------------------------
<S>                <C>      <C>          <C>     <C>          <C>      <C>
30 to 59 days      $ 470       0.71%     $ 3,320    5.59%     $ 2,162     4.06%

60 to 89 days        177       0.27%         934    1.57%         835     1.57%
 
90 days and over     129       0.19%         193    0.32%         219     0.41%
                   -------------------------------------------------------------
Total              $ 776       1.17%     $ 4,447    7.48%     $ 3,216     6.04%
                   -------------------------------------------------------------
</TABLE> 
 
        NONPERFORMING ASSETS AND CLASSIFIED ASSETS. Loan are placed on a non-
accrual when, in the opinion of management, the probability of continued
performance is deemed insufficient to warrant further accrual. Generally, the
Corporation places all loans more than 90 days past due on non-accrual status.
Subsequent payments are applied to either the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectability of the loan. A loan is returned to accrual status when the loan
has been brought current and, in the opinion of management, the borrower's
ability to pay as agreed has been restored.
 
        Real estate acquired through foreclosure, or a deed in lieu of
foreclosure, is classified as real estate acquired in the settlement of loans.
When the property is acquired, it is recorded at the lower of the recorded
investment in the property or its fair value, whichever is less. The recorded
investment is the sum of the unpaid principal balance, accrued 

                                       8
<PAGE>
 
interest as of the date of acquisition and acquisition costs associated with the
property. If the recorded investment in the property exceeds its fair value, the
excess is charged to the allowance for loan losses at the time of acquisition.
Any subsequent write-downs and costs associated with holding and maintaining the
property are charged to earnings.
 
        Under generally accepted accounting principles, the Corporation is
required to account for certain loan modifications or restructurings as
"troubled debt restructurings." In general, the modification or restructuring of
a debt constitutes a troubled debt restructuring if the Corporation, for
economic or legal reasons related to the borrower's financial difficulties,
grants a concession to the borrower that the Corporation would not otherwise
consider. Debt restructurings and/or loan modifications do not necessarily
always constitute troubled debt restructurings and troubled debt restructurings
do not necessarily result in non-accrual loans. Troubled debt restructuring
amounted to $120,000 as of June 30, 1996.

        The following table set forth information with respect to the
Corporation's non-performing assets at the periods indicated (dollars in
thousands).
<TABLE> 
<CAPTION> 

                                                     June 30,
                                                     --------
                                            1996       1995         1994
                                          --------------------------------
<S>                                       <C>          <C>          <C> 
Non-accruing loans:
  Single-family residential               $ 137        $  163       $  84
  Multi-family residential                    -             -           -
  Commercial real estate                      -             -           -
  Construction and land                       -             -           -
  Consumer and other                          -            27          27
                                          --------------------------------
  Total non-accruing loans                  137           190         111
                                          --------------------------------
Accruing loans greater than 90 
     days delinquent
  Consumer and other                          -             3         108
                                          --------------------------------
Total nonperforming loans                   137           193         219
                                          --------------------------------
Real estate acquired through foreclosure    353           294         380
                                          --------------------------------
Total nonperforming assets                  490           487         599
Troubled debt restructuring                 120           118         114
                                          --------------------------------
Total nonperforming assets and 
     troubled debt restructuring          $ 610        $  605       $ 713
                                          ================================
Total nonperforming loans and 
     troubled debt restructuring as
     a percentage of total loans           0.92%         1.02%       1.34%

Total nonperforming assets and 
     troubled debt restructuring as 
     a percentage of total assets          0.42%         0.45%       0.61%
</TABLE> 

        During the year ended June 30, 1996, the Corporation recognized no
interest income on loans past due 90 days or more, whereas, under the original
terms of these loans, the Corporation would have recognized additional interest
income of approximately $1,000 .

 
        CLASSIFIED ASSETS. State and federal regulations require that each
insured savings bank classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, federal examiners have the
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

                                       9
<PAGE>
 
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable and present 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. A fourth
category, designated "special mention", is for assets which contain deficiencies
but do not currently expose an insured institution to a sufficient degree of
risk to warrant classification as "substandard", "doubtful" or "loss". Potential
losses in assets classified as "substandard" or "doubtful" may require additions
to the institution's general allowance for loan loss. If an asset or portion
thereof is classified "loss", the insured institution must either establish a
specific allowance for loan loss 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. Federal examiners may disagree with an insured institution's self
classifications and corresponding reserve amounts and may require the
institution to reclassify assets and adjust reserves accordingly.
 
        The Corporation's total classified assets as of June 30, 1996 amounted
to $532,000, or 0.37% of total assets.

        ALLOWANCE FOR LOAN LOSSES. It is management's policy to maintain an
allowance for estimated loan loss at a level which management considers adequate
to absorb losses inherent in the loan portfolio at each reporting date.
Management's estimation of this amount includes a review of all loans for which
full collection is not reasonably assured. Management considers, among other
factors, prior years' loss experience, current and anticipated economic
conditions, distribution of portfolio loans by risk class and the estimated
value of underlying collateral. Although management uses the best information
available to make determinations with respect to the provisions for loan loss,
additional provisions for loan losses may be required in the future should
economic or other conditions change substantially. In addition, the Department
and the FDIC, as an integral part of their examination process, periodically
review the Corporation's allowance for loan loss and may require the Corporation
to recognize additions to such allowance based on their judgment about
information available to them at the time of their examination.
 
INVESTMENT ACTIVITIES.
 
        INVESTMENT AND MORTGAGE-BACKED SECURITIES. The Corporation has the
authority under state and federal regulation to invest in certain types of
investment securities, including United States Treasury obligations, securities
of various federal agencies, state and municipal governments, certificates of
deposits in federally insured institutions, certain banker's acceptances and
federal funds. Subject to various restrictions, the Corporation may also invest
in commercial paper, corporate debt securities and mutual funds.
 
        The Corporation's investment and mortgage-backed securities portfolio is
managed in accordance with the Corporation's Investment Policy adopted by the
Board of Directors and administered by the Investment Committee. The stated
goals of the investment policy are to maximize the return on the portfolio while
maintaining the liquidity necessary to effectively manage the operations of the
Corporation.
 
        Effective January 1, 1994, the Corporation adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investmentsin 
Debt and Equity Securities" ("SFAS 115"). Concurrent with the adoption of the
Statement, management reevaluated its intent with respect to its portfolio. No
reclassifications were deemed appropriate and all of the Corporation's
investment and mortgage-backed securities were classified as held-to-maturity.
 
        In response to the high number of inquiries received by the industry
with respect to SFAS 115 and its implementation, the Financial Accounting
Standards Board ("SFAS") issued A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities ("the Guide")
in November 1995. In connection with the issuance of the Guide, the FASB created
a one time window through which a company could reevaluate its SFAS 115
classifications and reclass securities as deemed necessary for purposes of SFAS
115. Securities reclassified during this window of opportunity would not "taint"
remaining SFAS 115 classifications. This window closed December 31, 1995. As
permitted by the Guide, the Corporation reevaluated it SFAS 115 classifications
and reclassified approximately $28,421,000 of investments and mortgage-backed
securities from held-to-maturity to

                                       10
<PAGE>
 
available-for-sale.
 
        The following table sets forth the Corporation's investment and 
mortgage-backed securities portfolio as of the dates indicated (dollars in
thousands).

<TABLE> 
<CAPTION> 
                                                    June 30,
                                                    --------
                                         1996                    1995
                               ------------------------------------------------
                                Amortized  Percent of    Amortized   Percent of 
                                   Cost    Portfolio        Cost     Portfolio
                               ------------------------------------------------
<S>                            <C>         <C>           <C>         <C>
Investment Securities:

    U.S. Government and        
     agency obligations        $ 13,352      20.75%      $ 16,595      26.03%
    Municipal bonds                 784       1.22%           818       1.28%
    Equity securities             1,266       1.98%           202       0.32%
                               ------------------------------------------------
Total investment securities      15,402      23.95%        17,615      27.63%
                               ------------------------------------------------
Mortgage-backed securities:

    FHLMC                         8,851      13.76%        11,428      17.92%
    FNMA                          4,313       6.70%         7,312      11.47%
    GNMA                          6,763      10.51%         7,985      12.52%
    CMO's                        29,002      45.08%        19,419      30.46%
                               ------------------------------------------------
Total Mortgage-backed            
 securities                      48,929      76.05%        46,144      72.37%
                               ------------------------------------------------
Total investment and           
 mortgage-backed securities    $ 64,331     100.00%      $ 63,759     100.00%
                               ================================================
</TABLE> 

        The fair value of the Corporation's investment and mortgage-backed
securities portfolio was $64,218,000 and $63,842,000 at June 30, 1996 and 1995,
respectively.

        Management purchases both fixed-rate and adjustable-rate mortgage-backed
securities, from FHLMC, FNMA and GNMA with maturities from five to forty years.
The Corporation also purchases adjustable-rate Small Business Administration
("SBA") securities that carry the full faith and credit of the U.S. government.

        The Corporation purchases mortgage derivative securities in the form of
collateralized mortgage obligations (CMO'S) and structured notes. CMO's that are
purchased must qualify as investment grade and be considered non-high risk for
inclusion in the investment portfolio. CMO's that do not meet this criteria are
not purchased. If a CMO should fail either of these tests subsequent to its
purchase and the results appear irreversible, the CMO is disposed of in the most
prudent and timely manner possible. The amortized cost and fair value of the
CMO's at June 30, 1996 were approximately $29,002,000 and $29,046,000,
respectively. The Corporation does not purchase CMO's for speculative or hedging
purposes.

        The Corporation has purchased structured notes for investment purposes.
These include step-up bonds, single-index floaters and dual-index floaters.
While these types of investments possess minimal credit risk due to the federal
guarantee backing the issuing U.S. government agencies, they do possess
liquidity risk and interest rate risk. While all financial instruments are
subject to interest rate risk and liquidity risk, structured notes are more
sensitive because of the regulatory concerns and differing note structures (call
provision, rate adjustments, etc.). The Corporation had approximately $9,100,000
in structured notes as of June 30, 1996 with a fair value of approximately
$8,400,000. See notes 1 and 2 of the Notes to Consolidated Financial Statements
for more information regarding investment and mortgage-backed securities.

                                       11
<PAGE>
 
        The Corporation is required by regulation to maintain a minimum amount
of liquid assets which may be invested in specified marketable securities and is
also permitted to make certain other investments. The Corporation's liquidity
requirement at June 30, 1996 was $10,400,000. At that date the Corporation held
approximately $68,200,000 in liquid funds, well in excess of regulatory
requirements. The following table sets forth at amortized cost the maturities
and weighted average yields of the Corporation's investment and mortgage-backed
securities portfolio at June 30, 1996 (dollars in thousands).

                                       12
<PAGE>
 
<TABLE>
<CAPTION>
 
                                  Less than            One to Five           Five to Ten          Over Ten         
                                  One Year                Years                 Years              Years                 Total
                              -----------------------------------------------------------------------------------------------------
                              Amount     Yield     Amount    Yield      Amount     Yield      Amount     Yield     Amount     Yield
                              -----------------------------------------------------------------------------------------------------
<S>                           <C>        <C>       <C>       <C>        <C>        <C>        <C>        <C>       <C>        <C>
U.S. Government and agency    
 securities                   $3,765      4.30%    $ 8,109    5.19%     $  997      7.97%     $   481     6.38%    $13,352     5.19%


Municipal securities             155      6.95%        431    4.70%         40      6.00%         159     5.32%        785     4.84%


Mutual funds                       0      0.00%          0    0.00%          0      0.00%       1,264     5.13%      1,264     5.13%


FHLB stock                         0      0.00%          0    0.00%          0      0.00%         751     6.00%        751     6.00%


FNMA stock                         0      0.00%          0    0.00%          0      0.00%           2        -           2        -

FHLMC mortgage-backed            
 securities                      675      6.95%        764    7.72%      2,184      7.30%       5,228     6.98%      8,851     7.12%


FNMA mortgage-backed               
 securities                        0      0.00%        306    7.17%      2,098      6.92%       1,909     6.64%      4,313     6.81%


GNMA mortgage-backed               
 securities                        0      0.00%         44    8.39%        410      8.43%       6,309     6.64%      6,763     6.76%


CMO's                             73      7.02%        860    5.95%      1,047      6.96%      27,022     6.90%     29,002     6.88%

                              -----------------------------------------------------------------------------------------------------
Total                          4,668      4.73%     10,514    5.49%      6,776      7.29%      43,125     6.78%     65,083     6.45%

                              =====================================================================================================
</TABLE>
At June 30, 1996, approximately $4,965,000 of debt securities and $32,894,000 of
mortgage-backed securities were adjustable-rate securities.

                                       13
<PAGE>
 
DEPOSITS AND BORROWINGS

        GENERAL. Deposits are the major source of the Corporation's funds for
lending and other investment purposes. In addition to deposits, the Corporation
derives funds from principal repayments and interest payments on loans and
mortgage-backed securities. Loans and mortgage-backed securities repayments of
principal and interest payments are a relatively stable source of funds,
typically slowing as rates rise and accelerating as rates fall. Borrowings are
used on a short-term basis to compensate for reductions in the availability of
funds from other sources and for general business purposes.

        DEPOSITS. Local deposits are, and traditionally have been, the primary
source of the Corporation's funds for use in lending and for other general
business purposes. The Corporation offers a number of deposit accounts including
negotiable order of withdrawal ("NOW") accounts, money market savings accounts,
savings accounts, individual retirement accounts ("IRAs") and certificate of
deposit accounts. Deposit accounts vary as to withdrawal provisions, deposit
provisions and interest rates.

        The Corporation adjusts the interest rates offered on its deposit
accounts as necessary so as to remain competitive with other financial
institutions in its market area. The Corporation does not solicit brokered
deposits.

        Savings deposits in the Corporation at June 30, 1996 were represented by
the various types of savings programs described below:
<TABLE>
<CAPTION>
 
                                           Weighted          Minimum      Balance     Percentage
                                       Average Interest      Balance       (In         of Total
                                             Rate            Required     Thousands)   Deposits
                                       ---------------------------------------------------------
<S>                                    <C>                   <C>          <C>         <C>
NOW Accounts :

     Commercial                              0.00%            $  500       $  1,949       1.86%

     Noncommercial                           1.71%            $  500          3,550       3.40%

Money market checking accounts               3.12%            $1,000          7,751       7.41%

Savings accounts                             3.28%            $    5          4,794       4.58%
                                       --------------------------------------------------------                        
Total checking and savings deposits                                          18,044      17.25%
                                       -------------------------------------------------------- 
Certificates of deposits                     5.41%            $  500         63,396      60.63%

IRA's                                        5.63%            $  250          7,629       7.30%

Money Market CD's                            4.81%            $2,500         15,496      14.82%
                                                                           --------------------
Total certificates of deposits                                               86,521      82.75%
                                                                           --------------------     
Total deposits                                                             $104,565     100.00%
                                                                           ==================== 
</TABLE>

                                       14
<PAGE>
 
          The following table sets forth the Corporation's time deposits
classified by rate as of the dates indicated (dollars in   thousands).
<TABLE>
<CAPTION>
 
                                        June 30,
                                  -------------------------
                                  1996     1995     1994
                                  -------------------------
<S>                               <C>      <C>      <C>
0.00 - 3.99%                      $   995  $13,213  $58,238

4.00 - 5.99%                       74,021   62,504   23,689

6.00 - 7.99%                       11,505    7,366       13

8.00 - 10.00%                           0      877       49
                                  -------------------------
Total                             $86,521  $83,960  $81,989
                                  ========================= 
</TABLE>

        The following sets forth the amounts and maturities of the Corporation's
time deposits by specified interest rates at June 30, 1996.
<TABLE>
<CAPTION>
 
                                     Amount Due in
                   -----------------------------------------------------
                                            Two to
                   One Year      One to     Three
     Rate          or Less     Two Years    Years     Thereafter  Total
                   -----------------------------------------------------
<S>                <C>        <C>           <C>       <C>        <C>
 0.00 - 2.99%      $   995        $    0    $    0      $    0   $   995

 3.00 - 5.99%       63,311         7,029     3,048         633    74,021

 6.00 - 6.99%        4,525         2,625       668         423     8,241

  Over 7.00%            12           220         0       3,032     3,264
                   -----------------------------------------------------
    Total          $68,843        $9,874    $3,716      $4,088   $86,521
                   =====================================================
 
</TABLE>
        The following table sets forth the maturities of the Corporation's
certificates of deposits with balances in excess of $100,000 at June 30, 1996
(dollars in thousands).
<TABLE>
<CAPTION>
 
Certificates of deposit maturing in:         Amount
----------------------------------------------------
<S>                                         <C>
Three months or less                         $ 1,747

Over three months but within six months        2,385

Over six months but within twelve months       3,711

Over twelve months                             3,553
                                             -------   
Total                                        $11,396
                                             =======
 
 
</TABLE>

                                       15
<PAGE>
 
The following table sets forth the Corporation's deposit activities for the
periods indicated (dollars in thousands).
<TABLE>
<CAPTION>
 
                                                    1996      1995       1994
                                                   ---------------------------
<S>                                                <C>      <C>        <C>
Net increase (decrease) before interest credited   $1,030   $(7,429)   $(2,160)
                                                
Interest credited                                  $2,602     2,200      2,311
                                                   ---------------------------
Net increase (decrease) in deposits                $3,632   $(5,229)   $   151
                                                   ===========================
</TABLE>
See Note 8 of Notes to Consolidated Financial Statements for additional
information regarding deposit accounts.

        BORROWINGS.  During the year ended June 30, 1996 the Corporation used
advances from the Federal Home Loan Bank of Dallas ("FHLB") to supplement its
supply of lendable funds for granting loans, making investments and to meet
deposit withdrawal requirements.  See "Regulation -- Federal Home Loan Bank
System."  The Corporation had an average amount of outstanding advances of
approximately $11,100,000 for the year ended June 30, 1996.  Advances
outstanding during the fiscal year end June 30, 1996 never exceeded $13,500,000,
the amount outstanding at June 30, 1996.  The Corporation has periodically
utilized reverse repurchase agreements as a source of borrowings.  Reverse
repurchase agreements are treated as financings and the obligations to
repurchase securities sold are reflected as a liability on the balance sheet.
There were no reverse repurchase agreements outstanding at June 30, 1996.

        COMPETITION.  The Corporation faces strong competition both in
attracting deposits and making real estate loan.  Its most direct competition
for deposits has historically come from other savings associations, credit
unions and commercial banks located in northeastern Texas, including many large
financial institutions which have greater financial and marketing resources
available to them.  In addition, the Corporation faces additional significant
competition for investors' funds from mutual funds, corporate and government
securities, annuities and other investment products.  The ability of the
Corporation to attract and retain savings deposits depends on its ability to
generally provide a rate of return, liquidity and risk comparable to that
offered by competing investment opportunities.

        The Corporation experiences competition for real estate loans
principally from other saving associations, commercial banks, and mortgage
banking companies.  The Corporation competes for loans principally through the
interest rates and the loan fees it charges as well as the quality of services
it provides borrowers.  Competition may increase as a result of the continuing
reduction of restrictions on the interstate operations of financial
institutions.

        EMPLOYEES.  The Corporation has 38 full-time employees as of June 30,
1996.  None of the employees are represented by a collective bargaining unit.
The Corporation believes that relations with its employees are excellent.

PROPOSED MERGER OF THE CORPORATION

        DEFINITIVE MERGER AGREEMENT SIGNED.   On September 26, 1996, the
Corporation entered into an Agreement and Plan of Merger pursuant to which
Jefferson Savings Bankcorp, Inc. ("Jefferson") would acquire all of the
outstanding common stock of the Corporation in exchange for a combination of
cash and common stock of Jefferson, at a price of $18.50 per share adjusted for
earnings of the Corporation from April 1, 1996, through the end of the month
prior to closing, less dividends.  The merger is subject to the approval of
regulators and the shareholders of the Corporation.  Reference is made to a copy
of the Agreement and Plan of Merger filed as Exhibit 10.2 to this Form 10-K
Report for information concerning the terms and conditions of the proposed
merger.

                                       16
<PAGE>
 
                                  REGULATION

        Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Company 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

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

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

        If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Bank, the
Company 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
shall commence or continue beyond a limited period of time after becoming a
multiple savings and loan holding company or subsidiary thereof any business
activity, other than: (i) furnishing or performing management services for a
subsidiary savings institution; (ii) conducting an insurance agency or escrow
business; (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary savings institution; (iv) holding or managing properties used
or occupied by a subsidiary savings institution; (v) acting as trustee under
deeds of trust; (vi) those activities authorized by regulation as of March 5,
1987 to be engaged in by multiple savings and loan holding companies; or (vii)
unless the Director of the OTS by regulation prohibits or limits such activities
for savings and loan holding companies, those activities authorized by the
Federal Reserve Board as permissible for bank holding companies.  The activities
described in (i) through (vi) above may be engaged in only after giving the OTS
prior notice and being informed that the OTS does not object to such activities.
In addition, the activities described in (vii) above also must be approved by
the Director of the OTS prior to being engaged in by a multiple savings and loan
holding company.

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

                                       17
<PAGE>
 
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 Federal
Deposit Insurance Act ("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).

        On October 14, 1994, the Bank, which was then a state-chartered
savings and loan association known as Sulphur Springs Loan and Building
Association, converted from mutual to stock form of ownership.  Applicable OTS
regulations imposed certain requirements on a savings association converting
from mutual to stock form of ownership which included a limitation on purchases
of stock of the converted association by its officers and directors for a period
of three years following the conversion, a requirement that the converting
association register the securities issued in the conversion pursuant to the
Securities Exchange Act of 1934 and undertake not to deregister such securities
for a period of three years thereafter, and limitations upon the converted
association's repurchase of any of its capital stock for a period of three years
from the date of conversion.  Further, under the OTS regulations, for a period
of three years following the date of conversion, no person is permitted,
directly or indirectly, to offer to acquire or acquire beneficial ownership of
more than 10% of any class of an equity security of the converted association
without the prior approval of the OTS, and any securities owned by such a person
in excess of 10% may not be counted as shares entitled to vote or counted as
voting shares in connection with any matter submitted to the stockholders for a
vote.  The Company became subject to these regulatory requirements to the same
extent as the Bank as the result of the 1995 reorganization by which the Bank
became the wholly-owned subsidiary of the Company.

        TEXAS REGULATIONS.  Under the Texas Savings Bank Act ("TSBA"), each
registered holding company, such as the Company, 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 of 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.
Moreover,

                                       18
<PAGE>
 
because some of the provisions of the FDIA, as amended by the Federal Deposit
Insurance Corporation Improvement Act of 1991, have not yet been fully
implemented through the adoption of regulations by the various federal banking
agencies, the Bank cannot yet fully assess the impact of these provisions on its
operations.

        In particular, the Bank cannot predict whether it will be in
compliance with such new regulations at the time they become effective.
Furthermore, the Bank cannot predict what other new regulatory requirements
might be imposed in the future.

        LIMITATIONS ON TRANSACTIONS WITH AFFILIATES.  Transactions between
savings institutions and any affiliate are governed by sections 23A and 23B of
the Federal Reserve Act.  An affiliate of a savings institution is any company
or entity which controls, is controlled by or is under common control with the
savings institution.  In a holding company context, the parent holding company
of a savings institution (such as the Company) and 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(h) places additional restrictions on loans
to executive officers.  At June 30, 1996, 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 core capital ratio" and
two "risk-based" capital requirements.  "Tier 1 core 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 all
intangible assets, other than properly valued mortgage servicing rights and
purchased credit card relationships up to certain specified limits and minus net
deferred tax assets in excess of certain specified limits.  At June 30, 1996,
the Bank did not have any net deferred tax assets in excess of the specified
limits.

        TIER 1 CORE CAPITAL RATIO.  FDIC regulations establish a minimum 3.0%
ratio of Tier 1 core 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 core 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 June 30, 1996,
the

                                       19
<PAGE>
 
required Tier 1 core capital ratio for the Bank was 4.00% and its actual Tier 1
core capital ratio was 21.38%.

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

        For purposes of the risk-based capital requirements, "total capital"
means Tier 1 core 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 core 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 June 30, 1996, the Bank's Tier 1 core capital ratio to risk-
weighted assets ratio was 22.45% and its total risk-based capital to risk-
weighted assets ratio was 23.34%.

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

        The Bank currently pays deposit insurance premiums to the FDIC based
on a risk-based assessment system established by the FDIC for all SAIF-member
institutions.  Under applicable regulations, institutions are assigned to one of
three capital groups based solely on the level of an institution's capital -
"well capitalized," "adequately capitalized" and "undercapitalized" - which is
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 rates ranging from .23% for well
capitalized, healthy SAIF-member institutions to .31% for undercapitalized SAIF-
member institutions with substantial supervisory concerns.  The Bank has been
notified by the FDIC that the assessment rate is equal to .23% of insured
deposits for the six months ending December 31, 1996.

        On November 14, 1995, the FDIC adopted a new assessment rate schedule
of zero to 27 basis points (subject to a $2,000 minimum) for Bank Insurance Fund
("BIF") members beginning on or about January 1, 1996 while retaining the
existing assessment rate schedule for SAIF-member institutions.  In announcing
this new schedule, the FDIC noted that the premium differential may have adverse
consequences for SAIF members, including reduced earnings and/or impaired
ability to raise funds in the capital markets.  In addition, SAIF members could
be placed at a competitive disadvantage to BIF members with respect to pricing
of loans and deposits and the ability to achieve lower operating costs.

        REGULATORY CAPITAL REQUIREMENTS.  The FDIA requires the Federal
banking agencies to revise their risk-based

                                       20
<PAGE>
 
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 risk
of non-traditional activities and to ensure that such standards reflect the
"actual performance and expected risk of loss of multi-family mortgages" of
which the Bank had $5,228,000 million at June 30, 1996.  In December 1995, the
FDIC and the other Federal banking agencies promulgated final amendments to
their respective risk-based capital requirements which would explicitly identify
concentration of credit risk and certain risks arising from nontraditional
activities, and the management of such risks as important factors to consider in
assessing an institution's overall capital adequacy.  The FDIC may now require
higher minimum capital ratios based on certain circumstances, including where
the institution has significant risks from concentration of credit or certain
risks arising from non-traditional activities.

        The Federal banking agencies have agreed to adopt for regulatory
purposes Statement 115, which, among other things, generally adds a new element
to stockholders' equity under generally accepted accounting principles by
including net unrealized gains and losses on certain securities.  In December
1994, the FDIC issued final amendments to its regulatory capital requirements
which would require that the net amount of unrealized losses from available-for-
sale equity securities with readily determinable fair values be deducted for
purposes of calculating the Tier 1 core capital ratio.  All other net unrealized
holding gains (losses) on available-for-sale securities are excluded from the
definition of Tier 1 core capital.  At June 30, 1996, the Bank had investment
and mortgage-backed securities available for sale with an amortized cost of
$22,153,000 with aggregate net unrealized loss of $167,000 ($118,000 net of tax
effect).

        SAFETY AND SOUNDNESS STANDARDS.  Each Federal banking agency is
required to prescribe, for all insured depository institutions and their holding
companies, standards relating to internal controls, information systems and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate.  The
compensation standards would prohibit employment contracts or other compensatory
arrangements that provide excess compensation, fees or benefits or could lead to
material financial loss to the institution.  In addition, each Federal banking
agency also is required to adopt for all insured depository institutions and
their holding companies standards that specify (i) a maximum ratio of classified
assets to capital, (ii) minimum earnings sufficient to absorb losses without
impairing capital, (iii) to the extent feasible, a minimum ratio of market value
to book value for publicly-traded shares of the institution or holding company,
and (iv) such other standards relating to asset quality, earnings and valuation
as the agency deems appropriate.  On July 10, 1995, the Federal banking
agencies, including the FDIC, adopted final rules and proposed guidelines
concerning safety and soundness required to be prescribed by regulations
pursuant to Section 39 of the FDIA. In general, the standards relate to
operational and managerial matters, asset quality and earnings and compensation.
The operational and managerial standards cover internal controls and information
systems, internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth, and compensation, fees and benefits.
Under the asset quality and earnings standards, which were adopted by the FDIC
and other federal banking agencies on August 27, 1996, the Bank is 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

                                       21
<PAGE>
 
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 or 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 trouble 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
finding and the IAP agrees in writing to reimburse the institution if it is
ultimately determined that the IAP violated a law, regulation or other fiduciary
duty.

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

        COMMUNITY REINVESTMENT ACT.  Under the Community Reinvestment Act
("CRA"), as implemented by FDIC regulations, a savings institution has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods.  The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the FDIC, in connection with its examination of a savings
institution, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such institution.  As of the date of its most recent regulatory
examination, the Bank was rated "satisfactory" with respect to its CRA
compliance.

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

                                       22
<PAGE>
 
and enforced.  Among other things, the revised regulations substitute for the
current process-based assessment factors a new evaluation system that would rate
institutions based on their actual performance in meeting community credit
needs.  In particular, the revised system will evaluate the degree to which an
institution is performing under tests and standards judged in the context of
information about the institution, its community, its competitors and its peers
with respect to (i) lending, (ii) service delivery systems and (iii) community
development.  The revised regulations also specify that an institution's CRA
performance will be considered in an institution's expansion (e.g., branching)
proposals and may be the basis for approving, denying or conditioning the
approval of an application.  Management of the Bank currently is unable to
predict the effects of the regulations under the CRA as recently adopted.

        QUALIFIED THRIFT LENDER TEST. All savings institutions, including the
Bank, are required to meet a QTL test set forth under Section 10(m) of the Home
Owners Loan Act, as amended, to avoid certain restrictions on their operations.
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 9 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 June 30, 1996.

        RESTRICTIONS ON CAPITAL DISTRIBUTIONS.  The Company is required to
provide to the OTS not less than 30 days' advance notice of the proposed
declaration by its board of directors of any dividend on its capital stock.  The
OTS may object to the payment of the dividend on safety and soundness grounds.

        The FDIA prohibits an insured depository institution from paying
dividends on its capital stock or interest on its capital notes or debentures
(if such interest is required to be paid only out of net profits) or distribute
any of its capital assets while it remains in default in the payment of any
assessment due the FDIC.  Texas law permits the Bank to pay dividends out of
current or retained income in cash or additional stock.

        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 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 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 June
30, 1996, the Bank's advances from the FHLB of Dallas amounted to $13,500,000 or
9.3% of its total assets.

        As a member, the Bank is required to purchase and maintain stock in
the FHLB of Dallas in an amount equal

                                       23
<PAGE>
 
to the greater of 1% of its aggregate unpaid residential mortgage loans, home
purchase contracts or similar obligations at the beginning of each year or 5% of
total advances.  At June 30, 1996, the Bank had $751,000 of 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 June 30, 1996, dividends
paid by the FHLB of Dallas to the Bank totaled $46,000.

        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 June 30, 1996, 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 non-interest-bearing account at a Federal Reserve Bank, the effect of
this reserve requirement is to reduce a bank's earning assets.  The amount of
funds necessary to satisfy this requirement has not had a material affect on the
Bank's operations.

        TEXAS SAVINGS BANK LAW.  As a Texas chartered savings bank, the Bank
is subject to regulation and supervision by the Department under the TSBA.  The
TSBA contains provisions governing the incorporation and organization, location
of offices, rights and responsibilities of directors, officers and members as
well as the corporate powers, savings, lending, capital and investment
requirements and other aspects of the Bank and its affairs.  In addition, the
Department is given extensive rule-making power and administrative discretion
under the TSBA, including authority to enact and promulgate rules and
regulations.

        The Bank is required under the TSBA to comply with certain capital
requirements established by the Department.  The TSBA also restricts the amount
the Bank can lend to one borrower to that permitted to national banks, which is
generally not more than 15% of the Bank's unimpaired capital and unimpaired
surplus and, if such loans are fully secured by readily marketable collateral,
an additional 10% of unimpaired capital and unimpaired surplus.  The Department
generally examines the Bank once every year and the current practice is for the
Department to conduct a joint examination with FDIC.  The Department monitors
the extraordinary activities of the Bank by requiring that the Bank seek the
Department's approval for certain transactions such as the establishment of
additional offices, a reorganization, merger or purchase and assumption
transaction, changes of control, or the issuance of capital obligations. The
Department may intervene in the affairs of a savings bank if the savings bank, a
director, officer or agent has: engaged in an unsafe and unsound practice,
violated the savings bank's articles of incorporation, violated a statute or
regulation, filed materially false or misleading information, committed a
criminal act or a breach of fiduciary duty, or if the savings bank is, or is in
imminent danger of becoming, insolvent.


                          FEDERAL AND STATE TAXATION

        GENERAL.  The Corporation will report its income on a fiscal year
basis using the accrual method of accounting and will be subject to federal
income taxation in the same manner as other corporations with some exceptions
that apply to thrift and other types of financial institutions.  The following
discussion of tax matters is intended only as a summary and does not purport to
be a comprehensive description of the tax rules applicable to the Corporation.

  
                                       24
<PAGE>
        
        BAD DEBT RESERVE.  As a "domestic building and loan association," the
Corporation is permitted to establish reserves for bad debts and to make annual
additions thereto which qualify as deductions for the purpose of determining
taxable income. The bad debt deduction is generally based on a savings
institution's actual loss experience (the "Experience Method"). In addition,
provided that certain definitional tests relating to the composition of assets
and the nature of its business were met, a savings institution prior to
enactment of the Small Business Job Protection Act of 1996 could elect annually
to compute its allowable addition to bad debt reserves for qualifying real
property loans (generally loans secured by improved real estate) by reference to
a percentage of its taxable income.

        The Corporation in the past has elected between these two methods of 
computing its bad debt reserve.  However, under the Small Business Job 
Protection Act of 1996 a thrift institution of the Bank's size will be required 
in the future to use the Experience Method and must recapture certain 
"applicable excess bad debt reserves" over a six year period, subject to certain
requirements, and begin paying taxes on the recaptured amount.  Generally, the 
1987 and prior reserves are exempt from such recapture.  The Corporation 
believes that implementation of this legislation will not have a material affect
on its operating results.

        DISTRIBUTIONS.  While the Corporation maintains a bad debt reserve, if
it were to distribute cash or property to its stockholders having a total fair
market value in excess of its accumulated tax-paid earnings and profits, or were
to distribute cash or property to its stockholders in redemption of its stock,
it would generally be required to recognize as income an amount which, when
reduced by the amount of federal income tax that would be attributable to the
inclusion of such amount in income, is equal to the lesser of: (i) the amount of
the distribution or (ii) the sum of (a) the amount of the accumulated bad debt
reserve of the Corporation with respect to qualifying real property loans (to
the extent that additions to such reserve exceed the additions that would be
permitted under the experience method) and (b) the amount of the Corporation's
supplemental bad debt reserve.

        CORPORATE ALTERNATIVE MINIMUM TAX.  The Code imposes an alternative
minimum tax at a rate of 20% on a base of regular taxable income plus certain
tax preferences ("alternative minimum taxable income" or "AMTI").  The
alternative minimum tax is payable to the extent that the tax on such AMTI is in
excess of the tax which would otherwise be payable.  The Code provides that one
item of tax preference is the excess of the bad debt deduction allowable for a
taxable year pursuant to the percentage of taxable income method over the amount
allowable under the experience method.  The other items of tax preference that
constitute AMTI include (a) tax exempt interest on newly-issued (generally
issued on or after August 8, 1986) private activity bonds other than certain
qualified bonds and (b) for taxable years beginning after 1989, 75% of the
excess (if any) of (i) adjusted current earnings as defined in the Code, over
(ii) AMTI (determined without regard to this preference and prior to reduction
by net operating losses).  New operating losses can offset no more than 90% of
AMTI.  Certain payments of alternative minimum tax may be used as credits
against regular tax liabilities in future years.

        STATE TAXATION.  Effective August 12, 1991, the Texas legislature
enacted the 1991 Texas Revenue Bill which, among other things, imposes a
franchise tax on the Corporation.  Under the new law, the Corporation will pay
an annual franchise tax equal to the greater of $2.50 per $1,000 of taxable
capital apportioned to Texas, or $4.50 per $100 of net taxable earned surplus
apportioned to Texas.  Net taxable earned surplus is the Corporations' Federal
taxable income with certain modifications.

                                       25
<PAGE>
 
ITEM 2. PROPERTIES

OFFICES AND PROPERTIES

     At June 30, 1996, the Corporation conducted its business from its main
office at 306 N. Davis Street, Sulphur Springs, Texas 75482 and five branch
office facilities, all of which are located in northeastern Texas (dollars in
thousands).

<TABLE>
<CAPTION>
                                              Net Book Value 
          Description/                              of           Deposits at
            Address           Leased/Owned     the Property     June 30 ,1996
-----------------------------------------------------------------------------
<S>                           <C>             <C>               <C>
    Main Office               Owned                 $  103         $ 55,706
    306 North Davis St.                                         
    Sulphur Springs, Tx                                         
                                                                
    Branch Office             Leased (1)                --           17,379
    101 Kaufman                                                 
    Mt. Vernon, Tx                                              
                                                                
    Branch Office             Owned                    341           12,669
    101 Broadnax                                                
    Daingerfield, Tx                                            
                                                                
    Branch Office             Owned                    318           13,927
    801 North Jefferson                                         
    Mt. Pleasant, Tx                                            
                                                                
    Branch Office             Owned                     55            3,593
    117 South Greer                                             
    Pittsburg, Tx                                               
                                                                
    Branch Office             Owned                    886            1,291
    3501 Sowell Ln.                                             
    Texarkana, Tx                                               
                                                                
    Vacant Office             Owned                     77               --
    101 East North Front St.                                    
    New Boston, Tx                                              
                                                                
    Office                    Leased (2)                --               --
    212 North Davis St.                                         
    Sulphur Springs, Tx                                         
                                                                
    Development Site          Owned                    198               --
    641 Gilmer                                                  
    Sulphur Springs, Tx                                         
                                              -------------------------------
    Total                                            1,978          104,565
                                              ===============================
</TABLE>
--------------------

(1)  This facility is leased from Mr. Connelly, a director of the Corporation,
on a month-to-month basis.  Annual rent is $4,200.

(2)  This facility is leased from Mr. Burgin a director of the Corporation, on a
month-to-month basis.  Annual rent is $4,500.
<PAGE>
 
ITEM 3.  LEGAL PROCEEDINGS
--------------------------

     Neither the Corporation or its subsidiary is engaged in any legal
proceedings of a material nature at the present time. From time to time, the
Bank is involved in routine legal proceedings occurring in the ordinary course
of business wherein it enforces the Bank's security interest in mortgage loans
made by the Bank.


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

     No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1996.


                                    PART II

                                        
ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
---------------------------------------------------------------------------
MATTERS
-------

     The information contained under the section captioned "Common Stock
Information" contained on page 5 of the Annual Report to Shareholders is
incorporated herein by reference.


ITEM 6.  SELECTED FINANCIAL DATA
--------------------------------

     The information contained under the section captioned "Selected
Consolidated Financial and Other Data" contained on pages 3 and 4 of the Annual
Report to Shareholders is incorporated herein by reference.


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

     The information contained under the section captioned "Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations" contained on page 6 through 14 of the Annual Report to Shareholders
is incorporated herein by reference.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
---------------------------------------------------

     The financial statements which are listed under Item 14 herein and are
contained on pages 13 through 40 of the Annual Report to Shareholders are
incorporated herein by reference.


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

     None.


                                    PART III
                                        
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------

     The information required by this item is hereby incorporated by
reference from pages 4 through 7 of the Corporation's 1996 definitive proxy
statement.
<PAGE>
 
ITEM 11.  EXECUTIVE COMPENSATION
--------------------------------

     The information required by this item is hereby incorporated by
reference from pages 7 and 8 of the Corporation's 1996 definitive proxy
statement.

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

     The information required by this item is hereby incorporated by
reference from pages 2, 3, 5, and 6 of the Corporation's 1996 definitive proxy
statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------

     The information required by this item is hereby incorporated by
reference from pages 8 and 9 of the Corporation's 1996 definitive proxy
statement.

                                    PART IV

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

     (A)  DOCUMENTS FILED AS PART OF THIS REPORT
          --------------------------------------

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

     Independent Auditors' Report.
     Consolidated Statements of Financial Condition at June 30, 1996 and 1995.
     Consolidated Statements of Operations for the Years Ended June 30, 1996,
     1995 and 1994.
     Consolidated Statements of Changes in Stockholders' Equity for the Years
     Ended June 30, 1996, 1995 and 1994.
     Consolidated Statements of Cash Flows for the Years Ended June 30, 1996,
     1995 and 1994.
     Notes to Consolidated Financial Statements.

(2)  All schedules for which provision is made in the applicable accounting
regulation 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.

(3) The following exhibits are filed as part of this Form 10-K:

     Exhibit No.
     ---------- 
     
     3.2  Articles of Incorporation of Registrant

     3.3  Bylaws of Registrant

     10.2 Agreement and Plan of Merger by and among L & B Financial, Inc., a
          Texas corporation, and Jefferson Savings Bancorp, Inc., a Delaware
          corporation, and Jefferson Savings Acquisition Co., Inc., a Missouri
          corporation dated September 25, 1996

     13.  1996 Annual Report to Shareholders (1)

     21.  Loan and Building State Savings Bank, a savings bank organized under
          the laws of the state of Texas, is a wholly-owned and operating
          subsidiary of the Registrant

     23.  Consent of Oakerson, Arnold, Walker & Co. to incorporation by
          reference

     24.  Powers of attorney

     27.  Financial Data Schedule
<PAGE>
 
     99.1 Sulphur Springs Loan and Building Association 1995 Stock Option
          Plan (2)

     99.2 Sulphur Springs Loan and Building Association Recognition and
          Retention Plan and Trust Agreement (3)

          (1) to be filed by amendment.

          (2) Incorporated by reference to Exhibit No. 99.1 to the
              Registrant's Form S-8 Registration Statement No. 333-2574

          (3) Incorporated by reference to Exhibit B to Registrant's Proxy
              Statement dated February 3, 1995.

     (B)  REPORTS ON FORM 8-K
          -------------------

          During the fourth quarter of the Registrant's 1996 fiscal year, the
          Registrant filed one Form 8-K Report. That report was dated May 7,
          1996, and disclosed the commencement of preliminary negotiations with
          a possible acquirer.
<PAGE>
 
                                   SIGNATURES

     Pursuant to the requirements of Section 13 of 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.


                                           L&B FINANCIAL, INC.


Date: September 30, 1996                   By: /s/ C. Glynn Lowe
                                               -------------------------------
                                               C. Glynn Lowe
                                               President and 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/ C. Glynn Lowe                               /s/ Enos L. Ashcroft
----------------------------------------      ---------------------------------
C. Glynn Lowe                                 Enos L. Ashcroft
Chief Executive Officer                       Chairman of the Board
                                             
Date: September 30, 1996                      Date: September 30, 1996
                                             
                                             
/s/ Jeffrey C. David                          W. T. Allison *
----------------------------------------      ---------------------------------
Jeffrey C. David                              W. T. Allison
Principal Financial and Accounting Officer    Director
                                            
Date: September 30, 1996                      Date: September 30, 1996
                                            

Daniel L. Bonner *                            Bob J. Burgin *
----------------------------------------      ---------------------------------
Daniel L. Bonner                              Bob J. Burgin
Director                                      Director
                                             
Date: September 30, 1996                      Date: September 30, 1996
                                             
James H. Connelly *                           Wayne H. Gaylean *
----------------------------------------      ---------------------------------
James H. Connelly                             Wayne H. Gaylean
Director                                      Director
                                             
Date: September 30, 1996                      Date: September 30, 1996
                                             
Thomas J. Payne *                            
----------------------------------------     
Thomas J. Payne
Director
 
Date: September 30, 1996
 


* By    /s/ C. Glynn Lowe
    ------------------------------------
     C. Glynn Lowe
     Attorney-in-fact
     under power of attorney