EX-99.2 5 w91621a1exv99w2.txt EXHIBIT 99.2 Exhibit 99.2 INDEPENDENT AUDITORS' REPORT The Board of Directors Jacksonville Bancorp, Inc. We have audited the accompanying consolidated statements of financial condition of Jacksonville Bancorp, Inc. and subsidiaries, as of September 30, 2003 and 2002, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended September 30, 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with U. S. generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jacksonville Bancorp, Inc. and subsidiaries, as of September 30, 2003 and 2002, and the results of their operations and cash flows for each of the years in the three year period ended September 30, 2003, in conformity with U. S. generally accepted accounting principles. HENRY & PETERS, P.C. Tyler, Texas November 4, 2003 F-1 JACKSONVILLE BANCORP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION SEPTEMBER 30, 2003 AND 2002

See accompanying notes to consolidated financial statements. F-2 JACKSONVILLE BANCORP, INC. CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001

See accompanying notes to consolidated financial statements. F-3 JACKSONVILLE BANCORP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001

See accompanying notes to consolidated financial statements. F-4 JACKSONVILLE BANCORP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001 CONTINUED

See accompanying notes to consolidated financial statements. F-5 JACKSONVILLE BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001

See accompanying notes to consolidated financial statements. F-6 JACKSONVILLE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 NOTE 1 - BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of Jacksonville Bancorp, Inc. (Company), and its wholly-owned subsidiary Jacksonville IHC, Inc. (IHC), and its wholly-owned subsidiary Jacksonville Savings Bank, SSB (Bank), and its wholly-owned subsidiary JS&L Corporation (JS&L). The Company, through its principal subsidiary, the Bank, is primarily engaged in attracting deposits from the general public and using those and other available sources of funds to originate loans secured by single-family residences located in the East Texas area. To a lesser extent, the Bank also originates construction loans, land loans, and consumer loans. IHC's main activity is holding an intercompany loan receivable from the Bank in connection with the Bank's employee stock ownership plan. JS&L's main activity is the servicing of purchased residential mortgage notes receivable and investment in, and development of real estate. All significant intercompany transactions and balances are eliminated in consolidation. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INVESTMENT AND MORTGAGE-BACKED SECURITIES The Association classifies and accounts for debt and equity securities as follows: HELD-TO-MATURITY Debt and equity securities that management has the positive intent and ability to hold until maturity are classified as held-to-maturity and are carried at their remaining unpaid principal balance, net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the level interest yield method over the estimated remaining term of the underlying security. AVAILABLE-FOR-SALE Debt and equity securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, needs for liquidity and changes in the availability of and the yield of alternative investments are classified as available-for-sale. These assets are carried at market value. Market value is determined using published quotes as of the close of business. Unrealized gains and losses are excluded from earnings and reported net of tax as a separate component of retained earnings until realized. Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary would result in write-downs of the individual securities to their fair value and be included in the consolidated statement of earnings as realized losses. No such write-downs have been included as realized losses have not occurred. TRADING SECURITIES Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at market value, with unrealized gains and losses included in earnings. PREMISES AND EQUIPMENT Land is carried at cost. Buildings, leasehold improvements, and furniture, fixtures, and equipment are carried at cost, less accumulated depreciation and amortization. Buildings and furniture, fixtures and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. The cost of leasehold improvements is being amortized using the straight-line method over the terms of the related leases. FEDERAL INCOME TAXES The Company and its subsidiaries file a consolidated Federal income tax return. The tax provision or benefit is based on income or loss reported for financial statement purposes, and differs from amounts currently payable or refundable because certain revenues and expenses are recognized for financial reporting purposes differently than they are recognized for tax reporting purposes. The cumulative effects of any temporary differences are reflected as deferred income taxes using the liability method (see Note 11). F-7 JACKSONVILLE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 CONTINUED NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED LOANS RECEIVABLE Loans receivable are stated at unpaid principal balances, less the allowance for loan losses, and net deferred loan origination fees and discounts. Discounts on loans are recognized over the lives of the loans using the interest method. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance is based on the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and current economic conditions. Currently, the allowance for loan losses is formally reevaluated on a quarterly basis. While management uses available information to recognize losses on loans, further additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies as an integral part of their examinations, periodically review the allowance for loan losses. Uncollectible interest on loans that are contractually past due is charged-off or an allowance is established based on management's periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments is back to normal, in which case the loan is returned to accrual status. LOANS HELD-FOR-SALE Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized by charges to earnings. LOAN ORIGINATION AND COMMITMENT FEES AND RELATED COSTS Loan fees received are accounted for substantially in accordance with FASB Statement No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases." Loan fees and certain direct loan origination costs are deferred, and the net fee is recognized as an adjustment to interest income over the contractual life of the loans. Commitment fees and costs relating to commitments whose likelihood of exercise is remote are recognized over the commitment period on a straight-line basis. If the commitment is subsequently exercised during the commitment period, the remaining unamortized commitment fee at the time of exercise is recognized over the life of the loan as an adjustment of yield. REAL ESTATE Real estate properties acquired through loan foreclosure are initially recorded at the lower of cost (loan balance) or fair value, less estimated costs of disposition, at the date of foreclosure. Investment in real estate is recorded at cost. Costs relating to development and improvement of property are capitalized, whereas costs relating to holding property are expensed. Valuations are periodically performed by management, and an allowance for losses is established by a charge to operations if the carrying value of a property exceeds its estimated net realizable value. Currently, all major foreclosed real estate properties are formally reevaluated on a quarterly basis to determine the adequacy of the allowance for losses. Gains on sale of real estate are accounted for in accordance with Statement of Financial Accounting Standards No. 66. When the borrower's initial cash down payment does not meet the minimum requirements, the gain on sale is deferred and recorded on the installment basis until such time as sufficient principal payments are received to meet the minimum down payment requirements. Losses on sale of real estate are recognized at the date of sale. ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-8 JACKSONVILLE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 CONTINUED NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED ESTIMATES - CONTINUED Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties. MORTGAGE SERVICING RIGHTS The cost of mortgage servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment of mortgage servicing rights is assessed based on the estimated fair value of those rights. Fair values are estimated using discounted cash flows based on current market interest rates and market data regarding sales of mortgage servicing rights. The Bank sells predominately single-family first mortgage loans with simple risk characteristics and uses a single stratum for purposes of measuring impairment. The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights exceed their fair value. EARNINGS PER SHARE The Company has adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128). This statement provides for a "basic" EPS computation based upon weighted-average shares outstanding. Shares issued to its Employee Stock Ownership Plan (ESOP) are accounted for in accordance with AICPA Statement of Position 93-6. Diluted earnings per share considers the dilutive effect of stock options. Earnings per share on a basic and diluted basis is calculated as follows:

STOCK-BASED COMPENSATION Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," and as amended by Statement of Financial Accounting Standards No. 148 encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the company's stock at the date of the grant over the amount an employee must pay to acquire the stock. F-9 JACKSONVILLE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 CONTINUED NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED GOODWILL AND OTHER INTANGIBLES Other intangible assets (core base deposits) are being amortized on the straight-line method over a period of 8 years. Goodwill is not being amortized. On a periodic basis, management performs an evaluations to determine whether any impairment of the goodwill and intangibles has occurred; if any such impairment is determined, a write-down of the intangibles and goodwill is recorded. Intangible assets are comprised of the following at September 30:

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

F-10 JACKSONVILLE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 CONTINUED NOTE 3 - INVESTMENT SECURITIES The amortized cost and estimated market values of investments in debt securities are as follows as of September 30, 2003:

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

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

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

F-11 JACKSONVILLE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 CONTINUED NOTE 4 - MORTGAGE-BACKED SECURITIES The amortized cost and estimated market values of mortgage-backed securities are summarized as follows:

F-12 JACKSONVILLE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 CONTINUED NOTE 4 - MORTGAGE-BACKED SECURITIES - CONTINUED The scheduled maturities of mortgage-backed securities at September 30, 2003 were as follows:

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

NOTE 5 - LOANS RECEIVABLE Loans receivable at September 30 are summarized as follows:

F-13 JACKSONVILLE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 CONTINUED NOTE 5 - LOANS RECEIVABLE - CONTINUED The Bank at September 30 had mortgage loan commitments outstanding substantially all of which are at rates to be determined at closing (rates range from 4.5% to 9.5%) as follows: 2003 2002 ------------ ----------- Variable-rate $ 2,977,475 $1,073,570 Fixed-rate 8,552,148 7,282,131 ------------ ----------- $ 11,529,623 $8,355,701 ============ =========== The Bank had committed to sell a substantial portion of fixed-rate loans when funded. Activity in the allowance for loan losses is summarized as follows as of September 30:

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

Custodial escrow balances maintained in connection with the foregoing loan servicing were approximately $1,998,000 and $1,773,000, at September 30, 2003 and 2002, respectively. NOTE 6 - REAL ESTATE An analysis of the activity in the allowance for losses in real estate acquired in settlement of loans at September 30 is as follows:

F-14 JACKSONVILLE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 CONTINUED NOTE 7 - ACCRUED INTEREST RECEIVABLE Accrued interest receivable at September 30 is summarized as follows:

NOTE 8 - PREMISES AND EQUIPMENT Premises and equipment at September 30 consist of the following:

NOTE 9 - DEPOSITS Deposits at September 30 are summarized as follows:

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

F-15 JACKSONVILLE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 CONTINUED NOTE 9 - DEPOSITS - CONTINUED Interest expense on deposits for the years ended September 30 is summarized as follows:

The Federal Reserve Board requires all depository institutions to maintain reserves against their transaction accounts (primarily NOW and Super NOW checking accounts) and non-personal time deposits. Required reserves must be maintained in the form of vault cash or a non-interest-bearing account at a Federal Reserve Bank. NOTE 10 - BORROWINGS Information related to Federal Home Loan Bank borrowings for the years ended September 30 is provided in the table below:

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

The advances are collateralized by a blanket lien on first mortgage loans. NOTE 11 - FEDERAL INCOME TAXES The Company and its subsidiaries file a consolidated federal income tax return. The provision for Federal income taxes differs from that computed at the statutory corporate tax rate as follows:

F-16 JACKSONVILLE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 CONTINUED NOTE 11 - FEDERAL INCOME TAXES - CONTINUED Deferred taxes are provided for timing differences in the recognition of income and expense for tax and financial statement purposes. The sources and effects of these differences are as follows:

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

Stockholders' equity at September 30, 2003 and 2002, includes approximately $3,000,000, for which deferred Federal income tax liability has not been fully recognized. This amount represents an allocation of bad-debt deductions for tax purposes only (base year bad debt reserve). Reduction of amounts so allocated for purposes other than tax bad-debt losses would create income for tax purposes only, which would be subject to the then-current corporate income tax rate. NOTE 12 - PENSION PLAN, THRIFT PLAN, DEFERRED COMPENSATION AND RETIREE MEDICAL INSURANCE The Bank has a qualified defined benefit retirement plan covering substantially all of its employees. The benefits are based on each employee's years of service and the average of the highest compensation for sixty consecutive completed calendar months. The benefits are reduced by a specified percentage of the employee's social security benefit. An employee becomes fully vested upon completion of five years of qualifying service. It is the policy of the Bank to fund an amount between the minimum and the maximum amount that can be deducted for Federal income tax purposes. F-17 JACKSONVILLE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 CONTINUED NOTE 12 - PENSION PLAN, THRIFT PLAN, DEFERRED COMPENSATION AND RETIREE MEDICAL INSURANCE - CONTINUED The following table sets forth the plan's funded status and amounts recognized in the Bank's consolidated statements of financial condition at September 30: Actuarial present value of benefit obligations:

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

The Bank has a defined contribution thrift plan in effect for substantially all employees. Compensation and benefits expense includes $66,019 in 2003, $58,233 in 2002, and $53,697 in 2001 for such plan. The thrift plan permits employee contributions in the amount of 1% to 6% of compensation. The Bank contributes for each thrift plan participant a matching contribution equal to 50% of the participant's contribution. In addition to the required matching contributions, the Bank may contribute an additional amount of matching contributions determined by the Board of Directors at its discretion. In addition to the aforementioned benefit plans, the Bank has deferred compensation arrangements with key officers and certain directors. The deferred compensation is funded through life insurance contracts and calls for annual payments for a period of ten years. The Bank funds the cost of the insurance for the officers while the cost of directors' insurance is funded through a reduction in their normal directors' fees. Vesting occurs after specified years of service and payments begin upon retirement. Expense reported in the statement of earnings under these arrangements totaled approximately $101,000 in 2003 and 2002, and $112,000 in 2001. At September 30, 2003 and 2002, the Bank had a liability of $1,034,000, related to such arrangements. Additionally, other assets include $851,000 and $793,000 at September 30, 2003 and 2002, respectively, in cash surrender value of life insurance contracts. F-18 JACKSONVILLE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 CONTINUED NOTE 12 - PENSION PLAN, THRIFT PLAN, DEFERRED COMPENSATION AND RETIREE MEDICAL INSURANCE - CONTINUED In November, 2002, the board of directors of the Bank adopted a resolution whereby all employees who retire after at least twenty-five years of continuous full-time service prior to their sixty-fifth birthday will continue to be provided group medical insurance until the earliest of (1) the day the retiree becomes eligible for any other group medical insurance as an employee, or (2) the first day of the calendar month immediately following their sixty-fifth birthday. Upon the attainment of age 65 the bank will continue to provide the retiree medical insurance under either (1) the Bank's group medical insurance policy, or (2) through an individual Medicare supplement policy until the day the retiree becomes eligible for any other group medical insurance as an employee. The choice of using the Bank's group medical insurance policy or a Medicare supplement policy will be at the sole discretion of the Bank's board of directors. Furthermore, if, in the sole judgement of the Bank's board of directors, continuing to provide retiree medical insurance creates economic hardship for the Bank, the board of directors has full authority to terminate the medical insurance of retirees. In the event medical insurance for retirees is terminated, the Bank will give retirees as much notice as possible. In connection with the adoption of the above resolution, the Bank, after consultation with its actuaries, recorded a liability for retiree insurance of approximately $633,000 and included this amount in compensation and benefits expense in the accompanying statement of earnings for the year ended September 30, 2003. The above mentioned resolution related to retiree health insurance was adopted in November, 2002; however, the Bank did not record the liability until the fourth quarter of the fiscal year after consultation with and upon receipt of information from its actuaries. Had this liability been recorded in the quarter ended December 31, 2002, the amounts originally reported for that quarter would be revised as follows (dollars in thousands except per share amounts):

If the entire $633,000 charge would have been recorded in the three months ended December 31, 2002, it would have had a similar impact on the financial condition at March 31, 2003, and June 30, 2003, and on the cumulative results of operations for the six and nine months ended March 31, 2003 and June 30, 2003. NOTE 13 - EMPLOYEE STOCK OWNERSHIP PLAN The Bank has established an Employee Stock Ownership Plan (ESOP) for employees age 21 or older who have at least one year of credited service with the Bank. The ESOP will be funded by the Bank's contributions made in cash (which primarily will be invested in Company common stock) or common stock. Benefits may be paid either in shares of common stock or in cash. The Bank accounts for its ESOP in accordance with the AICPA's Statement of Position 93-6. F-19 JACKSONVILLE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 CONTINUED NOTE 13 - EMPLOYEE STOCK OWNERSHIP PLAN - CONTINUED In prior years the ESOP acquired 202,048 shares of Company stock through borrowings from IHC. The Bank makes annual contributions to the ESOP equal to the debt service, less dividends received on the unallocated shares. The ESOP shares have been pledged as collateral for the loan. As the loan is repaid, shares are released from collateral and committed for allocation to active employees, based on the proportion of debt service paid in the year. The shares pledged as collateral are reported as stock acquired by the ESOP plan in the statement of financial condition. As shares are released from collateral, the Bank reports compensation expense equal to the average fair value of the shares over the period in which the shares were earned. Also, the shares become outstanding for earnings per share computations. Dividends on allocated shares are recorded as a reduction of retained earnings, and dividends on unallocated shares are recorded as a reduction of the loan and accrued interest. ESOP compensation expense was $119,966, $85,900, and $53,878, for the years ended September 30, 2003, 2002, and 2001, respectively. At September 30, 2003 and 2002, 137,315 and 128,683 ESOP shares, respectively, have been released for allocation, of which 130,838 and 122,206 were allocated to participants at September 30, 2003 and 2002, respectively. Of the 130,838 allocated to participants at September 30, 2003, 16,163 shares have been distributed to participants who have withdrawn from the plan. The fair value of the unallocated shares of 71,210 and 79,842 at September 30, 2003 and 2002, was approximately $2,653,285 and $1,981,000, respectively. NOTE 14 - MANAGEMENT RECOGNITION PLAN In prior years, the Bank adopted a Management Recognition Plan (MRP) to provide officers and employees with a proprietary interest in the Association as incentive to contribute to its success. Compensation expense in the amount of the fair market value of the common stock at the date of the grant to the officer or employee was recognized pro rata over the period during which the shares are earned and payable. MRP expense included in compensation and benefits in the accompanying consolidated statements of earnings totaled $-0-, $13,929, and $167,000 for the years ended September 30, 2003, 2002, and 2001, respectively. NOTE 15 - STOCK OPTION PLANS Certain directors and officers have options to purchase shares of the Company's common stock under its 1994, 1996 and 2001 Stock Incentive Plans. The option price is the fair market value at the date of grant and all shares have been granted and the options maximum term is ten years. The option price ranges from $7.05 to $21.87 per share and the options expire between March 2004 and March 2012. All available options under the 1994 and 1996 plans have been granted and are fully vested. Under the 2001 plan, 81,000 options have been granted and 9,000 remain available for future awards. A summary of activity in the Company's stock incentive plans follows:

F-20 JACKSONVILLE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 CONTINUED NOTE 15 - STOCK OPTION PLANS - CONTINUED No compensation cost has been recognized in the accompanying statements of operations for the Company's stock option plans. Had compensation cost for the Company's stock options plans been determined based on fair values at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company's net income would have been reduced on a proforma basis by approximately $60,000 in 2003; $60,000 in 2002; and $83,000 in 2001. Earning per share would have been reduced by $.04 basic and $.03 diluted in 2003; $.03 basic and diluted in 2002; and $.05 basic and $.04 diluted in 2001. The foregoing proforma amounts have been calculated using a binomial model and allocating compensation cost and a straight-line basis over the vesting period of the grant. The fair value of each option grant for the 1996 (fully vested in 2001) plan was estimated with the following weighted-average assumptions: dividend yield of 3%; expected volatility of 20%; risk-free interest rate of 6.6%; and expected life of 8 years. The fair value of each option grant for the 2001 (fully vested in 2006) plan was estimated with the following weighted average assumptions; dividend yield of 2.2%; expected volatility of 25%; risk-free interest rate of 3.4%; and expected life of 6 years. NOTE 16 - COMMITMENTS AND CONTINGENCIES In the ordinary course of business, the Company and subsidiaries have various outstanding commitments and contingent liabilities that are not reflected in the accompanying consolidated financial statements. In addition, the Company and subsidiaries are defendants in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial position of the Company and subsidiaries. The Bank is obligated under noncancelable operating leases for certain computer equipment. Leases are generally short-term and the remaining commitment at September 30, 2003, is not significant to the Company's operations or financial condition. The Bank leases office space for a branch location under an operating lease expiring August 2007. Rent expense was $30,000 for the years ended September 30, 2003 and 2002. The Bank has the option to extend the term of this lease for up to two consecutive terms of five years. In the normal course of business, operating leases are generally renewed or replaced by other leases. NOTE 17 - REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes that, as of September 30, 2003 and 2002, the Bank met all capital adequacy requirements to which it is subject. F-21 JACKSONVILLE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 CONTINUED NOTE 17 - REGULATORY MATTERS - CONTINUED

NOTE 18 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. The contractual amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as they do for on-balance-sheet instruments. Unless noted otherwise, the Company generally requires collateral to support financial instruments with credit risk. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since the majority of the commitments are expected to be funded, the total commitment amounts represent future expected cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based in part on management's credit evaluation of the counter-part. Collateral held varies, but consists principally of residential real estate and deposits. NOTE 19 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK Although the Bank has a diversified loan portfolio, a significant portion of its loans are secured by real estate. Repayment of these loans is in part dependent upon the economic conditions in the market area. Part of the risk associated with real estate loans has been mitigated, since much of this group represents loans secured by residential dwellings that are primarily owner-occupied. Losses on this type of loan have historically been less than those on speculative and commercial properties. The Bank's loan policy requires appraisal prior to funding any real estate loans and outlines the appraisal requirements on those renewing. F-22 JACKSONVILLE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 CONTINUED NOTE 20 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND INTEREST-BEARING DEPOSITS For these short-term instruments, the carrying amount is a reasonable estimate of fair value. INVESTMENT AND MORTGAGE-BACKED SECURITIES For securities held as investments, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. ACCRUED INTEREST The carrying amounts of accrued interest approximates their fair values. LOANS RECEIVABLE For certain homogeneous categories of loans, such as residential mortgages, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows, using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. DEPOSIT LIABILITIES The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. BORROWINGS Rates currently available to the Bank for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS-OF-CREDIT At September 30, 2003 and 2002, the Bank had not issued any standby letters-of-credit. Commitments to extend credit totaled $11,529,623 and $8,355,701, at September 30, 2003 and 2002, respectively, and consisted primarily of agreements to fund mortgage loans at the prevailing rates based upon acceptable collateral. Fees charged for these commitments are not significant to the operations or financial position of the Bank and primarily represent a recovery of underwriting costs. The Company has not been required to perform on any financial guarantees during the past two years. The Company has not incurred any losses on its commitments in the last three years. The estimated fair values of the Company's financial instruments at September 30 are as follows:

F-23 JACKSONVILLE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 AND 2002 CONTINUED NOTE 21 - CONDENSED FINANCIAL STATEMENTS OF JACKSONVILLE BANCORP, INC. (PARENT COMPANY ONLY) Jacksonville Bancorp, Inc., was organized in December 1995, and began operations on March 29, 1996, effective with the Reorganization. The Company's condensed balance sheets as of September 30 and related condensed statements of earnings for the years ended September 30 are as follows:

NOTE 22 - BRANCH ACQUISITION Effective November 9, 2001, the Bank purchased a branch location in Carthage, Texas, for a premium of approximately $3,672,000 including acquisition costs. In connection with the acquisition, the Bank assumed deposit liabilities of approximately $44,900,000, recorded loans of approximately $636,000 and recorded premises and equipment of approximately $238,000. NOTE 23 - MERGER On August 12, 2003, the Company entered into a definitive agreement with Franklin Bank Corp. (Franklin) whereby Franklin would acquire all of the common stock of the Company. Under the terms of the merger agreement, Company shareholders will receive $37.50 cash for each share of stock they own. Additionally, all outstanding Company stock options will be canceled in exchange for a payment equal to the difference between the per share option exercise price and $37.50. The total cash consideration to be paid to Company shareholders is expected to be approximately $72,500,000. The merger is subject to a number of conditions, including approval by shareholders and various regulatory authorities, as well as other closing conditions. Both the Company and Franklin have the right to terminate the merger under limited circumstances. At September 30, 2003, the Company had incurred approximately $300,000 in costs (principally legal and professional) related to the proposed merger which have been deferred and included in other assets pending completion of the merger. F-24

JACKSONVILLE BANCORP INC 8-K/A