<PAGE>
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the period ended September 30, 1998.
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 1-13819
MegaBank Financial Corporation
------------------------------
(Exact name of registrant as specified in its charter)
Colorado 84-0949755
-------- ----------
(State or other jurisdiction of (I.R.S.
Employer incorporation or organization) Identification Number)
8100 E. Arapahoe Road, Suite 214,Englewood, Colorado 80112
----------------------------------------------------------
(Address of principal executive offices) (Zip code)
(303) 740-2265
--------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1)has filed all
reports required to be filed 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.
[X] Yes [ ]No
At October 21, 1998, there were 6,407,340 shares of the registrant's common
stock outstanding.
Transitional Small Business Disclosure Format
[ ] Yes [X] No
</PAGE>
<PAGE>
MEGABANK FINANCIAL CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements 3
Item 2. Management's Discussion and
Analysis of Financial Condition
And Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
</PAGE>
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED
BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 12,148 $ 9,910
Interest-bearing deposits 88 1,470
Federal funds sold 13,300 1,775
Investment securities
available for sale 16,613 13,999
Loans 166,709 126,087
Less allowance for loan losses (2,491) (2,083)
___________ ___________
164,218 124,004
Bank premises, leasehold
improvements and equipment, net 7,974 4,799
Accrued interest receivable 1,176 898
Deferred tax asset 778 636
Preferred securities issuance
costs, net 734 255
Other 244 134
___________ ___________
Total assets $ 217,273 $ 157,880
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Demand, non-interest
bearing $ 61,320 $ 42,515
Demand, interest bearing 70,567 56,339
Savings 5,964 4,562
Time, $100,000 and over 14,327 10,141
Other time 36,716 28,321
___________ ___________
Total deposits 188,894 141,878
Federal Home Loan Bank
borrowings - 1,423
Securities sold under
agreement to repurchase 556 -
Income taxes payable 162 132
Accrued interest payable 399 152
Note payable - 2,000
Other 902 717
___________ ___________
Total liabilities 190,913 146,302
Company obligated manditorily
redeemable preferred
securities of subsidiary
trust holding solely Junior
Subordinated Debentures 12,000 -
Shareholders' equity
Preferred stock; no par value,
10,000,000 shares authorized,
none issued - -
Common stock; no par value,
50,000,000 shares authorized,
6,407,3401 (1) shares issued and
outstanding 1,961 1,961
Retained earnings 12,400 9,578
Accumulated other
comprehensive income (1) 39
___________ ___________
Total shareholders' equity 14,360 11,578
___________ ___________
Total liabilities and
shareholders' equity $ 217,273 $ 157,880
=========== ===========
The accompanying notes are an integral part of these statements.
- ----------------
<FN>
(1) Gives effect to a 30-for-1 stock split of the Company's Common Stock
in September 1998.
</TABLE>
</PAGE>
<PAGE>
<TABLE>
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME Nine months ended
September 30, 1998 and 1997 (Unaudited)
(Dollars in thousands, except per share data)
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1998 1997 1998 1997
_________ _________ _________ _________
<S> <C> <C> <C> <C>
Interest income
Loans, including fees $ 5,166 $ 3,576 $ 13,448 $ 9,982
Taxable investment
securities 89 72 231 209
Nontaxable investment
securities 187 137 561 413
Funds sold 74 137 381 447
Other interest 47 18 135 34
_________ _________ _________ _________
Total interest income 5,563 3,940 14,756 11,085
Interest expense
Deposits 1,499 1,199 4,164 3,358
Borrowed funds 28 32 112 126
Trust preferred securities 270 - 688 -
Notes payable - 44 19 135
_________ _________ _________ _________
Total interest expense 1,797 1,275 4,983 3,619
_________ _________ _________ _________
Net interest income 3,766 2,665 9,773 7,466
Provision for loan losses 190 110 410 360
_________ _________ _________ _________
Net interest income after
provision for loan
losses 3,576 2,555 9,363 7,106
Other income
Service charges on deposit
accounts 142 84 391 253
Gain on sale of investment
securities - - 25 -
Other income 92 128 280 287
_________ _________ _________ _________
Total other income 234 212 696 540
Other expenses
Salaries and employee
benefits 1,279 784 3,183 2,216
Occupancy expenses of
premises 301 221 688 539
Furniture and equipment
expense 108 93 337 221
Other expenses 501 518 1,681 1,608
_________ _________ _________ _________
Total other expenses 2,189 1,616 5,889 4,584
_________ _________ _________ _________
Income before income
taxes 1,621 1,151 4,170 3,062
Income tax expense 514 378 1,348 1,031
_________ _________ _________ _________
Net income 1,107 773 2,822 2,031
Other comprehensive income, net
of tax
Unrealized gains (losses) on
investment securities
available for sale (61) 106 (40) 104
_________ _________ _________ _________
Comprehensive income $ 1,046 $ 879 $ 2,782 $ 2,135
========= ========= ========= =========
Income per share
Basic earnings per share $ .17 $ .12 $ .44 $ .32
========= ========= ========= =========
Common shares outstanding 6,407,340 6,407,340 6,407,340 6,407,340
========== ========== ========== ==========
The accompanying notes are an integral part of these statements.
</TABLE>
</PAGE>
<PAGE>
<TABLE>
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1998 and 1997
(Unaudited)
(Dollars in thousands)
<CAPTION>
Nine months ended
September 30,
1998 1997
_________ _________
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income $ 2,822 $ 2,031
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses 410 360
Depreciation and amortization of fixed
assets 350 203
Amortization of preferred securities
issuance costs 16 -
Net discount accretion on investment
securities (12) (21)
FHLB stock dividend (23) (16)
Gain on sale of investment securities
available for sale (25) -
Deferred income taxes (126) 6
Changes in deferrals and accruals
Accrued interest receivable (278) (214)
Accrued interest payable 247 46
Other, net 105 265
_________ _________
Net cash provided by operating
activities 3,486 2,660
Cash flows from investing activities
Net (increase) in federal funds sold (11,525) (10,475)
Net (increase) decrease in interest-bearing
deposits 1,382 (1,542)
Purchase of securities available for sale (4,476) (3,531)
Proceeds from maturities of investment
securities available for sale 1,250 2,850
Proceeds from sales of securities available
for sale 616 -
Net (increase) in loans (40,624) (20,689)
Expenditures for bank premises and equipment (3,525) (1,462)
_________ _________
Net cash used in investing activities (56,902) (34,849)
Cash flows from financing activities
Net increase in deposits 47,016 38,605
Net(decrease) in advances from
Federal Home Loan Bank (1,423) (484)
Net increase in securities sold
under repurchase agreements 556 -
Proceeds from trust preferred securities 12,000 -
Trust preferred securities issuance costs (495) -
Principal payments on notes payable (2,000) (628)
_________ _________
Net cash provided by financing
activities 55,654 37,493
_________ _________
Net increase in cash and due from banks 2,238 5,304
Cash and due from banks at beginning of period 9,910 9,130
_________ _________
Cash and due from banks at end of period $ 12,148 $ 14,434
========= =========
Supplemental disclosures of cash flow
information
Cash paid year to date for:
Interest expense $ 4,735 $ 3,573
Income taxes 1,408 1,168
The accompanying notes are an integral part of these statements.
</TABLE>
</PAGE>
<PAGE>
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended September 30, 1998 and 1997
(Unaudited)
1. Unaudited Financial Statements
The accompanying unaudited interim financial statements have been prepared in
accordance with the instructions for Form 10-QSB and do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. All adjustments that are,
in the opinion of management, of a normal recurring nature necessary to
a fair statement of results for the interim periods presented have been made.
The results of operations for such interim periods are not necessarily
indicative of results of operations for a full year. The statements should be
read in conjunction with the summary of significant accounting policies and
notes to consolidated financial statements included in the prospectus of
the Company dated February 3, 1998, SEC File Nos. 333-42189 and 333-42191.
In the opinion of management, the accompanying financial statements
contain all adjustments necessary to present fairly the financial position of
the Company at September 30, 1998, and the results of operations and cash
flows for the periods ended September 30, 1998 and 1997.
The consolidated financial statements include the accounts of the Company's
respective subsidiaries. All material intercompany transactions have been
eliminated.
2. Nature of Operations
MegaBank Financial Corporation (the "Company") was founded in 1984 with the
objective of building a banking franchise in the Denver, Colorado
metropolitan area that would deliver a broad based package of products
and services to businesses and individuals. The Company's banking
subsidiary, MegaBank (the "Bank"), was organized in 1983. Since the
advent of branch banking in Colorado in 1993, the Bank has opened seven
additional banking locations throughout the Denver area. Two more branches are
in the planning and construction phases.
3. Offering of Trust Preferred Securities by MB Capital I
On February 9, 1998 the Company and its wholly owned subsidiary, MB Capital I
(the "Trust"), completed the sale of $12.0 million of 8.75% Cumulative Trust
Preferred Securities of the Trust. Net proceeds were approximately $11.2
million after payment of sales commissions and other offering costs, and were
invested in Junior Subordinated Debentures maturing February 9, 2028, issued
by the Company to the Trust in connection with the public offering.
Interest on the Junior Subordinated Debentures will be paid by the Company
to the Trust, will be the sole revenues of the Trust and the source for
distributions by the Trust to the holders of the Trust Preferred Securities.
</PAGE>
<PAGE>
For financial reporting purposes, the Trust is treated as a subsidiary of
the Company, and accordingly, the accounts of the Trust are included in the
consolidated financial statements of the Company. The Trust Preferred
Securities are presented as a separate line item in the consolidated balance
sheet under the caption "Company obligated mandatorily redeemable
preferred securities of subsidiary trust holding solely Junior Subordinated
Debentures." For financial reporting purposes, the Company records
distributions payable on the Trust Preferred Securities as interest expense in
the consolidated statements of income.
The Junior Subordinated Debentures are unsecured and rank junior and are
subordinate to all senior debt of the Company and constitute a full and
unconditional guarantee on a subordinated basis by the Company of the
obligations of the Trust under the Preferred Securities.
4. Accounting Changes
Comprehensive Income
The Company adopted Financial Accounting Standards Board Statement
No. 130, "Reporting Comprehensive Income" (SFAS No. 130), effective
January 1, 1998. SFAS No. 130 establishes standards for reporting
comprehensive income and its components (revenues, expenses, gains and
losses). Components of comprehensive income are net income and all
other non-owner changes in equity. The Statement requires that an enterprise
(a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Amounts formerly presented in Shareholders'
Equity as "Unrealized gains on securities available for sale, net of
taxes", are now reflected as "Accumulated other comprehensive income".
Operating Segments
The Company adopted Financial Accounting Standards Board Statement
No. 131, Disclosures About Segments of an Enterprise and Related
Information, (SFAS No. 131) effective January 1, 1998. This Statement
establishes standards for reporting information about segments in
annual and interim financial statements. SFAS No. 131 introduces a new
model for segment reporting called the "management approach." The
management approach is based on the way the chief operating decision-maker
organizes segments within the company for making operating decisions and
assessing performance. Reportable segments are based on products and
services, geography, legal structure, management structure and any other
in which management disaggregates a company. Based on the "management
approach" model, the Company has determined that its business is comprised
of a single operating segment and that SFAS No. 131 therefore has no impact on
its financial statements.
</PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
It is presumed that readers of these interim financial statements have read
or have access to the Management's Discussion and Analysis of Financial
Condition and Results of Operations for the year ended December 31, 1996,
included in the Company's Prospectus dated February 3, 1998, SEC File Nos.
333-42189 and 333-42191. The following discussion of the financial
condition and results of operation of the Company should be read in
conjunction with the unaudited consolidated financial statements of the Company
included elsewhere herein.
Charter Conversion
As of September 1, 1998, the Company changed its status to a unitary
thrift holding company within the meaning of the Home Owners' Loan Act of
1933 ("HOLA"), as amended. The Company is registered with the Office of
Thrift Supervision ("OTS") and is subject to OTS regulations, examinations,
supervision and reporting requirements. Conversely, the Company is no longer
a bank holding company registered under the Bank Holding Company Act of 1956
and, therefore, the Company is no longer subject to regulation by the Board
of Governors of the Federal Reserve System. In addition, the Bank converted
its charter from a Colorado state-chartered commercial bank to a
federal stock savings bank. Management believes that the flexibilities and
opportunities with a thrift charter complement the Bank's current lending
practices and should enhance the Company's long-term plans, including the
establishment of a real estate subsidiary. Management's plan is that the
real estate subsidiary will purchase undeveloped real estate in the Denver,
Colorado area, and develop and sell the land to small- to medium-sized
homebuilders who do not have resources to develop land but are able to build
homes economically. The Company would receive income from the land sales
as well as fee and interest income upon funding the homebuilders' loans
through the Bank. The Company also contemplates entering into related
activities, such as the formation or purchase of a title company.
Stock Split
The Company effected a 30-for-1 stock split of its Common stock on
September 1, 1998. The financial information herein gives effect to the split.
Results of Operations
Net interest income was $9.4 million for the nine months ended September 30,
1998, an increase of $2.3 million from $7.1 million for the same period in 1997.
Net interest income for the three months ended September 30, 1998 and 1997 was
$3.6 million and $2.6 million, respectively. Interest income for the nine
months ended September 30, 1998 and 1997 was $14.8 million and $11.1
million, respectively, and $5.6 million compared to $3.9 million for the
</PAGE>
<PAGE>
three month period ended September 30, 1998 and 1997, respectively. The
increase was due to higher balances of interest earning assets. Interest
expense for the same nine month period was $5.0 million in 1998 compared to
$3.6 million in 1997 and the three month period ended September 30, was
$1.8 million in 1998 compared to $1.3 million in 1997. Additional interest
bearing deposits contributed to the increase in interest expense, as well as
the additional interest expense of the Trust Preferred Securities offering
discussed elsewhere herein. Other income generated in the first three quarters
of 1998 increased to approximately $696,000 as compared to $540,000 for
the first three quarters of 1997,and $234,000 and $212,000 for the three
months ended September 30, 1998 and 1997, respectively. This overall
increase is attributable primarily to additional fee income, and to a lesser
extent, to a one-time gain on sale of equity securities. Other expenses in
the first three quarters of 1998 were $5.9 million compared to $4.6 million
for the same period the previous year. Other expenses in the three
months ended September 30, 1998 were $2.2 million compared to $1.6
million for the three months ended September 30, 1997. An increase in
other expenses is primarily due to additional employee and occupancy
expense required by branch expansion and internal growth.
In the nine months ended September 30, 1998, the Company generated net
income after provisions for income tax of $2.8 million compared to $2.0
million for the same period last year and $1.1 million compared to $0.8
million for the three months ended September 30, 1998 and 1997,
respectively. This improvement is attributable to the overall growth of
the Bank. Total assets of the Company were approximately $217 million and
$159 million at September 30, 1998 and 1997, respectively.
On February 9, 1998 the Company and its wholly owned subsidiary, MB Capital I
(the "Trust"), completed the sale of $12.0 million of 8.75% Cumulative Trust
Preferred Securities of the Trust. Net proceeds were approximately $11.2
million after payment of sales commissions and other offering costs, and were
invested in Junior Subordinated Debentures issued by the Company to the Trust
in connection with the public offering. Interest on the Junior Subordinated
Debentures will be paid by the Company to the Trust, will be the sole
revenues of the Trust and the source for distributions by the Trust to the
holders of the Trust Preferred Securities.
Net increases in loans were $40.6 million and $20.7 million during the
nine months ended September 30, 1998 and 1997, respectively and $19.3
million and $6.6 million for the three months ended September 30, 1998
and 1997, respectively. Actual origination of new loans was approximately
$231.6 million for the first nine months of 1998 as compared to $136.1
million during the same period in 1997.
Net increases in deposits were approximately $47.0 million and $38.6
million for the nine months ended September 30, 1998 and 1997, respectively,
due to the Bank's growth. Total deposits were approximately $188.9 million at
September 30, 1998 as compared to $143.3 million at September 30, 1997.
Analysis of Allowance for Loan Losses. The allowance for loan losses
represents management's recognition of the risks of extending credit and
its evaluation of the quality of the loan portfolio. The allowance is
maintained at a level considered adequate to provide for anticipated
</PAGE>
<PAGE>
loan losses based on management's assessment of various factors
affecting the loan portfolio. The allowance is increased by additional
charges to operating income and reduced by loans charged off, net of
recoveries.
The following table sets forth information regarding changes in the
allowance for loan losses of the Company for the period indicated.
<TABLE>
<CAPTION>
For The Nine Months Ended
September 30, 1998
------------------
(Dollars in thousands)
<S> <C>
Average total loans $142,481
========
Total loans at end of period $166,709
========
Allowance at beginning of period $2,083
Charge-offs:
Construction -
Commercial and industrial (2)
Installment (6)
Mortgage -
Other -
Total charge-offs (8)
<CAPTION>
Nine Months Ended
September 30, 1998
------------------
(Dollars in thousands)
<S> <C>
Recoveries:
Construction -
Commercial and industrial 3
Installment 3
Mortgage -
Other -
Total recoveries 6
---------
Net (charge-offs) recoveries (2)
Provisions for loan losses 410
---------
Allowance at end of period $ 2,491
Ratio of net (charge-offs) recoveries
to average loans 0.001%
Allowance to total loans at end of period 1.49%
Allowance to nonperforming loans 192.91%
</TABLE>
</PAGE>
<PAGE>
The Company's lending personnel are responsible for continuous monitoring
of the quality of loan portfolios. The loan portfolios are also
monitored and examined by the Company loan review personnel. The allowance
for loan losses is based primarily on management's estimates of possible
loan losses from the foregoing processes and historical experience.
These estimates involve ongoing judgments and may be adjusted over time
depending on economic conditions and changing historical experience.
As an integral part of their examination process, federal regulators
review the Company's loans and its allowance for loan losses. Management
believes that the Company's allowance for loan losses is adequate to cover
anticipated losses. There can be no assurance, however, that management
will not determine a need to increase the allowance for loan losses
or that regulators, when reviewing the Company's loan portfolios in the
future, will not require the Company to increase such allowance, either of
which could adversely affect the Company's earnings. Further, there can be no
assurance that the Company's actual loan losses will not exceed its allowance
for loan losses.
Nonperforming loans. Nonperforming loans consist of loans 90 days or
more delinquent and still accruing interest, nonaccrual loans and
restructured loans. When, in the opinion of management, a reasonable
doubt exists as to the collectibility of interest, regardless of the
delinquency status of a loan, the accrual of interest income is
discontinued and interest accrued during the current year is reversed
through a charge to current year's earnings. While the loan is on
nonaccrual status, interest income is recognized only upon receipt and then
only if, in the judgment of management, there is no reasonable doubt as to the
collectibility of the principal balance. Loans 90 days or more delinquent
generally are changed to nonaccrual status unless the loan is in the
process of collection and management determines that full collection of
principal and accrued interest is probable.
Restructured loans are those for which concessions, including the reduction
of interest rates below a rate otherwise available to the borrower or the
deferral of interest or principal, have been granted due to the borrower's
weakened financial condition. Interest on restructured loans is accrued at
the restructured rates when it is anticipated that no loss of original
principal will occur. The Company did not have any restructured loans as of
September 30, 1998.
The following table sets forth information concerning the nonperforming
assets of the Company at the dates indicated:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Nonaccrual loans $1,291 $1,604
Other loans 90 days past due - -
Other real estate - -
Total nonperforming loans $1,291 $1,604
====== ======
Ratio of nonaccrual and other loans
90 days past due to total loans 0.77% 1.27%
Ratio of nonperforming assets to total
loans plus other real estate 0.77 1.27
Ratio of nonperforming assets to total
assets 0.59 1.02
</TABLE>
Most of the amount of nonaccrual loans as of September 30, 1998 is the
Bank's portion of the five related loans totaling approximately $4.0
million that are subject to a Chapter 11 bankruptcy proceeding. Principal
reductions on these loans were made in April and July 1998. The loans were
originated by the Bank and were made at various times during 1994, 1995 and
1996 in connection with a real estate development on which the developer has
constructed a residential building assembly plant. The loans are secured by
real estate, certificates of deposit, as well as two personal guarantees from
the owners of the developer and a guarantee by a related limited partnership,
all three of which have substantial net worth. Management believes that the
Company is adequately collateralized on these loans.
As of September 30, 1998, there were no significant balances of loans
excluded from nonperforming loans set forth above, where known information
about possible credit problems of borrowers caused management to have serious
doubts as to the ability of such borrowers to comply with the present loan
repayment terms and which may result in such loans becoming nonperforming.
Management is not aware of any adverse trend relating to the Company's
loan portfolio.
</PAGE>
<PAGE>
Liquidity and Capital Resources
The Company has two basic sources of liquidity. The First is its retail
deposit market served by its banking offices. The Company has increased core
deposits through growth of its existing deposits and through promotions
directed at existing and potential customers. Deposits increased to $188.9
million at September 30, 1998 compared to $143.3 million at September 30,
1997.
The second source of the Company's liquidity is Federal Home Loan Bank
("FHLB") advances and Company lines of credit. FHLB advances are used
regularly in the cash management function both to fund a portion of the
lending portfolio and to manage the dayto-day fluctuations in liquidity
resulting from needs of depositors and borrowers. At September 30, 1998, the
Company had available $7.0 million of unused borrowing capacity from the FHLB
and $10.0 million from its other lenders. The Company anticipates that
it will continue to rely primarily upon customer deposits, FHLB borrowings,
other lending sources, loan repayments, loan sales and retained
earnings to provide liquidity, and will use funds provided primarily to make
Loans and to purchase investment securities.
The OTS capital regulations require savings associations to meet three
capital standards: a 1.5% tangible capital standard, a 3% leverage ratio
(or core capital ratio) and an 8% risk-based capital standard.
<TABLE>
<CAPTION>
At September 30, 1998
---------------------
<S> <C> <C>
Minimum
Ratio Actual Required
- ----- ------ --------
Tangible capital 10.34% 1.50%
Core (Tier 1) capital 10.34% 3.00%
Risk-Based capital 13.20% 8.00%
</TABLE>
In 1991, the OTS issued a proposal to amend its regulatory capital
regulations to establish a new framework for assessing capital adequacy.
The new regulation has yet to be enacted, and if enacted in final form as
proposed, management does not believe that the proposed regulation would have
a material effect on the Bank.
Year 2000 Considerations
As the year 2000 approaches, a significant business issue has emerged
regarding how existing application software programs and operating systems can
accommodate the date value for the year 2000. Many existing software
application products, including software application products used by the
Bank and its suppliers and customers, were designed to accommodate only a two-
digit date value, which represents the year. For example, information
relating the year 1996 is stored in the system as "96." As a result the
year 1999 (i.e., "99") could be the maximum date value that these systems
will be able to process accurately. In response to concerns about this
</PAGE>
<PAGE>
issue, regulatory agencies have begun to monitor holding companies; and banks'
readiness for the year 2000 as part of the regular examination process.
The Company presently believes that with modifications to existing software
and conversion to new software, the year 2000 issue will not pose significant
operation problems for the Company's computer systems or business operations.
Implementation of the Company's plan to test in-house and out-sourced software
has been underway since the first quarter of 1998. Testing of applications
considered to be "mission critical" are scheduled for completion by first
quarter of 1999. Total compliance for all systems is expected by
management to be completed by the third quarter of 1999; management currently
estimates that such compliance will cost $150,000. However, if such
modifications and conversions are not made, or are not completed timely,
the year 2000 issue could have a material adverse impact on the
operations of the Company. In addition, there can be no assurance
that unforeseen problems in the Company's computer systems, or the systems
of third parties on which the Company's computers rely, will not have an adverse
effect on the Company's systems or operations. Additionally, failure of
the Bank's customers to prepare for year 2000 compatibility could have a
significant adverse effect on such customers' operations and profitability,
thus inhibiting their ability to repay loans and adversely affecting the Bank's
operations. The Company does not have sufficient information accumulated
from customers of the Bank to enable the Company to assess the degree
to which customers' operations are susceptible to potential problems
relating to the year 2000 issue.
</PAGE>
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits.
Exhibit 27 - Financial Data Schedule (filed electronically only).
b. Reports on Form 8-K.
During the quarter ending September 30, 1998, the Registrant
filed a current report on Form 8-K dated September 24, 1998,
under "Item 5.Other Events" describing the conversion of the
Registrant's status to a unitary thrift holding company within
the meaning of the Home Owners' Loan Act of 1933, as well as
the Bank's conversion of its charter form a Colorado state
chartered commercial bank to a federal savings bank.
</PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
MEGABANK FINANCIAL CORPORATION
(Registrant )
/s/ Hiram J. Welton
___________________
Date: October 21, 1998 Hiram J. Welton
Duly authorized officer,
Treasurer and Chief Accounting Officer
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