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 quarterly period ended June 30, 1999.
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 001-13819
MegaBank Financial Corporation
(Exact name of small business issuer 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
(Issuer's telephone number)
Check mark whether the issuer (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 July 21, 1999, there were 7,769,709 shares of the issuer's
common stock, no par value, outstanding.
Transitional Small Business Disclosure Format
[ ] Yes [X] No
<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 2. Changes in Securities and
Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
1999 1998
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 13,414 $ 10,326
Interest-bearing deposits 105 128
Federal funds sold 3,100 5,625
------- -------
Cash and cash equivalents 16,619 16,079
Investment securities available for sale 21,293 15,677
Loans 228,728 189,602
Less allowance for loan losses (3,137) (2,610)
------- -------
225,591 186,992
Federal Home Loan Bank stock, at cost 742 482
Bank premises, leasehold improvements and
equipment, net 9,759 8,846
Accrued interest receivable 1,401 1,104
Deferred tax asset 868 718
Preferred securities issuance costs, net 715 729
Goodwill 2,641 -
Other 1,296 192
------- -------
Total assets $280,925 $230,819
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Demand, non-interest bearing $ 62,363 $ 54,093
Demand, interest bearing 69,478 72,444
Savings 7,255 6,271
Time 93,779 57,071
------- -------
Total deposits 232,875 189,879
Federal Home Loan Bank borrowings 1,000 -
Securities sold under agreement to 561 443
repurchase
Income taxes payable 348 71
Accrued interest payable 749 434
Other 1,545 601
------- -------
Total liabilities 237,078 191,428
Company obligated manditorily redeemable
preferred securities of subsidiary trust
holding solely Junior Subordinated
Debentures 12,000 12,000
Minority interest in subsidiary 133 -
Shareholders' equity
Preferred stock; no par value, 10,000,000
shares authorized, none issued - -
Common stock; no par value, 50,000,000
shares authorized, 7,769,709
and 7,607,340 shares issued and
outstanding in 1999 and 1998 15,473 13,974
Retained earnings 16,135 13,383
Accumulated other comprehensive income 106 34
------- -------
Total shareholders' equity 31,714 27,391
Total liabilities and
shareholders'equity $280,925 $230,819
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
(Unaudited)
<S> <C> <C> <C> <C>
Interest income
Loans, including fees $6,812 $4,380 $12,352 $8,282
Taxable investment 164 70 250 142
Nontaxable investment securities 165 187 383 374
Funds sold 10 201 17 307
Other interest 8 53 9 88
----- ----- ------ -----
Total interest income 7,159 4,891 13,011 9,193
Interest expense
Deposits 1,762 1,400 3,304 2,665
Borrowed funds 82 11 144 84
Trust preferred securities 237 269 525 418
Notes payable - - - 19
----- ----- ----- -----
Total interest expense 2,081 1,680 3,973 3,186
----- ----- ----- -----
Net interest income 5,078 3,211 9,038 6,007
Provision for loan losses 440 130 590 220
Net interest income after
provision for loan losses 4,638 3,081 8,448 5,787
Other income
Title fees 1,021 - 1,021 -
Service charges on deposit accounts 330 221 488 249
Gain on sale of investment securities - - - 25
Other income 78 20 205 188
----- ----- ----- -----
Total other income 1,429 241 1,714 462
Other expenses
Salaries and employee benefits 2,012 1,008 3,294 1,904
Occupancy expenses of premises 270 202 598 387
Furniture and equipment expense 222 114 347 229
Other expenses 1,220 481 1,733 1,180
----- ----- ----- -----
Total other expenses 3,724 1,805 5,972 3,700
----- ----- ----- -----
Income before income taxes 2,343 1,517 4,190 2,549
Income tax expense 799 485 1,438 834
----- ----- ----- -----
Net income $1,544 $1,032 $2,752 $1,715
Other comprehensive income, net of tax
Unrealized gains (losses)on investment
securities available for sale (36) 24 72 21
----- ----- ----- -----
Comprehensive income $1,508 $1,056 $2,824 $1,736
===== ===== ===== =====
Income per share
Basic earnings per share $ .20 $ .16 $ .36 $ .27
Weighted average common
shares outstanding 7,760,788 6,407,340 7,684.488 6,470,340
</TABLE>
The accompanying notes are an integral part of these statements.
-4-
<PAGE>
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
1999 1998
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income $ 2,752 $ 1,715
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses 590 220
Depreciation and amortization 400 233
Amortization of preferred securities issuance
costs 14 10
Gain on sale of investment securities
available for sale - (25)
Net discount accretion on investment
activities - (12)
Federal Home Loan Bank stock dividend (9) (14)
Amortization of goodwill 27 -
Deferred income taxes (192) (65)
Changes in deferrals and accruals
Interest receivable (297) (145)
Interest payable 315 220
Income taxes payable 277 56
Minority interest (1) -
Other, net 721 (270)
------ ------
Net cash provided by operating activities 4,597 1,923
Cash flows from investing activities
Purchase of securities available for sale (5,503) (3,479)
Purchase of Federal Home Loan Bank stock (251) -
Proceeds from maturities of investment
securities available for sale - 750
Proceeds from sales of securities available
for sale - 606
Acquisition of company under the purchase
method of accounting,net of cash acquired (1,500) -
Net (increase) in loans (39,189) (21,326)
Expenditures for bank premises and equipment (1,728) (2,783)
------ ------
Net cash used in investing activities (48,171) (26,232)
Cash flows from financing activities
Net increase in deposits 42,996 29,856
Net increase (decrease) in advances from
Federal Home Loan Bank 1,000 (1,423)
Net increase in repurchase agreements 118 1,253
Proceeds from trust preferred securities - 12,000
Trust preferred securities issuance costs - (495)
Principal payments on notes payable - (2,000)
------ ------
Net cash provided by financing activities 44,114 39,191
------ ------
Net increase in cash and cash equivalents 540 14,882
Cash and cash equivalents at beginning of period 16,079 13,155
----- -----
Cash and cash equivalents at end of period $16,619 $28,037
====== ======
Supplemental disclosures of cash flow information
Cash paid year to date for:
Interest expense $ 3,839 $2,955
Income taxes 1,355 854
</TABLE>
The accompanying notes are an integral part of these statements.
-5-
<PAGE>
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Six month period ended June 30, 1999 and 1998
(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 Form 10-KSB for the year
ended December 31, 1998.
In the opinion of management, the accompanying financial
statements contain all adjustments necessary to present fairly
the financial position of the Company at June 30, 1999, and the
results of operations and cash flows for the quarters and six
months ended June 30, 1999 and 1998.
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 eight additional
banking locations throughout the Denver area for a total of nine
locations, with one more branch in the planning phase.
On April 5, 1999, the Company purchased Empire Title and Escrow
Corporation and subsequently merged it with MB Title Company.
The consideration paid to the stockholders of Empire Title and
Escrow Corporation consisted of the Company's common stock and
cash. MB Title Company then changed its name to Empire Title and
Escrow Corporation ("Empire"). The purchase price for Empire
includes the potential for additional consideration based upon
the future performance of Empire during the three years following
the purchase (the "Post-Effective Time Consideration"). Empire
provides a full range of title insurance products and services to
the real estate community including homebuilders and real estate
firms. Management expects that this acquisition will provide
Empire the resources necessary to accelerate its expansion plans
while continuing to provide services to the Colorado real estate
community. This acquisition also allows the Company to offer a
broader array of financial products and services to its
customers. Empire operates as a subsidiary of the Company and
accordingly, the accounts of the subsidiary are included in the
consolidated financial statements of the Company.
-6-
<PAGE>
3. Trust Preferred Securities
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.
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.
-7-
<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 included in the Company's Form 10-KSB for the year
ended December 31, 1998, SEC File No. 1-13819. 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.
Information herein contains forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995, which can be identified by words such as "may,"
"will," "expect," "anticipate," "believe," "estimate," or
"continue," or comparable words. In addition, all statements
other than statements of historical facts that address activities
that the Company expects or anticipates will or may occur in the
future are forward-looking statements. Readers are encouraged to
read the SEC reports of the Company, particularly its Form 10-KSB
for the Year Ended December 31, 1998, for meaningful cautionary
language disclosing why actual results may vary materially from
those anticipated by management.
Results of Operations
Net interest income was $8.4 million for the six months
ended June 30, 1999, an increase of $2.6 million from $5.8
million for the same period in 1998. Net interest income for the
three months ended June 30, 1999 and 1998 was $4.6 million and
$3.1 million, respectively. Interest income for the six months
ended June 30, 1999 and 1998 was $13.0 million and $9.2 million,
respectively, and $7.2 million compared to $4.9 million for the
three month period ended June 30, 1999 and 1998, respectively.
The increases were due to higher balances of interest earning
assets resulting from internal growth. Interest expense for the
same six-month period was $4.0 million in 1999 compared to $3.2
million in 1998 and the three month period ended June 30, was
$2.1 million in 1999 compared to $1.7 million in 1998.
Additional interest bearing deposits contributed to the increase
in interest expense. Other income generated in the first two
quarters of 1999 increased to approximately $1.7 million as
compared to $462,000 for the first two quarters of 1998, and $1.4
million and $241,000 for the three months ended June 30, 1999 and
1998, respectively. This overall increase was attributable
primarily to additional fee income from an increase in service
charges and from Empire. Other expenses in the first half of
1999 were $6.0 million as compared to $3.7 million for the same
period the previous year. Other expenses in the three months
ended June 30, 1999 were $3.7 million compared to $1.8 million
for the three months ended June 30, 1998. An increase in other
expenses was primarily due to additional employee and occupancy
expense required by internal growth and additional expenses from
Empire.
For the six months ended June 30, 1999, the Company
generated net income after provisions for income tax of $2.8
million compared to $1.7 million for the same period last year
and $1.5 million compared to $1.0 million for the three months
ended June 30, 1999 and 1998, respectively. This improvement is
attributable to the overall growth of the Bank. Total assets of
the Company were approximately $280.9 million and $230.8 million
at June 30, 1999 and December 31, 1998, respectively.
Net increases in loans were $39.2 million and $21.3 million
during the six months ended June 30, 1999 and 1998, respectively
and $22.8 million and $17.8 million for the three months ended
June 30, 1999 and 1998, respectively. It is important to note
-8-
<PAGE>
that this was a net increase. Actual origination of new loans
was approximately $231.6 million for the first six months of 1999
compared to $143.8 million during the same period in 1998.
Net increases in deposits increased $13.1 million from $29.9
million to $43.0 million for the six months ended June 30, 1998
and 1999, respectively. Total deposits were approximately $232.9
million at June 30, 1999 compared to $171.7 million at June 30,
1998.
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 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. Based on the increase in loans of $22.8 million or
11.7% growth from the three months ended March 31, 1999,
management determined to add an additional $440,000 in loan loss
reserves as of June 30, 1999. The Company's allowance for loan
losses to total loans has remained relatively level.
The following table sets forth information regarding changes
in the allowance for loan losses of the Company for the period
indicated.
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
(Dollars in thousands)
<S> <C>
Average total loans $208,411
=======
Total loans at end of period $228,728
=======
Allowance at beginning of period $ 2,610
Charge-offs:
Construction -
Commercial and industrial (63)
Installment -
Mortgage -
Other -
-----
Total charge-offs (63)
Recoveries:
Construction -
Commercial and industrial -
Installment -
Mortgage -
Other -
-----
Total recoveries -
Net (charge-offs) recoveries (63)
Provisions for loan losses 590
-----
Allowance at end of period $ 3,137
=====
Ratio of net (charge-offs) recoveries
to average loans 0.03%
Allowance to total loans at end of period 1.37%
Allowance to nonperforming loans 189.66%
</TABLE>
-9-
<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.
State and federal regulatory agencies, as an integral part
of their examination process, 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 June 30, 1999.
The following table sets forth information concerning the
nonperforming assets of the Company at the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
<S> <C> <C>
Nonaccrual loans $1,628 $3,388
Other loans 90 days past due 26 -
Other real estate - -
----- -----
Total nonperforming loans $1,654 $3,388
Ratio of nonaccrual and other loans 90 days past
due to total loans 0.72% 1.81%
Ratio of nonperforming assets to total loans plus
other real estate 0.72 1.81
Ratio of nonperforming assets to total assets 0.59 1.47
</TABLE>
Of the amount of nonaccrual loans as of June 30, 1999,
approximately $1.6 million is the Bank's portion of five related
loans totaling approximately $4.1 million, which are subject to a
Chapter 11 bankruptcy proceeding. 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 had constructed a residential building assembly plant.
-10-
<PAGE>
The loans are secured by real estate, certificates of deposit,
and two personal guarantees from the owners of the developer, as
well as a guarantee by a related limited partnership. Subsequent
to June 30, 1999, the loan has been further reduced to $1.2
million from the proceeds of the sale of a portion of the real
estate held as collateral for the loan.
In addition to the above, the Bank had a loan position of
approximately $2.0 million of two loans totaling $2.8 million
that was placed on nonaccrual status just prior to December 31,
1998. During the quarter ended March 31, 1999, one loan to the
same borrower in the amount of $178,000 was paid off. During the
quarter ended June 30, 1999, the loan was paid down to
approximately $923,000 and the interest brought current. The
loan has been removed from nonaccrual status.
Management believes that the Company is adequately protected
on these loans. Management is not aware of any adverse trend
relating to the Company's loan portfolio.
As of June 30, 1999, there was no significant balance of
loans excluded from nonperforming loans set forth above. Nor was
there known information about possible credit problems of
borrowers causes 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.
Liquidity and Capital Resources
The Company has two basic sources of liquidity. The first
source 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. Additionally, in compliance
with the Bank's Liquidity Policy, the Company supplemented retail
deposit growth by obtaining deposits of $20 million from
wholesale sources. Deposits increased to $232.9 million at June
30, 1999 compared to $171.7 million at June 30, 1998. Deposits
from wholesale sources totaled approximately $28.0 million at
June 30, 1999. Management's determination to use an outside
funding source may continue in the future depending on funding
needs and the cost of these funds. Currently, wholesale sources
increase the Bank's cost of interest-bearing liabilities by
approximately 0.02%, effectively securing funds at an overall
lower rate than if the Bank had to internally generate additional
deposits through promotions or other methods.
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 day-
to-day fluctuations in liquidity resulting from needs of
depositors and borrowers. At June 30, 1999, the Company had
available $20.0 million of unused borrowing capacity from the
FHLB and $15.5 million from its other lenders. The Company
anticipates that it will continue to rely primarily upon customer
and brokered 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 Office of Thrift Supervision capital regulations require
savings associations to meet three capital standards: a 1.5%
tangible capital standard, a 4% leverage ratio (or core capital
ratio) and an 8% risk-based capital standard.
-11-
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1999
Minimum
Ratio Actual Required
<S> <C> <C>
Tangible capital 11.53% 1.50%
Core (Tier 1) capital 11.53% 4.00%
Risk-Based capital 13.95% 8.00%
</TABLE
Year 2000 Considerations
As the year 2000 approaches, a significant business issue
has emerged regarding existing application software programs and
operating systems and their ability to accommodate the date value
for the year 2000. Many existing software application products,
including products used by the Bank, its suppliers and customers,
were designed to accommodate only a two-digit date value that
represents the year. For example, information relating to 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 issue, regulatory agencies have begun to
monitor financial institutions and their holding companies'
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 operational 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" was completed in the first quarter of 1999 and
modifications and changes necessary have been completed and
tested. Compliance for all systems is expected by management to
be completed by the third quarter of 1999. Management currently
estimates that such total compliance will not exceed $150,000.
Costs incurred through June 30, 1999 were approximately $44,100.
Compliance audits performed to date have been positive and no
specific items of improvement were noted. The team for the plan
is responsible for the implementation of the plan and reports to
the Company's Board of Directors on a monthly basis until the
plan is completed.
However, if the 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.
Because of the factors discussed below, management cannot
estimate with any reasonable degree of certainty the magnitude of
lost revenues should management's reasonable worst case scenario
develop in which the Company would need to use an outside vendor
to become year 2000 compliant and noncompliant customers were
unable to repay their loans.
Even though the Company's "mission critical" systems have
tested year 2000 compliant, the Company has in place a business
resumption contingency plan in the event of an unforeseen problem
in its computer systems. This plan details actions to be taken
in the unlikely event of problems in the change over to the
millennium. This process of validation is in accordance with
Federal Financial Institutions Examination Council guidelines.
The Bank has sent direct mail to its customers regarding the
year 2000 issue and the need for readiness, pursuant to
guidelines of the banking industry regulators. Management intends
to continue to solicit customer response on this matter. The
Bank has also instituted a policy requiring a loan applicant to
sign a year 2000 acknowledgement certificate at closing as part
of a loan package. Failure of the Company's customers to prepare
for year 2000 compatibility could have a significant adverse
-12-
<PAGE>
effect of customers' operations and profitability, thus
inhibiting their ability to repay loans and adversely affecting
the Company's operations. The Company does not have sufficient
information accumulated from customers to enable the Company to
assess the degree to which customers' operations are susceptible
to potential problems relating to the year 2000 issue or,
further, to quantify the potential lost revenue to the Company in
this case.
-13-
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On April 5, 1999, the Company merged Empire Title and
Escrow Corporation and MB Title Company, a newly formed,
wholly owned subsidiary of the Company. MB Title Company
then changed its name to Empire Title and Escrow
Corporation ("Empire"). The consideration paid to the
seven stockholders of Empire consisted of the Company's
common stock and cash. On April 5, 1999, 162,369
authorized but unissued shares of common stock were issued
as a portion of this transaction. The Company used
exemptions from registration in Section 4(2) of the
Securities Act of 1933, as well as Regulation D adopted
thereunder based upon the limited number of offerees and
the sophistication and worth of the purchasers.
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.
Form 8-K dated April 5, 1999 - "Item 5. Other Events."
describes the merger of Empire Title and Escrow
Corporation and MB Title Company, a newly formed,
wholly-owned subsidiary of the Company.
Form 8-K dated June 1, 1999 - Pursuant to the
requirements of Section 11(a) of the Securities Act of
1933, as amended, and Rule 158 thereunder, the
Registrant filed an earnings statement covering a
period of at least 12 consecutive months beginning
after the effective date of February 9, 1998 for its
Registration Statement (SEC File Nos. 333-42189 and 333-
42191) reflecting the issuance of 1,200,000 Trust
Preferred Securities.
-14-
<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: July 22, 1999 Hiram J. Welton
Treasurer
Duly authorized officer and
Chief Accounting Officer
-15-
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 13,414
<INT-BEARING-DEPOSITS> 105
<FED-FUNDS-SOLD> 3,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,293
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 228,728
<ALLOWANCE> 3,137
<TOTAL-ASSETS> 280,925
<DEPOSITS> 232,875
<SHORT-TERM> 1,561
<LIABILITIES-OTHER> 14,775
<LONG-TERM> 0
0
0
<COMMON> 15,473
<OTHER-SE> 16,241
<TOTAL-LIABILITIES-AND-EQUITY> 280,925
<INTEREST-LOAN> 12,352
<INTEREST-INVEST> 633
<INTEREST-OTHER> 26
<INTEREST-TOTAL> 13,011
<INTEREST-DEPOSIT> 3,304
<INTEREST-EXPENSE> 3,973
<INTEREST-INCOME-NET> 9,038
<LOAN-LOSSES> 590
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,972
<INCOME-PRETAX> 4,190
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,752
<EPS-BASIC> .36
<EPS-DILUTED> .36
<YIELD-ACTUAL> 11.79
<LOANS-NON> 1,628
<LOANS-PAST> 26
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,610
<CHARGE-OFFS> 63
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 3,137
<ALLOWANCE-DOMESTIC> 2,087
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,050
</TABLE>
