<PAGE>
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 September 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 October 18, 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 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
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<TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
1999 1998
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 13,305 $ 10,326
Interest-bearing deposits 83 128
Federal funds sold - 5,625
------- -------
Cash and cash equivalents 13,388 16,079
Investment securities available for sale 17,268 15,677
Loans 252,286 189,602
Less allowance for loan losses (3,382) (2,610)
------- -------
248,904 186,992
Federal Home Loan Bank stock, at cost 925 482
Real estate held for investment 524 -
Bank premises, leasehold improvements and
equipment, net 10,323 8,846
Accrued interest receivable 1,758 1,104
Accounts receiveable 120 -
Deferred tax asset 781 718
Preferred securities issuance costs, net 709 729
Goodwill 2,619 -
Other 653 192
------- -------
Total assets $297,972 $230,819
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Demand, non-interest bearing $ 54,782 54,093
Demand, interest bearing 69,751 72,444
Savings 7,376 6,271
Time 106,059 57,071
Total deposits 237,968 189,879
Federal Funds borrowings 2,725 -
Federal Home Loan Bank borrowings 8,500 -
Securities sold under agreement to
repurchase 685 443
Income taxes payable 74 71
Accrued interest payable 796 434
Other 1,961 601
------- -------
Total liabilities 252,709 191,428
Company obligated manditorily redeemable
preferred securities of subsidiary trust
holding solely Junior Subordinated
Debentures 12,000 12,000
Minority interest in subsidiary 195 -
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 15,473 13,974
and 7,607,340 shares issued and
outstanding in 1999 and 1998
Retained earnings 17,662 13,383
Accumulated other comprehensive income (67) 34
Total shareholders' equity 33,068 27,391
Total liabilities and shareholders'
equity $297,972 $230,819
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
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<TABLE>
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MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
(Unaudited)
<S> <C> <C> <C> <C>
Interest income
Loans, including fees $ 6,969 $ 5,166 $19,321 $13,448
Taxable investment securities 210 89 460 231
Nontaxable investment securities 240 187 623 561
Funds sold 9 74 26 381
Other interest 26 47 35 135
------ ------ ------ ------
Total interest income 7,454 5,563 20,465 14,756
Interest expense
Deposits 2,000 1,499 5,304 4,164
Borrowed funds 118 28 262 112
Trust preferred securities 287 270 812 688
Note payable - - - 19
------ ------ ------ ------
Total interest expense 2,405 1,797 6,378 4,983
------ ------ ------ ------
Net interest income 5,049 3,766 14,087 9,773
Provision for loan losses 250 190 840 410
------ ------ ------ ------
Net interest income after
provision for loan losses 4,799 3,576 13,247 9,363
Other income
Title fees 851 - 1,872 -
Service charges on deposit accounts 257 142 745 391
Gain on sale of investment securities 135 - 135 25
Other income 320 92 525 280
------ ------ ------ ------
Total other income 1,563 234 3,277 696
Other expenses
Salaries and employee benefits 2,273 1,279 5,567 3,183
Occupancy expenses of premises 330 301 928 688
Furniture and equipment expense 177 108 524 337
Other expenses 1,154 501 2,887 1,681
------ ------ ------ ------
Total other expenses 3,934 2,189 9,906 5,889
------ ------ ------ ------
Income before income taxes 2,428 1,621 6,618 4,170
Income tax expense 901 514 2,339 1,348
------ ------ ------ ------
Net income $ 1,527 $ 1,107 $ 4,279 $ 2,822
Other comprehensive income, net of tax
Unrealized gains (losses) on invest-
ment securities available for sale 173 (61) (101) (40)
------ ------ ------ ------
Comprehensive income $ 1,700 $ 1,046 $ 4,178 $ 2,782
======== ========= ========= =========
Income per share
Basic earnings per share $ .20 $ .17 $ .55 $ .44
======== ========= ========= =========
Weighted average common shares
outstanding 7,769,709 6,407,340 7,713,207 6,407,340
======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
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<TABLE>
<CAPTION>
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine months ended
September 30,
1999 1998
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income $ 4,279 $ 2,822
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses 840 410
Depreciation and amortization 542 350
Amortization of preferred securities issuance costs 20 16
Gain on sale of investment securities available for sale (135) (25)
Net discount accretion on investment activities - (12)
Federal Home Loan Bank stock dividend (29) (23)
Amortization of goodwill 49 -
Deferred income taxes (2) (126)
Minority interest 61 -
Changes in deferrals and accruals
Interest receivable (654) (278)
Accounts receivable (122) -
Interest payable 362 247
Income taxes payable 3 -
Other, net 1,306 105
------ ------
Net cash provided by operating activities 6,520 3,486
Cash flows from investing activities
Purchase of securities available for sale (5,368) (4,476)
Purchase of Federal Home Loan Bank stock (414) -
Proceeds from maturities of investment
securities available for sale 3,000 1,250
Proceeds from sales of securities available for sale 750 616
Acquisition of company under the purchase
method of accounting, net of cash acquired (1,500) -
Net (increase) in loans (62,752) (40,624)
Expenditures for bank premises and equipment (2,483) (3,525)
------ ------
Net cash used in investing activities (68,767) (46,759)
Cash flows from financing activities
Ne increase in deposits 48,089 47,016
Net increase (decrease) in advances from
Federal Home Loan Bank 11,225 (1,423)
Net increase in repurchase agreements 242 556
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 59,556 55,654
------ ------
Net increase (decrease) in cash and cash equivalents (2,691) 12,381
Cash and cash equivalents at beginning of period 16,079 13,155
------ ------
Cash and cash equivalents at end of period $13,388 $25,536
====== ======
Supplemental disclosures of cash flow information
Cash paid year to date for:
Interest expense $ 6,016 $ 4,735
Income taxes 2,375 1,408
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine month period ended September 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 September 30, 1999, and
the results of operations and cash flows for the quarters and
nine months ended September 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.
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>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.
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<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 $13.2 million for the nine months
ended September 30, 1999, an increase of $3.8 million from $9.4
million for the same period in 1998. Net interest income for the
three months ended September 30, 1999 and 1998 was $4.8 million
and $3.6 million, respectively. Interest income for the nine
months ended September 30, 1999 and 1998 was $20.5 million and
$14.8 million, respectively, and $7.5 million compared to $5.6
million for the three month period ended September 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 nine-month period was $6.4 million in 1999
compared to $5.0 million in 1998 and the three month period ended
September 30, was $2.4 million in 1999 compared to $1.8 million
in 1998. Additional interest bearing deposits contributed to the
increase in interest expense. Other income generated in the
first three quarters of 1999 increased to approximately $3.3
million as compared to $696,000 for the first three quarters of
1998, and $1.6 million and $234,000 for the three months ended
September 30, 1999 and 1998, respectively. Most of the increase
was attributable primarily to additional fee income from an
increase in service charges and title fees from Empire. The
Company was requested to change the ticker symbol for the Trust
Preferred Securities issued by MB Capital I. These securities
traded under the symbol "MFC.Pr.A" on the American Stock
Exchange. At the request of the New York Stock Exchange, the
Company agreed to change its trading symbol to "MFG.Pr.A" to
accommodate another company. Additional miscellaneous income was
realized through compensation for relinquishing the rights to the
ticker symbol "MFC". Other expenses in the first nine months of
1999 were $9.9 million as compared to $5.9 million for the same
period the previous year. Other expenses in the three months
ended September 30, 1999 were 3.9 million compared to $2.2
million for the three months ended September 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 nine months ended September 30, 1999, the Company
generated net income after provisions for income tax of $4.3
million compared to $2.8 million for the same period last year
and $1.5 million compared to $1.1 million for the three months
ended September 30, 1999 and 1998, respectively. This
improvement is attributable to the overall growth of the Bank.
Total assets of the Company were
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<PAGE>
approximately $298.0 million and $230.8 million at September 30,
1999 and December 31, 1998, respectively.
Net loans increased $62.8 million and $40.6 million during
the nine months ended September 30, 1999 and 1998, respectively
and $23.6 million and $19.3 million for the three months ended
September 30, 1999 and 1998, respectively. Actual origination of
new loans was approximately $323.8 million for the first nine
months of 1999 compared to $231.6 million during the same period
in 1998.
Net deposits increased $1.1 million from $47.0 million to
$48.1 million for the nine months ended September 30, 1998 and
1999, respectively. Total deposits were approximately $238.0
million at September 30, 1999 compared to $189.9 million at
September 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 $23.6 million or
10.3% growth for the three months ended September 30, 1999, an
additional $250,000 in loan loss reserves was added as of
September 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.
Nine Months Ended September 30, 1999
(Dollars in thousands)
Average total loans $218,536
========
Total loans at end of period $252,286
========
Allowance at beginning of period $ 2,610
Charge-offs:
Construction -
Commercial and industrial (65)
Installment -
Mortgage -
Other (4)
-------
Total charge-offs (69)
Recoveries:
Construction -
Commercial and industrial -
Installment 1
Mortgage -
Other -
-------
Total recoveries 1
-------
Net (charge-offs) recoveries (68)
Provisions for loan losses 840
-------
Allowance at end of period $ 3,382
========
Ratio of net (charge-offs) recoveries
to average loans 0.03%
Allowance to total loans at end of period 1.34%
Allowance to nonperforming loans 162.67%
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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.
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 September 30, 1999.
The following table sets forth information concerning the
nonperforming assets of the Company at the dates indicated:
September 30, December 31,
1999 1998
Nonaccrual loans $2,079 $3,388
Other loans 90 days past due - -
Other real estate - -
------ ------
Total nonperforming loans $2,079 $3,388
Ratio of nonaccrual and other loans
90 days past due to total loans 0.82% 1.81%
Ratio of nonperforming assets to
total loans plus other real estate 0.82 1.81
Ratio of nonperforming assets to
total assets 0.70 1.47
Of the amount of nonaccrual loans as of September 30, 1999,
approximately $1.2 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
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constructed a residential building assembly plant. 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.
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 matured July 31, 1999 and was placed back on non-accrual.
The Bank has total principal outstanding of approximately
$890,000 as of September 30, 1999.
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 September 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 $6.8 million from other
sources during the third quarter of 1999. Deposits increased to
$238.0 million at September 30, 1999 compared to $189.9 million
at September 30, 1998. Deposits from other sources totaled
approximately $32.7 million at September 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.
The second source of the Company's liquidity is Federal Home
Loan Bank ("FHLB") advances and Company lines of credit. FHLB
advances are used 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 September 30, 1999, the Company had borrowed $11.2
million from the FHLB and its other lenders and had available
approximately $12.5 million of unused borrowing capacity from the
FHLB and $11.8 million from its other lenders. During the third
quarter, since interest rates were fluctuating, the Company
elected to borrow short-term funds in addition to seeking
additional deposits from customers and other sources. The
Company anticipates that it will continue to rely primarily upon
customer and other sources, 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.
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<PAGE>
The following table presents the Bank's capital ratios:
At September 30, 1999
Minimum
Ratio Actual Required
Tangible capital 11.48% 1.50%
Core (Tier 1) capital 11.48% 4.00%
Risk-Based capital 13.54% 8.00%
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. Management currently estimates that such total
compliance efforts will not exceed $150,000. Costs incurred
through September 30, 1999 were approximately $44,100. The team
for the plan is responsible for the implementation of the plan
and reports to the Company's Board of Directors.
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 statements 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
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
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<PAGE>
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.
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<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.
None
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<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 19, 1999 Hiram J. Welton
Treasurer
Duly authorized officer and
Chief Accounting Officer
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<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 13305
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