<PAGE>   1
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-KSB

[X]  Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of
     1934 
                 For the fiscal year ended DECEMBER 31, 1998.
                                      or

[ ]  Transition Report Under 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
                         ------------------------------
                 (Name of small business issuer 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)

Securities registered under Section 12(b) of the Exchange Act:

                                            Name of each exchange on which
 Title of each class                        registered
 -------------------                        ------------------------------
Cumulative trust preferred securities       American Stock Exchange

Securities registered under Section 12(g) of the Exchange Act: Common Stock

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to the Form 10-KSB: [ ]

The issuer's revenues for its most recent fiscal year: $21,162,000

The aggregate market value of the voting and non-voting common equity held by
non-affiliates based on the closing price of the common stock on The Nasdaq
National Market as of February 26, 1999 was $28,261,777.

At February 26, 1999, there were 7,607,340 shares of the registrant's common
stock outstanding.

Transitional Small Business Disclosure Format: [ ] Yes [X] No

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                         MEGABANK FINANCIAL CORPORATION

                                  FORM 10-KSB

                                     INDEX


<TABLE>
<S>                        <C>                                                                            <C>
              ITEM 1.      BUSINESS                                                                          3

              ITEM 2.      DESCRIPTION OF PROPERTIES                                                        14

              ITEM 3.      LEGAL PROCEEDINGS                                                                15

              ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                              15

              ITEM 5.      MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                         15

              ITEM 6.      MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION                        16
                           FORWARD LOOKING STATEMENT                                                        16

              ITEM 7.      FINANCIAL STATEMENTS                                                             29
                           INDEPENDENT AUDITORS' REPORT                                                     30
                           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                       36

              ITEM 8.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                           AND FINANCIAL DISCUSSION                                                         57

              ITEM 9.      DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
                           COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT                                57

              ITEM 10.     EXECUTIVE COMPENSATION                                                           58

              ITEM 11.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                           MANAGEMENT                                                                       60

              ITEM 12.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                   61

              ITEM 13.     EXHIBITS AND REPORTS ON FORM 8-K                                                 63

              SIGNATURES                                                                                    64
</TABLE>

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<PAGE>   3
                                     PART I


ITEM 1.       DESCRIPTION OF BUSINESS

         MegaBank Financial Corporation (the "Company") was founded in 1984 by
its Chairman and Chief Executive Officer, Thomas R. Kowalski, 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, for a total of eight locations, with two more branches in the
planning and construction phases.

         Since inception, the Bank has specialized its lending practice in the
residential construction industry. The Company's Chairman has extensive
experience in the home building industry and has expanded the Bank's lending
practice to date such that the Bank is a leading originator of land development
and residential construction loans to small-and medium-sized homebuilders.
Currently, the Bank can finance a builder or developer from the acquisition and
development loan process, including assistance with special district financing,
through the construction loan phase. During the three years ended December 31,
1998, the Bank originated over $715 million in total loans. While some of these
loans remain on the Company's balance sheet, most have been repaid, refinanced
or participated out to other financial institutions.

         The Company has achieved significant growth measured from the end of
1995. Total assets have increased to $231 million as of December 31, 1998 from
$158 million and $119 million as of December 31, 1997, December 31, 1996,
respectively. The Company has maintained above average profitability. During
the same time period, net income grew to $3.8 million for the year ended
December 31, 1998 from $2.8 million and $2.4 million for the years ended
December 31, 1997 and 1996, respectively. For the year ended December 31, 1998,
return on average assets equaled 1.89% while return on average equity equaled
24.48%.

         In September 1998, the Company changed its status to a unitary thrift
holding company within the meaning of the Home Owners' Loan Act of 1933, as
amended ("HOLA"). The Company is registered with the Office of Thrift
Supervision ("OTS") and is subject to OTS regulations, examinations,
supervision and reporting requirements. Also, in September 1998, the Bank
converted its charter from a Colorado state-chartered commercial bank to a
federal 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.

         In February 1998, MB Capital I, a Delaware trust subsidiary of the
Company, completed an offering of 1,200,000 shares totaling $12.0 million of
fixed-rate 8.75% Cumulative Trust Preferred Securities ("Preferred
Securities"), which are guaranteed by the Company. MB Capital I invested the
total proceeds it received in 8.75% Junior Subordinated Deferrable Interest
Debentures issued by the Company. Interest paid on the Debentures will be
distributed to the holders of the Preferred Securities. As a result, under
current tax law, distributions to the holders of the Preferred Securities are
recorded as interest expense in the consolidated statements of income. These
Debentures are unsecured and rank junior and are subordinate in right of
payment to all senior debt of the Company. See note H to notes to consolidated
financial statements.

         In November 1998, the Company completed a public offering of 1,200,000
shares of its common stock at $11.00 per share. Net proceeds were approximately
$12.0 million of which $5.0 million was used to provide capital to the Bank.
The remainder of funds are expected to be used to fund the Company's real
estate subsidiary ($3.5 million), for branch expansion ($1.5 million) and for
working capital ($2.0 million).

         The Bank intends to continue to focus on its niche of residential
construction lending in addition to providing a complete array of products and
services for its customers. High quality customer service has been a


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fundamental tenet of the Bank's operating strategy since its inception. The
Bank intends to continue to pursue its successful strategies and concentrate on
increasing its market share through referrals from existing customers and the
implementation of advertising and marketing strategies targeted at the
communities in which its branches are located.

         As of March 1, 1999, the Company and its subsidiaries had 123
employees of which 102 are full-time employees. Management considers its
relationship with the employees to be good.

STRATEGY

         Bank Growth. The Bank's goal in continuing its expansion is to
maintain a profitable, customer-focused financial institution. Management
believes that the Company's existing capital structure, management, data and
operational systems are sufficient to achieve further growth in asset size,
revenues and capital. This growth should allow the Bank to increase its lending
limits, thereby enabling it to continue to serve the needs of its customers.

         The Bank expects to continue its growth strategy through internal
growth and possibly through acquisitions. Management believes that the Bank's
largest source of growth is through referrals by existing customers, and that
the primary reason for referrals is positive customer feedback regarding the
Bank's customer service and response time. The Colorado banking market is
dominated by large national and regional financial institutions. This dominance
was achieved through the purchase of Colorado-based holding companies over the
past several years, which resulted in a significant consolidation of the
Colorado banking industry. Management believes that small and medium size
businesses often are not of sufficient size to be of interest to these large
banks, particularly as it relates to residential construction lending, and that
individuals frequently have difficulty in finding personalized banking
services. Many of these customers seek a banking relationship with a smaller
and significantly more service-oriented community banking organization such as
the Bank. Through the Bank's primary emphasis on customer service, management's
experience and the Company's product line, the Company will continue to focus
on attracting these customers in achieving internal growth. Management also
believes that the economic expansion in the Company's market area contributes
significantly to internal growth.

         The Bank's market area is the Denver metropolitan area, which is the
most densely populated area in the Rocky Mountain region. Total population is
approximately 2.2 million. Employment in the area is diversified across the
manufacturing, construction, financial services, tourism, transportation,
technology, cable television, retail trade, services and government sectors.

         In addition to internal growth, management believes there are
opportunities to grow through branching. Branching opportunities have arisen
through elimination by bank holding companies of certain overlapping branches
resulting from acquisitions. As a result, branch locations have become
available from time to time for purchase by the Company. To date, the Company
has acquired one such branch from a large bank holding company. Also,
management intends to pursue acquisitions of smaller financial institutions,
although the sales prices of such institutions are currently at significant
premiums over those paid the past few years. Thus, it may be difficult to
complete such a transaction. Management has considered and intends to consider
a variety of criteria when evaluating expansion. These include (i) the
geographic location, (ii) the investment required for, and opportunity costs
of, the branch or acquisition, (iii) the financial strength of a potential
acquisition target, and (iv) economies of scale that may be achieved.

         Proposed  Expansion  Activities. The Company intends to expand its 
business by entering into activities that complement its core banking activities
in residential land development and construction lending. Currently, management
is considering the following expansion activities:

  o      The Company recently established a subsidiary that intends to purchase
         real estate for development and sale to homebuilders. Management
         believes that this activity should supplement the Company's revenues
         since many smaller homebuilders do not have the resources to develop
         sites for home building. Management believes that the subsidiary can
         generate revenues through the sale to these homebuilders of individual
         or bulk lots. Also, management believes that the Bank can provide
         construction lending in connection with the sales of lots to
         homebuilders, thereby providing additional loans to the Bank.

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<PAGE>   5

  o      The Company is also considering engaging in the real estate title
         business, which management believes will complement its banking
         services and proposed real estate investment and development
         activities.

         Operations and Marketing. Management believes that, in meeting the
needs of consumers and small to medium sized businesses in its market area, the
Bank's first and foremost strategy is to provide excellent customer service.
This strategy is emphasized above all others of the Company, from top
management down to each bank teller. The Bank's operational systems have been
designed to complement customer service. Management believes the Company's
banking locations are small enough to facilitate personalized services and
decision-making, yet of sufficient size to meet most customers' needs.

         The Bank seeks to maximize operational and support efficiencies
consistent with maintaining high quality customer service. Various management
and administrative functions are consolidated, including consumer credit
administration and lending, investment management and accounting, enabling
branch personnel to better focus on customer service and sales.

         The Bank offers a wide range of consumer deposit products including
regular checking, checking with interest, money market accounts, regular
savings, certificates of deposit, and IRAs. The Bank also offers additional
access to its customers with an ATM/Visa Debit Card. The Bank's consumer loan
products are customized to meet the needs and requests of its customers. The
Bank also offers installment loans, including auto, recreational vehicle,
classic car and other secured and unsecured loans sourced directly by its
branches and from indirect sources. See "Loans" below for a discussion of
products that the Bank provides to commercial accounts.

LOANS

         The Company has the ability to provide a broad range of commercial and
retail lending services. However, the vast majority of the Bank's loans are
residential construction loans. The Company follows a uniform credit policy
which sets forth underwriting and loan administration criteria, including
levels of loan commitment, loan types, credit criteria, concentration limits,
loan administration, loan review and grading and related matters. In addition,
the Company provides ongoing loan officer training and review, obtains outside
independent loan reviews, operates a centralized processing, underwriting and
servicing center for consumer loans and manages problem assets centrally. At
December 31, 1998, substantially all loans outstanding were to customers within
the Company's market area. For a discussion of risks associated with the
Company's various types of loans, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Financial Condition -- Loan
Portfolio Composition."

         Land Development and Construction Loans. Land development and
construction loans include real estate construction loans and land loans. Real
estate construction loans are principally made to builders to construct single
family residences. These loans typically have maturities of six to 12 months
and adjustable interest rates, and are subject to origination fees. Terms may
vary depending upon many factors, including, but are not limited to, location,
type of project and financial condition of the builder.

         Land loans consist of loans made on raw land for the acquisition
and/or development of real property. These loans typically have maturities of
12 to 18 months and variable interest rates. Terms may vary depending upon many
factors, including adverse economic conditions in the home building industry,
location, type of project and financial condition of the builder.

         Commercial Loans. Commercial loans consist primarily of loans to
businesses for various purposes, including revolving lines of credit, equipment
financing, and commercial real estate lending. The commercial loans secured by
real estate are typically 20 to 25 year amortizing loans, callable in three to
five years, with fixed interest rates. The loans secured by collateral other
than real estate generally mature within one year, have adjustable interest
rates and are secured by inventory, accounts receivable or other commercial
assets. Revolving lines of credit generally are for business purposes,
generally mature annually and have adjustable interest rates.

         Installment Loans. Installment loans to individuals that are not
secured by real estate generally have terms of two to five years and bear
interest at fixed rates. These loans usually are secured by motor vehicles,


                                      -5-
<PAGE>   6
equipment, receivables, inventory, investment securities or other personal
assets, and in some instances are unsecured.

         The Company maintains a loan committee approach to commercial lending,
which it believes yields positive results in both responsiveness to customer
needs and asset quality. The loan committee usually meets twice per week to
review and discuss new loan requests.

         Interest rates charged on loans vary with the degree of risk,
maturity, underwriting and servicing costs, loan amount, and extent of other
banking relationships maintained with customers, and are further subject to
competitive pressures, money market rates, availability of funds and government
regulations. Most of the loans in the Company's portfolio at December 31, 1998
had interest rates that float with the prime rate.

         In the ordinary course of business, the Company issues letters of
credit. See note I of Notes to consolidated financial statements. The Company
applies the same credit standards to these commitments as it uses in all its
lending activities and has included these commitments in its lending risk
evaluations. The Company's exposure to credit loss under letters of credit is
represented by the amount of these commitments. Under applicable federal and
state law, permissible loans to one borrower were limited to an aggregate of
approximately $4.7 million for the Company at December 31, 1998. As of March 1,
1998, although the Bank's legal limit to one borrower was approximately $4.8
million, the Bank elected to maintain its in-house limit to one borrower at
$4.0 million.

COMPETITION

         The Company faces a high degree of competition. In its marketplace,
there are numerous small banks and several larger national and regional
financial banking groups. The Company also competes with insurance companies,
savings and loan associations, credit unions, leasing companies, mortgage
companies, and other financial service providers. Many of the banks and other
financial institutions with which the Company competes have capital resources
and legal lending limits substantially in excess of the capital resources and
legal lending limits of the Company.

         The Company competes for loans and deposits principally based on the
range and quality of services provided, interest rates, loan fees and office
locations. The Company actively solicits deposit customers and competes by
offering them high quality customer service and a complete product line. Over
the past few years, competition has increased as a result of changes in
Colorado banking laws that permit statewide branching and allow out-of-state
holding companies to acquire Colorado-based financial institutions. The Company
believes its customer service, broad product line and banking franchise enable
it to compete in its market area.

         The Company will also face significant competition from other
financial institutions in any potential acquisitions. Many of these competitors
have substantially greater resources than the Company as well as the ability to
issue marketable equity securities that can be used as part of the purchase
price.

SUPERVISION AND REGULATION

GENERAL

         The Bank is chartered under federal law by the Office of Thrift
Supervision ("OTS"). It is a member of the Federal Home Loan Bank ("FHLB")
System, and its deposit accounts are insured up to legal limits by the Federal
Deposit Insurance Corporation ("FDIC") under the Bank Insurance Fund ("BIF").
The OTS is charged with overseeing and regulating the Bank's activities and
monitoring its financial condition. This regulatory framework sets parameters
for the Bank's activities and operations and grants the OTS extensive
discretion with regard to its supervisory and enforcement powers and
examination policies. The Bank files periodic, reports with the OTS concerning
its activities and financial condition, must obtain OTS approval prior to
entering into certain transactions or initiating new activities, and is subject
to periodic examination by the OTS to evaluate the Bank's compliance with
various regulatory requirements.

                                      -6-

<PAGE>   7
         The Company is a unitary savings and loan holding company and, like
the Bank, is subject to regulation by the OTS. As part of this regulation, the
Company is required to file certain reports with, and is subject to periodic
examination by, the OTS.

PENDING FINANCIAL MODERNIZATION LEGISLATION

         Congress has begun hearings on the legislation of a sweeping financial
modernization bill, "The Financial Services Modernization Act of 1999". If
passed, the bill would not become law unless it is signed by the President.
Accordingly, whether the bill will pass in the near future remains uncertain,
and the ultimate form the legislation might take if enacted cannot be predicted
at this time.

         The bill, among other things, addresses the ongoing debate concerning
mixing banking and commerce. Under the proposal, banks could affiliate with
insurance and securities companies in a holding company structure, subject to
functional regulation. If adopted, the legislation would represent the most
significant overhaul of financial services laws since the 1930's when the
Glass-Steagall Act of 1933 was enacted.

         With respect to the thrift industry, the proposed legislation does not
contain provisions eliminating the federal thrift charter. The bill could allow
unitary thrift holding companies to continue operating, but prohibits the
establishment of new unitary thrifts if the application for unitary thrift
status is filed after February 28, 1999. A unitary thrift holding company is
defined as a company that owns one savings association, provided the savings
association that it owns meets the "Qualified Thrift Lender" test. See
"--Federal Savings Association Regulation--Qualified Thrift Lender Test." The
Company is a unitary thrift holding company, and as such it generally is not
restricted under existing laws as to the types of business activities in which
it may engage. See "--Holding Company Regulation." The Company filed its
application to become a savings and loan holding company on April 14, 1998.
Accordingly, if the bill is enacted into law and the grandfather date is
retained, the Company would not lose its unitary thrift holding company status.
Also, the legislation currently provides that the Company could be transferred
along with its grandfathered status.

FEDERAL SAVINGS ASSOCIATION REGULATION

         Business Activities. The activities of savings associations are
governed by the Home Owners' Loan Act of 1933, as amended (the "HOLA"), and, in
certain respects, the Federal Deposit Insurance Act (the "FDIC Act"). The HOLA
and the FDIC Act were amended by the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") and the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). FIRREA was enacted for the
purpose of resolving problem savings associations, establishing a new thrift
insurance fund, reorganizing the regulatory structure applicable to savings
associations, and imposing bank-like standards on savings associations. FDICIA,
among other things, requires that federal banking regulators intervene promptly
when a depository institution experiences financial difficulties, mandates the
establishment of a risk-based deposit insurance assessment system and requires
imposition of numerous additional operational standards and restrictions
regarding safety and soundness. FIRREA and FDICIA both contain provisions
affecting numerous aspects of the operations and regulations of
federally-insured savings associations and empowers the OTS and the FDIC, among
other agencies, to promulgate regulations implementing its provisions.

         Qualified Thrift Lender Test. Savings associations are required to
satisfy a qualified thrift lender test ("QTL" test) by (i) maintaining 65% of
their portfolio assets (defined as all assets minus intangible assets, property
used by the association in conducting its business and liquid assets equal to
20% of total assets) in certain "qualified thrift investments" (primarily
residential mortgages and related investments, including certain
mortgage-backed securities, along with small business, credit card, agriculture
and education loans) on a monthly basis in nine out of every twelve months, or
(ii) maintaining a similar-but different 60% asset test under the Internal
Revenue Code.

         If a federal savings association fails the QTL test, it must convert
to a bank or conform its activities to those permitted to a national bank (but
which activities also are not inconsistent with the powers permitted to a
savings association), particularly as they relate to investments, branching and
dividends, and it also becomes ineligible for new advances from any Federal
Home Loan Bank. A federal savings association that fails the QTL test may
requalify. As of December 31, 1998, the Bank satisfied the QTL test.


                                      -7-

<PAGE>   8
         Branching. A federally chartered savings association, like the Bank,
can establish branches in any state or states in the United States and its
territories, subject to a few exceptions. The exercise by the OTS of its
authority to permit interstate branching by federal savings associations is
preemptive of any state law purporting to address the subject of branching by a
federal savings association.

         Commercial and Consumer Lending Authority. Federal savings
associations may lend up to 20% of their assets in commercial business loans
(i.e., secured or unsecured loans for commercial, corporate, business or
agricultural purposes), provided that amounts in excess of 10% may be used only
for small business loans and, subject to OTS approval for a higher amount, up
to 400% of their capital in commercial real estate loans. In addition, federal
savings associations are permitted to make consumer loans (i.e., loans for
personal, family or household purposes) in an amount not to exceed 35% of their
assets. Credit card and educational loans are exempted from any percentage of
asset limitations applicable to consumer loans.

         Loans to One Borrower. Savings associations are generally subject to
the national bank limits regarding loans to one borrower, meaning they may not
make a loan or extend credit to a single or related group of borrowers in
excess of 15% of the association's unimpaired capital and surplus, where the
borrowing is not fully secured by readily-marketable collateral. An additional
amount may be lent, equal to 10% of the association's unimpaired capital and
surplus, if such additional borrowing is secured by readily-marketable
collateral at least equal to the amount of such additional funds. At December
31, 1998, the Bank had no outstanding loans or commitments that exceeded the
loans to one borrower limit at the time made or committed.

         Enforcement. The OTS has primary enforcement responsibility over
savings associations and has the authority to bring enforcement action against
all "institution-related parties," including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured association. Civil
penalties cover a wide range of violations and actions. Criminal penalties for
most financial association crimes include fines and imprisonment. In addition,
regulators have substantial discretion to impose enforcement action on an
association that fails to comply with its regulatory requirements, particularly
with respect to amounts of capital. Possible enforcement action ranges from
requiring the preparation of a capital plan or imposition of a capital
directive to receivership, conservatorship or the termination of deposit
insurance. Under the FDIC Act, the FDIC has the authority to recommend to the
Director of OTS enforcement action be taken with respect to a particular
savings association. If action is not taken by the Director, the FDIC has
authority to take enforcement action under certain circumstances.

         Assessments. Savings associations are required by OTS regulation to
pay assessments to the OTS to fund the operations of the OTS. In the past, the
general assessment paid on a semi-annual basis has been computed based upon the
savings association's total assets, including consolidated subsidiaries, as
reported in the association's latest quarterly thrift financial report. The OTS
announced in August 1998 that it intends to propose a regulation revising its
assessment schedule, so that assessments will be based on the asset size and
financial condition of the institution and the complexity of its operations.

         Federal Home Loan Bank System. The Bank is a member of the FHLB
System, which consists of 12 regional FHLB's. The FHLB provides a central
credit facility primarily for member associations. The Bank, as a member of the
FHLB-Topeka, is required to acquire and hold shares of capital stock in that
FHLB in an amount at least equal to 1% of the aggregate principal amount of its
unpaid residential mortgage loans and similar obligations at the beginning of
each year, or 1/20th of its advances from the FHLB-Topeka, whichever is
greater. The Bank is in compliance with this requirement, with an investment in
FHLB-Topeka stock at December 31, 1998 of $482,000. FHLB advances must be
secured by specified types of collateral and may be obtained only for the
purpose of purchasing or funding new residential housing finance assets.

         OTS Capital Requirements. The OTS 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.

         Tangible capital is defined as common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related
earnings, certain non-withdrawable accounts and pledged deposits of mutual
savings associations, and minority interests in equity accounts of fully
consolidated subsidiaries, less (i) intangible assets (other than purchased
credit card relationships and core deposit intangibles), (ii) non-mortgage
servicing assets, (iii) purchased credit card relationships, (iv) the amount of
mortgage servicing assets in excess 


                                      -8-
<PAGE>   9

of the lesser of 90 percent of their fair market value, determined pursuant to
a special OTS valuation formula, or 100 percent of their remaining unamortized
book value, subject to certain aggregate limits applicable to inclusion of
servicing assets in tangible capital, and (v) certain equity and debt
investments in "non-qualifying subsidiaries" (subsidiaries engaged in
activities not permissible for a national bank). For purposes of determining
capital under OTS capital standards, the term "intangible assets" means those
assets considered to be intangible under generally accepted accounting
principles, such as goodwill, core deposit premiums, purchased credit card
relationships and favorable leaseholds. Servicing assets are not intangible
assets, and interest-only strips receivable and other non-security financial
instruments are not intangible assets under this definition.

         Core capital (or leverage) ratio is the ratio of core capital to
adjusted tangible assets. Core capital is defined as common stockholders'
equity (including retained earnings), certain noncumulative perpetual preferred
stock and related surplus, minority interests in equity accounts of
consolidated subsidiaries, certain non-withdrawable accounts and pledged
deposits of mutual savings associations, certain amounts of goodwill resulting
from prior regulatory accounting practices, less (i) intangible assets (other
than purchased credit card relationships and core deposit intangibles), (ii)
the amount of servicing assets in excess of the lesser of 90 percent of their
fair market value, determined pursuant to a special OTS valuation formula, or
100 percent of their remaining unamortized book value, subject to certain
aggregate limits applicable to inclusion of servicing assets and sub-limits
applicable to inclusion of non-mortgage-related servicing assets in core
capital, and (iii) certain equity and debt investments in non-qualifying
subsidiaries, such as the proposed real estate investment and title
subsidiaries.

         The OTS' risk-based capital standard requires that savings
associations maintain a ratio of total capital (which is defined as core
capital and supplementary capital) to risk-weighted assets of 8%. In
calculating total capital, a savings association must deduct reciprocal
holdings of depository institution capital instruments, all equity investments
and that portion of land loans and nonresidential construction loans in excess
of 80% loan-to-value ratio and its interest rate risk component (as discussed
below), in addition to the assets that must be deducted in calculating core
capital. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks OTS
believes are inherent in the type of asset. Also, savings associations with
"above normal" interest rate risk exposure would be subject to a deduction from
total capital for purposes of calculating their risk-based capital
requirements. Savings associations with assets of less than $300 million and
risk-based capital ratios in excess of 12% are not subject to the interest rate
risk component. As of December 31, 1998, the Bank was not subject to interest
rate exposure for purposes of calculating its risk-based capital requirements.

         The components of core capital are equivalent to those discussed above
under the 4% leverage standard. The components of supplementary capital include
cumulative preferred stock, long-term perpetual preferred stock, mutual capital
certificates, certain non-withdrawable accounts and pledged deposits, certain
net worth certificates, income capital certificates, certain perpetual
subordinated debt, mandatory convertible subordinated debt, certain
intermediate-term preferred stock, certain mandatorily redeemable preferred
stock and allowance for loan and lease losses (up to 1.25% of risk-weighted
assets). Allowance for loan and lease losses includable in supplementary
capital is limited to a maximum of 1.25%. Overall, the amount of capital
counted toward supplementary capital cannot exceed 100% of core capital. The
table below sets for the Bank's capital ratios at December 31, 1998.

<TABLE>
<CAPTION>
                                              AT DECEMBER 31, 1998
     RATIO                                 ACTUAL       MINIMUM REQUIRED
                                           ------       ----------------
<S>                                        <C>               <C>  
     Tangible capital                      12.53%            1.50%
     Core (Tier l) capital                 12.53%            4.00%
     Risk-based capital                    15.38%            8.00%
</TABLE>

         Liquidity. The Bank is required to maintain an average daily balance
of liquid assets (e.g., cash, accrued interest on liquid assets, certain time
deposits, savings accounts, bankers' acceptances, specified United States
Government, state or federal agency obligations, shares of certain mutual funds
and certain corporate debt securities and commercial paper) equal to not less
than a specified percentage of the average daily balance of its net withdrawal
deposit accounts plus short-term borrowings. This liquidity requirement may be
changed from time 

                                      -8-
<PAGE>   10
to time by the OTS to any amount within the range of 4% to 10% depending upon
economic conditions and the savings flows of member associations; this
requirement is currently 4%.

         Insurance of Deposit Accounts and Deposit Insurance Premiums. FDICFA
required the FDIC to establish a risk-based assessment system for insured
depository associations that takes into account the risks attributable to
different categories and concentrations of assets and liabilities. Under the
rule, the FDIC assigns an association to one of three capital categories
consisting of (i) "well capitalized," (ii) "adequately capitalized" or (iii)
"undercapitalized," and one of three supervisory subcategories consisting of
Group "A" (for financially solid institutions with only a few minor
weaknesses), Group "B" (for those institutions with weaknesses which, if
uncorrected could cause substantial deterioration of the institution and
increase the risk to the deposit insurance fund) and Group "C" (for those
institutions with a substantial probability of loss to the fund absent
effective corrective action). The supervisory subgroup to which an association
is assigned is based on a supervisory evaluation provided to the FDIC by the
association's primary federal regulator and information that the FDIC
determines to be relevant to the association's financial condition and the risk
posed to the deposit insurance funds (which may include, if applicable,
information provided by the association's state supervisor). An association's
assessment rate depends on the capital category and supervisory category to
which it is assigned. There are nine assessment risk classifications (i.e.,
combinations of capital groups and supervisory subgroups) to which different
assessment rates are applied. Assessment rates range from 23 basis points for
an association in the highest category (i.e., well-capitalized and healthy) to
31 basis points for an association in the lowest category (i.e.,
undercapitalized and of substantial supervisory concern).

         Although the Bank recently converted its charter from a Colorado
state-chartered commercial bank to a federal savings bank, the Bank will
continue as a member of the Bank Insurance Fund ("BIF"), rather than the
Savings Association Insurance Fund ("SAIF").

         On September 30, 1996, President Clinton signed the Deposit Insurance
Funds Act of 1996 ("DIFA") that was part of the omnibus spending bill enacted
by Congress at the end of its 1996 session. DIFA mandated, among other things,
the merger of the SAIF and BIF, effective January 1, 1999, but only if no
insured depository institution is a savings association on that date. The
combined deposit insurance fund, if the funds are merged, will be called the
"Deposit Insurance Fund," or "DIF."

         Prompt Corrective Regulatory Action. FDICIA establishes a system of
prompt corrective action to resolve the problems of undercapitalized
associations. Under this system, the OTS is required to take certain
supervisory actions against undercapitalized associations, the severity of
which depends upon the association's degree of undercapitalization. Generally,
subject to a narrow exception, FDICIA requires the OTS to appoint a receiver or
conservator for an association that is critically undercapitalized. FDICIA
authorizes the OTS to specify the ratio of tangible equity to assets at which
an association becomes critically undercapitalized and requires that ratio be
no less than 2% of assets.

         Under OTS regulations, a savings association is considered to be
undercapitalized if it has risk-based capital of less than 8% or has a Tier I
risk-based capital ratio that is less than 4% or has a leverage ratio that is
less than 4% or has a leverage ratio less than 3% if the savings association is
rated composite 1 under the composite numerical rating assigned to the
association by the OTS under the Uniform Financial Institutions Rating System
or an equivalent rating under a comparable rating system adopted by the OTS in
the most recent rating of which the association has been notified in writing
(the "UFIRS"). A savings association that has risk-based capital less than 6%
or a Tier I risk-based capital ratio that is less than 3% or a leverage ratio
that is less than 3% would be considered to be "significantly
undercapitalized." A savings association that has a tangible equity to total
assets ratio equal to or less than 2% would be deemed to be "critically
undercapitalized." Generally, a capital restoration plan must be filed with the
OTS within 45 days of the date an association receives notice that it is
undercapitalized, significantly undercapitalized or critically
undercapitalized. In addition, numerous mandatory supervisory actions become
immediately applicable to the association, including, but not limited to,
restrictions on growth, investment activities, capital distributions, and
affiliate transactions. In addition, the OTS could issue a capital directive to
the savings association that includes additional discretionary restrictions on
the savings association.

         Limitation on Capital Distributions. The OTS regulations impose
limitations upon all capital distributions by savings associations, such as
cash dividends, payments to repurchase or otherwise acquire its shares,
payments to shareholders of another association in a cash-out merger and other
distributions charged against 


                                     -10-
<PAGE>   11

capital. The regulations establish three tiers of associations. An association
that exceeds all fully phased-in capital requirements before and after the
proposed capital distribution ("Tier 1 Association") and has not been advised
by the OTS that it is in need of more than normal supervision, could, after
prior notice but without the approval of the OTS, make capital distributions
during a calendar year up to the higher of (a) 100% of its net income to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year or (b) 75% of its net
reserve over the most recent four-quarter period. Any additional capital
distributions would require prior regulatory approval. In computing the
association's permissible percentage of capital distributions, previous
distributions made during the prior four-quarter period must be included. As of
December 31, 1998, the Bank met the requirements of a Tier I Association. In
the event the Bank's capital fell below its fully phased-in requirement or the
OTS notified it that it was in need of more than normal supervision, the Bank's
ability to make capital distributions could be restricted. In addition, the OTS
could prohibit a proposed capital distribution by any association, which would
otherwise be permitted by regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.

         On March 9, 1998, the OTS issued a Notice of Proposed Rulemaking that,
if adopted in final form, would amend its capital distribution regulation. The
proposed rule updates, simplifies, and streamlines the capital distribution
regulation to reflect OTS's implementation of the system of prompt corrective
action established under FDICIA.

         Community Reinvestment. The OTS, the FDIC, the Federal Reserve Board
and the OCC have jointly issued a final rule (the "Final Rule") under the
Community Reinvestment Act (the "CRA"). The Final Rule eliminates the existing
CRA regulation's 12 assessment factors and substitutes a performance based
evaluation system. The Final Rule was phased in over a period of time and
became fully effective by July 1, 1997. Under the Final Rule, an institution's
performance in meeting the credit needs of its entire community, including
low-and moderate-income areas, as required by the CRA, is generally evaluated
under three tests: the "lending test," the "investment test," and the "service
test."

         An independent financial institution with assets of less than $250
million, or a financial institution with assets of less than $250 million that
is a subsidiary of a holding company with assets of less than $1 billion, will
be evaluated under a streamlined assessment method based primarily on it
lending record. As of December 31, 1998, the Company's assets were
approximately $231 million, thereby meeting the streamlined assessment method.
The streamlined test considers an institution's loan-to-deposit ratio adjusted
for seasonal variation and special lending activities, its percentage of loans
and other lending related activities in the assessment area its record of
lending to borrowers of different income levels and businesses and farms of
different sizes the geographic distribution of its loans, and its record of
taking action, if warranted, in response to written complaints. In lieu of
being evaluated under the three assessment tests or the streamlined test, a
financial institution can adopt a strategic plan and elect to be evaluated on
the basis of achieving the goals and benchmarks outlined in the strategic plan.

         Failure to comply with the CRA's regulations could jeopardize future
growth plans of the Bank. The Bank is currently in compliance with the CRA.

         Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates," (i.e., any company that
controls or is under common control with an association) including the Company
and its non-savings-association subsidiaries or to make loans to certain
insiders, is limited by the Federal Reserve Act ("FRA"). The FRA limits the
aggregate amount of transactions with any individual affiliate to 10% of the
capital and surplus of the savings association and also limits the aggregate
amount of transactions with all affiliates to 20% of the savings association's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in the FRA and the
purchase of low quality assets from affiliates is generally prohibited. Also,
certain transactions with affiliates, including loans and asset purchases, must
be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the association as those
prevailing at the time for comparable transactions with non-affiliated
companies. In the absence of comparable transactions, such transactions may
only occur under terms and circumstances, including credit standards that in
good faith would be offered to or would apply to non-affiliated companies.
Notwithstanding the above, FIRREA prohibits any savings association from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies under Section 4(c) of the


                                     -11-
<PAGE>   12

Bank Holding Company Act ("BHC Act"). Further, no savings association may
purchase the securities of any affiliate other than a subsidiary.

         Real Estate Lending Standards. The OTS and the other federal banking
agencies have uniform regulations prescribing real estate lending standards.
The OTS regulation requires each savings association to establish and maintain
written internal real estate lending standards consistent with safe and sound
banking practices and appropriate to the size of the institution and the nature
and scope of its real estate lending activities. The policy must also be
consistent with accompanying OTS guidelines, which include maximum
loan-to-value ratios for the following types of real estate loans: raw land
(65%), land development (75%), nonresidential construction (80%), improved
property (85%) and one- to four-family residential construction (85%).
Owner-occupied one- to four-family mortgage loans and home equity loans do not
have maximum loan-to-value ratio limits, but those with a loan-to-value ratio
at origination of 90% or greater are to be backed by private mortgage insurance
or readily marketable collateral. Institutions are also permitted to make a
limited amount of loans that do not conform to the proposed loan-to-value
limitations so long as such exceptions are appropriately reviewed and
justified. The guidelines also list a number of lending situations in which
exceptions to the loan-to-value standard are justified.

         Standards for Safety and Soundness. As required by FDICIA and
subsequently amended by the Riegle Community Development and Regulatory
Improvement Act of 1994, the federal banking regulators adopted interagency
guidelines establishing standards for safety and soundness for depository
institutions on matters such as internal controls, loan documentation, credit
underwriting, interest-rate risk exposure, asset growth, compensation and other
benefits and asset quality and earnings (the "Guidelines"). The agencies expect
to request a compliance plan from an institution whose failure to meet one or
more of the standards is of such severity that it could threaten the safe and
sound operation of the institution. FDIC regulations enacted under FDICIA also
require all depository institutions to be examined annually by the banking
regulators and depository institutions having $500 million or more in total
assets to have an annual independent audit, an audit committee comprised solely
of outside directors, and to hire outside auditors to evaluate the
institution's internal control structure and procedures and compliance with
laws and regulations relating to safety and soundness. The FDIC, in adopting
the regulations, reiterated its belief that every depository institution,
regardless of size, should have an annual independent audit and an independent
audit committee.

         Proposed Rules Governing Financial Derivatives. In April 1998, the OTS
published a Notice of Proposed Rulemaking that, if adopted in final form, would
apply to all financial derivatives and would replace Its regulations on forward
commitments, futures transactions, and financial options transactions. The
proposal would continue to permit a savings association to engage in
transactions involving financial derivatives to the extent that these
transactions are authorized under applicable law and are otherwise safe and
sound. In addition, the proposed rule would describe the responsibilities of a
savings association's board of directors and management with respect to
financial derivatives. The rule defines a financial derivative as a financial
contract whose value depends on the value of one or more underlying assets,
indices, or reference rates. The most common types of financial derivatives are
futures, forward commitments, options, and swaps. A mortgage derivative
security, such as a collateralized mortgage obligation or a real estate
mortgage investment conduit, is not a financial derivative under the proposed
rule. As of December 31, 1998, the Bank did not own any financial derivatives
as defined under the proposed rule.

FEDERAL RESERVE SYSTEM

         The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts'), non-personal time deposits
(those which are transferable or held by a person other than a natural person)
with an original maturity of less than one and one-half years and certain money
market accounts. The Federal Reserve Board regulations generally require that
reserves of 3% must be maintained against aggregate transaction accounts of
$47.8 million or less (subject to adjustment by the Federal Reserve Board) and
an initial reserve of $1.4 million plus 10% against that portion of total
transaction accounts in excess of $47 8 million. The first $4.7 million of
otherwise reservable balances (subject to adjustments by the Federal. Reserve
Board,) are exempted from the reserve requirements. As of December 31, 1998,
the Bank is in compliance with the foregoing requirements.

         The balances maintained to meet the reserve requirements imposed by
the Federal Reserve Board may be used to satisfy liquidity requirements by the
OTS. Because required reserves must be maintained in the form 


                                     -12-
<PAGE>   13

of either vault cash, a non-interest-bearing account at a Federal Reserve Bank
or a pass-through account as defined by the Federal Reserve Board, the effect
of this reserve requirement is to reduce the Bank's interest-earning assets.

         FHLB System members are also authorized to borrow from the Federal
Reserve "discount window," but Federal Reserve Board regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal
Reserve Bank.

HOLDING COMPANY REGULATION

         The Company is considered a non-diversified, savings and loan holding
company within the meaning of the HOLA, has registered as a savings and loan
holding company with the OTS and is subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries. Among
other things, this authority permits the OTS to restrict or prohibit activities
that are determined to be a serious risk to the subsidiary savings association.

         The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from (i) acquiring control of,
or acquiring by merger or purchase of assets, another savings association or
holding company thereof, without prior written approval of the OTS; (ii)
acquiring or retaining, with certain exceptions, more than 5% of a
non-subsidiary savings association, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA; or (iii) acquiring or retaining control of an institution that is not
federally insured. In evaluating applications by holding companies to acquire
savings associations, the OTS must consider the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the insurance funds, the convenience
and needs of the community and competitive factors.

         As a unitary savings and loan holding company, the Company generally
is not restricted under existing laws as to the types of business activities in
which it may engage, provided that its savings association subsidiary continues
to satisfy the QTL test. Upon any acquisition by the Company of a savings
association or a state-chartered BIF-insured savings bank meeting the QTL test
that is deemed to be a savings institution by OTS, except for a supervisory
acquisition, the Company would become a multiple savings and loan holding
company (if the acquired institution is held as a separate subsidiary) and
would be subject to extensive limitations on the types of business activities
in which it could engage. The HOLA, as amended by the FIRREA, limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c) (8) of the BHC Act, subject to the prior approval
of the OTS, and activities in which multiple savings and loan holding companies
were authorized by regulation to engage in on March 5, 1987. Such activities
include, among others, mortgage banking, consumer finance, operation of a trust
company, and certain types of securities brokerage.



                                     -13-
<PAGE>   14

ITEM 2.       DESCRIPTION OF PROPERTY

         The principal offices of both the Company and the Bank are located in
a three-story building at 8100 East Arapahoe Road, Englewood, Colorado, and its
telephone number is (303) 740-2265. The Bank maintains seven other full service
banking facilities in the Denver metropolitan area with an eighth branch under
construction. The Bank is also renovating a building for its central processing
center for the Bank and its branch system. Information concerning these
properties, as of December 31, 1998, is presented in the following table:

<TABLE>
<CAPTION>
                                                                     APPROXIMATE
  DESCRIPTION AND                    YEAR          OWNED OR            SQUARE
      ADDRESS                       OPENED        LEASED (1)           FOOTAGE
      -------                       ------        ----------           -------

<S>                                 <C>          <C>                <C>   
Principal offices                    1983           Leased              22,300
8100 E. Arapahoe Road
Englewood, CO

Processing center                    1999(2)        Leased               6,390
3734 Osage Street
Denver, CO

Branch Offices:
North                                1995            Owned               3,000
4988 Federal Boulevard
Denver, CO

Monaco                               1996            Owned               3,000
777 S. Monaco Parkway
Denver, CO

South Broadway                       1997            Owned               3,000
4600 South Broadway
Englewood, CO

West Highland                        1997           Leased               2,600
3804 W. 32nd Avenue
Denver, CO

Greenwood Village                    1985           Leased                 850
6300 S. Syracuse
Englewood, CO

Lower Downtown ("LoDo")              1993           Leased               3,400
1401 17th Street
Denver, CO

Northglenn                           1998            Owned               5,200
480 E. 120th Avenue
Northglenn, CO

Westminster                          1999(3)         Owned               5,200
7377 Federal Boulevard
Westminster, CO

Other:
Northland Shopping Center             (4)            Owned              32,000
88th and Washington Street
Thornton, CO
</TABLE>

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

(1)  All of the lease properties are leased from affiliated entities with the
     exception of the Greenwood Village and LoDo branches. See "Item 12.
     Certain Relationships and Related Transactions."
(2)  The central processing center is currently under renovation.
(3)  The Westminster branch is scheduled to open the second quarter of 1999
(4)  Site purchased in 1998 for future branch.


                                     -14-
<PAGE>   15

ITEM 3.       LEGAL PROCEEDINGS

         The Company and its subsidiaries are from time to time parties to
various legal actions arising in the normal course of business. Management
believes that there is no proceeding threatened or pending against the Company
or any of its subsidiaries which, if determined adversely, would have a
material adverse effect on the financial condition or results of operations of
the Company.


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

         No matters were submitted to security holders of the Company during
the fourth quarter of 1998 by the solicitation of proxy or otherwise.


                                    PART II


ITEM 5.       MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         The following table sets forth, for the periods indicated, the high
and low closing prices per share of the Company's common stock as reported on
the Nasdaq National Market. The Company's common stock began trading on the
Nasdaq National Market on November 17, 1998 under the symbol "MBFC". These
quotations represent the prices between dealers and do not include retail mark
ups, mark downs or commissions and may not represent actual transactions.

<TABLE>
<CAPTION>
   1998                                 HIGH                        LOW
   ----                                 ----                        ---
<S>                                   <C>                         <C>  
Fourth Quarter (from November 17)     $11.75                      $9.50
</TABLE>

         On February 26, 1999, the last reported sales price of the Common
Stock reported on the Nasdaq National Market was $9.19 per share. As of
February 26, 1999, there were approximately 48 holders of record of the Common
Stock; however, management estimates that the number of beneficial owners is
significantly greater.

         The Company's policy is to retain its earnings to support the growth
of its business, and it is unlikely that dividends will be paid in the
foreseeable future. The Board of Directors has never declared cash dividends on
the Company's common stock. Future cash dividends will be determined by the
Board of Directors based on the Company's earnings, financial condition,
capital requirements and other relevant factors.


                                     -15-
<PAGE>   16
ITEM 6.       MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

BUSINESS ENVIRONMENT AND RISK FACTORS

         The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes included elsewhere herein.
The Company's future operating results may be affected by various trends and
factors that are beyond the Company's control. These include, among other
factors, the competitive banking environment in which the Company operates,
provisions for loan losses, risks relating to the Company's concentration of
loans related to residential construction, changes in general economic
conditions and interest rates, rapid or unexpected changes in technologies and
other uncertain business conditions that may affect the Company's business.
Also, readers are urged to read "Risk Factors" in the Company's Registration
Statement on Form SB-2, SEC registration number 333-63369, which discussion is
specifically incorporated herein by reference. Accordingly, past results and
trends may not be reliable indicators of future results or trends.

         With the exception of historical information, the matters discussed
below include forward-looking statements that involve risks and uncertainties
as set forth above. The Company wishes to caution readers that a number of
important factors discussed herein could affect the Company's actual results
and cause actual results to differ materially from those in the forward-looking
statements.

OVERVIEW

         Since inception, the Company, through the Bank, has specialized its
lending practice in the residential construction industry. The Company's
Chairman has extensive experience in the home building industry and has
expanded the Bank's lending practice to date such that the Bank is one of the
Denver, Colorado area's leading originators of land development and residential
construction loans to small- and medium-sized homebuilders. Currently, the Bank
can finance a builder or developer from the acquisition and development loan
process, including assistance with special district financing, through the
construction loan phase.

         The Company achieved significant profitable growth measured from the
end of 1995. Total assets have increased to $231 million as of December 31,
1998 from $158 million and $119 million as of December 31, 1997 and December
31, 1996, respectively. This represents a 31.82% average growth in assets over
the past three years. During the same time period, net income increased to $3.8
million for the year ended December 31, 1998 from $2.8 million and $2.4 million
for the years ended December 31, 1997 and 1996, respectively. The $1 million
increase in net income for 1998 represents a 34.26% increase over the net
income for 1997. During the past three years ended December 31, 1998, the
Company's return on average assets and return on average equity has averaged
2.07% and 28.02%, respectively. For the year ended December 31, 1998, return on
average assets for the Company equaled 1.89% while return on average equity
equaled 24.48%.

RESULTS OF OPERATIONS

         Net Interest Income. The Company's net income is derived primarily
from net interest income. Net interest income is the difference between
interest income, principally from loans, investment securities and funds sold,
and interest expense, principally on customer deposits. Changes in net interest
income result from changes in volume, net interest spread and net interest
margin. Volume refers to the average dollar levels of interest-earning assets
and interest-bearing liabilities. Net interest spread refers to the difference
between the average yield on interest-earning assets and the average cost of
interest-bearing liabilities. Net interest margin refers to net interest income
divided by average interest-earning assets and is influenced by the level and
relative mix of interest-earning assets and interest-bearing liabilities.

         The following tables set forth the average balances, net interest
income and expense and average yields and rates for the Company's earning
assets and interest-bearing liabilities for the indicated periods on a
tax-equivalent basis assuming a 34% tax rate.


                                     -16-

<PAGE>   17

<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                                                -----------------------
                                                                    1998                                      1997
                                                                    ----                                      ----
                                                                   INTEREST      AVERAGE                    INTEREST      AVERAGE
                                                      AVERAGE      EARNED         YIELD        AVERAGE        EARNED       YIELD
                                                      BALANCE      OR PAID       OR COST       BALANCE       OR PAID      OR COST
                                                     ----------   ----------    ----------    ----------    ----------   ----------
                                                                      (DOLLARS IN THOUSANDS)
<S>                                                  <C>          <C>          <C>            <C>           <C>          <C>  
INTEREST-EARNING ASSETS
    Investment securities:
       Taxable                                       $    5,290    $      318         6.02%   $    4,486    $      286         6.38%
       Tax exempt (tax equivalent)                        8,347         1,126        13.49         6,667           897        13.45
    Funds sold and interest-bearing deposits             11,502           643         5.59        12,876           699         5.43
    Loans (1)                                           150,951        18,464        12.23       109,167        13,806        12.65
    Allowance for loan losses                            (2,318)         --           --          (1,446)         --           --   
                                                     ----------   ----------    ----------    ----------    ----------   ----------
       Total interest-earning assets                 $  173,772    $   20,551        11.83    $  131,750    $   15,688        11.91
                                                     ==========    ==========   ==========    ==========    ==========   ==========

INTEREST-BEARING LIABILITIES
    Interest-bearing deposits:
       Demand, interest-bearing                      $   68,948    $    3,039         4.41%   $   53,370    $    2,453         4.60
       Savings                                            5,488           170         3.10         4,775           160         3.35
       Certificates of deposit:
         Under $100,000                                  32,098         1,850         5.76        25,295         1,444         5.71
         $100,000 and over                               12,354           683         5.52         9,749           578         5.93
                                                     ----------    ----------   ----------    ----------    ----------   ----------
       Total interest-bearing deposits                  118,888         5,742         4.83        93,189         4,635         4.97
    Advances from the Federal Home Loan
        Bank and federal funds purchased (3)              1,094            99         9.05         2,281           152         6.66
    Notes payable                                           167            19        11.38         2,250           179         7.96
    Trust preferred securities                           11,000           959         8.71          --            --           --
    Repurchase agreements                                   693            35         5.05          --            --           --
                                                     ----------    ----------   ----------    ----------    ----------   ----------
       Total interest-bearing liabilities            $  131,842    $    6,854         5.20    $   97,720    $    4,966         5.08
                                                     ==========    ==========   ==========    ==========    ==========   ==========

    Net interest income (tax equivalent)                           $   13,697                               $   10,722
                                                                   ==========                               ==========

    Net interest margin (2)                                                           7.88%                                    8.14%
    Net interest spread                                                               6.63%                                    6.83%
Ratio of average interest-bearing liabilities
    to average interest-earning assets                    75.87%                                   74.17%
</TABLE>

---------
     (1)  Loans are net of unearned discount. Nonaccrual loans are included in
          average loans outstanding. Loan fees are included in interest income
          as follows: 1998 - $3,566,820; 1997 - $2,723,678.
     (2)  Net interest margin is net interest income divided by average total
          earning assets.
     (3)  Includes a one-time prepayment penalty incurred on the early
          retirement of FHLB advances which management determined was
          advantageous to the Company compared to the cost of such funds.

         Net interest income, on a tax-equivalent basis, was $13.7 million for
the year ended December 31, 1998, an increase of $3.0 million from $10.7
million in 1997. Interest income increased $4.9 million to $20.6 million in
1998 from $15.7 million in 1997. A significant component of interest earned on
loans consists of loan fees. Because the majority of the construction loans are
real estate loans with terms of one year or less, any decrease in real estate
loan production can be expected to have an adverse effect on loan fees. See
"Loan Maturities". This increase resulted primarily from an increase of $42.0
million in average interest-earning assets to $173.8 million in 1998 from
$131.8 million in 1997. The majority of the asset growth was due to growth in
the loan portfolio. Average loans increased $41.8 million or 38.28% to $151.0
million in 1998 from $109.2 million in 1997 due primarily to the Company's
continuing growth. The change in the relative mix of interest-earning assets
other than loans was due primarily to the Company's objective of maximizing its
yield on funds not used for loans, including investing in double tax exempt
securities. The average yield on interest-earning assets decreased to 11.83% in
1998 from 11.91% in 1997 on a tax equivalent basis.

         Interest expense increased $1.9 million to $6.9 million in 1998 from
$5.0 million in 1997. A $15.6 million increase in interest-bearing demand
deposits accounted for $0.6 million of the increase. These deposits increased
due to the Company's growth, including the addition of a new branch in 1998.
Changes in the relative mix of average interest-bearing liabilities included a
$1.2 million decrease in advances from the FHLB. The cost of interest-bearing
liabilities for the years ended December 31, 1998 and 1997 was 5.20% and 5.08%,
respectively, and, when combined with noninterest-bearing deposits, the cost of
funds was 3.86% in 1998 compared to 3.72% in 1997. The net interest margin, on
a tax-equivalent basis, decreased to 7.88% in 1998 from 8.14% in 1997,
primarily as a result of lower interest earning asset yields and a higher cost
of funds.


                                     -17-
<PAGE>   18

         The following table illustrates, for the periods indicated, the
changes in the Company's net interest income (on a tax-equivalent basis) due to
changes in volume and changes in interest rates. Changes in net interest income
due to both volume and rate have been allocated to volume and rate in
proportion to the relationship of the absolute dollar amounts of the change in
each.

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,          YEAR ENDED DECEMBER 31,
                                                             1998 COMPARED TO 1997:           1997 COMPARED TO 1996:
                                                          ----------------------------     -----------------------------
                                                             INCREASE (DECREASE) IN           INCREASE (DECREASE) IN
                                                              NET INTEREST INCOME               NET INTEREST INCOME
                                                                DUE TO CHANGE IN                 DUE TO CHANGE IN
                                                                ----------------                 ----------------
                                                          VOLUME      RATE      TOTAL      VOLUME      RATE      TOTAL 
                                                          -------    -------    -------    -------    -------    -------
                                                                                  (IN THOUSANDS)

<S>                                                       <C>        <C>        <C>        <C>        <C>        <C>     
Interest-earning assets:
    Interest-earning securities
   Taxable                                                $    48    $   (16)   $    32    $  (168)   $   (33)   $  (201)
   Tax exempt (tax equivalent)                                227          2        229        523          0        523
   Funds sold                                                 (77)        22        (55)       511        (27)       484
   Loans                                                    5,111       (453)     4,658      3,661       (265)     3,396
                                                          -------    -------    -------    -------    -------    -------
          Total interest-earning assets                     5,309       (445)     4,864      4,527       (325)     4,202
                                                          -------    -------    -------    -------    -------    -------

Interest-bearing liabilities:
   Demand, interest bearing                                   687       (101)       586        707         29        736
   Savings                                                     22        (12)        10        (22)        (4)       (26)
   Certificates of deposit:
       Under $100,000                                         392         14        406        894         28        922
       $100,000 and over                                      144        (39)       105        170         39        209
   Advances from the Federal Home
       Loan Bank and federal funds purchased                 (107)        54        (53)        34         21         55
   Notes payable                                             (237)        77       (160)      (113)        51        (61)
   Trust preferred securities                                 959          0        959       --         --         --
   Repurchase agreement                                        35          0         35       --         --         --
                                                          -------    -------    -------    -------    -------    -------
            Total interest-bearing liabilities              1,895         (7)     1,888      1,670        164      1,835
                                                          -------    -------    -------    -------    -------    -------
            Net increase (decrease) in net interest
                 income (tax equivalent)                  $ 3,414    $  (438)   $ 2,976    $ 2,857    $  (490)   $ 2,367
                                                          =======    =======    =======    =======    =======    =======
</TABLE>

         Other Income. The following table sets forth the Company's other income
for the indicated periods.

<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31,
                                                     -----------------------
                                                        1998         1997
                                                     ----------   ----------
                                                          (IN THOUSANDS)
<S>                                                  <C>          <C>       
Service charges                                      $      144   $       68
Bank charges                                                394          267
Building rent                                               118          130
Gain on sale of investment securities                        46          341
Other                                                       291          190
                                                     ----------   ----------
        Total other income                           $      993   $      996
                                                     ==========   ==========
</TABLE>

         Other income for the year ended December 31, 1998 compared to 1997
decreased slightly due primarily to recognition of gain following the sale of
investment securities in 1997.

         Other Expenses. The following table sets forth the Company's operating
expenses for the indicated periods.

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                                     -----------------------
                                                        1998         1997
                                                     ----------   ----------
                                                          (IN THOUSANDS)

<S>                                                  <C>          <C>       
Salaries and employee benefits                       $    4,100   $    3,135
Occupancy expense of premises                               971          708
Furniture and equipment expense                             447          342
Service fees                                                252          135
Legal fees                                                   99          191
Indemnification and guarantee fees                          350          329
Settlement with related company                             355         --
Other expenses                                            1,479        1,587
                                                     ----------   ----------
     Total other expenses                            $    8,053   $    6,427
                                                     ==========   ==========
</TABLE>


                                     -18-
<PAGE>   19

         During the year ended December 31, 1998 total operating expenses
increased $1.7 million to $8.1 million from $6.4 million in 1997, with
increases occurring among the various components of salaries and occupancy
related expenses due to the Company's continued growth. The Company paid
$350,000 in indemnification and guarantee fees in accordance with an
Indemnification Agreement that terminated in February 1998 with the repayment
of the underlying loan. See "Item 12. Certain Relationships and Related
Transactions." The Company also reimbursed an entity related through common
ownership $355,000 for its income tax liability incurred due to the involuntary
sale of the Company's stock. These two expenses will not occur in 1999.

         Federal Income Tax. The Company's consolidated income tax rate varies
from statutory rates principally due to interest income from tax-exempt
securities and loans. The Company recorded income tax expenses totaling $1.9
million in 1998 and $1.3 million in 1997.

FINANCIAL CONDITION

         Loan Portfolio Composition. The following table sets forth the
composition of the Company's loan portfolio by type of loan at the dates
indicated. Management believes that the balance sheet information as of the
dates indicated should be read in conjunction with the average balance
information in the tables above under "--Net Interest Income." As indicated
above, the Company specializes its lending practice in the residential
construction industry. Depending on life cycles of real estate development,
balances of the Company's commercial loans and construction loans may fluctuate
significantly. Therefore, the data below are not necessarily indicative of
trends within a particular category.

<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                                                         ------------
                                                               1998                        1997
                                                               ----                        ----
                                                       AMOUNT          %           AMOUNT           %
                                                     ----------    ----------     ----------    ----------
                                                                    (DOLLARS IN THOUSANDS)

<S>                                                  <C>            <C>          <C>            <C>  
Land development and construction                    $  136,243          72.9%    $   88,825          71.7%
Commercial                                               47,225          25.3         33,530          27.0
Installment and other                                     7,910           4.2          4,710           3.8
Mortgage                                                   --            --             --            --
Loans held for sale                                        --            --             --            --
                                                     ----------    ----------     ----------    ----------
Total face amount of loans                              191,378         102.4        127,065         102.5
Deferred loan fees, discounts and costs, net             (1,776)         (1.0)          (978)          (.8)
                                                     ----------    ----------     ----------    ----------
Loans                                                   189,602         101.4        126,087         101.7
Less allowance for loan losses                           (2,610)         (1.4)        (2,083)         (1.7)
                                                     ----------    ----------     ----------    ----------
Net loans                                            $  186,992         100.0%    $  124,004         100.0%
                                                     ==========    ==========     ==========    ==========
</TABLE>

         Loans as of December 31, 1998 were up $63.5 million compared to
December 31, 1997, principally due to greater amounts of construction and
commercial loans, which reflect the Company's growth discussed above. The
weighted average interest rate of the loan portfolio at December 31, 1998 was
8.95%.

         The Company's two primary categories of loans, land development and
construction loans and commercial loans, trended upward as indicated. These
loans as a group were $61.1 million over the $122.4 million balance as of
December 31, 1997, with the majority being construction loans, up $47.4 million
over 1997.

         Installment loans increased slightly with a balance of $7.9 million as
of December 31, 1998 compared to $4.7 million as of December 31, 1997, again
due to the Company's growth.

         Mortgage loans have comprised less than 1% of the Company's loan
portfolio since year-end 1994. As discussed earlier, the Company primarily
makes land development and residential construction loans rather than
residential mortgage loans.

         Although the risk of non-payment exists for a variety of reasons with
respect to all loans, certain other more specific risks are associated with
each type of loan. Several risks are present in land development and
construction loans, including economic conditions in the home building
industry, fluctuating land values, the failure of the contractor to complete
the work and the borrower's inability to repay. The primary risks of land loans
include a general slowdown in the market resulting in fewer building permits
and lower absorption of newly developed sites to major homebuilders, building
moratoriums by municipalities, the general economy, and the fiscal condition of
the developer. Risks associated with commercial loans are quality of the
borrower's management and the impact of local economic factors. Installment
loans also have risks associated in a single


                                     -19-
<PAGE>   20
type of loan. Installment loans additionally face the risk of a borrower's
unemployment as a result of deteriorating economic conditions as well as the
personal circumstances of the borrower.

         The Company believes that its philosophy in extending credit is
relatively conservative in nature, with a presumption that most credit should
have both a primary and a secondary source of repayment, and that the primary
source should generally be operating cash flows, while the secondary source
should generally be disposition of collateral. The Company engages in limited
unsecured lending, and generally requires personal guarantees of principals for
business obligations. The Company practices a system of concurrence in the
approval of commercial credit whereby the documented concurrence of the loan
committee is obtained in addition to that of the recommending loan officer.

         At December 31, 1998, net loans totaled approximately 98.5% of total 
deposits and approximately 81.0% of total assets.

         Loan Maturities. The following tables present, at December 31, 1998
and December 31, 1997, loans by maturity in each major category of the
Company's portfolio based on contractual repricing schedules. Actual maturities
may differ from the contractual repricing maturities shown below as a result of
renewals and prepayments. Loan renewals are evaluated in the same manner as new
credit applications.

<TABLE>
<CAPTION>
                                                                      DECEMBER 31, 1998
                                                                      -----------------
                                                         OVER ONE YEAR
                                                       THROUGH FIVE YEARS          OVER FIVE YEARS
                                       ONE YEAR        ------------------          ---------------
                                        OR LESS     FIXED RATE  FLOATING RATE  FIXED RATE  FLOATING RATE    TOTAL
                                      ----------    ----------  -------------  ----------  -------------  ----------
                                                               (IN THOUSANDS)

<S>                                   <C>           <C>           <C>          <C>           <C>          <C>      
Land development and construction     $  132,583    $    2,307    $       --   $    1,353    $       --   $  136,243
Commercial                                30,049        13,460           115        3,601            --       47,225
Installment and other                      4,469         3,354            --           87            --        7,910
Mortgage                                      --            --            --           --            --           --
                                      ----------    ----------    ----------   ----------    ----------   ----------
       Total face amount of loans     $  167,101    $   19,121    $      115   $    5,041    $       --   $  191,378

Deferred loans fees                       (1,551)         (178)           --          (47)           --       (1,776)
                                      ----------    ----------    ----------   ----------    ----------   ----------
       Total loans                    $  165,550    $   18,943    $      115   $    4,994    $       --   $  189,602
                                      ==========    ==========    ==========   ==========    ==========   ==========
</TABLE>


<TABLE>
<CAPTION>
                                                                          DECEMBER 31, 1997               
                                                                          -----------------
                                                               OVER ONE YEAR
                                                              THROUGH FIVE YEAR          OVER FIVE YEARS
                                            ONE YEAR          -----------------          ---------------
                                            OR LESS      FIXED RATE   FLOATING RATE  FIXED RATE  FLOATING RATE     TOTAL
                                           ----------    ----------  -------------   ----------  -------------   ----------
                                                                     (IN THOUSANDS)

<S>                                        <C>           <C>           <C>          <C>           <C>            <C>       
Land development and construction          $   88,516    $      309    $     --     $     --      $     --       $   88,825
Commercial                                     24,504         7,823          --          1,203          --           33,530
Installment and other                           1,455         3,255          --           --            --            4,710
Mortgage                                         --            --            --           --            --               --
                                           ----------    ----------    ----------   ----------    ----------     ----------
        Total face amount of loans         $  114,475    $   11,387    $     --     $    1,203    $     --       $  127,065

Deferred loans fees                              (777)         (190)         --            (11)         --             (978)
                                           ----------    ----------    ----------   ----------    ----------     ----------
        Total loans                        $  113,698    $   11,197    $     --     $    1,192    $     --       $  126,087
                                           ==========    ==========    ==========   ==========    ==========     ==========
</TABLE>


                                     -20-
<PAGE>   21

         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 December 31,
1998 or December 31, 1997.

         The following table sets forth information concerning the
nonperforming assets of the Company at the dates indicated:

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                      1998               1997
                                                      ----               ----
                                                     (DOLLARS IN THOUSANDS)

<S>                                                  <C>           <C>   
Nonaccrual loans                                     $3,388        $1,604
Other loans 90 days past due                             --            --
Other real estate                                        --            --
                                                     ------        ------
Total nonperforming loans                            $3,388        $1,604
                                                     ======        ======
Ratio of nonaccrual and other loans 90
      days past due to total loans                     1.81%         1.27%
Ratio of nonperforming assets to total loans
      plus other real estate                           1.81          1.27
Ratio of nonperforming assets to total assets          1.47          1.02
</TABLE>

         Of the amount of nonaccrual loans as of December 31, 1998,
approximately $1.3 million is the Bank's portion of five related loans totaling
approximately $4.0 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 1997 in connection with a real estate development
on which the developer had 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 has approximately $2.1 million of
two loans totaling $2.8 million that was placed on nonaccrual status just prior
to year end. The loans were originated as acquisition and development loans and
are secured by real estate, and a personal residence. Foreclosure proceedings
have been filed. Subsequent to December 31, 1998, one loan in the amount of
$178,000 was paid off.

         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 December 31, 1998, there was no significant balance of loans
excluded from nonperforming loans set forth above, where 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.

         Prior to year end 1998, a loan in the amount of approximately $743,000
was nonperforming. The loan was brought current and categorized as performing
at December 31, 1998. Subsequent to December 31, 1998, the loan was placed on
nonaccrual and is now being foreclosed on. The office building securing the
loan has a significant higher appraisal value than the outstanding balance of
the loan. Management believes that the Company's loan is adequately
collalteralized.


                                      -21
<PAGE>   22
         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,
including a review of problem loans, business conditions, historical loss
experience, evaluation of the quality of the underlying collateral and holding
and disposal costs. 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 periods indicated.


<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                                     -------------------------
                                                        1998           1997
                                                     ----------     ----------
                                                       (DOLLARS IN THOUSANDS)

<S>                                                  <C>            <C>       
Average total loans                                  $  150,951     $  109,167
                                                     ==========     ==========
Total loans at end of period                         $  189,602     $  126,087
                                                     ==========     ==========
Allowance at beginning of year                       $    2,083     $    1,150
Charge-offs:
   Land development and construction                         --             --
   Commercial and industrial                                 (2)            (1)
   Installment                                               (8)            (7)
   Mortgage                                                  --             --
   Other                                                     --             (1)
                                                     ----------     ----------
          Total charge-offs                                 (10)            (9)
Recoveries:
   Land development and construction                         --             --
   Commercial and industrial                                  3             --
   Installment                                                4             62
   Mortgage                                                  --             --
   Other                                                     --             --
                                                     ----------     ----------
          Total recoveries                                    7             62
                                                     ----------     ----------

Net (charge-offs) recoveries                                 (3)            53
Provisions for loan losses                                  530            880
                                                     ----------     ----------
Allowance at end of period                           $    2,610     $    2,083
                                                     ==========     ==========

Ratio of net (charge-offs) recoveries
       to average total loans                              0.00%          0.05%
Allowance to total loans at end of period                  1.38%          1.65%
Allowance to nonperforming loans                          77.04%        129.92%
</TABLE>

         Net charge offs during 1998 totaled approximately $3,000 or less than
 .01% of average loans compared to net recoveries of approximately $53,000 or
 .05% of average loans in 1997.

         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. These reviews
assist in the identification of potential and probable losses, and also in the
determination of the level of the allowance for loan losses. 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.

         The following tables set forth an allocation of the allowance for loan
losses by loan category as of the dates indicated. Portions of the allowance
have been allocated to categories based on analysis of the status of


                                     -22-
<PAGE>   23

particular loans; however, the majority of the allowance is utilized as a
single unallocated allowance available for all loans. The allocation table
should not be interpreted as an indication of the specific amounts, by loan
classification, to be charged to the allowance. Management believes that the
table may be a useful device for assessing the adequacy of the allowance as a
whole. The table has been derived in part by applying historical loan loss
ratios to both internally classified loans and the portfolio as a whole in
determining the allocation of the loan losses attributable to each category of
loans.

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                             ------------
                                                     1998                      1997
                                                     ----                      ----
                                                         LOANS IN                   LOANS IN
                                                         CATEGORY                   CATEGORY
                                                           AS A                       AS A
                                            AMOUNT      PERCENTAGE      AMOUNT     PERCENTAGE
                                           OF GROSS      OF TOTAL      OF GROSS     OF TOTAL
                                           ALLOWANCE      LOANS       ALLOWANCE       LOANS   
                                           ----------   ----------    ----------   ----------
                                                         (DOLLARS IN THOUSANDS)

<S>                                        <C>          <C>           <C>           <C>  
Land development and construction          $      148         71.2%   $      155         69.9%
Commercial and industrial                         602         24.7           127         26.4
Installment and other                              13          4.1            16          3.7
Unallocated                                     1,847          0.0         1,785          0.0
                                           ----------   ----------    ----------   ----------
          Total                            $    2,610        100.0%   $    2,083        100.0%
                                           ==========                 ==========
</TABLE>

         As of December 31, 1998, the Company increased its net loan loss
reserve by $527,000 compared to December 31, 1997 due to the significant
increase in loan production of $115 million over the amount originated in 1997.
The total loan loss reserve at December 31, 1998 was $2,610,000 or 1.38% of
total loans and 77.04% of nonperforming assets. The majority of the loan loss
reserve increase at December 31, 1998 compared to December 31, 1997 was
included in the commercial category.

         The allocation for loan losses takes into account many factors such as
the Company's prior experience with loan losses and an evaluation of the risks
in the loan portfolio at any given time, including changes in economic,
operating and other conditions of borrowers, the Denver economy and to a lesser
extent, the national economy. As indicated in the table above, a majority of
the loan loss allowance was not allocated to a single category. The Company's
loan portfolio contains a significant amount of loans that are construction
and/or development loans, and management assesses general risks to the
portfolio that are common to both categories. These risks include the economic
conditions in the building industry that could effect a slowdown in the market
resulting in fewer building permits and lower absorption of newly developed
sites, fluctuating land values, building moratoriums by municipalities, and the
overall general economy of the Company's area of operations.

         Management believes that the approximate amount of charge-offs by
category during 1998 and 1999 will be in the range of 0.23% to 0.27% for
consumer loans, 0.14% to 0.17% for land development and construction loans, and
0.12% to 0.15% for commercial loans, for an overall total of approximately
0.15% of total loans. The foregoing is a good faith best estimate only and is
subject to several factors beyond the control of the Company, including the
risks discussed above.

         Investments. The Company's investment policy is designed to ensure
liquidity for cash-flow requirements; to help manage interest rate risk; to
ensure collateral is available for public deposits, FHLB advances and
repurchase agreements; and to manage asset quality diversification. Investments
are managed centrally to maximize compliance and effectiveness of overall
investing activities. Ongoing review of the performance of the investment
portfolio, market values, market conditions, current economic conditions,
profitability, capital ratios, liquidity needs, collateral position with the
FHLB and other matters related to investing activities is made.

         The Company's investment portfolio at December 31, 1998 was comprised
of U.S. Treasury bonds and bills, corporate equity and debt securities, and
general obligation and revenue municipal bonds. Although the municipal
securities are non-rated and were privately placed, none of these investments
are derivatives, structured notes or similar instruments that are classified as
"High-Risk Securities" as defined by the Federal Financial Institutions
Examinations Counsel. In accordance with the principles of the Financial
Accounting 


                                     -23-
<PAGE>   24
Standards Board ("FASB") in its Statement of Financial Accounting Standards No.
115 ("FASB 115"), Accounting for Certain Investment in Debt and Equity
Securities, all investments are accounted for as "Available for Sale."

         The following table sets forth the estimated market value of the
available for sale securities and the amortized cost basis of held to maturity
securities in the Company's investment portfolio by type at the dates
indicated, with the exception of the trading account.

<TABLE>
<CAPTION>
                                            DECEMBER 31,
                                      -----------------------
                                         1998          1997
                                      ----------   ----------
                                      (DOLLARS IN THOUSANDS)

<S>                                   <C>          <C>       
U.S. Treasury securities              $    4,549   $    4,774
Corporate debt securities                  2,741           --
Corporate equity securities                  405          454
Municipal securities (1)                   7,982        8,403
                                      ----------   ----------
          Total                       $   15,677   $   13,631
                                      ==========   ==========
</TABLE>

----------
         (1) Exempt from both federal and state income taxation.

         Investment Maturities and Yield. The following table sets forth the
estimated market value and approximate yield of the securities in the
investment portfolio by type and maturity at December 31, 1998.

<TABLE>
<CAPTION>
                                  DECEMBER 31, 1998
                                  -----------------
        TYPE AND MATURITY                                 AMOUNT      YIELD
        -----------------                                 -------     ------
                                                        (DOLLARS IN THOUSANDS)

<S>                                                       <C>          <C>  
 U.S. TREASURY SECURITIES:
   One year or less                                       $ 3,023       5.88%
   Over one through five years                              1,526       6.18
   Over five through 10 years                                  --         --
   Over 10 years                                               --         --
                                                          -------     
          Total                                           $ 4,549       5.98
                                                          =======     

 CORPORATE DEBT SECURITIES:
   One year or less                                       $    --         --
   Over one through five years                                 --         --
   Over five through 10 years                                  --         --
   Over 10 years                                            2,741       7.35
                                                          -------     
          Total                                           $ 2,741       7.35
                                                          =======     

 MUNICIPAL SECURITIES:
   One year or less                                       $    --         --
   Over one through five years                                 --         --
   Over five through 10 years                                 638       9.00
   Over 10 years                                            7,344       8.92
                                                          -------     
          Total                                           $ 7,982       8.92
                                                          =======     

 TOTAL INVESTMENT IN SECURITIES:
   One year or less                                       $ 3,023       5.88
   Over one through five years                              1,526       6.18
   Over five through 10 years                                 638       9.00
   Over 10 years                                           10,085       8.49
                                                          -------     
          Total                                           $15,272       7.76
                                                          =======     ====== 
</TABLE>

         Deposits. The Company's primary source of funds has historically been
customer deposits, and deposits have experienced significant growth in recent
years with average deposits increasing to $164.4 million for the year ended
December 31, 1998 from $128.9 million for the year ended December 31, 1997.
These increases are primarily a result of internal growth with the opening of
one new branch in 1998, and two branches in 1997. At December 31, 1998,
noninterest-bearing deposits comprised 28.49% of total deposits. Management
believes this ratio may decrease as the mix of deposits in new branches tend to
be more interest-bearing rather than noninterest-bearing due to start up
marketing activities.


                                     -24-

<PAGE>   25
         The following table presents the average balances for each major
category of deposits and the weighted average interest rates paid for
interest-bearing deposits for the period indicated.

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                            -----------------------
                                                         1998                      1997
                                                         ----                      ----
                                                                    AVERAGE                   AVERAGE
                                                      AVERAGE      INTEREST     AVERAGE      INTEREST
                                                      BALANCE        COST       BALANCE        COST  
                                                      -------      --------     -------      --------
                                                                     (DOLLARS IN THOUSANDS)

<S>                                                  <C>            <C>         <C>            <C>  
Demand, interest-bearing                             $ 68,948       4.41%       $ 53,370       4.60%
Savings                                                 5,488       3.10           4,775       3.35
Certificates of deposit under $100,000                 32,098       5.76          25,295       5.71
Certificates of deposit $100,000 and over              12,354       5.52           9,749       5.93
                                                     --------                   --------

        Total interest-bearing demand deposits        118,888       4.83        $ 93,189       4.97

Noninterest-bearing demand deposit                     45,545                     35,683
                                                     --------                   --------
        Total Deposits                               $164,433                   $128,872
                                                     ========                   ========
</TABLE>

The decreases in average costs were due primarily to a lower interest rate
environment.

The following table sets forth the amount of certificates of deposits at their
stated rates as of December 31, 1998:

<TABLE>
<CAPTION>
                                                                (IN THOUSANDS)
<S>                                                                <C>      
                           3.99% or less                           $     745
                           4.00% to 4.99%                              7,092
                           5.00% to 5.99%                             43,161
                           6.00% to 6.99%                              6,073
                           7.00% and above                                 0
                                                                   ---------
                                 Total                             $  57,071
                                                                   =========

                           Weighted average interest rate              5.59%
</TABLE>


         At December 31, 1998, the scheduled maturities of certificates of
deposit were are follows:

<TABLE>
<CAPTION>
                                                                (IN THOUSANDS)
<S>                                                             <C>    
                           1999                                   $   45,600
                           2000                                        9,155
                           2001                                          664
                           2002                                        1,380
                           2003                                          124
                           Thereafter                                    148
                                                                  ----------
                                 Total                            $   57,071
                                                                  ==========
</TABLE>

         The following table sets forth the amount and maturity of certificates
of deposit that had balances of more than $100,000 at December 31, 1998.

<TABLE>
<CAPTION>
                              REMAINING MATURITY                (IN THOUSANDS)

<S>                                                             <C>    
                           Less than three months                  $  6,593
                           Three months up to six months              3,025
                           Six months up to one year                  8,559
                           One year and over                          1,756
                                                                   --------

                                    Total                          $ 19,933
                                                                   ========
</TABLE>

         FHLB Borrowings. The Bank is a member of the Federal Home Loan Bank of
Topeka, which is one of 12 regional FHLB's. The FHLB system functions as a
central bank providing credit for members. As a member of the FHLB, the Bank is
entitled to borrow funds from the FHLB and is required to own FHLB stock in an
amount determined by a formula based upon the Bank's total assets and its FHLB
borrowings. The Bank may use FHLB borrowings to supplement deposits as a source
of funds. See "Liquidity--Asset/Liability Management." Average FHLB borrowings
for the year ended December 31, 1998 were $409,000 compared to $2.0 million for
the year ended December 31, 1997. At December 31, 1998, based on its FHLB
stockholdings, the Bank's total available and unused borrowing capacity based
on the Bank's current FHLB stockholdings was approximately $9.0 million,

                                     -25-
<PAGE>   26

which was available through a line of credit and term advances. FHLB borrowings
are collateralized by the Bank's FHLB stock, other investment securities and
certain loans.

         A variety of borrowing terms and maturities can be chosen from the
FHLB. Maturities available range generally from one day to 10 years. Interest
rates can be either fixed or variable and prepayment options are available if
desired. The FHLB offers both amortizing and nonamortizing advances. To date,
FHLB stock has been redeemable at the preset price of $100 per share, but there
can be no assurance that this will continue to be the case.

CAPITAL RESOURCES

         The Company monitors compliance with federal regulatory capital
requirements, focusing primarily on risk-based capital guidelines. Under the
risk-based capital method of capital measurement, the ratio computed is
dependent upon the amount and composition of assets recorded on the balance
sheet, and the amount and composition of off-balance sheet items, in addition
to the level of capital.

         The following tables set forth the Company's capital ratios as of the
indicated dates.

<TABLE>
<CAPTION>
                                                                   CAPITAL RATIOS
                                                  DECEMBER 31,                       DECEMBER 31,
                                                      1998                               1997 
                                                      ----                               ----
                                             AMOUNT           RATIO             AMOUNT            RATIO
                                           ---------          ------           --------           -----
                                                               (DOLLARS IN THOUSANDS)

<S>                                        <C>                <C>               <C>               <C>  
Core (Tier 1) capital                      $  28,410          12.53%           $ 12,579           8.02%
Core (Tier 1) capital minimum 
 requirement (1)                               9,069           4.00               4,707           3.00
                                           ---------          -----            --------           ----
Excess                                     $  19,341           8.53%           $  7,872           5.02%
                                           =========          =====            ========           ====

Tangible capital                           $  28,410          12.53%           $ 12,579           8.02%
Tangible capital minimum requirement (1)       3,401           1.50               2,354           1.50
                                           ---------          -----            --------           ----
Excess                                     $  25,009          11.03%           $ 10,225           6.52%
                                           =========          =====            ========           ====

Adjusted tangible assets                   $ 226,731                           $156,909
                                           =========                           ========
</TABLE>
-----------------

          (1)  Based on risk-based capital guidelines of the Office of Thrift
               Supervision, a savings association is required to maintain a
               Core (Tier 1) capital requirement of 4% of adjusted tangible
               assets and a tangible capital requirement of 1.5% of tangible
               assets. See "Supervision and Regulation--Federal Savings
               Association Regulation - OTS Capital Requirements" for
               definitions of the ratio terms.

<TABLE>
<CAPTION>
                                                             RISK-BASED CAPITAL RATIOS
                                                  DECEMBER 31,                        DECEMBER 31,
                                                      1998                               1997
                                                      ----                               ----
                                             AMOUNT           RATIO            AMOUNT            RATIO
                                           ---------          -----          ----------          -----
                                                               (DOLLARS IN THOUSANDS)

<S>                                        <C>                <C>            <C>                <C>   
Total risk-based capital                   $  30,315          15.38%         $   14,321          10.30%
Minimum requirement (1)                       15,766           8.00              11,122           8.00
                                           ---------          -----          ----------          -----
Excess                                     $  14,549           7.38%         $    3,199           2.30%
                                           =========          =====          ==========          =====

Total risk-based assets                    $ 197,077                         $  139,023
                                           =========                         ==========
</TABLE>
----------

          (1)  Based on risk-based capital guidelines of the Office of Thrift
               Supervision, a savings association generally is defined to
               maintain a total capital to risk-based assets ratio of 8%. See
               "Supervision and Regulation--Federal Savings Association
               Regulation - OTS Capital Requirements" for definitions of terms
               relating to the ratio.

LIQUIDITY

         Sources of Liquidity. The Company manages its liquidity in order to
satisfy cash flow requirements of depositors and borrowers and allow the
Company to meet its own cash flow needs. 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.
Average deposits increased by $35.6 million, or 27.6% in 1998 over 1997.

         The second source of the Company's liquidity is FHLB advances and
Company lines of credit. FHLB advances are used regularly in the cash
management function both to fund a portion of the investment portfolio


                                     -26-
<PAGE>   27
and to manage the day-to-day fluctuations in liquidity resulting from needs of
depositors and borrowers. At December 31, 1998 the Company had available $9.0
million of unused borrowing capacity from the FHLB and $15.0 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 so provided primarily to make loans and to purchase investment
securities.

         Asset/Liability Management. A principal function of asset/liability
management is to coordinate the levels of interest-sensitive assets and
liabilities to minimize net interest income fluctuations in times of
fluctuating market interest rates. Interest-sensitive assets and liabilities
are those that are subject to repricing in the near term, including both
variable rate instruments and those fixed-rate instruments which are
approaching maturity. Changes in net yield on interest-sensitive assets arise
when interest rates on those assets (e.g. loans and investment securities)
change in a different time period from that of interest rates on liabilities
(e.g. time deposits). Changes in net yield on interest-sensitive assets also
arise from changes in the mix and volumes of earning assets and
interest-bearing liabilities.

         The following table sets forth the interest rate sensitivity of the
Company's assets and liabilities as of December 31, 1998, and sets forth the
repricing dates of the Company's interest-earning assets and interest-bearing
liabilities as of that date, as well as the Company's interest rate sensitivity
gap percentages for the periods presented. The table is based upon assumptions
as to when assets and liabilities will reprice in a changing interest rate
environment, and since such assumptions can be no more than estimates, certain
assets and liabilities indicated as maturing or otherwise repricing within a
stated period may, in fact, mature or reprice at different times and at
different volumes than those estimated. Also, the renewal or repricing of
certain assets and liabilities can be discretionary and subject to competitive
and other pressures. Therefore, the following table does not and cannot
necessarily indicate the actual future impact of general interest rate
movements on the Company's net interest income.

<TABLE>
<CAPTION>
                                                    ESTIMATED MATURITY OR REPRICING AT DECEMBER 31, 1998
                                                    ----------------------------------------------------
                                                            THREE MONTHS
                                                LESS THAN   TO LESS THAN     ONE TO       OVER
                                               THREE MONTHS   ONE YEAR     FIVE YEARS   FIVE YEARS     TOTAL  
                                               ------------  ----------    ----------   ----------   ----------
                                                                    (DOLLARS IN THOUSANDS)
<S>                                             <C>          <C>           <C>          <C>          <C>       
Interest-earning assets:
  Funds sold and interest-bearing deposits      $    5,636   $       --    $       83   $       --   $    5,719
  Investment securities available for sale               0        3,023         1,526       10,723       15,272
  Loans                                            162,132        3,418        19,058        4,994      189,602
                                                ----------   ----------    ----------   ----------   ----------

  Total interest-earning assets                    167,768        6,441        20,667       15,717      210,593

Interest-bearing liabilities:
  Deposits:
    Demand, interest-bearing                        72,444           --            --           --       72,444
    Savings                                          6,271           --            --           --        6,271
    Certificates of deposit
      under $100,000                                11,530       15,893         9,567          148       37,138
      $100,000 and over                              6,593       11,584         1,756           --       19,933

  Federal Home Loan Bank borrowings                     --           --            --           --           --
  Trust preferred securities                            --           --            --       12,000       12,000
  Repurchase agreements                                443           --            --           --          443
                                                ----------   ----------    ----------   ----------   ----------


  Total interest-bearing liabilities                97,281       27,477        11,323       12,148      148,229
                                                ----------   ----------    ----------   ----------   ----------

Interest rate gap                               $   70,487   $  (21,036)   $    9,344   $    3,569   $   62,364
                                                ==========   ==========    ==========   ==========   ==========

Cumulative interest rate gap at
  December 31, 1998                             $   70,487   $   49,451    $   58,795   $   62,364
                                                ==========   ==========    ==========   ========== 

Cumulative interest rate gap
  to total assets                                    30.54%       21.42%        25.47%       27.02% 
                                                ==========   ==========    ==========   ========== 
</TABLE>

         Due to the volume of loans that reprice with changes in the prime
lending rate and the volume of noninterest-bearing deposits, the Company has
experienced a positive gap in assets and deposits that reprice or mature in
less than three months. Of the total interest-earning assets at December 31,
1998, 79.66% reprice or mature in less than three months while 65.63% of all
interest-bearing liabilities reprice or mature in that same time


                                     -27-
<PAGE>   28

frame. The Bank's positive interest rate gaps indicate that the Bank's net
income would increase in the event of rising interest rates and would decrease
in the event of decreasing interest rates. In the highly unlikely event of an
immediate, parallel and sustained shift of market interest rates of 200 basis
points, management estimates that the Bank's net income during the 12 months
ending December 31, 1999 would likely increase greater than 10% compared to the
prior like 12-month period if interest rates rose by 200 basis points and
likely fall by greater than 10% compared to the prior like 12-month period if
rates fell of the same amount. These are good faith estimates assuming all
other factors do not change materially, and, in management's belief, are not
necessarily indicative of what actually could occur in the event of immediate
interest rate increases or decreases of this magnitude. Management believes
that it is highly unlikely that such changes would occur in a short time
period. As interest-bearing assets and liabilities reprice at different time
frames and proportions to market interest rate movements, various assumptions
must be made based on historical relationships of these variables in reaching
any conclusion. Since these correlations are based on competitive and market
conditions, future results could, in management's belief, be materially
different from the foregoing estimates.

EFFECTS OF INFLATION AND CHANGING PRICES

         Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than inflation. Although interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services, increases in inflation generally have resulted in increased
interest rates. Over short periods of time interest rates may not move in the
same direction or magnitude as inflation.

YEAR 2000 COMPLIANCE

         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, which 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 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 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 cost approximately $150,000. Costs incurred through 1998 were
approximately $24,000. 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



                                     -28-
<PAGE>   29
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 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.


ITEM 7.       FINANCIAL STATEMENTS



                                     -29-

<PAGE>   30
                          INDEPENDENT AUDITORS' REPORT

Board of Directors
MegaBank Financial Corporation
Englewood, Colorado

         We have audited the consolidated balance sheet of MegaBank Financial
Corporation and Subsidiaries as of December 31, 1998 and the related
consolidated statements of income, comprehensive income, shareholders' equity
and cash flows for each of the two years in the period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

         We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

         In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of MegaBank Financial Corporation and Subsidiaries at December 31,
1998 and the consolidated results of their operations and consolidated cash
flows for each of the two years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.

                           /s/Fortner, Bayens, Levkulich and Co., P.C.



Denver, Colorado
February 19, 1999



                                     -30-
<PAGE>   31
                         MegaBank Financial Corporation
                           CONSOLIDATED BALANCE SHEET
                               December 31, 1998
                             (Amounts in thousands)


<TABLE>
<CAPTION>
                                     ASSETS

<S>                                                                                <C>       
           Cash and due from banks                                                 $   10,326
           Federal funds sold                                                           5,625
           Other interest-bearing deposits                                                128
                                                                                   ----------
             Cash and cash equivalents                                                 16,079

           Investment securities available for sale                                    15,677

           Loans                                                                      189,602
           Less allowance for loan losses                                              (2,610)
                                                                                   ----------
                                                                                      186,992

           Federal Home Loan Bank stock, at cost                                          482
           Bank premises, leasehold improvements
             and equipment, net                                                         8,846
           Accrued interest receivable                                                  1,104
           Deferred tax asset                                                             718
           Trust preferred securities issuance costs, net                                 729
           Other assets                                                                   192
                                                                                   ----------

                                                                                   $  230,819
                                                                                   ==========

                      LIABILITIES AND SHAREHOLDERS' EQUITY

           Liabilities
             Deposits                                                              $  189,879
             Securities sold under agreements to repurchase                               443
             Income taxes payable                                                          71
             Accrued interest payable                                                     434
             Other liabilities                                                            601
                                                                                   ----------
                   Total liabilities                                                  191,428

           Company obligated manditorily redeemable preferred securities of
             subsidiary trust holding solely Junior Subordinated Debentures            12,000

           Commitments (notes I, J, and L)

           Shareholders' equity
             Preferred stock; no par value, 10,000,000 shares authorized, none
               issued                                                                      --
             Common stock; no par value, 50,000,000 shares authorized,
               7,607,340 shares issued and outstanding                                 13,974
             Retained earnings                                                         13,383
             Accumulated other comprehensive income                                        34
                                                                                   ----------
                                                                                       27,391

                                                                                   $  230,819
                                                                                   ==========
</TABLE>


           The accompanying notes are an integral part of this statement.


                                     -31-
<PAGE>   32

                         MegaBank Financial Corporation
                       CONSOLIDATED STATEMENTS OF INCOME
                            Years ended December 31,
                 (Amounts in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                            1998         1997    
                                                                         ----------   ----------

<S>                                                                      <C>          <C>       
         Interest income
           Loans, including fees                                         $   18,464   $   13,806
           Taxable investment securities                                        318          286
           Nontaxable investment securities                                     743          592
           Funds sold                                                           463          636
           Other interest                                                       181           63
                                                                         ----------   ----------
                  Total interest income                                      20,169       15,383

         Interest expense
           Deposits                                                           5,742        4,635
           Borrowed funds                                                       134          152
           Trust preferred securities                                           959           --
           Notes payable                                                         19          179
                                                                         ----------   ----------
                  Total interest expense                                      6,854        4,966
                                                                         ----------   ----------

                  Net interest income                                        13,315       10,417

         Provision for loan losses                                              530          880
                                                                         ----------   ----------

         Net interest income after provision for loan losses                 12,785        9,537

         Other income
           Service charges on deposit accounts                                  538          335
           Gain on sale of investment securities                                 46          341
           Other income                                                         409          320
                                                                         ----------   ----------
                  Total other income                                            993          996

         Other expenses
           Salaries and employee benefits                                     4,100        3,135
           Occupancy expenses of premises                                       971          708
           Furniture and equipment expense                                      447          342
           Service fees                                                         252          135
           Legal fees                                                            99          191
           Indemnification and guarantee fees (note L)                          350          329
           Settlement with related company (note L)                             355           --
           Other expenses                                                     1,479        1,587
                                                                         ----------   ----------
                  Total other expenses                                        8,053        6,427
                                                                         ----------   ----------

                  Income before income taxes                                  5,725        4,106

         Income tax expense                                                   1,920        1,272
                                                                         ----------   ----------

         NET INCOME                                                      $    3,805   $    2,834
                                                                         ==========   ==========

         Income per share
           Basic                                                         $     0.58   $     0.44
                                                                         ==========   ==========
           Diluted                                                       $     0.58   $     0.44
                                                                         ==========   ==========
</TABLE>

         The accompanying notes are an integral part of these statements.

                                     -32-
<PAGE>   33
                         MegaBank Financial Corporation
                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                            Years ended December 31,
                             (Amounts in thousands)


<TABLE>
<CAPTION>
                                                        1998          1997   
                                                     ----------    ----------

<S>                                                  <C>           <C>       
Net income                                           $    3,805    $    2,834

Other comprehensive income, net of tax:
  Unrealized gains (losses) on investment
    securities available for sale                            (5)          (83)
                                                     ----------    ----------

Other comprehensive income (loss)                            (5)          (83)
                                                     ----------    ----------

Comprehensive income                                 $    3,800    $    2,751
                                                     ==========    ==========
</TABLE>


         The accompanying notes are an integral part of these statements.


                                     -33-
<PAGE>   34
                         MegaBank Financial Corporation
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                       Two years ended December 31, 1998
                             (Amounts in thousands)


<TABLE>
<CAPTION>
                                                                                      ACCUMULATED
                                                                                         OTHER
                                                             COMMON       RETAINED   COMPREHENSIVE
                                                              STOCK       EARNINGS       INCOME       TOTAL   
                                                            ----------   ----------  -------------  ----------


<S>                                                         <C>          <C>          <C>           <C>       
       Balance at January 1, 1997                           $    1,961   $    6,744   $      122    $    8,827

       Net income                                                   --        2,834           --         2,834

       Other comprehensive income (loss)                            --           --          (83)          (83)
                                                            ----------   ----------   ----------    ----------

       Balance at December 31, 1997                              1,961        9,578           39        11,578

       Issuance of 1,200,000 shares of common
         stock initial public offering at $11 per
         share, less selling expenses of $1,187,000             12,013           --           --        12,013

       Net income                                                   --        3,805           --         3,805

       Other comprehensive income (loss)                            --           --           (5)           (5)
                                                            ----------   ----------   ----------    ----------

       Balance at December 31, 1998                         $   13,974   $   13,383   $       34    $   27,391
                                                            ==========   ==========   ==========    ==========
</TABLE>

         The accompanying notes are an integral part of this statement.


                                     -34-
<PAGE>   35

                         MegaBank Financial Corporation
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                            Years ended December 31,
                             (Amounts in thousands)


<TABLE>
<CAPTION>
                                                                                      1998          1997   
                                                                                   ----------    ----------
<S>                                                                                <C>           <C>       
           Cash flows from operating activities
             Net income                                                            $    3,805    $    2,834
             Adjustments to reconcile net income to net cash
                provided by operating activities
                Provision for loan losses                                                 530           880
                Depreciation and amortization of fixed assets                             486           325
                Amortization of preferred securities issuance costs                        23            --
                Net discount accretion on investment securities                           (13)          (29)
                Stock dividend                                                            (32)          (16)
                Gain on sale of investment securities available for sale                  (46)         (341)
                Deferred income taxes                                                     (82)         (336)
             Changes in deferrals and accruals
                Accrued interest receivable                                              (206)         (217)
                Accrued interest payable                                                  282            46
                Income taxes payable                                                      (61)           23
                Other, net                                                               (174)          700
                                                                                   ----------    ----------
                    Net cash provided by operating activities                           4,512         3,869

           Cash flows from investing activities
             Purchase of securities available for sale                                 (4,482)       (6,214)
             Proceeds from maturities of securities available for sale                  1,250         3,160
             Proceeds from sales of securities available for sale                       1,158           495
             Net increase in loans                                                    (63,518)      (31,061)
             Expenditures for bank premises and equipment                              (4,533)       (2,494)
                                                                                   ----------    ----------
                    Net cash used in investing activities                             (70,125)      (36,114)

           Cash flows from financing activities
             Net increase in deposits                                                  48,001        37,217
             Trust preferred securities issuance costs                                   (497)         (255)
             Decrease in Federal Home Loan Bank borrowings                             (1,423)         (849)
             Increase in securities sold under repurchase agreements                      443            --
             Proceeds from issuance of trust preferred securities                      12,000            --
             Principal payments on notes payable                                       (2,000)         (628)
             Sale of common stock                                                      12,013            --
                                                                                   ----------    ----------
                    Net cash provided by financing activities                          68,537        35,485
                                                                                   ----------    ----------
           Net increase in cash and cash equivalents                                    2,924         3,240

           Cash and cash equivalents at beginning of year                              13,155         9,915
                                                                                   ----------    ----------

           Cash and cash equivalents at end of year                                $   16,079    $   13,155
                                                                                   ==========    ==========

           Supplemental disclosures of cash flow information 
             Cash paid during the year for:
                Interest expense                                                   $    6,572    $    4,920
                Income taxes                                                            2,062         1,499
</TABLE>



         The accompanying notes are an integral part of these statements.


                                     -35-

<PAGE>   36
                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A - SUMMARY OF ACCOUNTING POLICIES

    NATURE OF OPERATIONS

       MegaBank Financial Corporation ("the Company") owns the shares of and
       acts as parent holding company for MegaBank ("the Bank") and MB Capital
       I. The Bank provides a full range of banking services to individual and
       corporate customers principally in the Denver metropolitan area. A
       majority of the Bank's loans are related to real estate (principally
       residential construction) and commercial activities. The Bank is subject
       to competition from other financial institutions for loans and deposit
       accounts. The Bank is also subject to regulation by certain governmental
       agencies and undergoes periodic examinations by those regulatory
       agencies. In connection with an offering of Cumulative Trust Preferred
       Securities in 1998, the Company formed MB Capital I, which is treated as
       a wholly owned subsidiary of the Company.

    BASIS OF FINANCIAL STATEMENT PRESENTATION

        The financial statements have been prepared in conformity with
        generally accepted accounting principles. In preparing the financial
        statements, management is required to make estimates and assumptions
        that affect the reported amounts of assets and liabilities as of the
        date of the balance sheet and revenues and expenses for the period.
        Actual results could differ significantly from those estimates.

        Material estimates that are particularly susceptible to significant
        change in the near-term relate to the determination of the allowance
        for loan losses. In connection with the determination of the allowance
        for loan losses, management obtains independent appraisals for
        significant properties and assesses estimated future cash flows from
        borrowers' operations and the liquidation of loan collateral.

        Management believes that the allowance for loan losses is adequate.
        While management uses available information to recognize loan losses,
        changes in economic conditions may necessitate revisions in future
        years. In addition, various regulatory agencies, as an integral part of
        their examination process, periodically review the Bank's allowance for
        loan losses. Such agencies may require the Bank to recognize additional
        losses based on their judgments about information available to them at
        the time of their examination.

    PRINCIPLES OF CONSOLIDATION

       The consolidated financial statements include the accounts of the
       Company and its subsidiaries, MegaBank and, in 1998, MB Capital I. All
       intercompany accounts and transactions have been eliminated in the
       consolidated financial statements.

    INVESTMENT SECURITIES

       Management determines the classification of debt securities at the time
       of purchase and reevaluates such designation as of each balance sheet
       date. Debt securities are classified as held-to-maturity when the Bank
       has the positive intent and ability to hold the securities to maturity.
       Held-to-maturity securities are stated at amortized cost.

       Debt securities not classified as held to maturity are classified as
       available for sale. Available for sale securities are stated at fair
       value, with the unrealized gains and losses, net of tax, reported as a
       component of retained earnings in shareholders' equity.


                                     -36-
<PAGE>   37
                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

    INVESTMENT SECURITIES (CONTINUED)

       The amortized cost of debt securities classified as held to maturity or
       available for sale is adjusted for amortization of premiums and
       accretion of discounts to maturity or, in the case of mortgage-backed
       securities, over the estimated life of the security. Such amortization
       and accretion is included as an adjustment to interest income from
       investments. Realized gains and losses and declines in value judged to
       be other-than-temporary are included in net securities gains (losses).
       The cost of securities sold is based on the specific identification
       method.

    LOANS AND ALLOWANCE FOR LOAN LOSSES

       The accrual of interest on loans is discontinued when management
       believes that interest or principal may not be collectible or
       recoverable. Generally, loans that are 90 days past due as to interest,
       principal, or both; loans that are not 90 days past due but where the
       likelihood of collecting the interest, principal, or both within 90 days
       is unlikely; and loans which have been partially charged off will be
       placed on nonaccrual status. When placing a loan in nonaccrual status,
       interest accrued to date is generally reversed. When such a reversal is
       made, interest accrued during prior years is charged to the allowance
       for loan losses. All other interest reversed on nonaccrual loans is
       charged against current year interest income. Payments received on a
       loan on nonaccrual status are charged against the balance of the loan. A
       loan is returned to accrual status when principal and interest are no
       longer past due and collectibility is no longer doubtful. Restructured
       loans are those on which concessions in terms have been made as a result
       of deterioration in a borrower's financial condition. Interest on these
       loans is accrued under the new terms.

       Impaired loans are all specifically identified loans for which it is
       probable that the Company will not collect all amounts due according to
       the contractual terms of the loan agreement. Included in impaired loans
       are all nonaccrual and restructured loans. Loan impairment is measured
       based on the present value of expected future cash flows discounted at
       the loan's original effective interest rate. As practical expedient,
       impairment may be measured based on the loan's observable market price
       or the fair value of the collateral if the loan is collateral dependent.
       When the measure of the impaired loan is less than the recorded
       investment in the loan, the impairment is recorded through a valuation
       allowance. The valuation allowance is a component of the allowance for
       loan losses. Any excess of the carrying value of impaired loans over
       amounts realized from the liquidation of collateral and other sources is
       charged to the allowance for loan losses.

       Loan origination fees, net of certain direct origination costs, are
       deferred and amortized on a basis that approximates level yield over the
       contractual lives of the underlying loans. In addition, fees for a
       commitment to originate or purchase loans are offset against direct loan
       origination costs incurred to make such commitments. The net amounts are
       deferred and, if the commitment is exercised, recognized over the life
       of the related loan as a yield adjustment or, if the commitment expires
       unexercised, recognized as income upon expiration of the commitment.
       When a loan is placed on nonaccrual status, no income is recognized on
       the unamortized balance of loan origination fees until the loan is
       returned to accrual status or is repaid.

       The allowance for loan losses is established through a provision for
       loan losses charged to expenses. Loans are charged against the allowance
       for loan losses when management believes that the collectibility of the
       principal is unlikely or, with respect to consumer installment loans,
       according to an established delinquency schedule. The allowance is an
       amount that management believes will be adequate to absorb losses
       inherent in existing loans, leases and commitments to extend credit,
       based on evaluations of the collectibility and prior loss experience of
       loans, leases and commitments to extend credit. The evaluations take
       into consideration such factors as changes in the nature and volume of
       the portfolio, overall portfolio quality, loan concentrations,


                                     -37-
<PAGE>   38
                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


       NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

    LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

       specific problem loans, leases and commitments, and current and
       anticipated economic conditions that may affect the borrowers' ability
       to pay. Recoveries realized on loans previously charged off are credited
       to the allowance for loan losses.

    LEASEHOLD IMPROVEMENTS AND EQUIPMENT

       Leasehold improvements and equipment are stated at cost. Depreciation is
       provided for in amounts sufficient to relate the cost of depreciable
       assets to operations over their estimated service lives, principally on
       the straight-line method.

    TRUST PREFERRED SECURITIES ISSUANCE COSTS

       Direct costs incurred in connection with the issuance of Trust Preferred
       Securities have been capitalized. These costs are amortized on a
       straight-line basis through the maturity date of the securities.

    INCOME TAXES

       Provisions for income taxes are based on taxes payable or refundable for
       the current year (after exclusion of non-taxable income such as interest
       on state and municipal securities) and deferred taxes on temporary
       differences between the amount of taxable income and pretax financial
       income and between the tax bases of assets and liabilities and their
       reported amounts in the financial statements. Deferred tax assets and
       liabilities are included in the financial statements at currently
       enacted income tax rates applicable to the period in which the deferred
       tax assets and liabilities are expected to be realized or settled. As
       changes in tax laws or rates are enacted, deferred tax assets and
       liabilities are adjusted through the provision for income taxes.

    CASH AND CASH EQUIVALENTS

       For purposes of the Consolidated Statements of Cash Flows, cash and cash
       equivalents include cash and due from banks, other interest-bearing
       deposits and federal funds sold. Generally federal funds sold are held
       for one day.

    PER SHARE COMPUTATIONS

       Basic earnings per share is based on the weighted average number of
       common shares outstanding during each year. Share amounts have been
       adjusted to reflect a thirty-for-one common stock split which took place
       in September 1998. Diluted earnings per share is computed by dividing
       net earnings by the weighted average number of common shares outstanding
       during the year plus the common share equivalents related to outstanding
       stock options. Weighted average common shares outstanding and diluted
       shares deemed outstanding for 1998 and 1997 were as follows:

<TABLE>
<CAPTION>
                                                                                 1998         1997     
                                                                              ----------   ----------

<S>                                                                            <C>          <C>      
         Weighted average common shares outstanding                            6,542,135    6,407,340
         Common share equivalents related to outstanding stock options            12,187           -- 
                                                                              ----------   ----------

                                                                               6,554,322    6,407,340
                                                                              ==========   ==========
</TABLE>



                                     -38-
<PAGE>   39
                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

    STOCK-BASED COMPENSATION

        The Company has elected to follow Accounting Principles Board Opinion
        No. 25, Accounting for Stock Issued to Employees, (APB 25) and related
        interpretations in accounting for any stock options issued to
        employees. Under APB 25, no compensation expense is recorded for any
        stock options for which the exercise price equals the market price of
        the underlying stock on the date of the grant. The Company has adopted
        the disclosure-only provisions of Statement of Financial Accounting
        Standards No. 123, Accounting for Stock-Based Compensation (SFAS No.
        123).

    RECENT ACCOUNTING PRONOUNCEMENTS

      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 an enterprise to
        classify items of other comprehensive income by their nature in the
        financial statements and to display the accumulated balance of other
        comprehensive income separately from other components of equity in the
        balance sheet. The only component of comprehensive income consists of
        net unrealized holding gains and losses on available for sale
        securities, less the related tax effects. Reclassification of financial
        statements for earlier periods, provided for comparative purposes, is
        required.

        The Company has disclosed comprehensive income in a separate income
        statement.

      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.

      Derivative Instruments

        In June 1998, the FASB issued Statement of Financial Accounting
        Standards No. 133, Accounting for Derivative Instruments and Hedging
        Activities, (SFAS No. 133). This statement requires the recognition of
        all derivative financial instruments as either assets or liabilities in
        the balance sheet and measurement of those instruments at fair value.
        The accounting for gains and losses associated with changes in the fair
        value of a derivative and the effect on the consolidated financial
        statements will depend on its hedge designation and whether the hedge
        is highly effective in achieving offsetting changes in the fair value
        or cash flows of the asset or liability hedged. Under the provisions of
        SFAS No. 133, the method that will be used for assessing the
        effectiveness of a hedging derivative, as well as the measurement
        approach for determining the ineffective aspects of the hedge, must be
        established at the inception of the hedge. The methods must be
        consistent with the entity's approach to managing risk.


                                     -39-
<PAGE>   40
                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

    RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

        Derivative Instruments (Continued)

        SFAS No. 133 is effective for all fiscal quarters of fiscal years
        beginning after June 15, 1999, with initial application as of the
        beginning of an entity's fiscal quarter. On that date, hedging
        relationships must be designated anew and documented pursuant to the
        provisions of this statement. Earlier application is encouraged, but is
        permitted only as of the beginning of any fiscal quarter beginning
        after June 15, 1999. Retroactive application to financial statements of
        prior periods is prohibited. The Company does not currently have any
        derivative instruments nor is it involved in hedging activities.

    RECLASSIFICATIONS

        Certain reclassifications have been made to the 1997 consolidated
        financial statements to conform with the presentation adopted in 1998.

NOTE B - INVESTMENT SECURITIES

    At December 31, 1998, the Company had securities with the following
    amortized cost and estimated fair market values (in thousands):

<TABLE>
<CAPTION>
                                                          Gross         Gross        Estimated
                                            Amortized   unrealized    unrealized      market
                                              cost        gains         losses         value   
                                           ----------   ----------    ----------    ----------

<S>                                        <C>          <C>           <C>           <C>       
Securities available for sale
  U.S. Treasury securities                 $    4,497   $       52    $       --    $    4,549
 State and political subdivisions               7,891           91            --         7,982
 Corporate debt securities                      2,740          150          (149)        2,741
 Corporate equity securities                      495           --           (90)          405
                                           ----------   ----------    ----------    ----------

                                           $   15,623   $      293    $     (239)   $   15,677
                                           ==========   ==========    ==========    ==========
</TABLE>

    The amortized cost and estimated market value of debt securities at
    December 31, 1998 by contractual maturity are shown below (in thousands).
    Expected maturities will differ from contractual maturities because
    borrowers may have the right to call or prepay obligations without call or
    prepayment penalties.

<TABLE>
<CAPTION>
                                                                   Estimated
                                                      Amortized     market
                                                        cost         value   
                                                     ----------   ----------

<S>                                                  <C>          <C>       
       Due in one year or less                       $    2,998   $    3,023
       Due after one year through five years              1,499        1,526
       Due after five years through ten years               636          638
       Due after ten years                                9,995       10,085
                                                     ----------   ----------

                                                     $   15,128   $   15,272
                                                     ==========   ==========
</TABLE>


                                     -40-
<PAGE>   41
                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE B - INVESTMENT SECURITIES (CONTINUED)

    Securities included in the accompanying balance sheet at December 31, 1998
    with a carrying amount of $5,920,000 have been pledged as collateral for
    public deposits and for other purposes as required or permitted by law.

    Available for sale securities were sold in 1998 and 1997 and are summarized
as follows (in thousands):

<TABLE>
<CAPTION>
                                         1998         1997
                                      ----------   ----------

<S>                                   <C>          <C>       
              Gains realized          $       46   $      341
              Losses realized                 --           -- 
                                      ----------   ----------

                                      $       46   $      341
                                      ==========   ==========
</TABLE>

NOTE C - LOANS AND ALLOWANCE FOR LOAN LOSSES

    The components of the loan portfolio at December 31, 1998 are summarized as
    follows (in thousands):

<TABLE>
<S>                                                       <C>       
              Land development and construction           $  136,243
              Commercial                                      47,225
              Installment and other                            7,910
                                                          ----------
                                                             191,378
              Less unearned loan fees                         (1,776)
                                                          ----------
                                                          $  189,602
                                                          ==========
</TABLE>

    Transactions in the allowance for loan losses for 1998 and 1997 are as
    follows (in thousands):

<TABLE>
<CAPTION>
                                    1998          1997 
                                 ----------    ----------
<S>                              <C>           <C>       
Balance at beginning of year     $    2,083    $    1,150
Provision for loan losses               530           880
Recoveries                                7            62
Loans charged off                       (10)           (9)
                                 ----------    ----------

Balance at end of year           $    2,610    $    2,083
                                 ==========    ==========
</TABLE>

    There were no accruing loans having payments delinquent more than ninety
    days at December 31, 1998 and 1997.

    Loans on which the accrual of interest has been discontinued or reduced
    amounted to $3,388,000 and $1,604,000 at December 31, 1998 and 1997,
    respectively.


                                     -41-
<PAGE>   42
                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE C - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

    Information related to impaired loans is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                  1998         1997 
                                                               ----------   ----------
<S>                                                            <C>          <C>       
Total impaired loans at end of year                            $    3,388   $    1,604
Average impaired loans during the year                              1,529        1,600
Allowance for loan loss relative to impaired loans                    551           85
</TABLE>

    No interest income was recognized during the periods that loans were deemed
    to be impaired. The Company is not committed to lend additional funds to
    debtors whose loans are impaired.

    No loans were transferred to foreclosed real estate in 1998 or 1997.

NOTE D - BANK PREMISES, LEASEHOLD IMPROVEMENTS AND EQUIPMENT

    At December 31, 1998, bank premises, leasehold improvements and equipment,
    less accumulated depreciation and amortization, consisted of the following
    (in thousands):

<TABLE>
<S>                                                              <C>   
          Buildings and improvements                             $    4,761
          Leasehold improvements                                        450
          Equipment                                                   3,205
          Land                                                        2,060
                                                                 ----------
                                                                     10,476

          Less accumulated depreciation and amortization             (1,630)
                                                                 ----------

                                                                 $    8,846
                                                                 ==========
</TABLE>

NOTE E - ACCRUED INTEREST RECEIVABLE

    Accrued interest receivable at December 31, 1998 is summarized as follows
(in thousands):

<TABLE>
<S>                                                            <C>   
Loans                                                          $      868
Investment securities and interest-bearing deposits                   236
                                                               ----------

                                                               $    1,104
                                                               ==========
</TABLE>

                                     -42-

<PAGE>   43
                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE F - DEPOSITS

    Deposits are summarized at December 31, 1998 as follows (dollars in
    thousands):

<TABLE>
<CAPTION>
                                                                        Weighted
                                                                        average
                                                                        interest
                                            Balance       Percent         rate    
                                           ----------    ----------    ----------
<S>                                        <C>           <C>           <C>     
        Demand, noninterest-bearing        $   54,093         28.49%          --%
        NOW accounts                            7,992          4.21          3.21
        Money market deposit accounts          64,452         33.94          4.59
        Savings deposits                        6,271          3.30          3.10
        Certificates of deposit
          Under $100,000                       37,138         19.56          5.76
          $100,000 and over                    19,933         10.50          5.52
                                           ----------    ----------    ----------

                                           $  189,879        100.00%         3.49%
                                           ==========    ==========    ==========
</TABLE>

    Interest expense on deposits for 1998 and 1997 is summarized as follows (in
    thousands):

<TABLE>
<CAPTION>
                                              1998         1997 
                                           ----------   ----------

<S>                                        <C>          <C>       
        NOW accounts                       $      239   $      157
        Money market deposit accounts           2,800        2,296
        Savings deposits                          170          160
        Certificates of deposit
          Under $100,000                        1,850        1,444
          $100,000 and over                       683          578
                                           ----------   ----------
                                           $    5,742   $    4,635
                                           ==========   ==========
</TABLE>

    As of December 31, 1998, the Company has brokered deposits totaling
    $3,240,000.

    At December 31, 1998, the scheduled maturities of certificates of deposit
   are as follows (in thousands):

<TABLE>
<CAPTION>
                                                 Year ending December 31,  
                         --------------------------------------------------------------------------
             Rate          1999       2000       2001       2002       2003    Thereafter   Total  
        --------------   --------   --------   --------   --------   --------  ----------  --------

<S>                      <C>        <C>        <C>        <C>        <C>        <C>        <C>     
        3.99% or less    $    745   $     --   $     --   $     --   $     --   $     --   $    745
        4.00% to 4.99%      6,504        505          5         --          1         77      7,092
        5.00% to 5.99%     36,013      7,051         92         --          5         --     43,161
        6.00% to 6.99%      2,338      1,599        567      1,380        118         71      6,073
                         --------   --------   --------   --------   --------   --------   --------

                         $ 45,600   $  9,155   $    664   $  1,380   $    124   $    148   $ 57,071
                         ========   ========   ========   ========   ========   ========   ========
</TABLE>


                                     -43-

<PAGE>   44
                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE G - BORROWING COMMITMENTS

    As of December 31, 1998, the Bank had lines of credit with Federal Home
    Loan Bank, Bankers' Bank of the West, and the Federal Reserve Bank of
    $9,000,000, $14,500,000, and $500,000, respectively. There were no advances
    outstanding on these lines of credit as of December 31, 1998.

NOTE H - COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES

    In February 1998, MB Capital I, a special-purpose wholly-owned Delaware
    trust subsidiary of the Company, completed an offering of 1,200,000 shares
    (issue price of $10 per share) totaling $12.0 million of fixed-rate 8.75%
    Cumulative Trust Preferred Securities (Preferred Securities), which are
    guaranteed by the Company. MB Capital I invested the total proceeds it
    received in 8.75% Junior Subordinated Deferrable Interest Debentures
    (Debentures) issued by the Company. Interest paid on the Debentures will be
    distributed to the holders of the Preferred Securities. As a result, under
    current tax law, distributions to the holders of the Preferred Securities
    will be tax deductible by the Company. Distributions payable on the
    Preferred Securities are recorded as interest expense in the consolidated
    statements of income. These Debentures are unsecured and rank junior and
    are subordinate in right of payment to all senior debt of the Company.

    The distribution rate payable on the Preferred Securities is cumulative and
    payable quarterly in arrears and commenced on April 15, 1998. The Company
    has the right, subject to events of default, to defer payments of interest
    on the Debentures at any time by extending the interest payment period for
    a period not exceeding 20 consecutive quarters with respect to each
    deferral period, provided that no extension period may extend beyond the
    redemption or maturity date of the Debentures. The Preferred Securities are
    subject to mandatory redemption upon repayment of the Debentures. The
    Debentures mature on February 9, 2028, which may be shortened to not
    earlier than February 9, 2003, if certain conditions are met, or at any
    time upon the occurrence and continuation of certain changes in either the
    tax treatment or the capital treatment of MB Capital I, the Debentures or
    the Preferred Securities. The Company has the right to terminate MB Capital
    I and cause the Debentures to be distributed to the holders of the Capital
    Securities in liquidation of such trust, all subject to the Company having
    received prior approval of the Office of Thrift Supervision, if required.

NOTE I - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

    The Company is a party to financial instruments with off-balance-sheet risk
    in the normal course of business to meet the financing needs of its
    customers. These financial instruments include commitments to extend credit
    and stand-by letters of credit.

    Those instruments involve, to a varying degree, elements of credit risk in
    excess of the amount recognized in the statement of financial position. The
    contract amounts of those instruments reflect the extent of involvement the
    Bank has in particular classes of financial instruments.

    The Company's exposure to credit loss in the event of non-performance by
    the other party to the financial instrument for commitments to extend
    credit and stand-by letters of credit is represented by the contractual
    notional amount of those instruments. The Company uses the same credit
    policies in making commitments and conditional obligations as it does for
    on-balance-sheet instruments.

    Financial instruments whose contract amounts represent credit risk as of
    December 31, 1998 are as follows (in thousands):

<TABLE>
<S>                                                                 <C>     
                 Commitments to extend credit                       $ 99,761
                   Stand-by letters of credit                         12,779
</TABLE>


                                     -44-
<PAGE>   45
                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE I - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)

    Commitments to extend credit are agreements to lend to a customer as long
    as there is no violation of any condition established in the contract.
    Commitments generally have fixed expiration dates or other termination
    clauses and may require payment of a fee. Since many of the commitments may
    expire without being drawn upon or be participated to other financial
    institutions, the total commitment amounts do not necessarily represent
    future cash requirements. The Company evaluates each customer's
    credit-worthiness on a case-by-case basis.

    The amount of collateral obtained if deemed necessary by the Company upon
    extension of credit is based on management's credit evaluation. Collateral
    held varies, but may include accounts receivable, inventory, property,
    plant and equipment and income-producing commercial properties.

    Stand-by letters of credit are conditional commitments issued by the
    Company to guarantee the performance of a customer to a third party. The
    credit risk involved in issuing letters of credit is essentially the same
    as that involved in extending loan facilities to customers.

NOTE J - LEASE COMMITMENTS

    Future minimum rental and lease payments under noncancellable operating
    leases for premises, expiring at various dates through 2006 are as follows
    (in thousands):

<TABLE>
<CAPTION>
            Year ending
            December 31,
            ------------

<S>                                                                 <C>    
                  1999                                              $   476
                  2000                                                  476
                  2001                                                  474
                  2002                                                  476
                  2003                                                  469
            Thereafter                                                  751
                                                                    -------
                                                                    $ 3,122
                                                                    =======
</TABLE>

    Total lease expense for all operating leases was $445,000 and $436,000 in
1998 and 1997, respectively.


                                     -45-
<PAGE>   46
                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE K - INCOME TAXES

    The provision for income taxes for 1998 and 1997 consists of the following
(in thousands):

<TABLE>
<CAPTION>
                                                       1998        1997 
                                                      ------      ------
<S>                                                   <C>         <C>   
        Current
          Federal                                     $1,749      $1,406
          State                                          253         202
                                                      ------      ------
                                                       2,002       1,608

        Deferred
          Federal                                        (71)       (299)
          State                                          (11)        (37)
                                                      ------      ------
                                                         (82)       (336)
                                                      ------      ------

                                                      $1,920      $1,272
                                                      ======      ======
</TABLE>

    The effective income tax rate varies from the statutory federal rate
    because of several factors, the most significant being nontaxable interest
    income earned on obligations of state and municipalities. The following
    table reconciles the Company's effective tax rate to the statutory federal
    rate.

<TABLE>
<CAPTION>
                                                       1998                          1997      
                                             ------------------------     ------------------------
                                               Amount       Percent        Amount        Percent
                                             ----------    ----------     ----------    ----------
                                                  (in thousands)                (in thousands)

<S>                                          <C>           <C>            <C>            <C>  
    Tax expense at statutory rate            $    1,946          34.0%    $    1,396          34.0%
    Increase (decrease) in taxes due to:
      Tax exempt municipal interest                (235)         (4.1)          (187)         (4.5)
      State tax, net of federal tax effect          167           2.9            122           3.0
       Other                                         42            .7            (59)         (1.5)
                                             ----------    ----------     ----------    ----------

          Total provision for income taxes   $    1,920          33.5%    $    1,272          31.0%
                                             ==========    ==========     ==========    ==========
</TABLE>

    Deferred tax assets and liabilities are recorded based on the differences
    between financial statement and tax basis of assets and liabilities and the
    tax rates in effect when these differences are expected to reverse. Timing
    differences in the recognition of revenue and expense for tax and financial
    reporting purposes resulted in a deferred tax asset as of December 31, 1998
    as follows (in thousands):

<TABLE>
<S>                                                                  <C>
            Deferred tax assets
               Provision for loan losses                             $ 833
               Recognition of loan fees                                 13
                                                                     -----
                      Total deferred tax assets                        846

           Deferred tax liabilities
               Depreciation                                            (86)
               Market value adjustment to investment securities
                 available for sale                                    (20)
                 Other                                                 (22)
                                                                     -----
                      Total deferred tax liabilities                  (128)
                                                                     -----
                      Net deferred tax asset                         $ 718
                                                                     =====
</TABLE>


                                     -46-
<PAGE>   47
                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE L - RELATED PARTY TRANSACTIONS

       As discussed in note P, the Company, as of September 1, 1998, became a
       unitary thrift holding company, and as such, has the power to engage in
       activities not currently allowed under the Bank Holding Company Act.
       Orchard Valley Financial Corporation ("OVFC"), a bank holding company
       related to the Company through common ownership, was notified that it
       would either be required to reduce its ownership in the Company to less
       than 5% or the Company would be prevented from exercising its powers
       under its new regulations. OVFC agreed to reduce its ownership of the
       Company to under 5%. The Company paid OVFC $355,000 in 1998 to reimburse
       it for the income tax liability incurred due to the involuntary sale of
       the Company's stock.

       The Company has entered into certain loan participations with First
       State Bank of Hotchkiss, a financial institution related through common
       ownership. Approximate loan principal balances outstanding under these
       participations at December 31, 1998 are summarized as follows (in
       thousands):

<TABLE>
<S>                                                                  <C>   
         Participations sold                                         $9,703
         Participations purchased                                     1,346
</TABLE>

       The Company has also sold loan participations to other related parties
       (shareholders, directors, family members, businesses related through
       common ownership). At December 31, 1998 the participations sold to
       related parties were approximately $4,018,000.

       The following is an analysis of loans that were made to shareholders,
       directors and executive officers of the Company, and to corporations and
       others associated with those individuals (in thousands):

<TABLE>
<S>                                                                  <C>   
         Balance at January 1, 1998                                  $  553
         New loans                                                    1,202
         Repayments                                                    (450)
                                                                     ------
         Balance at December 31, 1998                                $1,305
                                                                     ======
</TABLE>

       Certain officers, directors, and shareholders of the Company personally
       guaranteed a note payable which was repaid in 1998. In return for the
       guarantee, the Company agreed to indemnify the guarantors for all
       liabilities, costs or expenses relating to the guarantee and to provide
       additional compensation to the guarantors. The additional compensation
       has consisted of an aggregate fee equal to 1.5% of the outstanding
       balance of the loan on each anniversary date plus a performance bonus
       based on earnings of the Bank as specified in the agreement. Total fees
       paid to the guarantors were $350,000 and $329,000 in 1998 and 1997,
       respectively.

       In March 1997, the Company entered into a consulting agreement with a
       company owned by an individual who is an officer, director and
       shareholder of the Company. Payments by the Company under the agreement
       are $5,000 per month. The term of the agreement is for one year, but
       automatically renews unless explicitly terminated by either party.

 NOTE M - EMPLOYEE BENEFITS

       Through June 30, 1998, the Bank had an IRA contribution plan available
       for all personnel who have been employed at least nine months. In 1998,
       the Board of Directors of the Bank approved the MegaBank 401(k) Savings
       Plan. The Plan was effective July 1, 1998. Employees who have completed
       three months of service, and meet other conditions, are eligible for the
       Plan. The Bank will match 50% of the first 6% of compensation which
       employees contribute to the Plan. The Bank's contributions to the Plan
       vest ratably over six years. The Plan replaces the IRA contribution
       plan. Contributions in 1998 and 1997 were $21,000 and $32,000,
       respectively.


                                      -47-

<PAGE>   48
                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS

    The following table presents estimated fair values of the Company's
    financial instruments as of December 31, 1998 (in thousands):

<TABLE>
<CAPTION>
                                                                                           Carrying     Fair
                                                                                             Amount     Value   
                                                                                           --------   ---------
<S>                                                                                        <C>        <C>      
         Financial assets
           Cash and due from banks                                                         $ 10,326   $  10,326
           Federal funds sold                                                                 5,625       5,625
           Other interest-bearing deposits                                                      128         128
           Investment securities available for sale                                          15,667      15,667
           Federal Home Loan Bank stock                                                         482         482
           Loans, less allowance for loan losses                                            186,992     187,163
           Accrued interest receivable                                                        1,104       1,104

         Financial liabilities
            Deposits
               Non-interest bearing                                                          54,092      54,092
               Interest bearing                                                             135,785     136,146

            Accrued interest payable                                                            434         434
            Short-term borrowings                                                               443         443
            Company obligated manditorily redeemable
              preferred securities of subsidiary trust holding
              solely Junior Subordinated Debentures                                          12,000      11,250

           Unrecognized financial instruments (net
             of contract amount)
               Commitments to extend credit                                                  99,761      99,761
               Standby letters of credit                                                     12,779      12,779
</TABLE>

     The following summary presents the methodologies and assumptions used to
     estimate the fair value of the Company's financial instruments. The
     Company operates as a going concern and except for its investment
     portfolio, no active market exists for its financial instruments. Much of
     the information used to determine fair value is highly subjective and
     judgmental in nature and, therefore, the results may not be precise. The
     subjective factors include, among other things, estimates of cash flows,
     risk characteristics, credit quality and interest rates, all of which are
     subject to change. Since the fair value is estimated as of the date, the
     amounts which will actually be realized or paid upon settlement or
     maturity of the various financial instruments could be significantly
     different.

     CASH AND CASH EQUIVALENTS

         For these short-term instruments, the carrying amount approximates
     fair value.


                                     -48-
<PAGE>   49
                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

     INVESTMENTS

       For securities held as investments, fair value equals quoted market
       price, if available. If a quoted market price is not available, fair
       value is estimated using quoted market prices for similar securities.
       The carrying amount of accrued interest receivable approximates its fair
       value.

     LOANS

       The fair value of fixed rate loans is estimated by discounting the
       future cash flows using the current rates at which similar loans would
       be made to borrowers with similar credit ratings and for the same
       remaining maturities. For variable rate loans, the carrying amount is a
       reasonable estimate of fair value. For loans where collection of
       principal is in doubt, an allowance for losses has been estimated. Loans
       with similar characteristics were aggregated for purposes of the
       calculations. The carrying amount of accrued interest approximates its
       fair value.

     DEPOSITS

       The fair value of demand deposits, savings accounts, NOW accounts, and
       certain money market deposits is the amount payable on demand at the
       reporting date (i.e. their carrying amount). The fair value of fixed
       maturity time deposits is estimated using a discounted cash flow
       calculation that applies the rates currently offered for deposits of
       similar remaining maturities. The carrying amount of accrued interest
       payable approximates its fair value.

     SHORT-TERM BORROWINGS

       For short-term borrowings, the carrying amount is a reasonable estimate
       of fair value.

     LONG-TERM BORROWINGS

       The fair value of long-term borrowings is estimated by discounting the
       future cash flows using the current rate at which a similar loan could
       be financed.

     TRUST PREFERRED SECURITIES

       For Trust Preferred Securities, the fair value is determined based on
       the quoted market price.

     COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND LINES OF CREDIT

       The fair value of commitments is estimated using the fees currently
       charged to enter into similar agreements, taking into account the
       remaining terms of the agreements and the present credit worthiness of
       the counterparts. For fixed-rate loan commitments, fair value also
       considers the difference between current levels of interest rates and
       the committed rates. The fair value of letters of credit and lines of
       credit is based on fees currently charged for similar agreements or on
       the estimated cost to terminate them or otherwise settle the obligations
       with the counterparts at the reporting date.


                                      -49-

<PAGE>   50
                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE O - EQUITY TRANSACTIONS AND AGREEMENTS

      AUTHORIZED CAPITAL AND REVERSE STOCK SPLIT

         Effective January 15, 1998, the Company increased its authorized
         capital stock to 50 million shares of Common Stock and authorized 10
         million shares of Preferred Stock. The increase was made to provide
         for possible future needs of the Company. In 1998, the Company
         effected a thirty-for-one stock split. References in the accompanying
         financial statements to numbers of shares and per share amounts have
         been retroactively restated to reflect the stock split.


      STOCK PURCHASE AGREEMENT

         The Company has a Stock Purchase Agreement with certain of its
         shareholders. This agreement, as amended and restated, provides that
         upon the death of the Company's Chairman of the Board of Directors,
         the shareholders will have the option to require the Company to
         purchase a pro rata portion of their shares of the Company's stock to
         the extent the Company receives proceeds from a life insurance policy
         on the life of the Chairman. These shareholders currently hold an
         aggregate of 2,709,650 shares of common stock. Based on an amendment
         to the agreement in 1998, the purchase price of the common stock would
         be based on the greater of 80% of its average closing bid price on any
         recognized quotation system for a designated period or its appraised
         value. The Company has purchased a life insurance policy in the amount
         of $3,000,000 on the Chairman.

      STOCK INCENTIVE PLAN

         In August 1998, the Company adopted the 1998 Long-Term Incentive Plan
         (the "Incentive Plan"). The purpose of the Incentive Plan is to
         provide continuing incentives to the Company's and its subsidiaries'
         key employees, which may include officers and members of the Board of
         Directors. The Incentive Plan provides for an authorization of 500,000
         shares of common stock for issuance thereunder. Under the Incentive
         Plan, the Company may grant to participants awards of stock options,
         restricted stock, stock appreciation rights, performance shares or any
         combination thereof.

         The Incentive Plan is administered by the Board of Directors or a
         Compensation Committee of the Board of Directors composed of at least
         two non-employee members. Subject to the terms of the Incentive Plan,
         the Board or Compensation Committee determines, among other matters,
         the persons to whom awards are granted and the terms of the awards.

         Under the stock option component of the Incentive Plan, the Company
         may grant both incentive stock options ("incentive stock options")
         intended to qualify under Section 422 of the Internal Revenue Code of
         1986, as amended (the "Code"), and options which are not qualified as
         incentive stock options. Incentive stock options may not be granted at
         an exercise price of less than the fair market value of the common
         stock on the date of grant, while non-qualified stock options may be
         granted at any exercise price. The exercise price may be paid in cash,
         in shares of common stock (valued at fair market value at the date of
         exercise) or by a combination of such means of payment, as may be
         determined by the Board or Compensation Committee.

         Under the restricted component of the Incentive Plan, the Company may
         award shares of restricted stock upon payment of consideration as
         determined by the Board or Compensation Committee. Upon the award, a
         restriction period (not to exceed ten years) and/or performance goals
         may be set. Subject to the terms of each individual award, the
         recipient forfeits a restricted stock award upon termination of
         employment during the restriction period and any consideration paid by
         the participant is returned.


                                     -50-

<PAGE>   51
                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE O - EQUITY TRANSACTIONS AND AGREEMENTS (CONTINUED)

       STOCK INCENTIVE PLAN (CONTINUED)

         An award of a stock appreciation right allows a recipient to receive a
         cash payment or shares of common stock to the extent of any
         appreciation in the book value or the fair market value of the common
         stock of the Company over a specified period of time. Stock
         appreciation rights may also be awarded in tandem with stock options,
         and recipients of such tandem awards may elect to exercise the award
         as a stock option or as a stock appreciation right.

         Under the performance share component of the Incentive Plan,
         recipients are awarded a specified number of shares of common stock of
         the Company subject to the recipient or the Company attaining
         specified performance goals as the Board or Compensation Committee may
         determine. The Board or Compensation Committee, under certain
         circumstances, may waive or modify performance criteria on existing
         performance share awards.

         The Incentive Plan will be discontinued in the event of the
         dissolution or liquidation of the Company or in the event of a
         reorganization (such as a merger, consolidation, or sale of
         substantially all of the assets of the Company) in which the Company
         is not the surviving or acquiring company, or in which the Company is
         or becomes a wholly-owned subsidiary of another company after the
         effective date of the reorganization and no plan or agreement
         respecting the reorganization is established which specifically
         provides for the continuation of the Incentive Plan and the change,
         conversion, or exchange of the common stock relating to existing
         awards under the Incentive Plan for securities of another corporation.
         Upon the dissolution of the Incentive Plan, all awards will become
         fully vested and all outstanding options and stock appreciation rights
         will become immediately exercisable by the holder thereof.

         On September 1, 1998, the Company granted options to purchase up to
         108,500 shares of common stock to directors and employees of the
         Company, exercisable as follows:

<TABLE>
<CAPTION>
                     Options                              Exercise price
                     granted                                 per share  
                     -------                              --------------
<S>                                                       <C>           
                     58,500                               $           10
                     50,000                                           11
</TABLE>

         These options were issued at the completion of the Company's public
         stock offering.

         Of the 108,500 options issued, 15,000 were nonqualified stock options
         and 93,500 were incentive stock options. The exercise price of the
         options was the estimated fair market value of the Company's common
         stock as of the date granted. Options must be exercised within a
         ten-year period. Options to purchase shares of common stock are
         exercisable as follows:

<TABLE>
<CAPTION>
                                                          Exercisable
                     On or after                            options  
                  -----------------                       -----------

<S>                                                          <C>   
                  September 1, 2000                          10,000
                  September 1, 2001                          32,550
                  September 1, 2002                          65,950
                                                            -------

                                                            108,500
                                                            =======
</TABLE>


                                     -51-

<PAGE>   52
                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE O - EQUITY TRANSACTIONS AND AGREEMENTS (CONTINUED)

       STOCK INCENTIVE PLAN (CONTINUED)

         The Stock Incentive Plan is accounted for under APB Opinion No. 25 and
         related interpretations. Accordingly, no compensation cost is
         recognized for the Plan. Had compensation cost for the Plan been
         determined consistent with the fair value method of SFAS No. 123, the
         Company's net income and income per share for the year ended December
         31, 1998 would not have been materially effected.

NOTE P - REGULATORY MATTERS

   The Company received permission from the Office of Thrift Supervision,
   Department of Treasury, to change its status to a savings and loan holding
   company within the meaning of the Home Owners' Loan Act of 1933 ("HOLA"), as
   amended. The Company was registered with the Office of Thrift Supervision
   ("OTS") and subject to OTS regulations, examinations, supervision and
   reporting requirements. In addition, the Bank received permission from the
   Office of Thrift Supervision to convert the Bank's charter from a
   state-chartered stock institution to a federal stock savings bank.
   Management believes that the Bank's balance sheet is currently more
   reflective of a thrift than a commercial bank, and that the flexibility and
   opportunities with a thrift charter are more in line with the long range
   plans of the Bank than those that are available under its present charter.
   The Company effected both of the conversions on September 1, 1998. In
   connection with its charter conversion, the Bank changed its name from
   MegaBank of Arapahoe to MegaBank.

   The Bank is subject to various regulatory capital requirements administered
   by the OTS. Failure to meet minimum capital requirements can initiate
   certain mandatory, and possibly additional discretionary, actions by
   regulators that, if undertaken, could have a direct material effect on the
   Bank's financial statements. Under capital adequacy guidelines and the
   regulatory framework for prompt corrective action, the Bank must meet
   specific capital guidelines that involve quantitative measures of the bank's
   assets, liabilities, and certain off-balance sheet items as calculated under
   regulatory accounting practices. The Bank's capital amounts and
   classification are also subject to qualitative judgments by the regulators
   about components, risk weightings, and other factors.

   Quantitative measures established by regulation to ensure capital adequacy
   require the Bank to maintain minimum amounts and ratios (set forth in the
   table below) of total and Tier 1 capital to risk-weighted assets (as
   defined), and of Tier 1 (core) capital and tangible capital to adjusted
   total assets. Management believes, as of December 31, 1998, that the Bank
   meets all capital adequacy requirements to which it is subject.


                                     -52-

<PAGE>   53
                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE P - REGULATORY MATTERS (CONTINUED)

   The Bank is well capitalized under the regulatory framework for prompt
   corrective action. To be categorized as well capitalized, institutions must
   maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 (core)
   ratios as set forth in the table below as of December 31, 1998:

<TABLE>
<CAPTION>
                                                                                               To be well
                                                                                             capitalized under
                                                                       For capital           prompt corrective
                                                   Actual            adequacy purposes       action provisions
                                               -------------         ---------------         ----------------  
                                               Amount  Ratio         Amount    Ratio         Amount     Ratio  
                                               ------  -----         ------    -----         ------     -----  
                                                                   (Amounts in thousands)

<S>                                           <C>       <C>         <C>         <C>          <C>       <C>  
         Total risk-based capital
           (to risk-weighted assets)          $30,315   15.38%       $15,766    >8.0%        $19,708   >10.0%
                                                                                -                      -
         Tier 1 risk-based capital
           (to risk-weighted assets)           28,410   14.42%         7,883    >4.0%         11,825   > 6.0%
                                                                                -                      -
         Core capital
           (to adjusted tangible assets)       28,410   12.53%         6,802    >3.0%         11,337   > 5.0%
                                                                                -                      -
         Tangible capital
           (to tangible assets)                28,410   12.53%         3,401    >1.5%            N/A      N/A
                                                                                -                    
</TABLE>

   Cash dividends paid to the Company by the Bank amounted to $1,000,000 in
   1997. The Bank paid no dividends in 1998. The payment of dividends to the
   Company by the Bank is subject to various regulatory limitations.


                                     -53-
<PAGE>   54
                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE Q - CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY ONLY

   The following presents the condensed balance sheet as of December 31, 1998
   and statements of income and cash flows for each of the two years in the
   period ended December 31, 1998 for MegaBank Financial Corporation:


                         MegaBank Financial Corporation
                                 BALANCE SHEET
                               December 31, 1998
                             (Amounts in thousands)


<TABLE>
<CAPTION>
                       ASSETS

<S>                                                            <C>       
   Cash and interest bearing deposits                          $    6,927
   Investment securities available for sale                         1,746
   Investment in bank subsidiary                                   28,872
   Investment in trust subsidiary                                     371
   Property and equipment                                           1,233
   Trust preferred securities issuance cost, net                      728
   Other assets                                                       153
                                                               ----------

         Total assets                                          $   40,030
                                                               ==========

                 LIABILITIES AND
              SHAREHOLDERS' EQUITY

   Accrued interest and other liabilities                      $      268
   Company obligated manditorily redeemable
     preferred securities of subsidiary trust holding
     solely Junior Subordinated Debentures                         12,371
   Shareholders' equity                                            27,391
                                                               ----------

         Total liabilities and shareholders' equity            $   40,030
                                                               ==========
</TABLE>


                                     -54-
<PAGE>   55
                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE Q - CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY ONLY (CONTINUED)


                         MegaBank Financial Corporation
                              STATEMENTS OF INCOME
                            Years ended December 31,
                             (Amounts in thousands)

<TABLE>
<CAPTION>
                                                                  1998          1997
                                                               ----------    ----------

<S>                                                            <C>           <C>       
   Income
     Dividends from subsidiary                                 $       --    $    1,000
     Interest                                                         148            12
     Rental income from subsidiary                                    407           341
     Other rental income                                              121           137
     Gain on sale of investment securities                             34           341
     Miscellaneous income                                               6            -- 
                                                               ----------    ----------
         Total income                                                 716         1,831

   Expenses
     Interest                                                         981           179
     Occupancy and equipment expense                                  513           362
     Other                                                            853           463
                                                               ----------    ----------
         Total expenses                                             2,347         1,004
                                                               ----------    ----------

   Income (loss) before income taxes and equity
     in undistributed net income of subsidiaries                   (1,631)          827

   Income tax benefit                                                 605            64
                                                               ----------    ----------

   Income (loss) before undistributed net
    income of subsidiaries                                         (1,026)          891
   Equity in undistributed net income of  subsidiaries              4,831         1,943
                                                               ----------    ----------

   Net income                                                  $    3,805    $    2,834
                                                               ==========    ==========
</TABLE>

                                     -55-

<PAGE>   56
                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE Q - CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY ONLY (CONTINUED)


                         MegaBank Financial Corporation
                            STATEMENTS OF CASH FLOWS
                            Years ended December 31,
                             (Amounts in thousands)

<TABLE>
<CAPTION>
                                                                                 1998          1997  
                                                                              ----------    ----------

<S>                                                                           <C>           <C>       
   Cash flows from operating activities
     Net income                                                               $    3,805    $    2,834
     Adjustments to reconcile net income to net cash provided
        by operating activities
         Depreciation                                                                 19             3
         Amortization of preferred securities issuance costs                          23            --
         Equity in undistributed net income of subsidiaries                       (4,831)       (1,942)
         Gain on sale of investment securities available for sale                    (34)         (341)
         (Increase) decrease in other assets                                         (73)          (67)
         Increase (decrease) in accrued expenses and other liabilities               (62)          268
                                                                              ----------    ----------

         Net cash provided by (used in) operating activities                      (1,153)          755

   Cash flows from investing activities
     Purchase of securities available for sale                                    (2,145)         (466)
     Proceeds for sales of securities available for sale                             661           495
     Investment in property and equipment                                         (1,250)           --
     Capital investment in bank subsidiary                                       (11,000)           --
     Investment in trust subsidiary                                                 (371)           -- 
                                                                              ----------    ----------

         Net cash provided by (used in) investing activities                     (14,105)           29

   Cash flows from financing activities
     Preferred securities issuance costs                                            (495)         (255)
     Principal payments on note payable                                           (2,000)         (500)
     Proceeds from issuance of preferred securities                               12,371            --
     Proceeds from sale of stock                                                  12,013            -- 
                                                                              ----------    ----------

         Net cash provided by (used in) financing activities                      21,889          (755)
                                                                              ----------    ----------

   Net increase in cash                                                            6,631            29

   Cash at beginning of year                                                         296           267
                                                                              ----------    ----------

   Cash at end of year                                                        $    6,927    $      296
                                                                              ==========    ==========
</TABLE>


                                     -56-
<PAGE>   57
ITEM 8.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
              FINANCIAL DISCLOSURE.

              There are no such changes and disagreements during the applicable
              period.


                                    PART III


ITEM 9.       DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; 
              COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

         The executive officers and directors of the Company, their respective
ages and positions as of March 1, 1999 are as follows:

<TABLE>
<CAPTION>
NAME                          AGE     POSITIONS
----                          ---     ---------

<S>                           <C>     <C>                                
Thomas R. Kowalski            59      Chairman of the Board and Chief Executive
                                      Officer of the Company and the Bank

Larry A. Olsen (1)            53      President, Chief Operating Officer and 
                                      Director of the Company and the Bank

Raymond L. Anilionis          51      Vice President and Director of the Company
                                      and Director of the Bank

Susan A. Putland              51      Vice President, Finance and Secretary of
                                      the Company and Vice President, Financial
                                      Services of the Bank

Hiram J. Welton               48      Treasurer and Chief Accounting Officer of
                                      the Company and Vice President, Finance 
                                      Officer of the Bank

Dr. Donald B. Brown (1)       70      Director of the Company and the Bank

William F. Sievers (1)        55      Director of the Company and the Bank

Roger L. Morgan               56      Director of the Company and the Bank

</TABLE>
----------
(1)      Member of the Audit Committee.

         There are no family relationships among any of the directors and
executive officers of the Company or the Bank with the exception that Thomas R.
Kowalski is the father of Ryan Kowalski, a Director and Vice President of Real
Estate of the Bank. All directors of the Company hold office until the next
meeting of shareholders or until their successors are elected and qualified.

         Thomas R. Kowalski has been Chairman of the Board and Chief Executive
Officer of the Company since he founded it in 1984, and has served in the same
positions for the Bank since January 1983. Since 1980 he has been Chairman of
the Board and Chief Executive Officer of the First State Bank of Hotchkiss, a
Colorado bank. Mr. Kowalski is also Chief Executive Officer, and beneficial
owner of approximately 97.0% of the outstanding stock, of Orchard Valley
Financial Corporation, the bank holding company that owns First State Bank of
Hotchkiss. From October 1972 through September 1992, Mr. Kowalski was President
of Realtek Company, a general contractor and real estate development
corporation he sold to Ryan Kowalski in 1992.

         Larry A. Olsen has been President, Chief Operating Officer and
Director of the Company since 1997 and has served in the same positions of the
Bank since 1994. From 1989 to 1994, Mr. Olsen was the Chief Operating Officer
of Non-Legal Affairs for Codilis and Stawiarski, P.C., a law firm. From 1972 to
1988, Mr. Olsen was employed by Columbia Savings & Loan Association, having
served from 1986 to 1988 as President and Chief Operating Officer.


                                     -57-
<PAGE>   58
         Raymond L. Anilionis has been a Vice President and Director of the
Company since 1984 and a Director of the Bank since 1984. Since January 1994,
Mr. Anilionis has been the President of Landmark Realty Advisors, a real estate
consulting and appraisal company. From 1974 to December 1993, Mr. Anilionis was
employed in the mortgage banking and real estate development and management
industry by Mortgage Investment Company and Associated Investment Company in
various positions, including Senior Vice President. He is also the owner of
First Fidelity Service Corp., a real estate consulting firm.

         Susan A. Putland has been Vice President, Finance and Secretary of the
Company since 1997 and Vice President, Financial Services of the Bank since
1996. Ms. Putland also serves as an independent director of FirstPlus Funding
Corp., CITGO Funding Corporation, and CITGO Funding Corporation II, special
purpose finance securitization entities. Ms. Putland was Vice President,
Structured Finance for The Chotin Group Corporation and its affiliates, a
privately-held securities issuer and investor, from 1989 to December 1995.

         Hiram J. Welton has been Treasurer and Chief Accounting Officer of the
Company since 1997 and Vice President, Finance Officer for the Bank since 1997.
Mr. Welton was Vice President of Red Rocks Federal Credit Union from 1996 to
1997. He was Vice President of Trepp Risk Management from 1994 to 1996. Prior
to 1994, Mr. Welton was Manager of GRA, Thompson, White & Co. P.A., an
accounting and consulting firm.

         Dr. Donald B. Brown has been a Director of the Company since 1997 and
a Director of the Bank since 1989. Dr. Brown previously served as a Director of
the Company from 1989 to 1994. Dr. Brown has practiced medicine as an
endocrinologist since 1961.

         William F. Sievers has been a Director of both the Company and the
Bank since 1997. Since 1994, Mr. Sievers has been employed with Lucent
Technologies as Program Management Vice President in the Network Systems
Division. Previously, he worked for AT&T for over 30 years in several
capacities, including the senior management positions of Manufacturing Vice
President and Regional Vice President.

         Roger L. Morgan has been a Director of the Company and the Bank since
January, 1999. Prior to his retirement in 1998, for twelve years, Mr. Morgan
was President, Chief Operating Officer and Director of HomeAmerican Mortgage
Corporation, a nationwide residential mortgage lender affiliated with M.D.C.
Holdings, Inc., and Richmond American Homes.

         Directors of the Company receive $500 for each regular board meeting
attended. Officers and directors of the Company in their capacities as
Directors of the Bank, receive $300 per Board meeting attended. In addition,
directors are reimbursed for expenses incurred in attending board meetings.


ITEM 10.      EXECUTIVE COMPENSATION

         The following table sets forth the cash compensation paid by the
Company to its Chief Executive Officer and all other named executive officers
who received cash compensation exceeding $100,000 for 1998, 1997 or 1996. No
other executive officer of the Company received compensation from the Company
exceeding $100,000 during 1998, 1997 and 1996.


                                     -58-
<PAGE>   59
SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>
                                                                     Awards                     Payouts
                                                                   ------------------------------------
                                                                                  Securities
                                                          Other                     Under-
                                                          Annual   Restricted       lying                     All Other
                                                          Compen-    Stock         Options/      LTIP          Compen-
Name                                   Salary    Bonus    sation    Award(s)         SARs       Payouts        sation
and Principal Position        Year       ($)      ($)       ($)        ($)            (#)         ($)            ($)
---------------------------- ------  ---------  --------  -------  ----------    ------------   -------      ----------
<S>                          <C>     <C>        <C>       <C>      <C>           <C>            <C>           <C>
Thomas R. Kowalski,           1998     150,000   298,490     --         --            --           --            --
  Chairman of the Board       1997     150,000   275,000     --         --            --           --            --
     and CEO                  1996     150,000   238,101     --         --            --           --            --
Larry A. Olsen, President     1998     105,000    11,167     --         --            --           --            --
  and COO of the Company      1997      86,250     8,733     --         --            --           --            --
     and the Bank             1996      80,000     9,367     --         --            --           --            --
---------------------------- ------  ---------  --------  -------  ----------    ------------   -------      ----------
</TABLE>

OPTION GRANTS IN LAST FISCAL YEAR AND VALUES AT YEAR END

         The following table set forth certain information regarding stock
options granted to the above named executive officers during 1998.


<TABLE>
<CAPTION>
                             Number of      Percent of
                            Securities     Total Options
                            Underlying      Granted to
                              Options      Employees in      Exercise     Expiration
Name                        Granted(#)    Fiscal Year(1)   Price ($/Sh)      Date
                            ----------    --------------   ------------   ----------
<S>                         <C>           <C>              <C>            <C> 
Thomas R. Kowalski            50,000          46.1%          $11.00       9/1/2008
Larry A. Olsen                 5,000           4.6%          $10.00       9/1/2008
</TABLE>
---------

(1)      Based on a total of 108,500 option shares granted to employees during
         1998.

         None of the above named executive officers had any options that were
in the money at December 31, 1998.

         Stock Incentive Plan. In August 1998, the Company adopted the 1998
Long-Term Incentive Plan (the "Incentive Plan"). The purpose of the Incentive
Plan is to provide continuing incentives to the Company's and its subsidiaries'
key employees, which may include officers and members of the Board of
Directors. The Incentive Plan authorizes 500,000 shares of common stock to be
reserved for issuance thereunder. Under the Incentive Plan, the Company may
grant to participants awards of stock options, restricted stock, stock
appreciation rights, performance shares or any combination thereof. The
Incentive Plan is to be administered by the Board of Directors or a
Compensation Committee of the Board of Directors composed of at least two
non-employee members. Subject to the terms of the Incentive Plan, the Board or
Compensation Committee determines, among other matters, the persons to whom
awards are granted and the terms of the awards.

         Under the stock option component of the Incentive Plan, the Company
may grant both incentive stock options intended to qualify under Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), and options which
are not qualified as incentive stock options. Incentive stock options may not
be granted at an exercise price of less than the fair market value of the
common stock on the date of grant, while non-qualified stock options may be
granted at any exercise price. The exercise price may be paid in cash, in
shares of common stock (valued at fair market value at the date of exercise) or
by a combination of such means of payment, as may be determined by the Board or
Compensation Committee.

         Under the restricted stock component of the Incentive Plan, the
Company may award shares of restricted stock upon payment of consideration as
determined by the Board or Compensation Committee. Upon the award, a
restriction period (not to exceed 10 years) and/or performance goals may be
set. Subject to the terms of each individual award, a restricted stock award is
forfeited upon termination of employment by the recipient during the
restriction period and any consideration paid by the participant is returned.
An award of a stock appreciation right


                                     -59-
<PAGE>   60

allows a recipient to receive a cash payment or shares of common stock to the
extent of any appreciation in the book value or the fair market value of the
common stock of the Company over a specified period of time. Stock appreciation
rights may also be awarded in tandem with stock options, and recipients of such
tandem awards may elect to exercise the award as a stock option or as a stock
appreciation right. Under the performance share component of the Incentive
Plan, recipients are awarded a specified number of shares of common stock
subject to the recipient or the Company attaining specified performance goals.
The Board or Compensation Committee, under certain circumstances, may waive or
modify performance criteria on existing performance share awards.

         The Incentive Plan will be discontinued in the event of the
dissolution or liquidation of the Company or in the event of a reorganization
in which the Company is not the surviving or acquiring company, or in which the
Company is or becomes a wholly-owned subsidiary of another company after the
effective date of the reorganization and no plan or agreement respecting the
reorganization is established which specifically provides for the continuation
of the Incentive Plan and the conversion, or exchange of the common stock
relating to existing awards for securities of another company. Upon the
dissolution of the Incentive Plan, all awards will become fully vested and all
outstanding options and stock appreciation rights will become immediately
exercisable by the holders.

         In the case of any reclassification, recapitalization, stock dividend,
stock split or other similar event, the Board or Compensation Committee is
empowered to make adjustments as to the number and kind of securities covered
by each outstanding award and, where applicable to adjust the exercise price
thereunder.

         Compliance with Section 16(a) of the Securities and Exchange Act of
1934. Based solely upon a review of Forms 3 and 4 and amendments thereto and
Forms 5 furnished to the Company and with respect to 1998, the Company is
unaware of any late filings other than a filing on Form 3 by Hiram J. and a
filing on Form 3 by William F. Sievers. The Company is unaware of any other
known failure to report in compliance with Section 16(a).

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

PRINCIPAL SHAREHOLDERS

         The following table sets forth certain information regarding
beneficial ownership of Common Stock of the Company, as of March 1, 1999, by
(i) each shareholder known by the Company to be the beneficial owner of more
than 5% of the outstanding Common Stock and (ii) each director of the Company
and certain executive officers and (iii) all directors and executive officers
as a group. Unless otherwise indicated, based on information furnished by such
owners, management believes that the shareholders listed below have sole
investment and voting power with respect to their shares.

<TABLE>
<CAPTION>
                                                        SHARES
                                                     BENEFICIALLY          PERCENTAGE
BENEFICIAL OWNER                                         OWNED              OF CLASS
----------------                                     ------------          ----------
<S>                                                  <C>                   <C>  
Thomas R. Kowalski.                                  3,021,650(1)             39.7%
  8100 East Arapahoe Road
  Englewood, Colorado 80112

Raymond L. Anilionis                                   642,780(2)              8.4%
  9034 East Easter Place, Suite 202
  Englewood, Colorado 80112

Warren P. Cohen                                        712,500                 9.4%
  595 South Broadway, Suite 200
  Denver, Colorado 80209

Realtek Company Employees' Profit                      614,820(3)              8.1%
  Sharing Plan and Trust
  8100 East Arapahoe Road, Suite 214
  Englewood, Colorado  80112

Vernon J. Purdy                                        468,750                 6.2%
  1900 East Girard, Suite 509
  Englewood, Colorado  80110
</TABLE>


                                     -60-
<PAGE>   61

<TABLE>
<CAPTION>
                                                        SHARES
                                                     BENEFICIALLY          PERCENTAGE
BENEFICIAL OWNER                                         OWNED              OF CLASS
----------------                                     ------------          ----------
<S>                                                  <C>                   <C>  
William D. Kenny                                       390,000                 5.1%
  38 Eagle Drive
  Littleton, Colorado  80123

Larry A. Olsen                                         151,590                 2.0%
  8100 East Arapahoe Road
  Englewood, Colorado  80112

Susan A. Putland                                           545                   *
  8100 East Arapahoe Road
  Englewood, Colorado  80112

Hiram J. Welton                                          1,000                   *
  8100 East Arapahoe Road
  Englewood, Colorado  80112

Dr. Donald B. Brown                                         --                  --
  4545 East Ninth Avenue
  Denver, Colorado 80220

William F. Sievers                                       2,000                   *
  26 West Dry Creek Circle, Suite 750
  Littleton, Colorado 80120

Roger L. Morgan                                             --                  --
  1615 Country Club Road
  Ft. Collins, Colorado 80524

All executive officers and
  directors as a group (eight persons)               3,819,565                50.2%
</TABLE>
------------
          (1)  O this amount, 1,394,690 shares are owned directly, and all
               other shares are owned indirectly through entities or persons
               controlled by Mr. Kowalski.
          (2)  Of this amount, 394,000 shares are owned directly, and all other
               shares are owned by entities controlled by Mr. Anilionis.
          (3)  Due to Mr. Kowalski's significant beneficial ownership of the
               named entity, these shares are included in the ownership of
               Thomas R. Kowalski in the table.
          *    Less than 1.0%


ITEM 12.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Nagrom LLC, a Colorado limited liability company, owns the building
and land in which the Company's principal office is located. The Bank leases
office space in the building. The lease began in 1995 and is for a period of 10
years. The rent for 1998 was approximately $334,000, and will increase 3.5% per
year. The Board of Directors of the Company believes that the rates are
comparable to those that could be obtained from unaffiliated third parties.
Nagrom LLC is beneficially owned by Kowalski Capital LLC, a Colorado limited
liability company (71.0%), Raymond L. Anilionis (13.0%), an officer and
director of the Company, and Warren P. Cohen (16.0%), a director of the Bank.
Kowalski Capital LLC is owned 95.0% by the Thomas R. Kowalski Irrevocable
Trust. The beneficiaries of the trust are Ryan Kowalski (the adult son of
Thomas R. Kowalski) and Ryan Kowalski's minor daughter. The remaining 5.0% of
Kowalski Capital LLC is owned by Respond Corp., of which Thomas R. Kowalski is
the sole shareholder.

         1996 Newton LLC, a Colorado limited liability company, leases space to
the Bank for its branch at 32nd Avenue and Newton, Denver. 1996 Newton LLC is
owned by Kowalski Capital (50.0%), Raymond L. Anilionis (25.0%) and the Warren
P. Cohen Beneficial Trust (25.0%). The lease commenced in May 1996 and runs for
a period of 10 years. Rent is approximately $31,000 per annum, and
incrementally increases to $36,000 per year for the last five years of the
lease. The Board of Directors of the Company believes that the rates are
comparable to those that could be obtained from unaffiliated third parties.

         Osage 3734, LLC, a Colorado limited liability company, leases space to
the Bank for its new centralized processing center at 3734 Osage Street,
Denver. Osage 3734, LLC is owned equally by KLA/4 Family Limited Partnership
RLLLP, an entity controlled by Raymond L. Anilionis, Ryan Kowalski, Vice
President and Director of the Bank and son of Thomas R. Kowalski, and Respond
Corporation, an entity owned by Thomas R. Kowalski. The building is currently
undergoing renovations to suit the needs of the Bank. Rent is approximately
$48,000 per annum and the Bank expects to occupy the building in 1999 under the
terms of a ten-year triple net lease. The


                                     -61-
<PAGE>   62
Board of Directors of the Company believes that the leasing terms are
comparable to those that could be obtained from unaffiliated third parties.

         In July 1995, Thomas R. Kowalski, Raymond L. Anilionis and Warren P.
Cohen (the "Guarantors"), all of whom are officers and/or directors of the
Company and/or the Bank and significant shareholders of the Company, entered
into an agreement with the Company in connection with their personal guarantee
of a $3.0 million loan to the Bank from First Interstate Bank of Denver. In
return for the guarantee, the Company agreed to indemnify the Guarantors for
all liabilities, costs or expenses relating to the guarantee and to provide
additional compensation to the Guarantors. The additional compensation
consisted of an aggregate fee, allocated among the three Guarantors, equal to
1.5% of the outstanding balance of the loan on each anniversary date plus a
performance bonus based on earnings of the Bank as specified in the agreement.
The loan was repaid in February 1998. The fees paid to the Guarantors from 1995
through 1998 in the aggregate were as follows: Mr. Kowalski - $507,965; Mr.
Anilionis - $121,191; and Mr. Cohen - $121,191.

         In March 1997, the Bank entered into a Consulting Agreement with First
Fidelity Service Corp. ("First Fidelity"), a consulting firm, which is
wholly-owned by Raymond L. Anilionis. The agreement provides that First
Fidelity will render services regarding bank site acquisitions, real estate
acquisitions, management of construction projects, evaluation and assistance
with negotiations of complex loans and work out transactions and any other
services reasonably requested by the Bank. The term of the agreement is for one
year, but automatically renews each year unless terminated by either party upon
30 days notice. Pursuant to the terms of the consulting agreement, First
Fidelity is paid $5,000 per month for its services.

         The Bank has entered into certain loan participations with First State
Bank of Hotchkiss, an entity controlled by Thomas R. Kowalski. Approximate loan
principal balances outstanding under these participations are summarized as
follows:

<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                                       -----------------------
                                                       1998               1997
                                                       ----               ----
                                                            (IN THOUSANDS)
<S>                                                   <C>                <C>   
              Participations sold                     $9,703             $8,227
              Participations purchased                 1,346              3,459
</TABLE>

         The Bank has also sold loan participations to shareholders, officers
and directors of the Company on the same terms as sold to third parties. At
December 31, 1998 and 1997, the participations sold to related parties were
approximately $4.0 million and $2.4, respectively.

         The officers, directors and principal shareholders of the Company and
members of their immediate families and businesses in which they hold
controlling interests are customers of the Bank. Credit transactions with these
parties are subject to review by the Bank's board of directors. All outstanding
loans and extensions of credit by the Bank to these parties were made in the
ordinary course of business on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other persons, and in the opinion of management did not
involve more than the normal risk of collectibility or present other
unfavorable features. At December 31, 1998, the aggregate balance of loans and
advances under existing lines of credit to these parties was approximately $1.3
million or 0.69% of the Bank's total loans.

         Stock Purchase Agreement. In December 1990, the Company, Thomas R.
Kowalski, Ryan R. Kowalski Trust, Realtek Company Profit Sharing Plan and
Trust, Thomas Investments and Orchard Valley Financial Corporation (the
"Shareholders") entered into a Stock Purchase Agreement in order to provide for
the orderly continuation of the affairs of the Company. The agreement, as
amended, provides that upon the death of Thomas R. Kowalski, the Shareholders
will have the option to require the Company to purchase their shares of Company
Common Stock to the extent the Company receives proceeds from a life insurance
policy on the life of Thomas R. Kowalski. As of December 31, 1998, the
Shareholders held an aggregate of 2,709,650 shares of Common Stock. The
agreement specifies that the purchase price for the stock shall be the greater
of 80% of the average closing price of the Common Stock of the Company on any
national securities exchange or recognized quotation system for five trading
days preceding the death of Thomas R. Kowalski or the appraised value as
determined by an appraiser selected mutually by the Company and the surviving
Shareholders.


                                     -62-
<PAGE>   63
ITEM 13.      EXHIBITS AND REPORTS ON FORM 8-K.

          a.   Exhibits

               3.1  Amended and Restated Articles of Incorporation of MegaBank
                    Financial Corporation(2).

               3.2  Bylaws of MegaBank Financial Corporation(2).

               4.1  Form of Subordinated Indenture dated February 9, 1998
                    entered into between the Issuer and Wilmington Trust
                    Company, as Indenture Trustee (2).

               4.2  Form of Junior Subordinated Debenture (included as an
                    exhibit to Exhibit 4.1)(2).

               4.7  Preferred Securities Guarantee Agreement (2).

               4.8  Agreement as to Expenses and Liabilities (included as an
                    exhibit to Exhibit 4.5)(2).

               4.9  Specimen Common Stock Certificate of Issuer(1).

               10.1 Federal Funds Transactions Purchase Agreement dated
                    November 8, 1993 between MegaBank of Arapahoe and Bankers'
                    Bank of the West and renewal letter dated October 20, 1997
                    from Bankers' Bank of the West(2).

               10.2 Lease dated December 29, 1994 between Nagrom, L.L.C. and
                    MegaBank Financial Corporation (2).

               10.3 Advance, Pledge and Security Agreement dated October 26,
                    1995 between Federal Home Loan Bank of Topeka and MegaBank
                    of Arapahoe(2).

               10.4 Federal Funds line of credit agreement signed September 24,
                    1997 between Norwest Bank Colorado, N.A. and MegaBank of
                    Arapahoe(2).

               10.5 Consulting Agreement - First Fidelity Corp.(2).

               10.6 Branching Rights Purchase Agreement - First State Bank of
                    Hotchkiss(2).

               10.7 Amended and Restated Stock Purchase Agreement by and among
                    MegaBank Financial Corporation, Thomas R. Kowalski, the
                    Ryan R. Kowalski Trust, the Realtek Company Profit Sharing
                    Plan and Trust, Thomas Investments Partnership and Orchard
                    Valley Financial Corporation dated as of December 4, 1997
                    and as further amended on September 1, 1998(1).

               10.8 Indemnification Agreement dated July 20, 1995 between
                    MegaBank Financial Corporation and Raymond L. Anilionis,
                    Warren P. Cohen and Thomas R. Kowalski (the
                    "Guarantors")(2).

               10.9 Issuer's 1998 Long-Term Incentive Plan(1).

               11.1 Statement re Computation of per share earnings - see
                    Consolidated Financial Statements.

               21.  Subsidiaries of the Issuer (2).

               27.  Financial Data Schedule.

               99.1 Risk factors incorporated by reference from Registration
                    Statement on Form SB-2 (Registration number 333-63369)
                    dated November 16, 1998.

               (1)  Incorporated by reference herein to the filing under the
                    same exhibit number to the Company's Registration Statement
                    on Form SB-2 (Registration number 333-63369) dated November
                    16, 1998.

               (2)  Incorporated by reference herein to the filing under the
                    same exhibit number to the Issuer's Registration Statement
                    on Form SB-2 (Registration No. 333-42189 and 333-42191)
                    dated December 12, 1997 and as amended on January 22, 1998
                    and January 29, 1998.

          b.   Reports on Form 8-K.

               None


                                      -63-
<PAGE>   64
                                   SIGNATURES


         In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.


                                    MEGABANK FINANCIAL CORPORATION


                                    By:  /s/ Thomas R. Kowalski
                                         --------------------------------------
                                         Thomas R. Kowalski
                                         Chairman and Chief Executive Officer
                                         (Principal Executive Officer)

                                    By:  /s/ Hiram J. Welton
                                         --------------------------------------
                                         Hiram J. Welton
                                         Treasurer and Chief Accounting Officer
                                         (Principal Accounting Officer)


Dated:   March 18, 1999

         Each person whose signature appears below constitutes and appoints
Thomas R. Kowalski and Larry A. Olsen his trust and lawful attorneys-in-fact
and agents, each acting alone, with full power of stead, in any and all
capacities, to sign any or all amendments to this Annual Report on Form 10-KSB
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could in each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.

/s/ Thomas R. Kowalski
---------------------------
Thomas R. Kowalski
Chairman of the Board

/s/ Raymond L. Anilionis
---------------------------
Raymond L. Anilionis
Director

/s/ Larry A. Olsen
---------------------------
Larry A. Olsen
Director

/s/ Dr. Donald B. Brown
---------------------------
Dr. Donald B. Brown
Director

/s/ William F. Sievers
---------------------------
William F. Sievers
Director

/s/ Roger L. Morgan
---------------------------
Roger L. Morgan
Director


                                     -64-
<PAGE>   65
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number             Description
-------            -----------
<S>                <C>
  3.1              Amended and Restated Articles of Incorporation of MegaBank
                   Financial Corporation(2).

  3.2              Bylaws of MegaBank Financial Corporation(2).

  4.1              Form of Subordinated Indenture dated February 9, 1998
                   entered into between the Issuer and Wilmington Trust
                   Company, as Indenture Trustee (2).

  4.2              Form of Junior Subordinated Debenture (included as an
                   exhibit to Exhibit 4.1)(2).

  4.7              Preferred Securities Guarantee Agreement (2).

  4.8              Agreement as to Expenses and Liabilities (included as an
                   exhibit to Exhibit 4.5)(2).

  4.9              Specimen Common Stock Certificate of Issuer(1).

  10.1             Federal Funds Transactions Purchase Agreement dated
                   November 8, 1993 between MegaBank of Arapahoe and Bankers'
                   Bank of the West and renewal letter dated October 20, 1997
                   from Bankers' Bank of the West(2).

  10.2             Lease dated December 29, 1994 between Nagrom, L.L.C. and
                   MegaBank Financial Corporation (2).

  10.3             Advance, Pledge and Security Agreement dated October 26,
                   1995 between Federal Home Loan Bank of Topeka and MegaBank
                   of Arapahoe(2).

  10.4             Federal Funds line of credit agreement signed September 24,
                   1997 between Norwest Bank Colorado, N.A. and MegaBank of
                   Arapahoe(2).

  10.5             Consulting Agreement - First Fidelity Corp.(2).

  10.6             Branching Rights Purchase Agreement - First State Bank of
                   Hotchkiss(2).

  10.7             Amended and Restated Stock Purchase Agreement by and among
                   MegaBank Financial Corporation, Thomas R. Kowalski, the
                   Ryan R. Kowalski Trust, the Realtek Company Profit Sharing
                   Plan and Trust, Thomas Investments Partnership and Orchard
                   Valley Financial Corporation dated as of December 4, 1997
                   and as further amended on September 1, 1998(1).

  10.8             Indemnification Agreement dated July 20, 1995 between
                   MegaBank Financial Corporation and Raymond L. Anilionis,
                   Warren P. Cohen and Thomas R. Kowalski (the
                   "Guarantors")(2).

  10.9             Issuer's 1998 Long-Term Incentive Plan(1).

  11.1             Statement re Computation of per share earnings - see
                   Consolidated Financial Statements.

  21.              Subsidiaries of the Issuer (2).

  27.              Financial Data Schedule.

  99.1             Risk factors incorporated by reference from Registration
                   Statement on Form SB-2 (Registration number 333-63369)
                   dated November 16, 1998.

  (1)              Incorporated by reference herein to the filing under the
                   same exhibit number to the Company's Registration Statement
                   on Form SB-2 (Registration number 333-63369) dated November
                   16, 1998.

  (2)              Incorporated by reference herein to the filing under the
                   same exhibit number to the Issuer's Registration Statement
                   on Form SB-2 (Registration No. 333-42189 and 333-42191)
                   dated December 12, 1997 and as amended on January 22, 1998
                   and January 29, 1998.
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