<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, 1999.
                                       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:

<TABLE>
<CAPTION>
         Title of each class                         Name of each exchange on which registered
         -------------------                         -----------------------------------------
<S>                                                  <C>
         Cumulative trust preferred securities       American Stock Exchange
</TABLE>

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: [X]

The issuer's revenues for its most recent fiscal year:  $33,149,000.

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
Stock Market(R) as of February 15, 2000 was $25,117,528.

At February 15, 2000, there were 7,769,709 shares of the registrant's common
stock outstanding.

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


<PAGE>   2


                         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                                                28
                           INDEPENDENT AUDITORS' REPORT                                        29
                           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                          35

              ITEM 8.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                           AND FINANCIAL DISCUSSION                                            56

              ITEM 9.      DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
                           COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT                   56

              ITEM 10.     EXECUTIVE COMPENSATION                                              57

              ITEM 11.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                           MANAGEMENT                                                          59

              ITEM 12.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                      60

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

              SIGNATURES                                                                       64
</TABLE>


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                                     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 eight additional banking locations throughout the Denver area,
for a total of nine locations.

         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,
1999, the Bank originated over $925 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 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 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.

         The Company has achieved significant growth measured from the end of
1997. Total assets have increased to $328 million as of December 31, 1999 from
$231 million and $158 million as of December 31, 1998, December 31, 1997,
respectively. The Company has maintained above average profitability. During the
same time period, net income grew to $6.1 million for the year ended December
31, 1999 from $3.8 million and $2.8 million for the years ended December 31,
1998 and 1997, respectively. For the year ended December 31, 1999, return on
average assets equaled 2.21% while return on average equity equaled 19.40%.

         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 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.

         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. Proceeds were used to provide capital to the Bank, for branch
expansion, and for working capital.

         In February, the Company formed a wholly owned subsidiary, MB Title
Company. On April 5, 1999, the Company purchased Empire Title & Escrow
Corporation and subsequently merged it with MB Title Company. The consideration
paid to the stockholders of Empire Title & Escrow Corporation consisted of the
Company's common stock and cash. MB Title Company then changed its name to
Empire Title & Escrow Corporation ("Empire"). The purchase price for Empire
included the potential for additional consideration based upon the


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future performance of Empire during the three years following the purchase.
Empire provides a full range of title insurance products and services to the
real estate community, including homebuilders and real estate firms. Management
expects that this acquisition will provide Empire the resources necessary to
accelerate its expansion plans while continuing to provide services to the
Colorado real estate community. This acquisition also allows the Company to
offer a broader array of financial products and services to its customers.
Empire operates as a wholly owned subsidiary of the Company. Accordingly, the
accounts of Empire are included in the Company's consolidated financial
statements.

         On November 4, 1999, the Company signed a definitive agreement to merge
with Compass Bancshares, Inc., ("Compass") an $18 billion bank holding company
headquartered in Birmingham, Alabama. Compass' acquisition strategy has been
geographic repositioning by targeting attractive high-growth markets with
diverse economies. The acquisition is scheduled for completion the second
quarter of the year 2000. If the merger is completed, Company shareholders will
receive a total of 3,370,000 shares of Compass common stock. Each share of
Company common stock will be exchanged for approximately 0.426 shares of Compass
common stock.

         As of December 31, 1999, the Company and its subsidiaries had 206
employees of which 174 are full-time employees. Management considers its
relationship with the employees to be good.

STRATEGY

         GROWTH. The Bank's goal in continuing its expansion is to maintain a
profitable, customer-focused financial institution. To this end, management
believes that the Company's existing capital structure, management, data and
operational systems should be enhanced by the proposed merger with Compass,
allowing for further growth in asset size, revenues and capital. The merger with
Compass will allow the Company to increase its lending limits, thereby enabling
it to continue to serve the needs of its customers.

         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 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. The Compass philosophy of customer service and providing
financial services to small and medium sized businesses closely mirrors that of
the Company.

         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.

         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. It is expected that this strategy
will be continued by Compass.

         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


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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.

         The Company is able to provide additional services to its customers
through Empire. Empire provides a full range of title insurance products and
services to the real estate community, including homebuilders and real estate
firms. The Company has provided Empire the resources necessary to accelerate its
expansion plans while continuing to provide services to the Colorado real estate
community.

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, 1999, 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 or
Plan of Operation -- 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,
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, 1999 had interest
rates that float with the prime rate.

         In the ordinary course of business, the Company issues letters of
credit. See note K of Notes to consolidated financial statements. The Company
applies the same credit standards to these commitments as it


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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 $5.6 million for the Company at December 31, 1999. As
of February 15, 2000, although the Bank's legal limit to one borrower was
approximately $5.8 million, the Bank elected to maintain its in-house limit to
one borrower at $5.0 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 those 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 and banking strategy enable it to compete in its market
area.

         The Company expects the acquisition by Compass to provide a greater
degree of competitiveness with the region's financial institutions. After the
acquisition is complete, the Bank will have larger lending limits enabling the
Bank to more than adequately provide lending limits comparable to the needs of
our customers. The Bank will also have access to a wider range of consumer
products and services, including investment products, from Compass that it
currently is unable to offer its customers.

         Empire faces intense competition in its title insurance business.
Empire competes with many other title companies in Colorado, some of whom have
greater financial and technical resources than Empire. Management believes that
Empire is able to compete in its area of operations by providing reliable, cost
effective services.


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.

         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.

FINANCIAL MODERNIZATION LEGISLATION

         The Gramm-Leach-Bliley Act ("GLBA"), enacted on November 12, 1999,
expands the bank holding company act framework to permit bank holding companies
with subsidiary banks meeting certain capital and management requirements to
elect to become "financial holding companies". Beginning March 2000, financial
holding companies may engage in a full range of financial activities, including
not only banking, insurance and securities activities, but also merchant banking
and additional activities determined to be "financial in nature". The


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GLBA also provides that the list of permissible activities will be expanded as
necessary for a financial holding company to keep abreast of competitive and
technological change.

         Although it preserves the Federal Reserve as the umbrella supervisor of
financial holding companies, the GLBA adopts an administrative approach to
regulation that defers to the actions and paperwork requirements of the
"functional" regulators of insurers, broker-dealers, investment companies and
banks. Thus, the various state and federal regulators of financial holding
company's operating subsidiaries would retain their jurisdiction and authority
over such operating entities. As the umbrella supervisor, however, the Federal
Reserve has the potential to affect the operations and activities of financial
holding companies' subsidiaries through its power over the financial holding
company parent. In addition, the GLBA contains numerous trigger points related
to legal noncompliance and other serious problems affecting bank affiliates that
could lead to direct Federal Reserve involvement and to the possible exercise of
remedial authority affecting both financial holding companies and their
affiliated operating companies. The GLBA contains restrictions on financial
institutions regarding the sharing of customer nonpublic personal information
with non-affiliated third parties unless the customer has had an opportunity to
opt out of the disclosure. The act also imposes periodic disclosure requirements
concerning a financial institution's policies and practices regarding data
sharing with affiliated and non-afiliated parties. As a unitary thrift holding
company, the Company will not be directly affected by GLBA at this time.
However, future legislation, regulations or activities of the Company could
cause it to become subject to the foregoing provisions.

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, 1999, the Bank satisfied the QTL test.

         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


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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, 1999, 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, 1999 of $943,500. 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 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.


                                      -8-
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         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, 1999,
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, 1999.

<TABLE>
<CAPTION>
                                                   AT DECEMBER 31, 1999
              RATIO                             ACTUAL   MINIMUM REQUIRED
              -----                             ------   ----------------
<S>                                             <C>      <C>
              Tangible capital                   10.64%       1.50%
              Core (Tier l) capital              10.64%       4.00%
              Risk-based capital                 12.90%       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 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


                                      -9-
<PAGE>   10


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 converted its charter from a Colorado state-chartered
commercial bank to a federal savings bank, the Bank has continued 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 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, 1999, the Bank met the requirements of a Tier I Association. In the
event the Bank's capital fell below its fully phased-in requirement


                                      -10-
<PAGE>   11


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.

         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, 1999, the Company's assets were approximately $328
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 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.


                                      -11-
<PAGE>   12


         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, 1999, 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, 1999, 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 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.


                                      -12-
<PAGE>   13


         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.

REGULATION OF EMPIRE

         Empire is subject to regulation under the Colorado Insurance Code,
which governs title insurance companies doing business within Colorado and
comprehensive regulation by the Colorado Division of Insurance. The statute
provides that title insurance rates shall be regulated in the manner provided
for in the regulation of casualty and in surety insurance. The statute requires
title insurance not be written unless a title insurance company has conducted a
reasonable examination of title and has caused determination of insurability of
title in accordance with sound underwriting practices for title insurance
companies. A title insurance company shall keep records to evidence
determination of insurability. The statute provides that a title insurance
company in Colorado may not guaranty, underwrite or issue any kind of insurance
other than title insurance, give or receive remuneration in any form for the
referral of title insurance business nor receive or attempt to receive any
charge in connection with title insurance if the charge is not for services
actually rendered. The statute requires reserves to be maintained by title
insurance companies, which must constitute the unearned portions of premiums due
or received, and be carried as a reserve liability of title insurance companies.
Title insurance companies in Colorado must comply with investment requirements
for other insurance companies but may also invest in a title plant, which
consists generally of title abstracts, title briefs, copies of the conveyances
and other related documents. The statute also requires that insurance producers
who sell title insurance must be licensed with the Colorado Division of
Insurance and title companies must comply with detailed selling practice
regulations. Financial statements of title insurance companies are also required
to be filed with the Colorado Division of Insurance. Because this regulation may
be considered comprehensive, Empire has spent and expects to devote significant
efforts in complying with the regulation.


                                      -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 eight other full service
banking facilities in the Denver metropolitan area. The Bank also leases a
building for its central processing center for the Bank and its branch system.
Empire leases six facilities for its operations. Information concerning these
properties, as of December 31, 1999, 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           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            Owned               5,200
         7377 Federal Boulevard
         Westminster, CO

         OTHER:
         Northland Shopping Center                  (2)            Owned              32,000
         88th and Washington Street
         Thornton, CO

         EMPIRE TITLE & ESCROW CORPORATION:
         Downtown                                  1994           Leased               7,100
         999 18th Street, Suite 3000
         Denver, CO

         Castle Rock                               1994           Leased               1,650
         107 Wilcox Street, Suite 200
         Castle Rock, CO

         Fort Collins                              1998           Leased               2,360
         1075 West Horsetooth Road, Suite 200
         Fort Collins, CO

         Northwest                                 1994           Leased               2,100
         12000 Pecos Street, Suite 275
         Westminster, CO

         Southwest                                 1994           Leased               1,201
         7125 West Jefferson Avenue, Suite 140
         Lakewood, CO

         Empire Title Southeast LLC                1999           Leased               1,400
         9200 East Panorama Circle, Suite 170
         Englewood, CO
</TABLE>


                                      -14-
<PAGE>   15


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

(1) All leased bank properties are leased from affiliated entities with the
    exception of the Greenwood Village and LoDo branches. See "Item 12. Certain
    Relationships and Related Transactions." All properties occupied by Empire
    are leased from nonaffiliated third parties.

(2) Site originally purchased in 1998 for future branch but the future of the
    space is currently unknown.


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 1999 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 Stock Market(R). The Company's common stock began trading on The Nasdaq
Stock Market(R) 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. All share values
have been rounded to the nearest 1/8 of one dollar.

<TABLE>
<CAPTION>
   1998                               HIGH                        LOW
   ----                             --------                    -------
<S>                                 <C>                         <C>
Fourth quarter                        11 3/4                      9 1/2
</TABLE>

<TABLE>
<CAPTION>
   1999                               HIGH                        LOW
   ----                             --------                    -------
<S>                                 <C>                         <C>
First quarter                          9 5/8                          9
Second quarter                        10 1/2                      9 1/4
Third quarter                         10 1/8                      9 7/8
Fourth quarter                            12                          9
</TABLE>

         On February 15, 2000, the last reported sales price of the Common Stock
reported on The Nasdaq Stock Market(R) was $7.62 per share. As of December 31,
1999, there were approximately 53 holders of record of the Common Stock.
However, management estimates that the number of beneficial owners is
approximately 600.

         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 provides certain information regarding the
financial condition and results of operations of the Company. This discussion
should be read in conjunction with the Consolidated Financial Statements and
related notes included elsewhere herein.

         Information herein contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, which can be
identified by words such as "may," "will," "expect," "anticipate," "believe,"
"estimate," or "continue," or comparable words. In addition, all statements
other than statements of historical facts that address activities that the
Company expects or anticipates will or may occur in the future are
forward-looking statements. 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. Actual results may vary materially from those anticipated by
management.


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. Empire provides a full range of title insurance
products and services to the real estate community, including homebuilders and
real estate firms.

         The Company achieved significant growth measured from the end of 1997.
Total assets have increased to $328 million as of December 31, 1999 from $231
million and $158 million as of December 31, 1998 and December 31, 1997,
respectively. This represents a 40.3% average growth in assets over the past
three years. During the same time period, net income increased to $6.1million
for the year ended December 31, 1999 from $3.8 million and $2.8 million for the
years ended December 31, 1998 and 1997, respectively. The $2.3 million increase
in net income for 1999 represents a 61.5% increase over the net income for 1998.
During the past three years ended December 31, 1999, the Company's return on
average assets and return on average equity has averaged 2.02% and 23.89%,
respectively. For the year ended December 31, 1999, return on average assets for
the Company equaled 2.21% while return on average equity equaled 19.40%.


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.


                                      -16-
<PAGE>   17


         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.

<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31,
                                                                         -----------------------
                                                              1999                               1998
                                                              ----                               ----
                                                            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                                 $   7,959    $     504      6.33%   $   5,290    $     318      6.01%
       Tax exempt (tax equivalent)                10,011        1,327     13.26        8,347        1,126     13.49
    Funds sold and interest-bearing deposits       2,013           96      4.77       11,502          643      5.59
    Loans (1)                                    231,159       27,172     11.75      150,951       18,464     12.23
    Allowance for loan losses                     (3,058)          --        --       (2,318)          --        --
    Other                                             --           --        --           --           --        --
                                               ---------    ---------   -------    ---------    ---------   -------
       Total interest-earning assets           $ 248,084    $  29,099     11.73    $ 173,772    $  20,551     11.83
                                               =========    =========   =======    =========    =========   =======

INTEREST-BEARING LIABILITIES
    Interest-bearing deposits:
       Demand, interest-bearing                $  73,094    $   2,756      3.77%   $  68,948    $   3,039      4.41
       Savings                                     6,870          151      2.20        5,488          170      3.10
       Certificates of deposit:
         Under $100,000                           45,346        2,413      5.32       32,098        1,850      5.76
         $100,000 and over                        43,819        2,441      5.57       12,354          683      5.53
                                               ---------    ---------   -------    ---------    ---------   -------
       Total interest-bearing deposits           169,129        7,761      4.59      118,888        5,742      4.83
    Advances from the Federal Home Loan
        Bank and federal funds purchased (3)       7,560          405      5.36        1,094           99      9.05
    Notes payable                                     --           --        --          167           19     11.38
    Trust preferred securities                    12,000        1,108      9.23       11,000          959      8.72
    Repurchase agreements                            499           21      4.21          693           35      5.05
                                               ---------    ---------   -------    ---------    ---------   -------
       Total interest-bearing liabilities      $ 189,188    $   9,295      4.91    $ 131,842    $   6,854      5.20
                                               =========    =========   =======    =========    =========   =======

    Net interest income (tax equivalent)                    $  19,804                           $  13,697
                                                            =========                           =========

    Net interest margin (2)                                                7.98%                               7.88%
    Net interest spread                                                    6.82%                               6.63%
Ratio of average interest-bearing liabilities
    to average interest-earning assets             76.26%                              75.87%
</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: 1999 - $4,549,549; 1998 - $3,566,820.
        (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.
        (4)  Interest earned or paid includes interest paid to the Bank on the
             common securities held plus amortized cost of issuance

         Net interest income, on a tax-equivalent basis, was $19.8 million for
the year ended December 31, 1999, an increase of $6.1 million from $13.7 million
in 1998. Interest income increased $8.5 million to $29.1 million in 1999 from
$20.6 million in 1998. 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 $74.3 million
in average interest-earning assets to $248.1 million in 1999 from $173.8 million
in 1998. The majority of the asset growth was due to growth in the loan
portfolio. Average loans increased $80.2 million or 51.3% to $231.2 million in
1999 from $151.0 million in 1998 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 11.72% in 1999 from
11.83% in 1998 on a tax equivalent basis.

         Interest expense increased $2.3 million to $9.2 million in 1999 from
$6.9 million in 1998. A $31.5 million increase in certificates of deposits over
$100,000 accounted for $1.8 million of the increase. These deposits increased
due to the Company's growth, including the use of wholesale deposits and the
addition of a new branch in 1999. Changes in the relative mix of average
interest-bearing liabilities included a $6.5 million increase in


                                      -17-
<PAGE>   18


advances from the FHLB. The cost of interest-bearing liabilities for the years
ended December 31, 1999 and 1998 was 4.88% and 5.20%, respectively, and, when
combined with noninterest-bearing deposits, the cost of funds was 3.79% in 1999
compared to 3.86% in 1998. The net interest margin, on a tax-equivalent basis,
increased to 7.99% in 1999 from 7.88% in 1998, primarily as a result of higher
levels of interest earning assets due to loan growth.

         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,
                                                        1999 COMPARED TO 1998:            1998 COMPARED TO 1997:
                                                         ----------------------           -----------------------
                                                         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                                            $   191    $    (5)   $   186    $    48    $   (16)   $    32
   Tax exempt (tax equivalent)                            221        (20)       201        227          2        229
   Funds sold                                            (322)      (225)      (547)       (77)        22        (55)
   Loans                                                9,428       (720)     8,708      5,111       (453)     4,658
   Other                                                   --         --         --         --         --         --
                                                      -------    -------    -------    -------    -------    -------
          Total interest-earning assets                 9,518       (970)     8,548      5,309       (445)     4,864
                                                      -------    -------    -------    -------    -------    -------

Interest-bearing liabilities:
   Demand, interest bearing                               157       (440)      (283)       687       (101)       586
   Savings                                                 30        (49)       (19)        22        (12)        10
   Certificates of deposit:
       Under $100,000                                     704       (141)       563        392         14        406
       $100,000 and over                                1,753          5      1,758        144        (39)       105
   Advances from the Federal Home
       Loan Bank and federal funds purchased              346        (40)       306       (107)        54        (53)
   Notes payable and trust preferred securities           107         23        130        722         77        799
Repurchase agreement                                       (8)        (6)       (14)        35         --         35
                                                      -------    -------    -------    -------    -------    -------
            Total interest-bearing liabilities          3,089       (648)     2,441      1,895         (7)     1,888
                                                      -------    -------    -------    -------    -------    -------
            Net increase (decrease) in net interest
                 income (tax equivalent)              $ 6,429    $  (322)   $ 6,107    $ 3,414    $  (438)   $ 2,976
                                                      =======    =======    =======    =======    =======    =======
</TABLE>


         OTHER INCOME. The following table sets forth the Company's other income
for the indicated periods.

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                                     -----------------------
                                                      1999             1998
                                                     ------           ------
                                                          (IN THOUSANDS)
<S>                                                  <C>              <C>
Title fees                                           $2,590           $   --
Service charges                                         518              144
Bank charges                                            485              394
Building rent                                           164              118
Gain on sale of investment securities                   246               46
Other                                                   498              291
                                                     ------           ------
        Total other income                           $4,501           $  993
                                                     ======           ======
</TABLE>

         Other income for the year ended December 31, 1999 compared to 1998
increased due primarily to title fees attributable to Empire and additional fee
income from an increase in service fees. Increased expenses offset revenue
received in title fees from Empire. With rising interest rates and fewer
opportunities to refinance properties, Empire experienced a loss for the year
ended December 31, 1999 of approximately $142,000. The Company received a
request to change the ticker symbol for the Trust Preferred Securities issued by
MB Capital I. These securities traded under the symbol "MFC.Pr.A" on the
American Stock Exchange. At the request of the New York Stock Exchange, the
Company agreed to change its trading symbol to "MFG.Pr.A" to accommodate another
company. Additional miscellaneous income of $100,000 was realized through
compensation for relinquishing the rights to the ticker symbol "MFC".


                                      -18-
<PAGE>   19


         OTHER EXPENSES. The following table sets forth the Company's operating
expenses for the indicated periods.

<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                                   -----------------------
                                                    1999            1998
                                                   -------         -------
                                                       (IN THOUSANDS)
<S>                                                <C>             <C>
Salaries and employee benefits                     $ 7,549         $ 4,100
Occupancy expense of premises                        1,328             971
Furniture and equipment expense                        702             447
Cost of title fees                                     529              --
Service fees                                           202             252
Legal fees                                             217              99
Indemnification and guarantee fees                      --             350
Settlement with related company                         --             355
Other expenses                                       2,623           1,479
                                                   -------         -------
     Total other expenses                          $13,150         $ 8,053
                                                   =======         =======
</TABLE>

         During the year ended December 31, 1999 total operating expenses
increased $5.1 million to $13.2 million from $8.1 million in 1998, with
increases occurring among the various components of salaries and occupancy
related expenses due to the Company's continued growth and the additional title
expenses, personnel and occupancy expenses associated with Empire.

         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 $3.4
million in 1999 and $1.9 million in 1998.

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,
                                                              ------------
                                                         1999                  1998
                                                         ----                  ----
                                                 AMOUNT       %        AMOUNT        %
                                               ---------    ------   ---------    ------
                                                          (DOLLARS IN THOUSANDS)
<S>                                            <C>          <C>      <C>          <C>
Land development and construction              $ 204,333      76.2%  $ 136,243      72.9%
Commercial                                        61,944      23.1      47,225      25.3
Installment and other                              7,646       2.9       7,910       4.2
Mortgage                                              --        --          --        --
Loans held for sale                                   --        --          --        --
                                               ---------    ------   ---------    ------
Total face amount of loans                       273,923     102.2     191,378     102.4
Deferred loan fees, discounts and costs, net      (2,124)     (0.8)     (1,776)     (1.0)
                                               ---------    ------   ---------    ------
Loans                                            271,799     101.4     189,602     101.4
Less allowance for loan losses                    (3,674)     (1.4)     (2,610)     (1.4)
                                               ---------    ------   ---------    ------
Net loans                                      $ 268,125     100.0%  $ 186,992     100.0%
                                               =========    ======   =========    ======
</TABLE>

           Loans as of December 31, 1999 were up $82.2 million compared to
December 31, 1998, 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, 1999 was
11.51%.

         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 $266.3 million over the $183.5 million balance as of
December 31, 1998, with the majority being construction loans, up $68.1 million
over 1998.

         Installment loans decreased slightly with a balance of $7.6 million as
of December 31, 1999 compared to $7.9 million as of December 31, 1998.


                                      -19-
<PAGE>   20


         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 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, 1999, net loans totaled approximately 100.5% of total
deposits and approximately 81.8% of total assets.

         LOAN MATURITIES. The following tables present, at December 31, 1999 and
December 31, 1998, 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, 1999
                                                                      -----------------
                                                      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   $ 203,645    $      644   $          --   $       44  $          --   $ 204,333
Commercial                             45,665        13,028             911        2,340             --      61,944
Installment and other                   4,663         2,901              --           82             --       7,646
Mortgage                                   --            --              --           --             --          --
                                    ---------    ----------   -------------   ----------  -------------   ---------
       Total face amount of loans   $ 253,973    $   16,573   $         911   $    2,466  $          --   $ 273,923

Deferred loans fees                    (1,969)         (129)             (7)         (19)            --      (2,124)
                                    ---------    ----------   -------------   ----------  -------------   ---------
       Total loans                  $ 252,004    $   16,444   $         904   $    2,447  $          --   $ 271,799
                                    =========    ==========   =============   ==========  =============   =========
</TABLE>


<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>

         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.


                                      -20-
<PAGE>   21


         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,
1999 or December 31, 1998.

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

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                            ------------
                                                      1999               1998
                                                     -------            -------
                                                       (DOLLARS IN THOUSANDS)
<S>                                                  <C>                <C>
Nonaccrual loans                                     $ 4,095            $ 3,388
Other loans 90 days past due                              --                 --
Other real estate                                         --                 --
                                                     -------            -------
Total nonperforming loans                            $ 4,095            $ 3,388
                                                     =======            =======
Ratio of nonaccrual and other loans 90
          days past due to total loans                  1.51%              1.81%
Ratio of nonperforming assets to total loans
          plus other real estate                        1.51               1.81
Ratio of nonperforming assets to total assets           1.25               1.47
</TABLE>

         Of the amount of nonaccrual loans as of December 31, 1999,
approximately $1.2 million is the Bank's portion of a $3.0 million loan, which
was subject to a Chapter 11 bankruptcy proceeding. The loan is a consolidation
of four loans 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. When the
loans were consolidated, additional collateral in the form of an assignment of a
promissory note was taken. The loans have been discharged from the bankruptcy.
Principal payments of $1.1 million were received during 1999.

         In addition to the above, the Bank has approximately $1.9 million of a
$2.1 million loan that were placed on nonaccrual status in December 1999. The
loan was originated as a commercial construction loan for a mini-storage
facility. The construction is complete and the mini-storage is open for
business. Real estate, two personal guarantees and a guarantee by a related
corporation secure the loan. Foreclosure proceedings have been initiated.

         The Bank also has $0.9 million of a $1.3 million loan on nonaccrual.
This loan was placed on nonaccrual status at the end of 1998. The loan was cured
during the year and a principal reduction of approximately $1.5 million was made
in May 1999. This loan was placed back on nonaccrual status in August 1999. The
loan originated as an acquisition and development loan and is secured by real
estate. The Bank has started foreclosure proceedings.

         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, 1999, 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.

         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


                                      -21-
<PAGE>   22


charged off, net of recoveries. The Company's allowance for loan losses to total
loans has remained relatively level.

         The following table sets forth information regarding changes in the
allowance for loan losses of the Company for the periods indicated.


<TABLE>
<CAPTION>
                                               YEAR ENDED DECEMBER 31,
                                               -----------------------
                                                 1999          1998
                                               ---------     ---------
                                                (DOLLARS IN THOUSANDS)
<S>                                            <C>           <C>
Average total loans                            $ 231,159     $ 150,951
                                               =========     =========
Total loans at end of period                   $ 271,799     $ 189,602
                                               =========     =========
Allowance at beginning of year                 $   2,610     $   2,083
Charge-offs:
   Land development and construction                  --            --
   Commercial and industrial                         (86)           (2)
   Installment                                        (7)           (8)
   Mortgage                                           --            --
   Other                                              --            --
                                               ---------     ---------
          Total charge-offs                          (93)          (10)
Recoveries:
   Land development and construction                  --            --
   Commercial and industrial                          --             3
   Installment                                         2             4
   Mortgage                                           --            --
   Other                                              --            --
                                               ---------     ---------
          Total recoveries                             2             7
                                               ---------     ---------

Net (charge-offs) recoveries                         (91)           (3)
Provisions for loan losses                         1,155           530
                                               ---------     ---------
Allowance at end of period                     $   3,674     $   2,610
                                               =========     =========

Ratio of net (charge-offs) recoveries
       to average total loans                      (0.04%)       (0.00%)
Allowance to total loans at end of period           1.35%         1.38%
Allowance to nonperforming loans                   89.72%        77.04%
</TABLE>

         Net charge-offs during 1999 totaled approximately $91,000 or less than
(0.04)% of average loans compared to net charge-offs of approximately $3,000 or
less that 0.01% of average loans in 1998.

         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.


                                      -22-
<PAGE>   23


         The following tables set forth an allocation of the allowance for loan
losses by loan category as of the dates indicated. When determining the adequacy
of the allowance for loan losses, management considers changes in the size and
character of the loan portfolio, changes in nonperforming and past due loans,
historical loan loss experience, the existing risk of individual loans,
concentrations of loans to specific borrowers or industries and current and
projected economic conditions. The portion of the allowance that has not been
identified by the Bank as related to specific loan categories has been allocated
to the individual loan categories on a pro rata basis for purposes of the
following table only.

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                                  ------------
                                                      1999                             1998
                                                      ----                             ----
                                                            LOANS IN                        LOANS IN
                                                           CATEGORY                         CATEGORY
                                                             AS A                             AS A
                                              AMOUNT       PERCENTAGE         AMOUNT       PERCENTAGE
                                             OF GROSS       OF TOTAL         OF GROSS       OF TOTAL
                                            ALLOWANCE(1)     LOANS          ALLOWANCE(1)      LOANS
                                            ------------   ----------       ------------   ----------
                                                                 (DOLLARS IN THOUSANDS)
<S>                                         <C>                  <C>        <C>                  <C>
Land development and construction           $      2,577         74.6%      $      1,463         71.2%
Commercial and industrial                          1,020         22.6              1,058         24.7
Installment and other                                 77          2.8                 89          4.1
                                            ------------   ----------       ------------   ----------
          Total                             $      3,674        100.0%      $      2,610        100.0%
                                            ============                    ============
</TABLE>

----------
(1)  For purposes of this table only, the portion of the allowance that has not
     been identified by the Bank as related to specific loan categories has been
     allocated to the individual loan categories on a pro rata basis.

         The total loan loss reserve at December 31, 1999 was $3.7 million or
1.35% of total loans and 89.7% of nonperforming assets. The majority of the loan
loss reserve increase at December 31, 1999 compared to December 31, 1998 was
included in the land development and construction category.

         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, 1999 was comprised
of U.S. Treasury bonds, 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 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.


<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                            ------------
                                                      1999                1998
                                                     -------            --------
                                                       (DOLLARS IN THOUSANDS)
<S>                                                  <C>                <C>
U.S. Treasury securities                             $ 3,983            $  4,549
Corporate securities                                     843               2,741
Equity investment trust                                  373                  --
Municipal securities (1)                              12,909               7,982
                                                     -------            --------
          Total                                      $18,108            $ 15,272
                                                     =======            ========
</TABLE>

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


                                      -23-
<PAGE>   24


         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, 1999.

<TABLE>
<CAPTION>
                                    DECEMBER 31, 1999
                                    -----------------
      TYPE AND MATURITY                                     AMOUNT      YIELD
      -----------------                                     ------      -----
                                                          (DOLLARS IN THOUSANDS)
U.S. TREASURY SECURITIES:
<S>                                                         <C>         <C>
  One year or less                                          $ 1,500      6.21%
  Over one through five years                                 2,483      5.60
  Over five through 10 years                                     --        --
  Over 10 years                                                  --        --
                                                            -------
         Total                                              $ 3,983      5.83
                                                            =======

CORPORATE SECURITIES:
  One year or less                                          $    --        --
  Over one through five years                                    --        --
  Over five through 10 years                                     --        --
  Over 10 years                                                 843      8.60
                                                            -------
         Total                                              $   843      8.60
                                                            =======

MUNICIPAL SECURITIES:
  One year or less                                          $    --        --
  Over one through five years                                 1,069      9.04
  Over five through 10 years                                    558      9.00
  Over 10 years                                              11,282      8.72
                                                            -------
         Total                                              $12,909      8.76
                                                            =======

TOTAL INVESTMENT IN SECURITIES:
  One year or less                                          $ 1,500      6.21
  Over one through five years                                 3,551      6.63
  Over five through 10 years                                    558      9.00
  Over 10 years                                              12,126      8.71
                                                            -------
         Total                                              $17,735      8.09
                                                            =======
</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 $219.5 million for the year ended
December 31, 1999 from $164.4 million for the year ended December 31, 1998.
These increases are primarily a result of internal growth with the opening of
one new branch in 1999, and one branch in 1998 and the addition of $58.1 million
in deposits from other sources. Management has determined that wholesale sources
of deposits provide a cost effective and profitable means of funding new loan
growth that cannot be funded from internal sources. These wholesale deposits
bear interest at rates ranging from 5.25% to 6.72% and have maturities of
various dates through February 2002. At December 31, 1999, noninterest-bearing
deposits comprised 21.4% 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.

         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,
                                                                -----------------------
                                                            1999                      1998
                                                            ----                      ----
                                                                AVERAGE                    AVERAGE
                                                     AVERAGE    INTEREST         AVERAGE   INTEREST
                                                     BALANCE      COST           BALANCE     COST
                                                    ---------   --------       ---------   --------
                                                                      (DOLLARS IN THOUSANDS)
<S>                                                 <C>             <C>        <C>             <C>
Demand, interest-bearing                            $  73,094       3.77%      $  68,948       4.41%
Savings                                                 6,870       2.20           5,488       3.10
Certificates of deposit under $100,000                 45,346       5.32          32,098       5.76
Certificates of deposit $100,000 and over              43,819       5.57          12,354       5.52
                                                    ---------                  ---------

        Total interest-bearing demand deposits        169,129       4.59       $ 118,888       4.83

Noninterest-bearing demand deposit                     50,343                     45,545
                                                    ---------                  ---------
        Total Deposits                              $ 219,472                  $ 164,433
                                                    =========                  =========
</TABLE>

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


                                      -24-
<PAGE>   25


         The following table sets forth the amount of certificates of deposits
at their stated rates as of December 31, 1999:

<TABLE>
<CAPTION>
                         (DOLLARS IN THOUSANDS)
<S>                           <C>
3.99% or less                 $    1,439
4.00% to 4.99%                     9,807
5.00% to 5.99%                    80,806
6.00% to 6.99%                    37,494
                              ----------
      Total                   $  129,546
                              ==========

Weighted average interest rate      5.59%
</TABLE>

         At December 31, 1999, the scheduled maturities of certificates of
deposit were are follows:

<TABLE>
<CAPTION>
                              (IN THOUSANDS)
<S>                             <C>
2000                            $116,857
2001                              10,822
2002                               1,491
2003                                 257
2004                                  43
Thereafter                            76
                                --------
      Total                     $129,546
                                ========
</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, 1999.

<TABLE>
<CAPTION>
REMAINING MATURITY            (IN THOUSANDS)
<S>                              <C>
Less than three months           $ 5,600
Three months up to six months     15,886
Six months up to one year         53,089
One year and over                  7,687
                                 -------
         Total                   $82,262
                                 =======
</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, 1999 were $7.6 compared to $409,000 for the year
ended December 31, 1998. At December 31, 1999, based on its FHLB stockholdings,
the Bank's total available and unused borrowing capacity based on the Bank's
current FHLB stockholdings was approximately $11 million, 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 15 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.


                                      -25-
<PAGE>   26


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

<TABLE>
<CAPTION>
                                                                      CAPITAL RATIOS
                                                      DECEMBER 31,                         DECEMBER 31,
                                                          1999                                1998
                                                          ----                                ----
                                                 AMOUNT           RATIO             AMOUNT            RATIO
                                               ---------         -------           ---------         -------
                                                                 (DOLLARS IN THOUSANDS)
<S>                                            <C>               <C>               <C>               <C>
Core (Tier 1) capital                          $  34,038           10.64%          $  28,410           12.53%
Core (Tier 1) capital minimum requirement (1)     12,801            4.00               9,069            4.00
                                               ---------         -------           ---------         -------
Excess                                         $  21,237            6.64%          $  19,341            8.53%
                                               =========         =======           =========         =======

Tangible capital                               $  34,038           10.64%          $  28,410           12.53%
Tangible capital minimum requirement (1)           4,795            1.50               3,401            1.50
                                               ---------         -------           ---------         -------
Excess                                         $  29,243            9.14%          $  25,009           11.03%
                                               =========         =======           =========         =======

Adjusted tangible assets                       $ 320,027                           $ 226,731
                                               =========                           =========
</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,
                                                      1999                              1998
                                                      ----                              ----
                                             AMOUNT          RATIO             AMOUNT           RATIO
                                           ---------        -------           ---------        -------
                                                               (DOLLARS IN THOUSANDS)
<S>                                        <C>              <C>               <C>              <C>
Total risk-based capital                   $  37,345          12.90%          $  30,315          15.38%
Minimum requirement (1)                       23,154           8.00              15,766           8.00
                                           ---------        -------           ---------        -------
Excess                                     $  14,191           4.90%          $  14,549           7.38%
                                           =========        =======           =========        =======

Total risk-based assets                    $ 289,422                          $ 197,077
                                           =========                          =========
</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 has two basic sources of liquidity.
The first source is its retail deposit market served by its banking offices. The
Company has increased core deposits through growth of its existing deposits and
through promotions directed at existing and potential customers. Additionally,
in compliance with the Bank's Liquidity Policy, the Company supplemented retail
deposit growth by obtaining deposits of $29.4 million from other sources during
the fourth quarter ended December 31, 1999. Deposits increased to $266.8 million
at December 31, 1999 compared to $189.9 million at December 31, 1998. Deposits
from other sources totaled approximately $58.1 million at December 31, 1999.
Management's determination to use an outside funding source may continue in the
future depending on funding needs and the cost of these funds. Currently,
wholesale sources increase the Bank's cost of interest-bearing liabilities by
approximately 0.08%, effectively securing funds at an overall lower rate than if
the Bank had to internally generate additional deposits through promotions or
other methods.

         The second source of the Company's liquidity is Federal Home Loan Bank
("FHLB") advances and Company lines of credit. FHLB advances are used in the
cash management function both to fund a portion of the investment portfolio and
to manage the day-to-day fluctuations in liquidity resulting from needs of
depositors and borrowers. At December 31, 1999 the Company had borrowed $11
million from the FHLB and its other lenders and had available $11 million of
unused borrowing capacity from the FHLB and $16.7 million from its other
lenders. . During the fourth quarter, the Company elected to borrow short-term
funds in addition to seeking additional deposits from customers and other
sources. The Company anticipates that it will continue to rely primarily upon
customer 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.


                                      -26-
<PAGE>   27


         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, 1999, 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, 1999
                                                           ----------------------------------------
                                                           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   $      9,384  $         83    $       --    $       --   $   9,467
  Investment securities available for sale            501           999         3,551        12,684      17,735
  Loans                                           271,622           104            73            --     271,799
                                             ------------  ------------    ----------    ----------   ---------
  Total interest-earning assets                   281,507         1,186         3,624        12,684     299,001

Interest-bearing liabilities:
  Deposits:
    Demand, interest-bearing                       73,292            --            --            --      73,292
    Savings                                         6,747            --            --            --       6,747
    Certificates of deposit
      under $100,000                               14,413        27,869         4,926            76      47,284
      $100,000 and over                             5,600        68,975         7,687            --      82,262

  Federal Home Loan Bank borrowings                11,000            --            --            --      11,000
  Trust preferred securities                           --            --            --        12,000      12,000
  Repurchase agreements                               358            --            --            --         358
                                             ------------  ------------    ----------    ----------   ---------


  Total interest-bearing liabilities              111,410        96,844        12,613        12,076     232,943
                                             ------------  ------------    ----------    ----------   ---------

Interest rate gap                            $    170,097  $    (95,658)   $   (8,989)   $      608   $  66,058
                                             ============  ============    ==========    ==========   =========

Cumulative interest rate gap at
  December 31, 1999                          $    170,097  $     74,439    $   65,450    $   66,058
                                             ============  ============    ==========    ==========

Cumulative interest rate gap
  to total assets                                   51.92%        22.72%        19.98%        20.16%
                                             ============  ============    ==========    ==========
</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, 1999,
94.2% reprice or mature in less than three months while 47.8% of all
interest-bearing liabilities reprice or mature in that same time 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, 2000 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


                                      -27-
<PAGE>   28


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

         The Company did not experience any problems with the date change to
year 2000 or the date value for the year 2000. Expenses incurred during fiscal
year 1999 associated with year 2000 compliance totaled approximately $70,000.



ITEM 7.       FINANCIAL STATEMENTS



                                      -28-
<PAGE>   29


                          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, 1999 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, 1999.
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, 1999 and the
consolidated results of their operations and consolidated cash flows for each of
the two years in the period ended December 31, 1999, in conformity with
generally accepted accounting principles.

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








Denver, Colorado
January 14, 2000


                                      -29-
<PAGE>   30


                         MEGABANK FINANCIAL CORPORATION
                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 1999
                             (AMOUNTS IN THOUSANDS)


<TABLE>
<CAPTION>
                                     ASSETS
<S>                                                                          <C>
Cash and due from banks                                                      $   3,133
Federal funds sold                                                               9,350
Other interest-bearing deposits                                                    117
                                                                             ---------
  Cash and cash equivalents                                                     22,600

Investment securities available for sale                                        18,108

Loans                                                                          271,799
Less allowance for loan losses                                                  (3,674)
                                                                             ---------
                                                                               268,125

Federal Home Loan Bank stock, at cost                                              944
Bank premises, leasehold improvements and equipment, net                        10,289
Investment in title plant                                                          670
Accrued interest receivable                                                      1,611
Deferred tax asset                                                               1,201
Trust preferred securities issuance costs, net                                     703
Goodwill                                                                         2,919
Other assets                                                                       464
                                                                             ---------
                                                                             $ 327,634
                                                                             =========

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities
  Deposits                                                                   $ 266,800
  Federal Home Loan Bank borrowings                                             11,000
  Securities sold under agreements to repurchase                                   358
  Income taxes payable                                                             520
  Accrued interest payable                                                         886
  Other liabilities                                                              1,147
                                                                             ---------
          Total liabilities                                                    280,711

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

Minority interest in consolidated subsidiary                                       333

Commitments (notes B, C, K 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,
    7,776,709 shares issued and outstanding                                     15,473
  Retained earnings                                                             19,529
  Accumulated other comprehensive income                                          (412)
                                                                             ---------
                                                                                34,590
                                                                             ---------
                                                                             $ 327,634
                                                                             =========
</TABLE>

The accompanying notes are an integral part of this statement.


                                      -30-
<PAGE>   31


                         MEGABANK FINANCIAL CORPORATION
                        CONSOLIDATED STATEMENTS OF INCOME
                          YEARS ENDED DECEMBER 31, 1999
                  (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                  1999        1998
                                                --------    --------
<S>                                             <C>         <C>
Interest income
  Loans, including fees                         $ 27,172    $ 18,464
  Taxable investment securities                      504         318
  Nontaxable investment securities                   876         743
  Funds sold                                          47         463
  Other interest                                      49         181
                                                --------    --------
     Total interest income                        28,648      20,169

Interest expense
  Deposits                                         7,761       5,742
  Borrowed funds                                     426         134
  Trust preferred securities                       1,108         959
  Notes payable                                       --          19
                                                --------    --------
          Total interest expense                   9,295       6,854
                                                --------    --------
          Net interest income                     19,353      13,315


Provision for loan losses                          1,155         530
                                                --------    --------


Net interest income after provision for
     loan losses                                  18,198      12,785

Other income
  Title policy revenues and fees                   2,590          --
  Service charges on deposit accounts              1,003         538
  Gain on sale of investment securities              246          46
  Other income                                       662         409
                                                --------    --------
     Total other income                            4,501         993

Other expenses
  Salaries and employee benefits                   7,549       4,100
  Occupancy expenses of premises                   1,328         971
  Furniture and equipment expense                    702         447
  Cost of title fees                                 529          --
  Service fees                                       202         252
  Legal fees                                         217          99
  Goodwill amortization                               90          --
  Minority interest in loss of subsidiary            (60)         --
  Indemnification and guarantee fees (note N)         --         350
  Settlement with related  company (note N)           --         355
  Other expenses                                   2,593       1,479
                                                --------    --------
     Total other expenses                         13,150       8,053
                                                --------    --------

     Income before income taxes                    9,549       5,725

Income tax expense                                 3,403       1,920
                                                --------    --------

NET INCOME                                      $  6,146    $  3,805
                                                ========    ========

Earnings per share
  Basic                                         $   0.80    $   0.58
                                                ========    ========
  Diluted                                       $   0.79    $   0.58
                                                ========    ========
</TABLE>

The accompanying notes are an integral part of this statement.


                                      -31-
<PAGE>   32


                         MEGABANK FINANCIAL CORPORATION
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                          YEARS ENDED DECEMBER 31, 1999
                             (AMOUNTS IN THOUSANDS)


<TABLE>
<CAPTION>
                                             1999        1998
                                            -------    -------
<S>                                         <C>        <C>
Net income                                  $ 6,146    $ 3,805

Other comprehensive income, net of tax:
  Unrealized gains (losses) on investment
    securities available for sale              (446)        (5)
                                            -------    -------

Other comprehensive income (loss)              (446)        (5)
                                            -------    -------

Comprehensive income                        $ 5,700    $ 3,800
                                            =======    =======
</TABLE>





The accompanying notes are an integral part of this statement.


                                      -32-
<PAGE>   33


                         MEGABANK FINANCIAL CORPORATION
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                        TWO YEARS ENDED DECEMBER 31, 1999
                             (AMOUNTS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                   Accumulated
                                                                                      other
                                                          Common       Retained   comprehensive
                                                          stock        earnings       income         Total
                                                         --------     ----------  --------------   ---------
<S>                                                      <C>          <C>         <C>              <C>
Balance at January 1, 1998                               $  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

Issuance of 162,369 shares of common
  stock in connection with the acquisition of
  Empire Title & Escrow Corporation (note B)                1,499             --              --       1,499

Net income                                                     --          6,146              --       6,146

Other comprehensive income (loss)                              --             --            (446)       (446)
                                                         --------     ----------  --------------   ---------

Balance at December 31, 1999                             $ 15,473     $   19,529  $         (412)  $  34,590
                                                         ========     ==========  ==============   =========
</TABLE>










The accompanying notes are an integral part of this statement.


                                      -33-
<PAGE>   34


                         MEGABANK FINANCIAL CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                          YEARS ENDED DECEMBER 31, 1999
                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                         1999        1998
                                                                       --------    --------
<S>                                                                    <C>         <C>
Cash flows from operating activities
  Net income                                                           $  6,146    $  3,805
  Adjustments to reconcile net income to net cash
      provided by operating activities
      Provision for loan losses                                           1,155         530
      Depreciation and amortization of fixed assets                         814         486
      Amortization of preferred securities issuance costs                    26          23
      Amortization of goodwill                                               90          --
      Net discount accretion on investment securities                        (3)        (13)
      Stock dividend received                                               (42)        (32)
      Gain on sale of investment securities available for sale             (246)        (46)
      Deferred income taxes                                                (349)        (82)
      Minority interest in loss of subsidiary                                60          --
  Changes in deferrals and accruals
      Accrued interest receivable                                          (507)       (206)
      Accrued interest payable                                              452         282
      Income taxes payable                                                  449         (61)
      Other, net                                                             57        (174)
                                                                       --------    --------
          Net cash provided by operating activities                       8,102       4,512

Cash flows from investing activities
  Purchase of securities available for sale                              (7,918)     (4,482)
  Proceeds from maturities of securities available for sale               3,110       1,250
  Proceeds from sales of securities available for sale                    1,496       1,158
  Net increase in loans                                                 (82,288)    (63,518)
  Acquisition of subsidiary under purchase method of
    accounting, net of cash acquired                                     (1,478)         --
  Additions to bank premises and equipment                               (2,179)     (4,533)
  Additions to title plant                                                 (160)         --
                                                                       --------    --------
          Net cash used in investing activities                         (89,417)    (70,125)

 Cash flows from financing activities
  Net increase in deposits                                               76,921      48,001
  Trust preferred securities issuance costs                                  --        (497)
  Increase (decrease) in Federal Home Loan Bank borrowings               11,000      (1,423)
  Increase (decrease) in securities sold under repurchase agreements        (85)        443
  Proceeds from issuance of trust preferred securities                       --      12,000
  Principal payments on notes payable                                        --      (2,000)
  Proceeds from sale of common stock                                         --      12,013
                                                                       --------    --------
          Net cash provided by financing activities                      87,836      68,537
                                                                       --------    --------
Net increase in cash and cash equivalents                                 6,521       2,924

Cash and cash equivalents at beginning of year                           16,079      13,155
                                                                       --------    --------

Cash and cash equivalents at end of year                               $ 22,600    $ 16,079
                                                                       ========    ========

Supplemental disclosures of cash flow information
 Cash paid during the year for:
    Interest expense                                                   $  8,842    $  6,572
    Income taxes                                                          3,302       2,062
</TABLE>

The accompanying notes are an integral part of this statement.


                                      -34-
<PAGE>   35


                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A - SUMMARY OF ACCOUNTING POLICIES

    NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION

       MegaBank Financial Corporation ("the Company") owns the shares of and
       acts as parent holding company for MegaBank ("the Bank"), MB Capital I
       and Empire Title & Escrow Corporation ("Empire"). 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. Empire was acquired in April 1999. Results of its operations
       since acquisition are included in the consolidated financial statements.
       Empire's principal business activity is the sale of title insurance
       policies.

       The consolidated financial statements include the accounts of the Company
       and its subsidiaries. All intercompany accounts and transactions have
       been eliminated in the consolidated financial statements.

    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.

    INVESTMENT SECURITIES

       Management determines the classification of debt securities at the time
       of purchase and reevaluates such designations 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.

       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.

       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.


                                      -35-
<PAGE>   36
                        MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

    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 a 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, 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.


    BANK PREMISES, LEASEHOLD IMPROVEMENTS AND EQUIPMENT

       These assets 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.


                                      -36-
<PAGE>   37
                        MEGABANK FINANCIAL CORPORATION

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

    TITLE PLANT

       In connection with the purchase of Empire in 1999, the Company acquired a
       title plant. A title plant constitutes an historical record of all
       matters affecting title to parcels of land in a particular geographic
       area. This asset is carried at its appraised value as of the date of
       acquisition plus the cost of subsequent additions. The costs of
       maintaining this plant are charged to expense as incurred. Because
       properly maintained title plants have indefinite lives and do not
       diminish in value with the passage of time, no provision has been made
       for depreciation.

    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.

    GOODWILL

       Goodwill consists of the cost in excess of fair value of the net assets
       acquired in the 1999 acquisition of Empire. Amortization is computed on
       the straight-line method over 25 years. Capitalized costs and accumulated
       amortization for costs in excess of fair value of net assets acquired, as
       of December 31, 1999, are as follows (in thousands):

<TABLE>
<S>                                                     <C>
                  Capitalized costs                     $ 3,009
                  Less accumulated amortization             (90)
                                                        -------

                                                        $ 2,919
                                                        =======
</TABLE>

    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.


                                      -37-
<PAGE>   38


NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

    PER SHARE COMPUTATIONS

       Basic earnings per share is based on the weighted average number of
       common shares outstanding during each year.

       Diluted earnings per share is computed by dividing net income by the
       weighted average number of common shares outstanding during the year plus
       common share equivalents. Common shares used in the determination of
       basic and diluted earning per share follows:

<TABLE>
<CAPTION>
                                                                         1999          1998
                                                                      ----------    ----------
<S>                                                                   <C>           <C>
         Basic
           Weighted average common shares outstanding                  7,727,449     6,542,135
         Common share equivalents
           Stock options                                                      --        12,187
           Contingent consideration related to Empire acquisition         61,644            --
                                                                      ----------    ----------

         Diluted                                                       7,789,093     6,554,322
                                                                      ==========    ==========
</TABLE>

    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).

    COMPREHENSIVE INCOME

       The Company has adopted Financial Accounting Standards Board Statement
       No. 130, Reporting Comprehensive Income, (SFAS No. 130). 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.

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

    OPERATING SEGMENTS

       The Company had evaluated Financial Accounting Standards Board Statement
       No. 131, Disclosures about Segments of an Enterprise and Related
       Information, (SFAS No. 131). 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 a
       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 principal business, commercial banking,
       is comprised of a single operating segment and that SFAS No. 131
       therefore has no impact on its financial statements.


                                      -38-
<PAGE>   39


                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE B - ACQUISITION

  On April 5, 1999, the Company purchased all of the outstanding stock of Empire
  Title & Escrow Corporation ("Empire"). Empire owns 50% of the outstanding
  common stock of Colorado Record Data, LLC. The Company paid cash of $1,500,000
  and issued 162,369 shares of its common stock to shareholders of Empire. The
  issued stock was valued by the Company at $9.238 per share.

  The acquisition has been accounted for under the purchase method of
  accounting, and accordingly, the purchase price has been allocated to the
  assets acquired and the liabilities assumed based on the estimated fair value
  at the date of acquisition. The excess of purchase price over the net assets
  acquired has been recorded as an intangible asset, which is amortized over 25
  years. The estimated fair values of consolidated assets acquired and
  liabilities assumed are summarized as follows (in thousands):

<TABLE>
<S>                                                                    <C>
         Cash                                                          $    96
         Investment in title plant                                         510
         Property and equipment                                             78
         Goodwill                                                        3,009
         Other assets                                                      112
         Deferred income taxes                                            (130)
         Other liabilities                                                (363)
         Minority interest in consolidated subsidiary                     (238)
                                                                       -------

         Cash paid, direct costs of acquisition and value
           of common stock issued                                      $ 3,074
                                                                       =======
</TABLE>

  Pro forma results of operations presented as though the enterprises had
  combined at the beginning of 1998 have not been presented since they are
  deemed to be immaterial to the Company's historical results of operations.

  The merger agreement with Empire includes the potential for former
  shareholders of Empire to realize additional consideration based on the future
  performance of Empire during the three years following the purchase. These
  shareholders have the contingent right to receive up to $1,000,000 in
  additional consideration. This consideration is payable in cash and shares of
  the Company's common stock, divided equally. The additional consideration is
  subject to upward adjustment to a maximum of $1,500,000 or downward adjustment
  based on Empire's actual results of operations in relation to "Pro Forma
  Earnings". If Empire's results of operations in relation to Pro Forma Earnings
  do not reach a minimum level, no additional compensation is payable for that
  period. For the period from the date of acquisition through December 31, 1999,
  no additional compensation is payable. Future payments of additional
  consideration, if any, would be accounted for as an addition to the purchase
  price.

NOTE C - MERGER AGREEMENT

  On November 4, 1999, the Company entered into a merger agreement with Compass
  Bancshares, Inc. ("Compass"), headquartered in Birmingham, Alabama. If the
  merger is completed, shareholders of the Company will receive 3,370,000 shares
  of common stock in exchange for their shares of the Company's common stock.
  The merger is scheduled for completion during the second quarter of the year
  2000.

  The Company will operate as a subsidiary of Compass. The merger will be
  accounted for under the pooling-of-interests method of accounting.


                                      -39-
<PAGE>   40
                         MEGABANK FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE C - MERGER AGREEMENT (CONTINUED)

  The Company has utilized the services of an investment advisor in connection
  with this transaction. A fee of approximately $750,000 is payable to the
  investment advisor upon completion of the merger. This cost will be charged to
  operations when the merger takes place. Additionally, under the provisions of
  the Company's agreement with former shareholders of Empire (discussed in note
  B), additional purchase price consideration becomes payable to those
  individuals upon the change of control of the Company. The consideration
  payable as of December 31, 1999, under the remaining term of the agreement is
  $1,125,000 of which one-half would be in the form of common stock.

NOTE D - INVESTMENT SECURITIES

  At December 31, 1999, 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                             $   3,999     $        1     $        17     $   3,983
   State and political subdivisions                        12,781            128              --        12,909
   Corporate debt securities                                1,490             --             647           843
   Corporate equity securities                                494             --             121           373
                                                        ---------     ----------     -----------     ---------

                                                        $  18,764     $      129     $       785     $  18,108
                                                        =========     ==========     ===========     =========
</TABLE>

  The amortized cost and estimated market value of debt securities at December
  31, 1999 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                        $   1,500       $   1,500
       Due after one year through five years              3,478           3,551
       Due after five years through ten years               557             558
       Due after ten years                               12,735          12,126
                                                      ---------       ---------

                                                      $  18,270       $  17,735
                                                      =========       =========
</TABLE>

  Securities included in the accompanying balance sheet at December 31, 1999
  with a market value of $14,907,000 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 1999 and 1998 and are summarized as
  follows (in thousands):

<TABLE>
<CAPTION>
                                                        1999          1998
                                                       ------        ------
<S>                                                    <C>           <C>
              Gains realized                           $  246        $   46
              Losses realized                              --            --
                                                       ------        ------

                                                       $  246        $   46
                                                       ======        ======
</TABLE>


                                      -40-
<PAGE>   41


                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE E - LOANS AND ALLOWANCE FOR LOAN LOSSES

    The components of the loan portfolio at December 31, 1999 are summarized as
    follows (in thousands):

<TABLE>
<S>                                                             <C>
              Land development and construction                 $ 204,333
              Commercial                                           61,944
              Installment and other                                 7,646
                                                                ---------
                                                                  273,923
              Less unearned loan fees                              (2,124)
                                                                ---------

                                                                $ 271,799
                                                                =========
</TABLE>

    Transactions in the allowance for loan losses for 1999 and 1998 are as
    follows (in thousands):

<TABLE>
<CAPTION>
                                     1999       1998
                                    -------    -------
<S>                                 <C>        <C>
     Balance at beginning of year   $ 2,610    $ 2,083
     Provision for loan losses        1,155        530
     Recoveries                           2          7
     Loans charged off                  (93)       (10)
                                    -------    -------

     Balance at end of year         $ 3,674    $ 2,610
                                    =======    =======
</TABLE>

    There were no accruing loans having payments delinquent more than ninety
    days at December 31, 1999 and 1998.

    Loans on which the accrual of interest has been discontinued or reduced
    amounted to $4,095,000 and $3,388,000 at December 31, 1999 and 1998,
    respectively.

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

<TABLE>
<CAPTION>
                                                     1999     1998
                                                    ------   ------
<S>                                                 <C>      <C>
Total impaired loans at end of year                 $4,095   $3,388
Average impaired loans during the year               4,670    1,529
Allowance for loan loss related to impaired loans      614      551
</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 1999 or 1998.

NOTE F - BANK PREMISES, LEASEHOLD IMPROVEMENTS AND EQUIPMENT

    At December 31, 1999, bank premises, leasehold improvements and equipment,
    less accumulated depreciation and amortization, consisted of the following
    (in thousands):

<TABLE>
<S>                                                   <C>
     Buildings and improvements                       $  5,817
     Leasehold improvements                                718
     Equipment                                           3,833
     Land                                                1,868
                                                      --------
                                                        12,236

     Less accumulated depreciation and amortization     (1,947)
                                                      --------

                                                      $ 10,289
                                                      ========
</TABLE>


                                      -41-
<PAGE>   42


                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE G - ACCRUED INTEREST RECEIVABLE

    Accrued interest receivable at December 31, 1999 is summarized as follows
    (in thousands):

<TABLE>
<S>                                                        <C>
     Loans                                                 $1,353
     Investment securities and interest-bearing deposits      258
                                                           ------

                                                           $1,611
                                                           ======
</TABLE>

NOTE H - DEPOSITS

    Deposits are summarized at December 31, 1999 as follows (dollars in
    thousands):

<TABLE>
<CAPTION>
                                                              Weighted
                                                               average
                                                              interest
                                     Balance       Percent      rate
                                    ---------      -------    --------
<S>                                 <C>            <C>        <C>
     Demand, noninterest-bearing    $  57,216        21.45%         --%
     NOW accounts                       9,217         3.45        2.02
     Money market deposit accounts     64,074        24.02        4.04
     Savings deposits                   6,747         2.53        2.20
     Certificates of deposit
       Under $100,000                  47,284        17.72        5.32
       $100,000 and over               82,262        30.83        5.57
                                    ---------       ------

                                    $ 266,800       100.00%       4.59%
                                    =========       ======
</TABLE>

    Interest expense on deposits for 1999 and 1998 is summarized as follows (in
    thousands):

<TABLE>
<CAPTION>
                                      1999     1998
                                     ------   ------
<S>                                  <C>      <C>
     NOW accounts                    $  173   $  239
     Money market deposit accounts    2,583    2,800
     Savings deposits                   151      170
     Certificates of deposit
       Under $100,000                 2,413    1,850
       $100,000 and over              2,441      683
                                     ------   ------

                                     $7,761   $5,742
                                     ======   ======
</TABLE>

    As of December 31, 1999, the Company has brokered certificates of deposit
    totaling $58,122,000. These bear interest at rates ranging from 5.25% to
    6.72% and have maturities of various dates through February 2002.


                                      -42-
<PAGE>   43


                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE H - DEPOSITS (CONTINUED)

    At December 31, 1999, the scheduled maturities of certificates of deposit
    are as follows (in thousands):

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

             Rate                          2000      2001      2002     2003    2004     Thereafter   Total
        --------------                   --------  --------  --------  ------  ------    ----------  --------
<S>                                      <C>       <C>       <C>       <C>     <C>       <C>         <C>
        3.99% or less                    $  1,431  $     --  $      8  $   --  $   --    $       --  $  1,439
        4.00% to 4.99%                      8,436     1,288        40      --      43            --     9,807
        5.00% to 5.99%                     78,836     1,946        19       5      --            --    80,806
        6.00% to 6.99%                     28,154     7,588     1,424     252      --            76    37,494
                                         --------  --------  --------  ------  ------    ----------  --------

                                         $116,857  $ 10,822  $  1,491  $  257  $   43    $       76  $129,546
                                         ========  ========  ========  ======  ======    ==========  ========
</TABLE>

NOTE I - BORROWING COMMITMENTS

    As of December 31, 1999, the Bank had lines of credit with Federal Home Loan
    Bank, Bankers' Bank of the West, and other banks of $21,722,000, $16,730,000
    and $700,000, respectively. At December 31, 1999, $11,000,000 was advanced
    on these lines.

NOTE J - 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 K - 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.


                                      -43-
<PAGE>   44


                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

    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, 1999 are as follows (in thousands):

<TABLE>
<S>                                                         <C>
       Commitments to grant loans                           $  25,916
       Unfunded commitments under lines of credit             138,855
       Stand-by letters of credit                              17,937
</TABLE>

    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 L - 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>
                  2000                                     $   884
                  2001                                         898
                  2002                                         759
                  2003                                         627
                  2004                                         522
            Thereafter                                         270
                                                           -------

                                                           $ 3,960
                                                           =======
</TABLE>


    Total lease expense for all operating leases was $685,000 and $445,000 in
    1999 and 1998, respectively.


                                      -44-
<PAGE>   45


                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE M - INCOME TAXES

    The provision for income taxes for 1999 and 1998 consists of the following
    (in thousands):

<TABLE>
<CAPTION>
                                                         1999        1998
                                                        ------      ------
<S>                                                     <C>         <C>
        Current
          Federal                                       $3,286      $1,749
          State                                            466         253
                                                        ------      ------
                                                         3,752       2,002

        Deferred
          Federal                                         (298)        (71)
          State                                            (51)        (11)
                                                        ------      ------
                                                          (349)        (82)
                                                        ------      ------

                                                        $3,403      $1,920
                                                        ======      ======
</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>
                                                      1999                      1998
                                              ----------------------     -------------------
                                              Amount         Percent      Amount      Percent
                                              -------        -------     --------    --------
                                              (in thousands)             (in thousands)
<S>                                           <C>            <C>         <C>         <C>
     Tax expense at statutory rate            $ 3,247           34.0%    $  1,946        34.0%
     Increase (decrease) in taxes due to:
       Tax exempt municipal interest             (320)          (3.4)        (235)       (4.1)
       State tax, net of federal tax effect       308            3.2          167         2.9
       Other                                      168            1.8           42          .7
                                              -------        -------     --------    --------

           Total provision for income taxes   $ 3,403           35.6%    $  1,920        33.5%
                                              =======        =======     ========    ========
</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, 1999
    as follows (in thousands):

<TABLE>
<S>                                                                          <C>
            Deferred tax assets
               Provision for loan losses                                     $ 1,195
               Market value adjustment to investment securities
                 available for sale                                              245
               Other                                                              19
                                                                             -------
                      Total deferred tax assets                                1,459

            Deferred tax liabilities
               Bases of fixed assets and title plant                            (258)
                                                                             -------
                      Total deferred tax liabilities                            (258)
                                                                             -------
                      Net deferred tax asset                                 $ 1,201
                                                                             =======
</TABLE>


                                      -45-
<PAGE>   46


                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE N - RELATED PARTY TRANSACTIONS

    As discussed in note R, 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 1999 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, 1999 are summarized as follows (in thousands):

<TABLE>
<S>                                                    <C>
                  Participations sold                  $ 14,520
                  Participations purchased                2,446
</TABLE>

    The Company has also sold loan participations to other related parties
    (shareholders, directors, family members, businesses related through common
    ownership). At December 31, 1999 the participations sold to related parties
    were approximately $6,353,000.

    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, 1999           $ 1,305
                  New loans                              1,295
                  Repayments                              (689)
                                                       -------

                  Balance at December 31, 1999         $ 1,911
                                                       =======
</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. No fees were paid to guarantors
    in 1999. Total fees paid to the guarantors were $350,000 in 1998.

    The Company has 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 O - EMPLOYEE BENEFITS

    Through June 30, 1998, the Bank had an IRA contribution plan available for
    all personnel who have been employed at least six 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 1999 and 1998 were
    $68,000 and $21,000, respectively.


                                      -46-
<PAGE>   47


                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS

    The following table presents estimated fair values of the Company's
    financial instruments as of December 31, 1999 (in thousands):

<TABLE>
<CAPTION>
                                                                                          Carrying      Fair
                                                                                           Amount       Value
                                                                                          ---------   ---------
<S>                                                                                       <C>         <C>
         Financial assets
           Cash and due from banks                                                        $  13,133   $  13,133
           Federal funds sold                                                                 9,350       9,350
           Other interest-bearing deposits                                                      117         117
           Investment securities available for sale                                          18,108      18,108
           Federal Home Loan Bank stock                                                         944         944
           Loans, less allowance for loan losses                                            268,125     267,891
           Accrued interest receivable                                                        1,611       1,611
         Financial liabilities
            Deposits
               Non-interest bearing                                                          57,216      57,216
               Interest-bearing                                                             209,584     209,430
            Federal Home Loan Bank borrowings                                                11,000      11,000
            Securities sold under agreements to repurchase                                      358         358
            Accrued interest payable                                                            886         886
            Company obligated manditorily redeemable preferred
               securities of subsidiary trust holding solely junior
               subordinated debentures                                                       12,000      10,650

         Unrecognized financial instruments (net of contract amount)
           Commitments to grant loans                                                        25,916      25,916
           Unfunded commitments under lines of credit                                       138,885     138,885
           Stand-by letters of credit                                                        17,937      17,937
</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 balance sheet 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.

     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.


                                      -47-
<PAGE>   48
                         MEGABANK FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

     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.


                                      -48-
<PAGE>   49

                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE Q - EQUITY TRANSACTIONS AND AGREEMENTS

      AUTHORIZED CAPITAL AND 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
         2,658,192 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.

         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.


                                      -49-
<PAGE>   50


                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE Q - EQUITY TRANSACTIONS AND AGREEMENTS (CONTINUED)


         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.

         A summary of the activity in the Incentive Plan for 1999 and 1998 is
         presented below:

<TABLE>
<CAPTION>
                                                1999                   1998
                                        --------------------   --------------------
                                                    Weighted               Weighted
                                                     Average                Average
                                                    Exercise               Exercise
                                         Shares       Price     Shares      Price
                                        --------    --------   --------   ---------
<S>                                     <C>         <C>        <C>        <C>
     Outstanding, beginning of year      108,500    $  10.46         --   $      --
     Granted                               2,500       10.00    108,500       10.46
     Exercised                                --          --         --          --
     Forfeited                           (14,000)      10.00         --          --
                                        --------    --------   --------   ---------

     Outstanding, end of year             97,000       10.52    108,500       10.46
                                        ========               ========

     Options exercisable, end of year       None                   None
</TABLE>


                                      -50-
<PAGE>   51


                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE Q - EQUITY TRANSACTIONS AND AGREEMENTS (CONTINUED)

         Of the 97,000 options outstanding at December 31, 1999, 15,000 were
         nonqualified stock options and 82,000 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                           29,100
                  September 1, 2002                           57,900
                                                         -----------

                                                              97,000
                                                         ===========
</TABLE>

         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 1999 and 1998 would not
         have been materially effected.

NOTE R - REGULATORY MATTERS

   In September 1998, 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 is registered with the Office of Thrift
   Supervision ("OTS") and subject to OTS regulations, examinations, supervision
   and reporting requirements. In addition, in September 1998, 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. 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, 1999, that the Bank meets all
   capital adequacy requirements to which it is subject.


                                      -51-
<PAGE>   52


                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE R - 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, 1999:

<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)          $37,345   12.90%      $ 23,160   >or=8.0%   $ 28,950   >or=10.0%
         Tier 1 risk-based capital
           (to risk-weighted assets)           34,038   11.76%        11,578   >or=4.0%     17,367    >or=6.0%
         Core capital
           (to adjusted tangible assets)       34,038   10.64%         9,588   >or=3.0%     15,980    >or=5.0%
         Tangible capital
           (to tangible assets)                34,038   10.64%         9,588   >or=1.5%        N/A        N/A
</TABLE>

   Cash dividends paid to the Company by the Bank amounted to $1,500,000 in
   1999. The payment of dividends to the Company by the Bank is subject to
   various regulatory limitations.



                                      -52-
<PAGE>   53


                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE S - CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY ONLY

   The following presents the condensed balance sheet as of December 31, 1999
   and statements of income and cash flows for each of the two years in the
   period ended December 31, 1999 for MegaBank Financial Corporation:

                         MegaBank Financial Corporation
                                  BALANCE SHEET
                                December 31, 1999
                             (Amounts in thousands)


<TABLE>
<S>                                                                  <C>
                             ASSETS

   Cash and interest bearing deposits                                $  5,590
   Investment securities available for sale                             1,217
   Investment in bank subsidiary                                       34,109
   Investment in trust subsidiary                                         317
   Investment in title company                                          3,432
   Property and equipment                                               1,747
   Trust preferred securities issuance cost, net                          702
   Other assets                                                           864
                                                                     --------

         Total assets                                                $ 47,978
                                                                     ========

                         LIABILITIES AND
                      SHAREHOLDERS' EQUITY

   Accrued interest payable and other liabilities                    $  1,017
   Company obligated manditorily redeemable
     preferred securities of subsidiary trust holding
     solely Junior Subordinated Debentures                             12,371
   Shareholders' equity                                                34,590
                                                                     --------

         Total liabilities and shareholders' equity                  $ 47,978
                                                                     ========
</TABLE>


                                      -53-
<PAGE>   54


                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

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

<TABLE>
<CAPTION>
                                                       1999      1998
                                                      -------   -------
<S>                                                   <C>       <C>
Income
  Dividends from subsidiary                           $ 1,500   $    --
  Interest                                                386       148
  Rental income from subsidiary                           415       407
  Other rental income                                     164       121
  Gain on sale of investment securities                    --        34
  Miscellaneous income                                    100         6
                                                      -------   -------
      Total income                                      2,565       716

Expenses
  Interest                                              1,108       981
  Occupancy and equipment expense                         469       513
  Other                                                   693       853
                                                      -------   -------
      Total expenses                                    2,270     2,347
                                                      -------   -------

Income (loss) before income taxes and equity
  in undistributed net income of subsidiaries             295    (1,631)

Income tax benefit                                        365       605
                                                      -------   -------

Income (loss) before undistributed net
 income of subsidiaries                                   660    (1,026)

Equity in undistributed net income of  subsidiaries     5,486     4,831
                                                      -------   -------

Net income                                            $ 6,146   $ 3,805
                                                      =======   =======
</TABLE>


                                      -54-
<PAGE>   55


                         MEGABANK FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

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

<TABLE>
<CAPTION>
                                                                        1999        1998
                                                                      --------    --------
<S>                                                                   <C>         <C>
Cash flows from operating activities
  Net income                                                          $  6,146    $  3,805
  Adjustments to reconcile net income to net cash provided
     by operating activities
      Depreciation                                                          34          19
      Amortization of preferred securities issuance costs                   26          23
      Equity in undistributed net income of subsidiaries                (5,486)     (4,831)
          Gain on sale of investment securities available for sale          --         (34)
      (Increase) decrease in other assets                                 (280)        (73)
      Increase (decrease) in accrued expenses and other liabilities        749         (62)
                                                                      --------    --------

      Net cash provided by (used in) operating activities                1,189      (1,153)

Cash flows from investing activities
  Purchase of securities available for sale                                 --      (2,145)
  Proceeds for sales of securities available for sale                       --         661
  Acquisition of subsidiary under purchase method of accounting,
    net of cash acquired                                                (1,478)         --
  Additions to property and equipment                                     (548)     (1,250)
  Capital investment in bank subsidiary                                     --     (11,000)
  Capital investment in title company subsidiary                          (500)         --
  Investment in trust subsidiary                                            --        (371)
                                                                      --------    --------

      Net cash used in investing activities                             (2,526)    (14,105)

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

      Net cash provided by financing activities                             --      21,889
                                                                      --------    --------

Net increase (decrease) in cash                                         (1,337)      6,631

Cash at beginning of year                                                6,927         296
                                                                      --------    --------

Cash at end of year                                                   $  5,590    $  6,927
                                                                      ========    ========
</TABLE>


                                      -55-
<PAGE>   56

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, 2000 are as follows:

<TABLE>
<CAPTION>
NAME                                AGE     POSITIONS
----                                ---     ---------
<S>                                 <C>     <C>
Thomas R. Kowalski                  60      Chairman of the Board and Chief Executive Officer of the Company and the Bank

Larry A. Olsen (1)                  54      President, Chief Operating Officer and Director of the Company and the Bank

Raymond L. Anilionis                52      Vice President and Director of the Company and Director of the Bank

Susan A. Putland                    52      Vice President,  Finance, Chief Accounting Officer, and Secretary of the Company
                                            and Vice President, Financial Services, Treasurer and Secretary of the Bank

Ryan R. Kowalski                    32      Director of the Company and Vice President and Director of the Bank

Dr. Donald B. Brown (1)             71      Director of the Company and the Bank

William F. Sievers (1)              56      Director of the Company and the Bank

Roger L. Morgan                     57      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.

         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,


                                      -56-
<PAGE>   57
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 CITGO Funding
Company, L.L.C., 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. Subsequent to December 31,
1999, Ms. Putland was appointed Chief Accounting Officer for the Company and
Treasurer for the Bank.

         Ryan R. Kowalski has been a Director of the Company since 1999 and a
Vice President and Director of the Bank since 1997. Prior to his employment with
the Bank, Mr. Kowalski was self-employed as a land developer and residential and
commercial general contractor for nine years.

         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 1999, 1998 or 1997. No
other executive officer of the Company received compensation from the Company
exceeding $100,000 during 1999, 1998 and 1997.


                                      -57-
<PAGE>   58


SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                                                                           Awards                  Payouts
                                                                         ----------------------------------
                                                                                      Securities
                                                               Other                    Under-
                                                              Annual     Restricted      lying                All Other
                                                             Compen-       Stock       Options/      LTIP      Compen-
Name                                   Salary     Bonus       sation     Awards(s)       SARs      Payouts      sation
and Principal Position         Year      ($)       ($)          ($)          ($)          ($)        ($)         ($)
------------------------------ -----  --------  ------------ ---------   ----------   ----------   --------   ---------
<S>                            <C>    <C>       <C>          <C>         <C>          <C>          <C>        <C>
Thomas R. Kowalski,             1999   150,000   692,500(1)         --           --           --         --          --
  Chairman of the Board         1998   150,000   298,490            --           --           --         --          --
     and CEO                    1997   150,000   275,000            --           --           --         --          --
Larry A. Olsen, President       1999   125,000    66,100            --           --           --         --       3,751
  and COO of the Company        1998   105,000    11,167            --           --           --         --       1,444
     and the Bank               1997    86,250     8,733            --           --           --         --          --
Ryan R. Kowalski, Vice          1999    95,000    20,600            --           --           --         --       1,425
  President of the Bank         1998    95,000    19,259            --           --           --         --       1,108
                                1997    95,000     5,666            --           --           --         --          --
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

----------
         (1) A portion of the bonus reported for 1999 was paid in 1999 but was
accrued in 1998.

AGGREGATED OPTION EXERCISES AND FISCAL YEAR END OPTION VALUES

         The following table sets forth the aggregate options held by the above
named executive officers as of December 31, 1999. The options were granted in
1998. No options were granted to or exercised by the specified officers in 1999.

<TABLE>
<CAPTION>
         -------------------------------------------------------------------------------------------------------------------
                                                                                                     Value of Unexercised
                                           Shares                        Number of Securities      In-the-Money Options at
                                        Acquired on       Value           Underlying Options          December 31, 1999
                     Name                 Exercise      Realized      Exercisable/Unexercisable    Exercisable/Unexercisable
         ------------------------------ ------------- -------------- ----------------------------- -------------------------
<S>                                     <C>           <C>            <C>                           <C>
         Thomas R. Kowalski,
           Chairman of the Board
              and CEO                        --            --                  0/50,000                     $0/$0
         Larry A. Olsen, President
           and COO of the Company
              and the Bank                   --            --                  0/5,000                      $0/$0
         Ryan R. Kowalski, Vice
           President of the Bank             --            --                  0/5,000                      $0/$0

         ------------------------------ ------------- -------------- ----------------------------- -------------------------
</TABLE>

         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
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


                                      -58-
<PAGE>   59


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.

         TERMINATION OF THE PLAN. As a result of the proposed merger with
Compass, the Board of Directors has determined to discontinue the Incentive Plan
effective March 6, 2000. All options will be fully vested as of that date and
all shares underlying the options may be exercised on or after that date;
provided, however, that the options will expire and become void as of March 21,
2000. Termination of the Plan and the acceleration of the vesting of the options
are contingent on consummation of the merger with Compass. If, for any reason,
the merger is not consummated, the Plan and options will continue in full force
and effect under the original terms.

         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 1999, the Company is
unaware of any late filings. 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 February 15, 2000, 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.                             2,970,192(1)          38.2%
                    8100 East Arapahoe Road
                    Englewood, Colorado 80112

                  Raymond L. Anilionis                              642,780(2)           8.3%
                    9034 East Easter Place, Suite 202
                    Englewood, Colorado 80112
</TABLE>


                                      -59-
<PAGE>   60


<TABLE>
<CAPTION>
                                                                 SHARES
                                                              BENEFICIALLY     PERCENTAGE
                  BENEFICIAL OWNER                                OWNED        OF CLASS
                  ----------------                            -------------    ----------
<S>                                                           <C>              <C>
                  Warren P. Cohen                                   707,500(3)        9.1%
                    595 South Broadway, Suite 200
                    Denver, Colorado 80209

                  Realtek Company Employees' Profit                 614,820(4)        7.9%
                    Sharing Plan and Trust
                    8100 East Arapahoe Road, Suite 214
                    Englewood, Colorado  80112

                  Vernon J. Purdy                                   468,750           6.0%
                    1900 East Girard, Suite 509
                    Englewood, Colorado  80110

                  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

                  Ryan R. Kowalski                                   76,890(5)        1.0%
                    8100 East Arapahoe Road
                    Englewood, Colorado 80112

                  Dr. Donald B. Brown                                    --            --
                    6700 East Berry
                    Englewood, Colorado 80111

                  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 (nine persons)           3,768,107          48.5%
</TABLE>

------------
(1)  Of this amount, 1,343,232 shares are owned directly, and all other shares
     are owned indirectly through entities or persons controlled by Mr.
     Kowalski.
(2)  Of this amount, 399,000 shares are owned directly, and all other shares are
     owned by entities controlled by Mr. Anilionis.
(3)  Of this amount, 455,473 shares are owned directly, and all other shares are
     owned by an entity controlled by Mr. Cohen.
(4)  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.
(5)  Ryan R. Kowalski owns 76,890 shares through the Ryan R. Kowalski Trust;
     however, he disclaims beneficial ownership of such securities. Since Thomas
     R. Kowalski is the trustee of the Ryan R. Kowalski Trust, these shares are
     included in the ownership of Thomas R. Kowalski.
*    Less than 1.0%


ITEM 12.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         PROPERTIES. 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 1999 was approximately $350,000, 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 Med Partnership LLLP (16.0%) an entity controlled by Warren
P. Cohen, 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


                                      -60-
<PAGE>   61


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 $32,000 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. Rent is approximately $48,000 per annum and
the Bank occupies the building under the terms of a ten-year triple net lease.
The Board of Directors of the Company believes that the leasing terms are
comparable to those that could be obtained from unaffiliated third parties.

         In connection with the consummation of the merger, Compass will merge
Osage 3734 LLC, 1996 Newton LLC and Nagrom LLC (collectively "LLC's") in
exchange for 150,000 shares of Compass common stock. It is a condition to the
completion of the merger that Compass merge the LLC's'.

         EMPLOYMENT AGREEMENTS. Compass Bank and Thomas R. Kowalski, Chairman of
the Company, entered into an employment agreement, which will become effective
upon completion of the merger with Compass. Under the employment agreement, Mr.
Kowalski will serve as a senior officer of Compass Bank for three years
beginning at the effective time of the Merger. Mr. Kowalski's annual salary will
be $175,000 with merit increases based upon performance. Mr. Kowalski will also
receive benefits available to Compass Bank employees of equal title and base
salary. The employment agreement also contains noncompetition and
confidentiality provisions. Larry Olsen, President of the Company, also entered
into an employment agreement to become effective upon completion of the merger
with Compass. Under the employment agreement, Mr. Olsen will serve as a senior
officer of Compass Bank for two years beginning at the effective time of the
merger. Mr. Olsen's annual salary will be $145,000 with merit increases based
upon performance. Mr. Olsen will also receive benefits available to Compass Bank
employees of equal title and base salary. The employment agreement also contains
noncompetition and confidentiality provisions. Certain other employees of the
Bank and Empire also entered into employment agreements, which will become
effective upon completion of the Merger.

         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. Mr. Anilionis also entered into a
consulting agreement with Compass Bank, which will become effective upon
completion of the merger. The consulting agreement is for one year and contains
noncompetition and confidentiality provisions.

         LOAN PARTICIPATIONS. 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,
                                              -----------------------
                                                1999          1998
                                              --------       --------
                                                   (IN THOUSANDS)
<S>                                           <C>            <C>
              Participations sold             $ 14,520       $  9,703
              Participations purchased           2,446          1,346
</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, 1999 and 1998, the participations sold to related parties were
approximately $6.4 million and $4.0 million, respectively.


                                      -61-
<PAGE>   62


         CREDIT TRANSACTIONS. 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, 1999, the aggregate balance of loans and
advances under existing lines of credit to these parties was approximately $1.9
million or 0.7% 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, 1999, the Shareholders held an aggregate
of 2,658,192 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. It is a condition of the
Merger with Compass that the Stock Purchase Agreement be nullified at the time
of completion of the Merger.

         INDEMNIFICATION. For five years after the Merger, Compass will
indemnify the officers, directors and employees of the Company for all
liabilities arising before the Merger to the maximum extent permitted by law.


                                      -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 4,1 997 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).

         10.10 Agreement and Plan of Merger by and between Compass Bancshares,
               Inc. and MegaBank Financial Corporation dated as of November 4,
               1999.

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

         21.   Subsidiaries of the Issuer (2).

         27.1  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/ SUSAN A. PUTLAND
                                       ---------------------------------------
                                       Susan A. Putland
                                       Treasurer and Chief Accounting Officer
                                       (Principal Accounting Officer)


Dated:  March 2, 2000


         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.

         Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed by the following persons on behalf of the
registrant and in the capacities indicated as of March 2, 2000.


/s/ THOMAS R. KOWALSKI                     /s/ RAYMOND L. ANILIONIS
----------------------                     ------------------------
Thomas R. Kowalski                         Raymond L. Anilionis
Chairman of the Board                      Director


/s/ LARRY A. OLSEN                         /s/ RYAN R. KOWALSKI
------------------                         --------------------
Larry A. Olsen                             Ryan R. Kowalski
Director                                   Director


/s/ DR. DONALD B. BROWN                    /s/ WILLIAM F. SIEVERS
-----------------------                    ----------------------
Dr. Donald B. Brown                        William F. Sievers
Director                                   Director


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

                                      -64-
<PAGE>   65


                               INDEX TO EXHIBITS

<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 4,1 997 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).

  10.10       Agreement and Plan of Merger by and between Compass Bancshares,
              Inc. and MegaBank Financial Corporation dated as of November 4,
              1999.

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

  21.         Subsidiaries of the Issuer (2).

  27.1        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.
</TABLE>