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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
/X/ Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1998
/ / Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Commission File Number: 000-25081
Vail Banks, Inc.
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(Exact name of registrant as specified in its charter)
Colorado 84-1250561
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
108 South Frontage Road West, Vail, Colorado 81657
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (970) 476-2002
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Securities registered pursuant to Section 12(b) of the Act: None
Name of exchange on which registered:
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$1.00 par value per share.
Check whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not 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
this Form 10-KSB.____
State issuer's revenues for its most recent fiscal year. $23.8 MILLION
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Transitional Small Business Disclosure format. Yes No X
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State the aggregate market value of the voting stock held by
non-affiliates (which for purposes hereof are all holders other than
executive officers and directors): As of February 1, 1999: 3,905,928 shares
of common stock $1.00 par value (the "Common Stock"), with an aggregate value
of $47,359,377 (based on market value of $12.125/share) (computed by
reference to the price at which the common equity was sold.)
State the number of shares outstanding of each of the issuer's classes
of Common Stock as of the latest practicable date: As of March 1, 1999,
there were issued and outstanding 6,040,608 shares of Common Stock, par value
$1.00 per share.
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PART I
ITEM 1. BUSINESS.
GENERAL
Vail Banks, Inc. ("Vail Banks") is a bank holding company headquartered in
Vail, Colorado with total assets of approximately $439 million at December 31,
1998. Vail Banks' wholly owned subsidiary, WestStar Bank ("WestStar"), is a
Colorado state bank with 20 retail offices located primarily in the western
slope region of Colorado. On July 31, 1998, Vail Banks merged with Independent
Bankshares, Inc. ("Independent"), a bank holding company, and WestStar merged
with Glenwood Independent Bank ("Glenwood"), a Colorado state bank. Glenwood
served Garfield County. In connection with the merger, Vail Banks issued an
aggregate of 318,770 shares of its Common Stock and paid $3.8 million in cash to
holders of Independent common stock. On December 15, 1998, Vail Banks merged
with Telluride Bancorp, Ltd. ("Telluride"), a bank holding company. Through
Telluride's former subsidiaries, Bank of Telluride and Western Colorado Bank,
both Colorado state banks, Vail Banks serves Ouray, San Miguel and Montrose
Counties. Vail Banks issued an aggregate of 908,913 shares of Common Stock and
paid approximately $13.3 million in cash to the holders of Telluride common
stock.
WestStar was formed in 1977 as a community bank to serve the local
residents and businesses of Vail. In 1993, Vail Banks was formed as a bank
holding company for WestStar. Vail Banks has maintained WestStar's position as
an institution offering a broad range of convenient banking services, delivered
with personalized customer service. Vail Banks intends to operate Bank of
Telluride and Western Colorado Bank in the same manner. WestStar currently has
offices in the region of Colorado locally referred to as the "Western Slope",
including Summit County (which includes the Breckenridge and Keystone ski
resorts), Eagle County (which includes the Vail and Beaver Creek ski resorts),
Delta County, Garfield County (which serves the Aspen and Snowmass ski resorts),
Montrose County, Ouray County and San Miguel County (which includes the town and
ski resort of Telluride) and offices in Denver. These areas of Colorado are home
to a variety of commercial, recreational, entertainment, cultural and tourist
enterprises.
The Western Slope has experienced significant growth in recent years,
primarily as a result of an expanding market for first and second homes and
summer and winter tourism. As the year-round population of this region has
grown, local businesses have prospered by servicing this growth. Consequently, a
large concentration of Vail Banks' business is in construction lending and
providing banking services for small-to-medium size businesses in its markets.
The acquisition of Western Colorado Bank, which is located in a more rural area
and is less dependent on customers involved in the tourism industry than
WestStar, will diversify the economic base in which Vail Banks operates. To meet
the growing needs of its customers and to prepare for future growth throughout
the Western Slope, Vail Banks has developed infrastructure by (1) expanding its
capabilities in computer technology, (2) entering emerging growth markets by
building and staffing new facilities, and (3) centralizing certain
administrative, processing, accounting and other operations functions into
regional facilities. Although this investment in infrastructure has adversely
affected net income since 1994, management believes that the desired
infrastructure is now substantially in place to absorb growth in
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existing markets and to allow for the efficient integration of retail offices in
new markets. Management also believes these expenses will be reduced in the
future.
Vail Banks' growth has been designed to maintain customer loyalty through
continuity of operations and personnel. Historically, shareholders of entities
merged into Vail Banks, who are typically members of the local community, elect
to hold ownership stakes in Vail Banks after the merger. Also, local executives
and employees of banks and branches merged into Vail Banks are generally
interested in and encouraged to continue their employment with Vail Banks. The
additions of Bank of Telluride (founded in 1969), Western Colorado Bank (founded
in 1950) and Glenwood (founded in 1955) will provide Vail Banks with the
opportunity to expand its presence in Western Slope markets through established
community banks that have significant local sponsorship. Several directors of
WestStar, as well as its president, have been associated with WestStar for more
than ten years. The director of Independent and one of the two directors of
Telluride who joined the Board of Vail Banks have also been associated with
those banks for more than ten years. Vail Banks will consolidate Western
Colorado Bank and Glenwood into WestStar in the second quarter of 1999.
In January 1999, Vail Banks executed a definitive agreement to acquire
approximately $43,000,000 of deposits and the branch office of the Glenwood
Springs, Colorado branch of World Savings of Oakland, California. World Savings
will retain the mortgage loans its owns in Glenwood Springs. The acquisition,
which is subject to the receipt of certain regulatory approvals and other
customary closing conditions, will be consummated in the second quarter of 1999.
GROWTH STRATEGIES
Vail Banks intends to enhance and solidify its position as a major provider
of community banking services for individuals and small-to-medium size
businesses on the Western Slope. As a result of its significant investment in
retail offices, technology and administration infrastructure, management
believes that Vail Banks' growth, both internally and by merger or acquisition,
can be quickly and efficiently integrated.
Vail Banks believes that it will continue to grow through expansion of its
existing market shares, de novo establishment of retail offices and mergers and
acquisitions. For example, Vail Banks' loan portfolio, excluding acquisitions,
increased from $78.7 million to $269.2 million from December 31, 1995 to
December 31, 1998, a compound average annual growth rate of 50.7%. During the
same period, Vail Banks opened six de novo branches. The merger with Telluride
represents the third acquisition completed by Vail Banks since January 1, 1997.
See "Recent Mergers" in this Item 1.
EXPANSION OF EXISTING MARKET SHARE. Vail Banks intends to continue to
increase its overall market share in its markets by solidifying relationships
with current customers and attracting new customers who desire a local banking
relationship. Management believes that this can be accomplished by (1)
evaluating the needs of its existing and potential customers to determine ways
to enhance services and products, (2) continuing a focus on training and
motivating its employees, (3) providing personalized customer service, and (4)
further implementing technological advances to make banking more efficient and
convenient.
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DE NOVO ESTABLISHMENT OF RETAIL OFFICES. Vail Banks intends to continue
to expand its existing business by opening new retail offices in markets where
it identifies the potential for growth. Management believes that initially
establishing a small presence in a growing community positions Vail Banks to
expand with the community, thereby fostering a local identity with existing
businesses and consumers in the community as well as offering new customers an
alternative to impersonal, institutional banks.
MERGERS AND ACQUISITIONS. Vail Banks' merger and acquisition strategy is
to increase its overall market share in its markets by utilizing the existing
operations of acquired banking operations and to enter new markets by merging
with well established community banks. In assessing potential mergers, Vail
Banks focuses on prospects of the merger candidate, credit quality, past
financial performance, market share, management, location, community
demographics, relative health of the local economy and the terms of the
transaction. Management believes that there are a number of community banks that
meet Vail Banks' criteria and whose owners may be interested in selling their
banks to a community-based organization like Vail Banks. Additionally,
management believes that merging with established banks and then methodically
integrating their operations and retail offices into Vail Banks allows Vail
Banks to offer its broad range of services while maintaining the merged bank's
reputation and community ties. Vail Banks' underlying strategy is to streamline
operations judiciously, in order to optimize the balance between the potentially
conflicting effects of operational integration (which may provide cost savings)
and individual community-focused service (which may provide market share and
revenue growth).
COMMUNITY BANKING PHILOSOPHY
WestStar, Bank of Telluride and Western Colorado Bank are community banks
that provide a broad range of banking services to consumers and businesses in
all of the communities served by their retail offices. Retail offices are
operated with the goal of offering individualized customer service and providing
superior financial services. Many administrative operations, such as data
processing, loan paperwork and documentation, account reconciliation and
maintenance, accounting, compliance and overall policy decisions are centralized
or will be centralized in order to ensure consistency, accuracy and efficiency
and to free retail office personnel to concentrate on providing superior
customer service. The managers and employees of each retail office focus on
day-to-day customer service, including providing financial services to existing
customers, evaluating and working with customers to help choose loan and account
options and striving to present a favorable impression of Vail Banks' banking
subsidiaries to the community to attract new customers. Management of Vail Banks
believes that this organizational structure allows retail offices to offer the
friendly, individualized customer service of a community bank, while maximizing
the benefits of technological expertise, operating synergies and other cost
saving administrative efficiencies.
Management also believes that community banks should invest a portion of
their financial and human resources in the communities within which they
operate. Executive officers and market managers live in the communities served
by their retail offices, and Vail Banks encourages board members, bank officers
and retail office managers to become actively involved in civic and public
service activities in their communities. Management believes that this
involvement and the substantial resources available at the retail office level
for close interaction with customers results in a stronger
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community and increases Vail Banks' banking subsidiaries' visibility in the
community, thereby enhancing their marketing efforts and growth strategies.
HISTORY
In December 1993, Vail Banks commenced operations by acquiring 100% of the
outstanding shares of WestStar, which opened in December 1977. Since that time,
Vail Banks has grown through a combination of internal growth, including the
establishment of retail offices in selected Western Slope communities, and
external growth, including the acquisition of community banks. In 1994, WestStar
converted from a national bank to a state bank. In January 1994, WestStar opened
a retail office in Avon to begin serving that growing community located west of
Vail. In June 1995, Vail Banks acquired Snow Bancorp, a bank holding company
located in Dillon, and merged its bank subsidiary into WestStar. Also in 1995,
taking advantage of changes to Colorado bank branching laws that permitted
subsidiary banks of Colorado bank holding companies to branch into additional
locations, WestStar applied for regulatory approval to open retail offices in
Frisco and Edwards, which opened in mid-1996. Opportunities to serve more of the
Western Slope prompted the merger in 1997 with Cedaredge Financial Services,
Inc. ("Cedaredge"), a bank holding company owning retail offices in Basalt,
Cedaredge, Delta and Montrose that were converted to WestStar retail offices.
WestStar's Gypsum, Breckenridge and Eagle retail offices were opened in 1997.
The acquisition of Independent added retail offices in Glenwood Springs and New
Castle, and the acquisition of Telluride added Bank of Telluride and Western
Colorado Bank, with retail offices in Telluride, Norwood and Montrose. See
"Recent Mergers" in this Item 1.
SERVICES AND PRODUCTS
Through retail offices, Vail Banks serves the banking needs of its business
and consumer customers by providing a broad range of commercial and consumer
banking products and services in all of the communities served by its retail
offices. These services include short-term and medium-term loans, revolving
credit facilities, inventory and accounts receivable financing, equipment
financing, short-term commercial mortgage lending, installment loans, home
improvement loans, short-term loans for the purchase or refinancing of principal
residences or second homes, personal banking through computer and telephone
access, safe deposit box services and various savings accounts, money market
accounts, time certificates of deposit and checking accounts, automated teller
machines and night depository services.
LENDING. Vail Banks offers loans for business and consumer purposes and
focuses its lending activities on individuals and small-to-medium size
businesses in its market areas. Lending activities are funded primarily from the
core deposit base gathered from the local community. Loan products are
concentrated in relatively short-term, variable rate loans, and a majority of
the loans at December 31, 1998 have a committed term of less than two years. At
December 31, 1998 approximately 44% of loans had an average term greater than
one and less than five years, and less than 11% percent of loans had a term
greater than five years. Collateral for loans is concentrated in real estate,
operating business assets and other personal and business assets. Prior to the
mergers with Independent and Telluride, lending was primarily focused on
small-to-medium size businesses; however, these acquisitions are expected to
foster continued expansion in consumer loan activity. Vail Banks also
participates in many Small Business Administration ("SBA") programs. It has
experienced significant growth in its SBA lending division since 1995, and in
January 1999 the SBA designated WestStar as one of the top
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25 SBA lenders in Colorado during 1998. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Financial Condition"
in Item 6.
DEPOSITS. Vail Banks offers the usual and customary range of depository
products provided by commercial banks to both consumers and businesses,
including checking, savings and money market accounts and certificates of
deposit. Deposits are insured by the Federal Deposit Insurance Corporation up to
statutory limits. Generally, deposits are short-term in nature with
approximately 65% of WestStar's deposits having a term in excess of three
months, and approximately 20% having a term in excess of one year. Within ranges
set by policies determined on a centralized basis, retail office managers have
local authority to determine the type, mix and pricing of the depository
products offered to best compete in a retail office's particular marketplace and
to provide appropriate funding for Vail Banks' assets. Additionally, because
some of Vail Banks' markets (Eagle and Summit Counties) are located in resort
areas, seasonality of deposits can run as high as 15% to 20% of deposits, with
deposits peaking during the ski season, increasing in December and declining in
April of each year. Management believes that deposits in non-resort, Western
Slope markets, including the Montrose market in which Vail Banks will have a
greater presence after the Telluride Merger, will serve to reduce the overall
impact of such seasonality.
OTHER SERVICES. WestStar's centralized administrative operations and use
of advanced technology allow it to offer its customers the option and
flexibility of monitoring their loan and account activity and conducting some
banking transactions 24 hours a day through personal computers from their home
or business. Telephone access allows customers to receive up-to-the-minute
account balances, deposit status, checks paid, withdrawals made, loan status,
loan amounts due and other specifics relating to services provided by WestStar.
WestStar has a total of 12 automated teller machines available to its customers,
six of which are located at retail offices and six of which are located
elsewhere in WestStar's market area. Through agreements with other banks and ATM
networks, customers have access to automated teller machines throughout the
world.
ADMINISTRATION OF THE BANKING SUBSIDIARIES OF VAIL BANKS
The retail offices operate through a customer driven organization. Market
managers and retail office managers operate with significant customer
service-oriented local autonomy, within criteria established by WestStar, to
provide financial services to existing customers, to make lending decisions with
respect to potential customers, to price deposit products and to present a
favorable impression of WestStar, Bank of Telluride and Western Colorado Bank to
the community in order to attract new customers. Many functions that can be
centralized with common administration have been placed in operations centers.
At the operations facilities (currently located in Dillon, Vail, Delta and
Avon), Vail Banks offers administrative services, oversight and support to the
retail offices, including data processing, accounting services, investments,
credit policy formulation, loan documentation and a customer service center to
provide PC banking and other customer service assistance. In early 1999, Vail
Banks intends to further consolidate administrative functions at a new 30,800
square foot facility being built by Vail Banks in Gypsum. See Item 2.
Management believes that by standardizing products, services and systems
and providing appropriate holding company support, market managers, retail
office managers and other personnel can
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concentrate on individual customer service and community relations. Management
also believes that continued centralization of services will benefit the
individual retail offices by lowering expenses of administration and data
processing services, by streamlining credit policy formulation and supervision
and by facilitating compliance with the requirements of increasingly complex
banking regulations. Ultimately, such standardization and centralization is
intended to contribute to Vail Banks' acquisition strategy by improving the
results of operations of acquired banks and retail offices. Vail Banks believes
that autonomy at the retail office level allows its banking subsidiaries to
better serve customers in the respective communities, and thus enhances business
opportunities and operations. This structure also has served in the past to ease
the integration of banks acquired by Vail Banks because it allows Vail Banks
generally to maintain customer familiarity (by maintaining existing management
and retail office culture), while at the same time transitioning new retail
offices into Vail Banks' policies and procedures (by utilizing centralized
administrative operations and management personnel) and providing a higher level
of service and expertise through operating efficiencies generated by
centralization.
TECHNOLOGY
Vail Banks' use of advanced technology enables it to offer customers fast,
efficient services and connects all of Vail Banks' financial service
representatives with on-line, real-time access to information concerning all
customer account data. Additionally, advanced hardware and software has been
installed in Dillon, Avon and Delta and will be installed in the new operations
facility in Gypsum by early 1999 that will "image" or photograph all items
(checks, deposit tickets and payments, etc.) in each local market at the end of
each day. The images will then be transmitted for centralized processing where
the various accounts and items will be balanced and processed. Once processed,
the images of checks and deposit tickets will be simultaneously associated with
the appropriate customer's account, where they will be stored indefinitely and
retrieved to be printed on multi-check pages for statements on a monthly basis.
The imaging system also will allow, via a data network, instant access at all
retail offices to current and, on a going forward basis, loan files, customer
signature cards and other data that is available currently only on an
originating retail office basis. Independent's data processing systems have been
integrated into this imaging system, and Telluride's banks have recently
converted to a similar, centralized imaging system. Vail Banks believes that its
technology platform is and will be among the most advanced for banks of Vail
Banks' size in Colorado and provides Vail Banks with the resources to continue
to offer leading edge services to current and new customers. Vail Banks believes
that the integrity of client information is well protected by its data security
system and its off-site disaster back-up storage facilities.
COMPETITION
The banking business is highly competitive, and the profitability of Vail
Banks depends principally upon Vail Banks' ability to compete in the markets in
which its banking operations are located. The financial services industry is
currently highly fragmented, but consolidation in the industry has begun to
reduce the number of independent banks. Vail Banks competes with other
commercial banks, savings banks, savings and loan associations, credit unions,
finance companies, mutual funds, insurance companies, asset-based non-bank
lenders and certain other nonfinancial institutions, including retail stores
which may maintain their own credit programs and certain governmental
organizations which may offer more favorable financing than Vail Banks. Many
competitors of Vail Banks have much greater financial resources, greater name
recognition and more offices than Vail Banks. Some of these
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entities and institutions are not subject to the same regulatory restrictions as
Vail Banks. Vail Banks believes it has been able to compete effectively with
other financial institutions by emphasizing customer service, technology and
local office decision-making, by establishing long-term customer relationships
and building customer loyalty, and by providing products and services designed
to address the specific needs of its customers.
Legislation permitting full nationwide interstate banking and branching was
recently enacted by Congress. The Colorado legislature has passed a law
permitting interstate branching (the acquisition of a bank in Colorado by an
out-of-state bank without the requirement of maintaining a Colorado banking
charter) that became effective in 1997. These new laws may lead to increased
competition from out-of-state banks in Vail Banks' markets. See "Supervision and
Regulation" in this Item 1.
Management believes that each banking subsidiary of Vail Banks will be able
to compete successfully in its respective communities. Vail Banks believes its
competitive strengths include its reputation for developing and continuing
banking relationships, responsiveness to customer needs and individualized
customer service and skilled and resourceful personnel. Management believes that
large, institutional banks cannot or are unwilling to offer a high level of
individualized customer service, and that Vail Banks' customers and potential
customers in its markets choose to bank with Vail Banks in order to take
advantage of this attention while also receiving a range of banking services at
competitive prices. The factors affecting competition include banking and
financial services provided, customer service and responsiveness, customer
convenience and office location. Vail Banks further believes that the community
commitment and involvement of its personnel and its commitment to providing
quality banking and financial services are factors that should allow it to
continue to maintain and improve its competitive position.
Vail Banks also faces competition in acquiring financial institutions.
Colorado has recently experienced a significant consolidation of its banking
industry, and many large holding companies with greater resources than Vail
Banks (including several out-of-state holding companies) are actively pursuing
acquisitions in Colorado. This competition affects the acquisition opportunities
for Vail Banks and can affect the cost of such acquisitions.
EMPLOYEES
As of December 31, 1998, Vail Banks and its banking subsidiaries employed
approximately 283 persons, 238 on a full-time basis and 45 on a part-time basis.
Neither Vail Banks nor any of its banking subsidiaries is a party to any
collective bargaining agreement, and Vail Banks believes that its employee
relations are good.
In March 1999, Vail Banks announced that it would consolidate two of
its banking subsidiaries into WestStar. In connection with the
consolidation, Vail Banks will close two banking offices resulting in
significant management and staff adjustments.
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SELECTED FINANCIAL DATA
The selected historical data set forth below should be read in conjunction
with "Recent Mergers," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the consolidated financial statements and
notes thereto and other financial data contained elsewhere in this Annual Report
on Form 10-KSB.
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<CAPTION>
As of or for the year ended
December 31,
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1998 1997 1996 1995 1994 1993
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(Dollars in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income............................. $ 21,383 $ 14,022 $ 11,655 $ 8,582 $ 5,041 $ 4,417
Interest expense (1)........................ 7,809 4,514 4,210 3,045 1,452 1,256
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Net interest income.................... 13,574 9,508 7,445 5,537 3,589 3,161
Provision for loan losses................... 0 232 154 40 (125) (200)
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Net interest income after provision
for loan losses...................... 13,574 9,276 7,291 5,497 3,714 3,361
Noninterest income.......................... 2,388 1,273 1,071 911 733 1,052
Noninterest expenses........................ 13,048 9,787 7,740 5,621 3,553 2,989
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Income before income taxes............. 2,914 762 622 787 894 1,424
Income tax expense.......................... 955 288 257 266 377 271
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Net income............................. 1,959 474 365 521 517 1,153
Income tax benefit of net operating
loss carryforwards....................... 1,343 274 242 264 368 271
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Total increase in shareholders' equity
after benefit of loss carryforwards...... $ 3,302 $ 748 $ 607 $ 785 $ 885 $ 1,424
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COMMON SHARE DATA (2)
Earnings per common share (basic)........... $ 0.47 $ 0.23 $ 0.21 $ 0.30 $ 0.39 $ 0.87
Earnings per common share (diluted) ........ 0.47 0.23 0.21 0.30 0.39 0.82
Book value per common share................. 9.00 5.91 5.29 5.16 3.95 3.75
Tangible book value per common share........ 5.20 4.19 4.35 4.14 3.95 3.75
Cash dividends per common share............. 0.00 0.00 0.22 0.34 0.51 0.00
Weighted average common shares outstanding
(basic).................................. 2,691,987 2,100,423 1,778,373 1,763,021 1,320,390 1,306,930
Weighted average common shares outstanding
(diluted)................................. 3,361,560 2,153,653 1,870,431 1,855,079 1,412,448 1,398,988
End of period common shares outstanding..... 6,040,608 2,250,980 1,782,510 1,766,050 1,320,390 1,306,930
BALANCE SHEET DATA (END OF PERIOD):
Total assets................................ $ 439,122 $ 231,191 $ 157,194 $ 136,931 $ 82,366 $ 75,165
Investment securities....................... 40,735 19,732 18,843 22,094 28,297 29,606
Net loans................................... 266,601 153,549 105,963 78,067 31,896 28,467
Allowance for loan losses................... 2,590 1,364 823 620 361 353
Deposits.................................... 377,572 206,215 144,350 125,564 75,028 68,112
Note payable................................ 1,114 1,200 1,400 1,600 1,800 1,950
Shareholders' equity........................ 54,376 17,868 9,429 9,121 5,222 4,904
PERFORMANCE RATIOS:
Return on average assets(3) ............... 0.75% 0.29% 0.26% 0.49% 0.70% 1.66%
Return on average shareholders' equity(3) .. 8.78 3.71 3.94 5.78 10.21 18.52
Net interest margin(3) ..................... 6.31 6.80 6.14 6.09 4.87 4.55
Operating efficiency ratio(4) .............. 81.75 89.54 84.56 83.84 82.21 70.95
Shareholders' equity to total assets........ 12.38 7.73 6.00 6.66 6.34 6.52
Loan to deposit ratio....................... 70.61 74.46 73.41 62.17 42.51 41.79
ASSET QUALITY RATIOS (END OF PERIOD):
Nonperforming assets to total assets(5) .... 0.41% 0.09% 0.04% 0.35% 0.03% 0.58%
Nonperforming loans to total loans(6) ...... 0.51 0.14 0.06 0.45 0.00 0.18
Net loan charge-offs (recoveries) to average 0.07 0.03 (0.05) (0.07) (0.43) (0.79)
total loans.................................
Allowance for loan losses to total loans.... 0.96 0.88 0.77 0.79 1.12 1.22
Allowance for loan losses to nonperforming
loans..................................... 187.27% 637.38 1266.15 174.16 NM* 666.04
CAPITAL RATIOS (END OF PERIOD)(7):
Leverage ratio.............................. 7.69% 7.33% 6.23% 7.22% 9.11% 9.70%
Tier 1 risk-based capital ratio............. 11.42 8.26 8.59 9.93 17.22 20.51
Total risk-based capital ratio.............. 12.34 10.15 9.37 10.62 18.12 21.57
</TABLE>
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* "NM" represents a number that is not calculable because there were no
performing loans.
(1) Includes expenses associated with Mandatorily Convertible Debentures.
(2) Adjusted for the 10-for-one stock split. Does not include conversion of the
Series A Preferred Stock and the Mandatorily Convertible Debentures except
in diluted computations.
(3) Interim periods annualized.
(4) Calculated by dividing total noninterest expenses, excluding intangible
asset amortization, by net interest income plus noninterest income.
(5) Nonperforming assets consist of nonaccrual loans, loans past due 90 days or
more, restructured loans and other real estate owned.
(6) Nonperforming loans consist of nonaccrual loans, loans past due 90 days or
more and restructured loans.
(7) Leverage and risk-based capital ratios are defined in "Supervision and
Regulation."
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CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS (AS SUCH TERM IS DEFINED IN THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT")) CONCERNING VAIL BANKS' MERGERS, OPERATIONS, PERFORMANCE
AND FINANCIAL CONDITION, INCLUDING, IN PARTICULAR, THE LIKELIHOOD OF VAIL BANKS'
SUCCESS IN DEVELOPING AND EXPANDING ITS BUSINESS. THESE STATEMENTS ARE BASED
UPON A NUMBER OF ASSUMPTIONS AND ESTIMATES WHICH ARE INHERENTLY SUBJECT TO
SIGNIFICANT UNCERTAINTIES, MANY OF WHICH ARE BEYOND THE CONTROL OF VAIL BANKS.
CONSEQUENTLY, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR
IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO, THOSE SET FORTH
BELOW.
RISKS INVOLVED IN MERGER AND ACQUISITION STRATEGY
Vail Banks believes that a portion of its growth will come from mergers
with and acquisitions of banks and other financial institutions. Vail Banks has
not previously consummated mergers on the same scale as the recent mergers. Vail
Banks merged with Telluride (the "Telluride Merger") on December 15, 1998. It
merged with Independent (the "Independent Merger") on July 31, 1998. Mergers and
acquisitions involve risks of (1) changes in results of operations, (2)
unforeseen liabilities relating to the merged institutions or arising out of the
merger transaction, (3) asset quality problems of the merged entity and (4)
other conditions not within the control of Vail Banks. Such other conditions
include adverse personnel relations, loss of customers because of change of
identity, deterioration in local economic conditions and other risks affecting
the merged institutions.
Vail Banks cannot assure that any acquisition or merger that it completes
will enhance its business or results of operations. Mergers or acquisitions may
have an adverse effect upon Vail Banks' results of operations, particularly
during periods in which the mergers or acquisitions are being integrated into
Vail Banks' operations. Vail Banks must compete with a variety of individuals
and institutions for suitable merger and acquisition candidates. This
competition includes bank holding companies with greater resources than Vail
Banks. Furthermore, merger and acquisition candidates may not be available or
available on terms favorable to Vail Banks. Such competition could affect Vail
Banks' ability to pursue mergers and acquisitions. See "Recent Mergers" in this
Item 1.
In addition, as a result of the growth from mergers, Vail Banks' management
must successfully integrate the operations of merged institutions with those of
Vail Banks. Vail Banks must (1) consolidate data processing operations, (2)
combine employee benefit plans, (3) create joint deposit and lending products,
(4) develop unified marketing plans and (5) consolidate other related areas.
Vail Banks will incur additional expenses to accomplish these goals. These
expenditures could negatively impact Vail Banks' net income. Completion of these
tasks could divert management's attention from other important issues. In
addition, the process of merging and acquiring banks and other financial
institutions could have a material adverse effect on the operation of their
businesses. These effects could have an adverse impact on combined operations.
Vail Banks may also incur additional unexpected costs in connection with the
integration of merged and acquired banks. These unexpected costs could
negatively impact Vail Banks' net income. See "Recent Mergers" in this Item 1.
NEED FOR ADDITIONAL FINANCING
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Vail Banks' ability to merge with and acquire financial institutions may
depend on its ability to obtain additional debt and equity funding. Vail Banks
has no commitments for additional borrowings or sales of equity capital. It
cannot assure that it will be successful in consummating any future financing
transactions. Factors which could affect Vail Banks' access to the capital
markets, or the costs of such capital, include (1) changes in interest rates,
(2) general economic conditions and the perception in the capital markets of
Vail Banks' business, (3) results of operations, (4) leverage, (5) financial
condition and (6) business prospects. Each of these factors is to a large extent
subject to economic, financial, competitive and other factors beyond Vail Banks'
control. Borrowing restrictions contained in certain regulations which apply to
Vail Banks and its subsidiary banks may also have an effect on Vail Banks'
ability to obtain additional financing. Vail Banks' future credit facilities may
significantly restrict Vail Banks' ability to incur additional indebtedness.
Vail Banks' ability to repay any then outstanding indebtedness at maturity may
depend on its ability to refinance such indebtedness. Its ability to refinance
could be adversely affected if Vail Banks is not able to sell additional debt or
equity securities on terms reasonably satisfactory to Vail Banks.
NO PRESENT INTENTION TO PAY DIVIDENDS; RESTRICTIONS ON ABILITY TO PAY DIVIDENDS
Vail Banks presently intends to retain its earnings to finance its growth
and expansion and for general corporate purposes. In the future, the payment of
dividends on the Common Stock, if any, will depend upon (1) Vail Banks'
profitability and financial condition, (2) capital requirements, (3) future
growth plans and (4) other factors deemed relevant by Vail Banks' Board of
Directors. Further, certain regulations provide that a bank holding company
should not maintain a level of cash dividends that undermines its ability to
serve as a source of strength to its banking subsidiaries. See "Dividends" in
Item 5.
Vail Banks' principal source of funds to pay dividends on the shares of
Common Stock will be cash dividends that Vail Banks receives from its banking
subsidiaries. Under regulations of the State of Colorado Division of Banking
(the "CDB") and the Board of Governors of the Federal Reserve System (the
"Federal Reserve"), approval of regulators is required if the total of all
dividends declared by WestStar, Bank of Telluride and Western Colorado Bank in
any calendar year exceeds the total of its respective net profits of that year
combined with its retained net profits of the preceding two years, less any
required transfers to surplus or transfers to a fund for the retirement of
preferred stock. At December 31, 1998, net assets available from WestStar, Bank
of Telluride and Western Colorado Bank to pay dividends without prior approval
from regulatory authorities totaled approximately $1,346,000, $449,000, and
$1,038,000, respectively. See "Supervision and Regulation" in this Item 1.
The federal banking statutes prohibit federally insured banks from making
any capital distributions (including a dividend payment) if the institution
would be "undercapitalized" as defined by statute. In addition, the relevant
federal regulatory agencies also have authority to prohibit an insured bank from
engaging in an unsafe or unsound practice, which could include the payment of
dividends. See "Supervision and Regulation" in this Item 1.
LOCAL ECONOMIC CONDITIONS
The success of Vail Banks depends to a great extent upon general economic
conditions in the communities it serves. Vail Banks primarily operates on the
Western Slope. Some parts of the Western
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Slope are largely dependent on seasonal tourism that particularly affects
small-to-medium size businesses. These businesses are a significant portion of
Vail Banks' borrowers. The seasonality of Vail Banks' business in those areas
results in fluctuations in deposit and credit needs. In some of Vail Banks'
markets (Eagle and Summit Counties), seasonal deposits can run as high as 15% to
20% of total deposits, with deposits peaking during the ski season--increasing
in December and declining in April of each year. In addition, a decline in the
economy of these areas could have a material adverse effect on Vail Banks'
business. A decline could affect (1) the demand for new loans, (2) refinancing
activity, (3) the ability of borrowers to repay outstanding loans and (4) the
value of loan collateral. A decline could also adversely affect asset quality
and net income. See "Business--General" in this Item 1.
DEPENDENCE UPON KEY PERSONNEL
The continued success of Vail Banks substantially depends upon the efforts
of the directors and executive officers of Vail Banks. Vail Banks particularly
depends on E.B. Chester, Jr. and Lisa M. Dillon. The success of Vail Banks
depends in large part on the retention of present key management personnel. It
also depends on Vail Banks' ability to hire and retain additional qualified
personnel in the future. Neither Mr. Chester nor Ms. Dillon has entered into
employment agreements with Vail Banks. Vail Banks does not maintain key-person
life insurance coverage on either of them.
CERTAIN ANTI-TAKEOVER PROVISIONS
Vail Banks' Articles of Incorporation and Bylaws contain certain provisions
that may delay, discourage or prevent an attempted acquisition or change in
control of Vail Banks. These provisions include (1) a Board of Directors
classified into three classes of directors with the directors of each class
having staggered, three-year terms and providing for the removal of directors
only for cause, and (2) noncumulative voting for directors. Vail Banks' Articles
of Incorporation authorize the Board of Directors of Vail Banks to issue shares
of preferred stock of Vail Banks without shareholder approval. The preferred
stock may be issued upon any terms that the Board of Directors may determine.
The issuance of preferred stock may provide desirable flexibility in connection
with possible mergers, acquisitions, financings and be used for other corporate
purposes. But the preferred stock make it more difficult for a third party to
acquire, or discourage a third party from acquiring, a controlling interest in
Vail Banks.
GOVERNMENT REGULATION
The banking industry is regulated by federal and state regulatory
authorities. The Federal Reserve and the CDB supervise and regularly examine
Vail Banks and WestStar. In addition to the CDB, the Federal Deposit Insurance
Corporation ("FDIC") regulates and examines Bank of Telluride and Western
Colorado Bank. Federal and state banking law regulates and limits Vail Banks'
credit extensions, securities purchases, dividend payments, acquisitions,
branching and many other aspects of the banking business. Banking laws are
designed primarily to protect depositors and customers, not investors. These
laws include, among other things, (1) minimum capital requirements, (2)
limitations on products and services offered, (3) geographical limits, (4)
consumer credit regulations, (5) community investment requirements and (6)
restrictions on transactions with affiliated parties.
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Financial institution regulation has been the subject of significant
legislation in recent years. This regulation may be the subject of further
significant legislation in the future. Vail Banks has no control over changes in
regulation. This regulation substantially affects the business and financial
results of all financial institutions and holding companies, including Vail
Banks and its banking subsidiaries. Vail Banks cannot predict the impact of
changes in such regulations on Vail Banks' business and profitability. Changes
in regulation could adversely affect Vail Banks' financial condition and results
of operations. See "Supervision and Regulation" in this Item 1.
COMPETITION
The banking business is highly competitive. The profitability of Vail Banks
depends principally upon its ability to compete in its market areas. Vail Banks
competes with other commercial banks, savings banks, savings and loan
associations, credit unions, finance companies, mutual funds, insurance
companies, brokerage and investment banking firms, asset-based non-bank lenders
and certain other nonfinancial institutions, including retail stores which may
maintain their own credit programs, and certain governmental organizations which
may offer more favorable financing alternatives than Vail Banks. Many of such
competitors may have greater financial and other resources than Vail Banks. Vail
Banks has been able to compete effectively with other financial institutions by
(1) emphasizing customer service, technology and local office decision-making,
(2) establishing long-term customer relationships and building customer loyalty,
and (3) providing products and services designed to address the specific needs
of its customers. Vail Banks may not be able to continue to compete effectively
in the future. Further, changes in government regulation of banking,
particularly recent legislation which removes restrictions on interstate banking
and permits interstate branching, are likely to increase competition by
out-of-state banking organizations or by other financial institutions in Vail
Banks' market areas. See "Business--Competition" in this Item 1.
CONTROL BY MANAGEMENT
The directors and executive officers of Vail Banks beneficially own
approximately 35% of the outstanding Common Stock. Furthermore, E. B. Chester,
Jr., Chairman of Vail Banks, beneficially owns approximately 20% of the
outstanding Common Stock. Accordingly, these persons will have substantial
influence over the business, policies and affairs of Vail Banks, including the
ability potentially to control the election of directors and other matters
requiring shareholder approval by simple majority vote.
INTEREST RATE RISK
Vail Banks' earnings depend to a great extent on its net interest income.
Net income is the difference between interest income earned on loans and
investments and the interest expense paid on deposits and other borrowings. The
net interest margin is highly sensitive to many factors that are beyond Vail
Banks' control. These factors include general economic conditions and the
policies of various governmental and regulatory authorities. Increases in the
discount rate by the Federal Reserve usually lead to rising interest rates.
These interest rate shifts affect Vail Banks' interest income, interest expense
and investment portfolio. Also, governmental policies, such as the creation of a
tax deduction for individual retirement accounts, can increase savings and
affect the cost of funds. From time to time, maturities of assets and
liabilities are not balanced, and a rapid increase or decrease in interest rates
could have an adverse effect on the net interest margin and results of
operations of Vail Banks. Vail
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Banks cannot predict the nature, timing and effect of any future changes in
federal monetary and fiscal policies.
YEAR 2000 COMPLIANCE
The advent of the year 2000 presents significant issues regarding how a
company's software and operating systems will deal with the numerical value
representing the year 2000 ("Y2K"). This issue extends beyond individual
companies to include the effect on other companies with which they do business.
Vail Banks has responded proactively to address this issue with respect to its
own information technology ("IT") systems and has already converted critical
mainframe and PC based operating systems and software. Vail Banks expects to
incur approximately $200,000 in Y2K related expenses, approximately $130,000 of
which have already been incurred. In addition, Vail Banks has tested its mission
critical non-IT systems and processes. Management believes that those systems
are Y2K-compliant. Management also believes that all Vail Banks' operations
affected by Y2K issues will be tested and compliant in advance of the year 2000.
Vail Banks cannot assure that there will not be any Y2K operating problems or
expenses that will arise with Vail Banks' IT systems or non-IT systems and
processes. Likewise, it cannot assure that there will not be any Y2K problems or
expenses that arise with Vail Banks' interface with the computer systems and
software of its suppliers, clients and other financial institutions with which
it interacts. Because such third-party systems or software may not be
Y2K-compliant, Vail Banks could be required to incur unanticipated expenses to
remedy any problems. These problems could have a material adverse effect on Vail
Banks' business, results of operations and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Impact of the Year 2000 Issue" in Item 6.
RECENT MERGERS
THE INFORMATION CONTAINED IN THIS ANNUAL REPORT ON FORM 10-KSB WITH RESPECT
TO THE MERGERS DESCRIBED BELOW IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
COMPLETE TEXT OF THE RESPECTIVE MERGER AGREEMENTS, COPIES OF WHICH HAVE BEEN
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AS EXHIBITS TO THIS FORM
10-KSB.
GENERAL
Vail Banks completed the Telluride Merger on December 15, 1998, the
Independent Merger on July 31, 1998 and the merger with Cedaredge (the
"Cedaredge Merger") in December 1997. Each merger is described below. Management
of Vail Banks believes that the mergers will (1) expand Vail Bank's market area
to desirable locations; (2) broaden the base of operations for Vail Banks and
diversify risks that may exist in Vail Banks' markets; (3) improve profitability
as a result of the economies of scale achieved in the combination of resources;
(4) result in a larger organization that should better enable management to
attract well-qualified employees and provide opportunities to broaden access to
capital markets and merger opportunities; and (5) allow each of Vail Banks'
subsidiary banks to access products, services, talents and capabilities of the
other subsidiary banks and their management and employees. See "Business--Growth
Strategies" in this Item 1.
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TELLURIDE BANCORP, LTD. MERGER
On December 15, 1998, Vail Banks and Telluride consummated the merger of
Telluride into Vail Banks. Vail Banks was the survivor in the merger. Therefore,
Bank of Telluride and Western Colorado Bank became wholly-owned subsidiaries of
Vail Banks. The shareholders of Telluride received an aggregate of 908,913
shares of Common Stock and approximately $13.3 million in cash. In connection
with the Telluride Merger, Vail Banks added Garner F. Hill, II, former Chairman
of Telluride, and Dennis R. Devor, a former director of Western Colorado Bank,
to its Board of Directors. Vail Banks also entered into two-year employment
agreements with seven employees of Telluride.
Telluride began operations as a bank holding company for Bank of Telluride
in October 1988. It owned all of the issued and outstanding capital stock of
Bank of Telluride and Western Colorado Bank. Telluride had assets of
approximately $132 million at the date of the Telluride Merger. Telluride,
through its subsidiaries, engages in commercial and consumer banking activities
primarily in Ouray, Montrose and San Miguel County.
INDEPENDENT BANKSHARES, INC. MERGER
On July 31, 1998, Vail Banks and Independent consummated both the merger of
Independent into Vail Banks and the merger of Glenwood, the wholly-owned banking
subsidiary of Independent, into WestStar. The shareholders of Independent
received an aggregate of 318,770 shares of Vail Banks Common Stock and $3.8
million in cash. Donald L. Vanderhoof, the former Chairman of the Board of
Independent, was elected to the Board of Directors of Vail Banks in connection
with the Independent Merger.
Prior to the Independent Merger, Glenwood provided a wide range of
commercial and consumer banking products and services for small-to-medium size
businesses, consumers and professionals. At June 30, 1998, Glenwood's loan
portfolio was comprised as follows: commercial, financial and agricultural
(12%); real estate--construction (8%); real estate--mortgage (53%); and
installment loans (27%). Glenwood provided its customers with a competitive
variety of deposit products and services, installment and home equity loans,
credit cards and other customary banking services. A majority of Glenwood's
business was originated in Garfield County, which includes Glenwood Springs.
CEDAREDGE FINANCIAL SERVICES, INC. MERGER
In the Cedaredge Merger, consummated on December 1, 1997, Vail Banks
purchased all of the issued and outstanding capital stock of Cedaredge for $3.25
million in cash, and assumed $1.6 million of Cedaredge's Mandatorily Convertible
Debentures and $458,000 in other obligations. Cedaredge was merged into Vail
Banks, with Vail Banks being the surviving corporation, and Western Community
Bank, Cedaredge's wholly-owned subsidiary, was merged into WestStar, with
WestStar being the survivor.
SUPERVISION AND REGULATION
THE FOLLOWING DISCUSSION OF STATUTES AND REGULATIONS AFFECTING BANK HOLDING
COMPANIES AND BANKS IS A SUMMARY THEREOF AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH STATUTES AND REGULATIONS.
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GENERAL. Vail Banks is a registered multi-bank holding company subject to
regulation by the Federal Reserve System under the Bank Holding Company Act of
1956, as amended (the "Act"). Vail Banks is required to file financial
information with the Federal Reserve periodically and is subject to periodic
examination by the Federal Reserve.
The Act requires every bank holding company to obtain the prior approval of
the Federal Reserve before (i) it may acquire direct or indirect ownership or
control of more than 5% of the voting shares of any bank that it does not
already control; (ii) it or any of its subsidiaries, other than a bank, may
acquire all or substantially all of the assets of a bank; and (iii) it may merge
or consolidate with any other bank holding company. In addition, a bank holding
company is generally prohibited from engaging in, or acquiring, direct or
indirect control of the voting shares of any company engaged in non-banking
activities. This prohibition does not apply to activities found by the Federal
Reserve, by order or regulation, to be so closely related to banking or managing
or controlling banks as to be a proper incident thereto. Some of the activities
that the Federal Reserve has determined by regulation or order to be closely
related to banking are: making or servicing loans and certain types of leases;
performing certain data processing services; acting as fiduciary or investment
or financial advisor; providing discount brokerage services; underwriting bank
eligible securities; underwriting debt and equity securities on a limited basis
through separately capitalized subsidiaries; and making investments in
corporations or projects designed primarily to promote community welfare.
Vail Banks must also register with the CDB and file periodic information
with the CDB. As part of such registration, the CDB requires information with
respect to, among other matters, the financial condition, operations, management
and intercompany relationships of Vail Banks and its subsidiaries. The CDB may
also require such other information as is necessary to ascertain whether the
provisions of Colorado law and the regulations and orders issued thereunder by
the CDB have been complied with, and the CDB may examine Vail Banks and its
subsidiary.
Vail Banks is an "affiliate" of its banking subsidiaries under the Federal
Reserve Act, which imposes certain restrictions on (1) loans by WestStar, Bank
of Telluride and Western Colorado Bank to Vail Banks, (2) investments in the
stock or securities of Vail Banks by its banking subsidiaries, (3) its banking
subsidiaries' taking the stock or securities of an "affiliate" as collateral for
loans by them to a borrower and (4) the purchase of assets from Vail Banks by
its banking subsidiaries. Further, a bank holding company and its subsidiaries
are prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit, lease or sale of property or furnishing of services.
WestStar is a member of the Federal Reserve Bank of Kansas City and is
subject to the supervision of and is regularly examined by the Federal Reserve.
Furthermore, WestStar, as a state banking association organized under Colorado
law, is subject to the supervision of, and is regularly examined by the CDB.
Both the Federal Reserve and the CDB must grant prior approval of any merger,
consolidation or other corporation reorganization involving WestStar. Bank of
Telluride and Western Colorado Bank are state chartered banks subject to the
supervision and regulation of the CDB and the FDIC. Both the FDIC and the CDB
must grant prior approval of any merger, consolidation or other corporation
reorganization involving those banks. A bank can be held liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC in connection
with the default of a commonly-controlled institution.
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PAYMENT OF DIVIDENDS. Vail Banks is a legal entity separate and distinct
from its banking subsidiaries. Most of the revenues of Vail Banks result from
dividends paid to it by its banking subsidiaries. There are statutory and
regulatory requirements applicable to the payment of dividends by Vail Bank's
banking subsidiaries, as well as by Vail Banks to its shareholders.
WestStar is a state chartered bank regulated by the CDB and the Federal
Reserve and Bank of Telluride and Western Colorado Banks are state banks
chartered and regulated by the CDB. Under the regulations of the CDB and the
Federal Reserve, approval of the regulators will be required if the total of all
dividends declared by such state bank in any calendar year shall exceed the
total of its net profits of that year combined with its retained net profits of
the preceding two years, less any required transfers to a fund for the
retirement of any preferred stock.
The payment of dividends by Vail Banks and its banking subsidiaries may
also be affected or limited by other factors, such as the requirement to
maintain adequate capital above regulatory guidelines. In addition, if, in
the opinion of the applicable regulatory authority, a bank under its
jurisdiction is engaged in or is about to engage in an unsafe or unsound
practice (which, depending upon the financial condition of the bank, could
include the payment of dividends), such authority may require, after notice
and hearing, that such bank cease and desist from such practice. In addition
to the formal statutes and regulations, regulatory authorities consider the
adequacy of a bank's total capital in relation to its assets. Capital
adequacy considerations could further limit the availability of dividends.
At December 31, 1998, net assets available from WestStar, Bank of Telluride
and Western Colorado Bank to pay dividends without prior approval from
regulatory authorities totaled approximately $1,346,000, $449,000, and
$1,038,000, respectively.
MONETARY POLICY. The results of operations of Vail Banks' banking
subsidiaries are affected by credit policies of monetary authorities,
particularly the Federal Reserve. The instruments of monetary policy employed by
the Federal Reserve include open market operations in U.S. government
securities, changes in the discount rate on bank borrowings and changes in
reserve requirements against bank deposits. In view of changing conditions in
the national economy and in the money markets, as well as the effect of actions
by monetary and fiscal authorities, including the Federal Reserve, no prediction
can be made as to possible future changes in interest rates, deposit levels,
loan demand or the business and earnings of Vail Banks' banking subsidiaries.
CAPITAL ADEQUACY. The Federal Reserve and the FDIC have implemented
substantially identical risk-based rules for assessing bank and bank holding
company capital adequacy. These regulations establish minimum capital standards
in relation to assets and off-balance sheet exposures as adjusted for credit
risk. Banks and bank holding companies are required to have (i) a minimum level
of total capital (as defined) to risk-weighted assets of 8%; (ii) a minimum Tier
1 Capital (as defined) to risk-weighted assets of 4%; and (iii) a minimum
shareholders' equity to risk-weighted assets of 4%. In addition, the Federal
Reserve and the FDIC have established a minimum 3% leverage ratio of Tier 1
Capital to total assets for the most highly-rated banks and bank holding
companies. "Tier 1 Capital" generally consists of common equity not including
unrecognized gains and losses on securities, minority interests in equity
accounts of consolidated subsidiaries and certain perpetual preferred stock less
certain intangibles. The Federal Reserve and the FDIC will require a bank
holding company and a bank, respectively, to maintain a leverage ratio greater
than 3% if either is experiencing or anticipating significant growth or is
operating with less than well-diversified risks in the opinion of the Federal
Reserve. The Federal Reserve and the FDIC use the leverage ratio in tandem with
the risk-based ratio
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to assess the capital adequacy of banks and bank holding companies. The FDIC,
and the Federal Reserve have amended effective January 1, 1997 the capital
adequacy standards to provide for the consideration of interest rate risk in the
overall determination of a bank's capital ratio, requiring banks with greater
interest rate risk to maintain greater capital for the risk.
In addition, Section 38 to the Federal Deposit Insurance Act implemented
the prompt corrective action provisions that Congress enacted as a part of the
Federal Deposit Insurance Corporation Improvement Act of 1991 (the "1991 Act").
The "prompt corrective action" provisions set forth five regulatory zones in
which all banks are placed largely based on their capital positions. Regulators
are permitted to take increasingly harsh action as a bank's financial condition
declines. Regulators are also empowered to place in receivership or require the
sale of a bank to another depository institution when a bank's capital leverage
ratio reaches 2%. Better capitalized institutions are generally subject to less
onerous regulation and supervision than banks with lesser capital ratios.
The FDIC and the Federal Reserve have adopted regulations implementing the
prompt corrective action provisions of the 1991 Act, which place financial
institutions in the following five categories based upon capitalization ratios
(i) a "well capitalized" institution has a total risk-based capital ratio of at
least 10%, a Tier 1 risk-based ratio of at least 6% and a leverage ratio of at
least 5%; (ii) an "adequately capitalized" institution has a total risk-based
capital ratio of at least 8%, a Tier 1 risk-based ratio of at least 4% and a
leverage ratio of at least 4%; (iii) an "undercapitalized" institution has a
total risk-based capital ratio of under 8%, a Tier 1 risk-based ratio of under
4% or a leverage ratio of under 4%; (iv) a "significantly undercapitalized"
institution has a total risk-based capital ratio of under 6%, a Tier 1
risk-based ratio of under 3% or a leverage ratio of under 3%; and (v) a
"critically undercapitalized" institution has a leverage ratio of 2% or less.
Institutions in any of the three undercapitalized categories would be prohibited
from declaring dividends or making capital distributions. The Federal Reserve
regulations also establish procedures for "downgrading" an institution to a
lower capital category based on supervisory factors other than capital. Under
the Federal Reserve's regulations, each banking subsidiary exceeded "well
capitalized" minimum requirements in terms of Tier 1 capital and "adequately
capitalized" in terms of total capital at December 31, 1998.
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Set forth below are pertinent capital ratios for the banking subsidiaries
as of December 31, 1998:
<TABLE>
<CAPTION>
Minimum Capital Requirement WestStar Bank of Telluride Western Colorado
- --------------------------- -------- ----------------- ----------------
<S> <C> <C> <C>
Tier One Capital to 9.50% 12.75% 10.86%
Risk Based
Assets: 4.00%(1)
Total Capital to 10.24% 14.25% 12.08%
Risk Based
Assets: 8.00%(2)
Leverage Ratio (Tier One 6.84% 8.51% 8.55%
Capital to Average Total
Assets): 3.00%(3)
</TABLE>
- -------------------
(1) Minimum required ratio for "well capitalized" banks is 6.00%
(2) Minimum required ratio for "well capitalized" banks is 10.00%
(3) Minimum required ratio for "well capitalized" banks is 5.00%
On April 19, 1995, the four federal bank regulatory agencies adopted
revisions to the regulations promulgated pursuant to the Community Reinvestment
Act (the "CRA"), which are intended to set distinct assessment standards for
financial institutions. The revised regulation contains three evaluation tests
(i) a lending test, which will compare an institution's market share of loans in
low- and moderate-income areas to its market share of loans in its entire
service area and the percentage of a bank's outstanding loans to low- and
moderate-income areas or individuals; (ii) a services test, which will evaluate
the provisions of services that promote the availability of credit to low- and
moderate-income areas; and (iii) an investment test, which will evaluate an
institution's record of investments in organizations designed to foster
community development, small- and minority-owned businesses and affordable
housing lending, including state and local government housing or revenue bonds.
The regulations are designed to reduce some paperwork requirements of the
previous regulations and provide regulators, institutions and community groups
with a more objective and predictable manner with which to evaluate the CRA
performance of financial institutions. The rules became effective on January 1,
1996, at which time evaluation under streamlined procedures began for
institutions with assets of less than $250 million that are owned by a holding
company with total assets of less than $1 billion.
Congress and various federal agencies (including, in addition to the bank
regulatory agencies, the Department of Housing and Urban Development, the
Federal Trade Commission and the Department of Justice) (collectively the
"Federal Agencies") responsible for implementing the nation's fair lending laws
have been increasingly concerned that prospective home buyers and other
borrowers are experiencing discrimination in their efforts to obtain loans. In
recent years, the Department of Justice has filed suit against financial
institutions, which it determined had discriminated, seeking fines and
restitution for borrowers who allegedly suffered from discriminatory practices.
Most, if not all, of these suits have been settled (some for substantial sums)
without a full adjudication on the merits.
On March 8, 1994 the Federal Agencies, in an effort to clarify what
constitutes lending discrimination and specify the factors the agencies will
consider in determining if lending discrimination exists, announced a joint
policy statement detailing specific discriminatory practices
19
<PAGE>
prohibited under the Equal Credit Opportunity Act and the Fair Housing Act. In
the policy statement, three methods of proving lending discrimination were
identified (i) overt evidence of discrimination, when a lender blatantly
discriminates on a prohibited basis; (ii) evidence of disparate treatment, when
a lender treats applicants differently based on a prohibited factor even where
there is no showing that the treatment was motivated by prejudice or a conscious
intention to discriminate against a person; and (iii) evidence of disparate
impact, when a lender applies a practice uniformly to all applicants, but the
practice has a discriminatory effect, even where such practices are neutral on
their face and are applied equally, unless the practice can be justified on the
basis of business necessity.
On September 23, 1994, Reigle Community Development and Regulatory
Improvement Act of 1994 (the "Regulatory Improvement Act") was signed. The
Regulatory Improvement Act contains funding for community development projects
through banks and community development financial institutions and also numerous
regulatory relief provisions designed to eliminate certain duplicative
regulations and paperwork requirements.
FDIC INSURANCE AND FICO ASSESSMENTS FOR WESTSTAR, BANK OF TELLURIDE AND
WESTERN COLORADO BANK. WestStar, Bank of Telluride and Western Colorado
Bank are subject to FDIC deposit insurance assessments for the Bank Insurance
Fund (the "BIF"). Currently the deposit insurance premium for healthy banks
is zero but the assessment for the riskiest banks can be as high as $.27 per
$100 of deposits, which is determined based upon a sliding scale depending on
their placement in supervisory categories.
EXECUTIVE OFFICERS OF VAIL BANKS
Certain information regarding the executive officers of the Company is set
forth in the following table and paragraphs.
NAME AGE POSITION
---- --- --------
E.B. Chester, Jr. 56 Chairman of the Board
Lisa M. Dillon 45 President and Chief Executive Officer
Joseph S. Dillon 40 Senior Executive Vice President and
Chief Financial Officer
Mr. Chester, who formed Vail Banks through a series of acquisitions, has
served as Chairman of the Board of Directors of Vail Banks since 1993 and the
Chairman of the Board of Directors of WestStar since 1989. Mr. Chester is also
currently on the executive committee of Vail Valley Jet Center, a business
involved in private and commercial aviation, and Manager of King Creek Ranch
LLC, a ranching business. From 1986 to 1997, Mr. Chester served as the Chief
Executive Officer of First Carolina Cable TV, LP, a cable television company,
and from 1987 to 1997 served as the Chief Executive Officer of the corporate
general partner of Outdoor East, LP, an outdoor advertising firm.
Ms. Dillon has served as the President and Chief Executive Officer and
director of Vail Banks since 1993. Ms. Dillon, who started her career with
WestStar in 1979, also has served as President and Chief Executive Officer of
WestStar since 1989.
Mr. Dillon has served as the Senior Executive Vice President and Chief
Financial Officer of Vail Banks since June 1998. Mr. Dillon is currently the
Chairman, President and Chief Executive
20
<PAGE>
Officer of Dillon Technologies, Inc., a business consulting firm, and an
associate of Dillon Schramm Associates, Ltd., also a business consulting firm.
Mr. Dillon served as Chief Financial Officer, Secretary and Treasurer at Oread,
Inc., a pharmaceutical company, where he was employed from 1996 to 1997, and was
employed by Hoechst Marion Roussel, also a pharmaceutical company, from 1988 to
1996, where he held various management positions within finance.
ITEM 2. DESCRIPTION OF PROPERTIES.
The following table sets forth information about Vail Banks' banking and
administrative offices.
LOCATION OWNED LEASED
-------- ----- ------
Avon X
Basalt X
Breckenridge X
Cedaredge--South Grand X
Cedaredge--Mercantile X
Delta X
Denver--17th Street X
Denver--Stout Street X
Dillon X
Eagle X
Edwards X
Frisco X
Glenwood Springs X
Glenwood Springs--City Market X
Gypsum X
Gypsum - Administrative X
Montrose--City Market X
Montrose--City Market X
Montrose X
New Castle X
Norwood X
Telluride X
Vail--Main Office X
Vail--West Vail X
Vail--Vail Village X
The properties range in size from 1,400 square feet to 30,800 square feet.
None of the properties owned by Vail Banks secure the outstanding balance of the
purchase prices for the properties. The aggregate annual lease payments for
real properties in 1998 were approximately $546,000. Leases for the facilities
expire at various periods between 1999 and 2011.
All of WestStar's administrative operations in Dillon, Vail, Avon and
Glenwood will be centralized in an operations facility under construction in
Gypsum, Colorado. WestStar's administrative operations in Delta and those of
Telluride in the future may be centralized in Western Colorado Bank's new
operations facility in Montrose.
21
<PAGE>
Vail Banks considers its properties adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS.
Vail Banks and its banking subsidiaries periodically are parties to or
otherwise involved in legal proceedings arising in the normal course of
business, such as claims to enforce liens, claims involving the making and
servicing of real property loans and other issues incident to their business.
Management does not believe that there is any pending or threatened proceeding
against Vail Banks or its banking subsidiaries which, if determined adversely,
would have a material effect on the business, results of operations, or
financial position of Vail Banks or its banking subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to security holders during the fourth quarter of
the 1998 fiscal year.
22
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKETS FOR CAPITAL STOCK
Vail Banks' Common Stock began trading on The Nasdaq Stock Market under the
symbol "VAIL" on December 10, 1998. Prior to that time, there was no trading
market for the Common Stock. The following table sets forth for the periods
indicated the high and low sales prices of the Common Stock on The Nasdaq Stock
Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1998
Fourth Quarter (from December 10, 1998) . . . . . $14.00 $12.00
1999
First Quarter (through March 22, 1999). . . . . . $12 7/8 $12.00
</TABLE>
HOLDERS
As of February 17, 1999, there were 143 holders of record of the Common
Stock. Investors who beneficially own Common Stock that is held in street name
by brokerage firms or similar holders are not included in this number.
DIVIDENDS
Holders of Common Stock will be entitled to receive dividends when, as and
if declared by Vail Banks' Board of Directors out of funds legally available
therefor. Vail Banks presently intends to retain its earnings to finance its
growth and expansion and for use in general corporate purposes. It has not paid
cash dividends on its Common Stock since 1996. The final determination of the
timing, amount and payment of dividends on the Common Stock is at the discretion
of the Board of Directors. It will depend on conditions then existing, including
Vail Banks' profitability, financial condition, capital requirements, future
growth plans and other relevant factors. The principal source of Vail Banks'
income is dividends from its banking subsidiaries. The payment of dividends by
WestStar is subject to certain restrictions imposed by the federal and state
banking laws and regulations. See "Supervision and Regulation" in Item 1.
Vail Banks' ability to pay cash dividends on the Common Stock is also
subject to statutory restrictions, including banking regulations, and
restrictions arising under the terms of securities or indebtedness which may be
issued or incurred in the future. The terms of such securities or indebtedness
may restrict payment of dividends on Common Stock until required payments and
distributions are made on such securities or indebtedness. Under regulations of
the CDB and the Federal Reserve, approval of the regulators will be required if
the total of all dividends declared by any banking subsidiary in any year
exceeds the total of its net profits of that year combined with its retained net
profits of the preceding two years.
23
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN
OF OPERATION FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
BASIS OF PRESENTATION
The following discussion and analysis provides information regarding Vail
Banks' historical results of operations and financial condition as of or for the
years ended December 31, 1998, 1997 and 1996. The following discussion should be
read in conjunction with the consolidated financial statements and related notes
included elsewhere in this Annual Report on Form 10-KSB.
Effective December 1, 1997, Vail Banks consummated the Cedaredge Merger by
paying cash of $3.25 million, and assuming certain obligations of $458,000 and
the Series I and Series II Convertible Notes (the "Mandatorily Convertible
Debentures") totaling approximately $1.6 million. As of the date of the merger,
Cedaredge had total assets of $45.5 million, net loans of $33.9 million, total
deposits of $42.0 million and equity capital of $3.0 million. The Mandatorily
Convertible Debentures were converted to Vail Banks Common Stock subsequent to
Vail Banks' initial public offering in December 1998 (the "Offering"). The
merger 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 their estimated fair values at the date of the
merger. The consolidated statements of income include only the income and
expenses of Cedaredge since the date of the Cedaredge Merger. The excess of
purchase price over net assets acquired has been recorded as an intangible
asset, which is amortized over 25 years. The effect on results of operations for
the first eleven months of 1997, had the purchase transaction occurred at the
beginning of the year, would have been material. See Item 1. "Business-- Recent
Mergers" for further information on this transaction and the mergers described
below. See footnote 2 of the consolidated financial statements included herein.
Effective July 31, 1998, Vail Banks consummated the Independent Merger
by paying cash of $3.8 million and issuing 318,770 shares of Vail Banks
Common Stock. As of the merger date, Independent had total assets of $30.3
million, net loans of $17.0 million, total deposits of $27.4 million and
equity capital of $2.6 million. The merger 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 their
estimated fair values at the date of the merger. The consolidated statements
of income include only the income and expense of Independent since the date
of the Independent Merger. The excess of purchase price over net assets has
been recorded as an intangible asset, which is amortized over 25 years. The
effect on results of operations for the first seven months of 1998, had the
purchase transaction occurred at the beginning of the year, would have been
material. See footnote 2 of the consolidated financial statements included
herein.
Effective December 15, 1998, Vail Banks consummated the Telluride Merger
by paying cash of $13.3 million and issuing 908,913 shares of Vail Banks
Common Stock. As of the merger date, Telluride had total assets of $132.9
million, net loans of $80.6 million, total deposits of $119.9 million and
equity capital of $10.8 million. The merger 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 their
estimated fair values at the date of the merger. The consolidated statements
of income include only the income and expense of Telluride since the date of
the Telluride Merger. The excess of purchase price over net assets has been
recorded as an intangible asset, which
24
<PAGE>
is amortized over 25 years. The effect on income and average balances for
the year 1998, due to the Telluride Merger, was generally minimal as the
transaction closed with only 16 days remaining in 1998. The effect on results
of operations for the first eleven months of 1998, had the purchase
transaction occurred at the beginning of the year, would have been material.
OVERVIEW
Vail Banks' net income for the year ended December 31, 1998 increased $1.5
million, or 313.1%, to $2.0 million from $474,000 for the same period in 1997.
Net income for the year ended December 31, 1997 increased $109,000, or 29.9%, to
$474,000 from $365,000 in 1996.
Total assets at December 31, 1998 increased $207.9 million, or 89.9%, to
$439.1 million from $231.2 million at December 31, 1997. Total assets at
December 31, 1997 increased $74.0 million, or 47.1%, from $157.2 million at
December 31, 1996.
The return on average assets was 0.75% for the year ended December 31, 1998
compared to 0.29% for year ended December 31, 1997. The return on average assets
was 0.26% for the year ended December 31, 1996.
The return on average equity was 8.78% for the year ended December 31, 1998
compared to 3.71 % for the year ended December 31, 1997. The return on average
equity was 3.94% for the year ended December 31, 1996.
Vail Banks is utilizing its tax loss carryforward position, obtained from a
merger in 1993, by taking funds that would normally have been used to pay taxes
and using those funds to expand its banking business and facilities. Under GAAP
requirements, however, net income must be reported net of an equivalent expense
which would have been paid for taxation. Therefore, both the expenses associated
with these investments and the "equivalent taxation" amount reduce net income.
These investments, such as de novo retail offices, advanced real-time
information technology networks and item imaging systems, have increased
expenses and put downward pressure on returns on assets and equity in the
current and immediate historical periods. Vail Banks believes such investments
will yield significant returns in future periods.
RESULTS OF OPERATIONS
NET INTEREST INCOME. Vail Banks' net income is derived primarily from net
interest income. Net interest income is the difference between interest income,
principally from loans, investment securities and federal 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 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, interest-bearing liabilities and
noninterest-bearing liabilities.
25
<PAGE>
The following table sets forth the average balances, net interest income
and expense and average yields and rates for Vail Banks' earning assets and
interest-bearing liabilities for the periods indicated on a nontax-equivalent
basis.
26
<PAGE>
<TABLE>
<CAPTION>
NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
1998 1997
---------------------------------------- --------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED OR YIELD OR AVERAGE EARNED OR YIELD OR
BALANCE PAID COST BALANCE PAID COST
-------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets
Federal funds sold......... $ 27,779 1,459 5.25% $ 9,396 $496 5.28%
Investment securities
Taxable................. 16,845 981 5.82 15,780 934 5.92
Tax exempt(1) .......... 3,396 156 4.59 482 22 4.56
Loans(2)................... 170,667 18,787 11.01 115,179 12,570 10.91
Allowance for loan losses.. (1,431) (848)
-------- --------- -------- --------
Total interest-earning assets 217,256 21,383 9.84% 139,989 14,022 10.02%
Noninterest-earning assets. 44,348 22,039
-------- --------
Total assets............... $261,604 $162,028
-------- --------
-------- --------
Liabilities and Stockholders'
Equity Interest-bearing
liabilities: Interest-bearing
deposits
Demand, interest-bearing $106,155 $ 3,868 3.64% $ 73,651 $ 2,752 3.74%
Savings................. 15,897 430 2.71 8,099 219 2.70
Certificates of deposit. 56,757 3,228 5.69 22,757 1,280 5.62
-------- --------- -------- --------
Total interest-bearing deposits 178,809 7,526 4.21% 104,525 4,251 4.07%
Federal funds sold and
securities sold Under
repurchase agreements... 734 31 4.24% 1,665 88 5.29
Note payable............... 1,105 111 10.03 1,275 123 9.65
Other liabilities.......... 0 0 392 39 9.82
-------- --------- -------- --------
Total interest-bearing
liabilities(3)(4).......... 180,648 7,668 4.24% 107,857 4,501 4.17%
--------- --------
Noninterest-bearing liabilities 58,655 41,388
-------- --------
Total liabilities(3)....... 239,303 149,245
-------- --------
Stockholders'equity(3)..... 22,301 12,783
-------- --------
Total liabilities and
shareholders' Equity.... $261,604 $162,028
-------- --------
-------- --------
Net interest income(4).... $13,715 $ 9,521
--------- --------
--------- --------
Net interest margin........ 6.31% 6.80%
------- ------
------- ------
Net interest spread........ 5.60% 5.84%
------- ------
------- ------
Ratio of average interest-
earning assets to average
interest-bearing
liabilities............. 120.26% 129.79%
<CAPTION>
NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
1996
---------------------------------------
INTEREST AVERAGE
AVERAGE EARNED OR YIELD OR
BALANCE PAID COST
------- ---------- ---------
<S> <C> <C> <C>
Assets
Interest-earning assets
Federal funds sold......... $ 6,609 $ 343 5.19%
Investment securities
Taxable................. 23,482 1,300 5.54
Tax exempt(1) .......... 349 19 5.44
Loans(2)................... 91,583 9,993 10.91
Allowance for loan losses.. (680)
-------- -------
Total interest-earning assets 121,343 11,655 9.61%
Noninterest-earning assets. 21,497
--------
Total assets............... $142,840
--------
--------
Liabilities and Stockholders'
Equity Interest-bearing
liabilities: Interest-bearing
deposits
Demand, interest-bearing $ 66,089 $ 2,476 3.75%
Savings................. 8,227 231 2.81
Certificates of deposit. 18,595 1,035 5.57
-------- -------
Total interest-bearing deposits 92,911 3,742 4.03
Federal funds sold and
securities sold Under
repurchase agreements... 4,095 210 5.13%
Note payable............... 1,500 144 9.60
Other liabilities.......... 2,087 114 5.47
-------- -------
Total interest-bearing
liabilities(3)(4).......... 100,594 4,210 4.19%
Noninterest-bearing liabilities 32,973 -------
--------
Total liabilities(3)....... 133,566
--------
Stockholders' equity(3).... 9,274
--------
Total liabilities and
shareholders' Equity.... $142,840
--------
--------
Net interest income(4).... $ 7,445
-------
-------
Net interest margin........ 6.14%
-----
-----
Net interest spread........ 5.42%
-----
-----
Ratio of average interest-
earning assets to average
interest-bearing
liabilities............. 120.63%
</TABLE>
- ------------------------
(1) Yields are calculated using stated rates, not tax-equivalent rates.
(2) Loans are net of unearned discount. Nonaccrual loans are included in
average loans outstanding. Loan fees are included in interest income as
follows: December 31, 1998--$1,957,000; December 31, 1997--$1,143,000;
December 31, 1996--$960,000.
(3) Mandatorily Convertible Debentures are included in the "Stockholders'
equity" account as the Offering required the automatic conversion to Common
Stock.
(4) Expenses associated with the Mandatorily Convertible Debentures are not
reflected in interest expense in this table as the Mandatorily Convertible
Debentures were converted in connection with the Offering.
27
<PAGE>
Net interest income, on a nontax-equivalent basis, was $13.7 million for
the year ended December 31, 1998, an increase of $4.2 million, or 44.2%, from
$9.5 million for the same period in 1997. Interest income for the year ended
December 31, 1998 and 1997 was $21.4 million and $14.0 million, respectively.
The $7.4 million increase is primarily due to growth of the loan portfolio. The
Cedaredge Merger in December 1997 added approximately $34.4 million of the $55.5
million increase in average loans reported as of December 31, 1998, with retail
office expansion and internal growth accounting for the remainder of the
increase. A balanced blend of fixed and variable rate loans in the portfolio and
relatively stable interest rates over the past twelve months served to minimize
changes due to rate in favor of changes due to volume. The average yield on
interest-earning assets decreased to 9.84% during 1998, from 10.02% during the
same period in 1997.
Interest expense increased $3.2 million, or 71.1%, to $7.7 million for the
year ended December 31, 1998, compared to $4.5 million for the same period in
1997. Increases in the volume of interest-bearing demand deposits and
certificates of deposit accounted for the majority of the increase in interest
expense. The Cedaredge Merger added approximately $10.8 million of the $32.5
million increase in the average interest-bearing demand deposit accounts and
approximately $15.9 million of the $34.0 million increase in average
certificates of deposit. The balance of the increase is attributable to retail
office expansion and internal growth. The average cost of interest-bearing
liabilities increased to 4.24% for the year ended December 31, 1998, from 4.17%
in the same period of 1997.
The net interest margin and net interest spread for the year ended December
31, 1998 were 6.31% and 5.60%, respectively, compared to 6.80% and 5.84%,
respectively for the same period in 1997. The combination of the decreased loan
yields, an increase in the cost of interest-bearing liabilities and a smaller
ratio of interest-bearing assets to interest-earning liabilities caused a
decline in the net interest margin, when comparing the periods of 1998 and 1997.
However, the net interest spread narrowed by a lesser extent, due to loan yield
improvement.
Net interest income, on a nontax-equivalent basis, was $9.5 million for the
year ended December 31, 1997, an increase of $2.1 million, or 28.4%, from $7.4
million in 1996. Interest income for the years ended December 31, 1997 and 1996
was $14.0 million and $11.7 million, respectively. The increase in interest
income from 1996 to 1997 of $2.4 million is primarily due to an increase in size
of the loan portfolio. The Cedaredge Merger added $2.9 million of the $23.6
million increase in average loans to the December 31, 1997 figure, with retail
office expansion and internal growth contributing the remainder of the increase
over the periods. The average yield on interest- earning assets increased to
10.02% in 1997 from 9.61% in 1996.
Interest expense increased $291,000, or 6.9%, to $4.5 million for the year
ended December 31, 1997 compared to $4.2 million for 1996. Increases in the
volume of interest-bearing demand deposit accounts and certificates of deposit
accounted for the majority of the increase in interest expense over the periods.
The Cedaredge Merger added approximately $900,000 of the $7.6 million increase
in average interest-bearing demand deposit accounts and approximately $1.3
million of the $4.2 million increase in average certificates of deposit over the
periods. The balance of the increases is attributable to retail office expansion
and internal growth. The increase in interest expense on deposits was partially
offset by reductions in other interest expense due to a partial retirement of
securities sold under repurchase agreements and other liabilities. Retirement of
these liabilities continued through 1998. The average cost of interest-bearing
liabilities decreased to 4.17% in 1997 from 4.19% in 1996.
28
<PAGE>
The following table illustrates, for the periods indicated, the changes in
Vail Banks' net interest income, on a nontax-equivalent basis, due to both
volume and rate changes. Changes in net interest income due to both volume and
rate have been allocated to both volume and rate in proportion to the
relationship of the absolute dollar amounts of the change in each.
<TABLE>
<CAPTION>
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
COMPARED TO 1997 COMPARED TO 1996
------------------------------------- ------------------------------------
INCREASES (DECREASES) INCREASES (DECREASES)
IN NET INTEREST INCOME IN NET INTEREST INCOME
DUE TO CHANGES IN DUE TO CHANGES IN
------------------------------------- ----------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Federal funds sold............. $970 $(7) $963 $145 $8 $153
Investment securities
Taxable..................... 63 (16) 47 (426) 60 (366)
Tax exempt.................. 133 1 134 7 (4) 3
Loans.......................... 6,056 161 6,217 2,575 2 2,577
------ ---- ------ ------ --- ------
Total interest income..... 7,222 139 7,361 2,301 66 2,367
------ ---- ------ ------ --- ------
------ ---- ------ ------ --- ------
INTEREST EXPENSE:
Interest-bearing deposits
Demand, interest-bearing.... 1,215 (99) 1,116 283 (7) 276
Saving...................... 210 1 211 (4) (8) (12)
Certificates of deposit..... 1,911 37 1,948 233 12 245
Federal funds purchased and
securities sold under repurchase
agreements (49) (8) (57) (125) 3 (122)
Note payable................... (16) 4 (12) (22) 1 (21)
Other liabilities.............. (39) 0 (39) (93) 18 (75)
------ ---- ------ ------ --- ------
Total interest expense:... 3,232 (65) 3,167 272 19 291
------ ---- ------ ------ --- ------
Change in net interest income.. $3,990 $204 $4,194 $2,029 $47 $2,076
------ ---- ------ ------ --- ------
------ ---- ------ ------ --- ------
</TABLE>
PROVISION FOR LOAN LOSSES. The amount of the provision for loan losses is
based on quarterly evaluations of the loan portfolio, with particular attention
directed toward nonperforming and other potential problem loans. During these
evaluations, consideration is also given to such factors as management's
evaluation of specific loans, the level and composition of nonperforming loans,
historical loan loss experience, results of examinations by regulatory agencies,
an internal asset review process, the market value of collateral, the strength
and availability of guarantees, concentrations of credit and other judgmental
factors.
Vail Banks recorded no provision for loan losses for the year ended
December 31, 1998. Vail Banks assessed its loan quality monthly during 1998 and
determined that no provisions were necessary during the year to maintain an
adequate allowance for loan losses. Vail Banks recorded a $232,000 provision
for the year ended December 31, 1997 as compared to $154,000 for the year ended
December 31, 1996. Provisions for these periods were increased to reflect
growth in the loan portfolio and to maintain a target allowance to total loans
ratio of 0.75% to 1.50%.
29
<PAGE>
NONINTEREST INCOME. The following table sets forth Vail Banks'
noninterest income for the periods indicated.
<TABLE>
<CAPTION>
NONINTEREST INCOME
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
-------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service charges.......................... $ 489 $ 335 $ 320
NSF and returned check charges........... 916 581 470
Other fee income......................... 420 220 144
Rental income............................ 489 12 0
Other income............................. 74 125 137
-------- -------- -------
Total noninterest income................. $ 2,388 $1,273 $1,071
-------- -------- -------
-------- -------- -------
</TABLE>
During the year ended December 31, 1998, total noninterest income increased
$1.1 million, or 87.6%, to $2.4 million from $1.3 million for the comparable
period in 1997 due primarily to increases in service charges and fees on demand
deposit accounts in approximate proportion to growth in those deposit amounts.
Also contributing to the increase was rental income from third parties.
Noninterest income for the year ended December 31, 1997 compared to 1996
increased $202,000, or 18.9%, due primarily to increases in service charges and
fees on demand deposit accounts in approximate proportion to growth in those
deposit amounts.
NONINTEREST EXPENSES. The following table sets forth Vail Banks'
noninterest expenses for the periods indicated.
<TABLE>
<CAPTION>
NONINTEREST INCOME
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
-------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Salaries and employee benefits........... $ 6,954 $5,086 $3,670
Occupancy................................ 1,626 1,325 1,185
Furniture and equipment.................. 1,151 852 492
Service fees............................. 660 366 207
Professional fees........................ 293 238 178
Supplies and printing.................... 425 342 336
Telephone................................ 359 209 130
Marketing and promotions................. 204 399 255
Postage and freight...................... 195 137 125
Other.................................... 1,181 833 1,162
-------- -------- -------
Total noninterest expenses......... $13,048 $9,787 $7,740
-------- -------- -------
-------- -------- -------
</TABLE>
During the year ended December 31, 1998, noninterest expenses increased
$3.2 million, or 33.3%, to $13.0 million from $9.8 million for the comparable
period in 1997. This increase is primarily due to salaries and employee benefits
increasing $1.9 million as a result of the addition of eight retail
30
<PAGE>
offices, one through expansion, four from the Cedaredge Merger and three from
the Independent Merger. Furniture and equipment expense increased $299,000, or
35.1%, due to the expansion and acquisition of operating facilities. Service
fees increased $294,000, or 80.3%, due to courier services required to move
documents to and from the new facilities, which now serve a much broader
geographical area, and central backroom operations. Other expenses increased
$349,000, or 41.9% primarily as a result of expansion of operations, the
Cedaredge Merger and the Independent Merger. Specific "other" expenses which
increased over the period were travel, training, ATM interchange, insurance,
software depreciation and conversion, and goodwill amortization.
During the year ended December 31, 1997, noninterest expenses increased
$2.0 million, or 26.4%, to $9.8 million from $7.7 million in 1996, primarily as
a result of salaries and employee benefits increasing by $1.4 million due to the
addition of seven retail offices, three through expansion and four from the
Cedaredge Merger. The balance of the increase is generally due to continued
growth of the existing operations combined with internal growth.
FEDERAL INCOME TAX. For approximately five years, Vail Banks has utilized a
net operating loss ("NOL") carryforward obtained from a 1993 merger. Under GAAP
requirements, net income includes an equivalent expense that would be paid for
taxation. A federal taxation rate of 34% is used for this purpose. The taxes
saved by use of the NOL carryforward are recorded directly to additional paid-in
capital and are added to net income "below the line" to arrive at the "net
addition to stockholders' equity." This results in a reduced retained earnings
and an increase to additional paid-in capital.
FINANCIAL CONDITION
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of Vail Banks' 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." Vail Banks has followed a policy to manage the
loan portfolio composition to hedge risks in specific markets by diversifying
the loan portfolio. However, Vail Banks does have a concentration of loans in
the commercial market. As a result of trends in the retail, service and real
estate markets, balances of Vail Banks' commercial loans may fluctuate
significantly. The Independent Merger initially increased the mix of loans in
the installment category. This initial change in loan type mix, however, was
only temporary as increased lending capacity was utilized across all markets and
loan types. The Telluride Merger shifted the mix back toward real estate
construction. Therefore, the data below is not necessarily indicative of longer
term trends within a particular category.
31
<PAGE>
<TABLE>
<CAPTION>
LOAN PORTFOLIO COMPOSITION
DECEMBER 31,
1998 1997 1996
-------------------------- -------------------------- -------------------------
AMOUNT % AMOUNT % AMOUNT %
----------- ---------- ----------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $130,677 48.5% $ 77,801 50.2% $ 46,850 43.9%
Real estate--construction............. 55,642 20.7 25,163 16.2 23,852 22.3
Real estate--mortgage................. 51,000 18.9 31,618 20.4 31,815 29.8
Installment........................... 31,872 11.8 20,331 13.1 4,269 4.0
----------- ---------- ----------- ----------- ----------- ----------
Total loans...................... $269,191 100.0% $154,913 100.0% $106,786 100.0%
----------- ---------- ----------- ----------- ----------- ----------
----------- ---------- ----------- ----------- ----------- ----------
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1995 1994
-------------------------- --------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 33,995 43.2% $ 14,945 46.7%
Real estate--construction............. 19,524 24.8 8,197 25.6
Real estate--mortgage................. 21,479 27.3 7,844 24.5
Installment........................... 3,690 4.7 1,011 3.2
----------- ---------- ----------- -----------
Total loans...................... $ 78,688 100.0% $32,006 100.0%
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
</TABLE>
As of December 31, 1998, loans were $269.2 million, which was an increase
of $114.3 million, or 73.8%, over $154.9 million as of December 31, 1997. All
categories of loans increased over this period, primarily due to the Independent
Merger ($17.2 million in loans), the Telluride Merger ($81.8 million in loans),
as well as core business growth. Loans as of December 31, 1997 were up $48.1
million, or 45.1%, compared to December 31, 1996, primarily due to increases in
commercial loans resulting from Vail Banks' new retail offices and the Cedaredge
Merger.
Commercial, financial and agricultural loans principally include loans to
service, real estate, retail businesses and farmers. These loans are primarily
secured by real estate and operating business assets. Commercial, financial and
agricultural loans are made on the basis of the financial strength and repayment
ability of the borrower as well as the collateral securing the loans. As of
December 31, 1998, commercial, financial and agricultural loans represented the
largest class of loans at $130.7 million or 48.5% of total loans, up from $77.8
million or 50.2% of total loans at December 31, 1997. Commercial, financial and
agricultural loans as of December 31, 1997 were up $31.0 million compared to
December 31, 1996, representing an increase in share of the total loan portfolio
of 6.3% from 43.9% at December 31, 1996.
Real estate--construction loans principally include short-term loans to
fund the construction of buildings and residences and/or to purchase land for
planned and near-term commercial or residential development. These loans are
primarily non-revolving lines of credit and secured by real estate, typically
well margined with a first security lien. As of December 31, 1998, real
estate--construction loans totaled $55.6 million or 20.7% of total loans, up
from $25.2 million or 16.2% of total loans at December 31, 1997. Real estate--
construction loans as of December 31, 1997 were up $1.3 million compared to
December 31, 1996, representing a decrease in the share of the total loan
portfolio of 6.1% from 22.3% at December 31, 1996.
32
<PAGE>
Real estate--mortgage loans principally include short-term financing for
existing one to four family residences. The majority of these loans have
maturities of less than one year. These loans are secured by the subject real
estate, typically well margined with a first lien position. As of December 31,
1998, real estate--mortgage loans totaled $51.0 million or 18.9% of total loans
up from $31.6 million or 20.4% of total loans at December 31, 1997. Real
estate--mortgage loans as of December 31, 1997 were down $197,000 compared to
December 31, 1996, representing a decrease in share of the total loan portfolio
of 9.4% from 29.8% at December 31, 1996.
Installment loans to individuals principally include one to five year loans
for consumer items, such as automobiles, snowmobiles, motor homes and other
goods. These loans are secured, at minimum, by the value of the item being
financed. As of December 31, 1998, installment loans totaled $31.9 million or
11.8% of total loans, up from $20.3 million or 13.1% of total loans at December
31, 1997. Installment loans as of December 31, 1997 were up $16.1 million
compared to December 31, 1996, representing an increase in share of the total
loan portfolio of 9.1% from 4.0% at December 31, 1996. The primary reason for
this increase is loans acquired in the Cedaredge Merger.
Vail Banks rarely makes loans at its legal lending limit. Lending officers
are assigned various levels of loan approval authority based upon their
respective levels of experience and expertise. Secured loans exceeding $750,000
and unsecured loans exceeding $250,000 are evaluated and acted upon by the
Directors' Loan Committee, which meets once a week, and are reported to the
Board of Directors. Vail Banks' strategy for approving or disapproving loans is
to follow a conservative loan policies and underwriting practice which includes
(i) granting loans on a sound and collectible basis; (ii) investing funds for
the benefit of stockholders and the protection of depositors; (iii) serving the
needs of the community and Vail Banks' general market area while obtaining a
balance between maximum yield and minimum risk; (iv) ensuring that primary and
secondary sources of repayment are adequate in relation to the amount of the
loan; (v) developing and maintaining diversification of the loan portfolio as a
whole and of the loans within each loan category; and (vi) ensuring that each
loan is properly documented and, if appropriate, insurance coverage is adequate.
Vail Banks' loan review and compliance personnel interact daily with commercial
and consumer lenders to identify potential underwriting or technical exception
variances. In addition, Vail Banks has placed increased emphasis on early
identification of problem loans to aggressively seek resolution of the
situations. Management believes that this strict adherence to conservative loan
policy guidelines has contributed to Vail Banks' below average level of loan
losses compared to its industry peer group.
LOAN MATURITIES. The following tables present, at December 31, 1998, loans
by maturity in each major category of Vail Banks' loan portfolio. 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.
33
<PAGE>
<TABLE>
<CAPTION>
LOAN MATURITIES
DECEMBER 31, 1998
---------------------------------------------------------------------------
AFTER ONE YEAR
ONE YEAR THROUGH FIVE YEARS AFTER FIVE YEARS
------------------------- -------------------------
OR LESS FIXED RATE FLOATING RATE FIXED RATE FLOATING RATE TOTAL
-------- ---------- ------------- ---------- ------------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural...... $ 55,072 $ 24,464 $ 33,137 $ 7,845 $ 10,159 $ 130,677
Real estate--construction................... 48,938 1,155 5,549 0 0 55,642
Real estate--mortgage....................... 8,650 24,799 9,117 1,608 6,826 51,000
Installment................................. 9,760 17,158 1,863 1,352 1,739 31,872
-------- -------- -------- -------- -------- ---------
Total loans........................... $122,420 $ 67,576 $ 49,666 $ 10,805 $ 18,724 $ 269,191
-------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- ---------
</TABLE>
NONPERFORMING ASSETS. Nonperforming assets consist of loans 90 days or more
delinquent and still accruing interest, nonaccrual loans, restructured loans and
other real estate owned. When, in the opinion of management, a reasonable doubt
exists as to the collectibility of interest, regardless of the delinquency
status of the loan, the accrual of interest income is discontinued and interest
accrued during the current year is reversed through a charge to current year's
earnings. While the loan is on nonaccrual status, interest income is recognized
only upon receipt and then only if, in the judgment of management, there is no
reasonable doubt as to the collectibility of the principal balance. Loans 90
days or more delinquent generally are changed to nonaccrual status unless the
loan is in the process of collection and management determines that full
collection of principal and accrued interest is probable.
Restructured loans are those for which concessions, including reduction of
interest rate 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 following table sets forth information concerning the nonperforming
assets of Vail Banks as of the dates indicated.
<TABLE>
<CAPTION>
NONPERFORMING ASSETS
DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
------- -------- ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans...................................... $ 322 $ 136 $ 0 $ 353 $ 0
Other loans 90 days past due.......................... 1,061 78 65 3 0
Other real estate owned............................... 405 0 0 128 23
------- -------- ------ ------ ------
Total nonperforming assets............................ $ 1,788 $ 214 $ 65 $ 484 $ 23
------- -------- ------ ------ ------
------- -------- ------ ------ ------
Nonaccrual and other loans 90 days past due to total
loans.............................................. 0.51% 0.14% 0.06% 0.45% 0.00%
Nonperforming assets to total loans plus other real
estate............................................. 0.66% 0.14% 0.06% 0.61% 0.07%
Nonperforming assets to total assets.................. 0.41% 0.09% 0.04% 0.35% 0.03%
</TABLE>
Nonperforming assets as a percentage of total loans plus other real estate
owned as of December 31, 1998 was 0.66%, compared to 0.14%, 0.06%, and 0.61% as
of December 31, 1997, 1996, and
34
<PAGE>
1995, respectively. The $322,000 in nonaccrual loans as of December 31, 1998, is
made up of several small loans. Management believes Vail Banks is adequately
collateralized to recover the majority of the balance of these nonaccrual loans.
The increase in nonaccrual and nonperforming loans relative to the size of the
loan portfolio rose in 1998 due to acquisition of the Telluride loan portfolio.
Vail Banks has reviewed and analyzed each of these loans and has implemented
strategies to resolve the issues with the few loans that caused these measures
to rise. In addition, Vail Banks analyzed the amount of the allowance for loan
losses reserve in the Telluride banks and made appropriate adjustments to the
allowance as part of the purchase accounting process. Management generally
obtains and maintains appraisals on real estate collateral. Management is not
aware of any adverse trends relating to Vail Banks' loan portfolio.
As of December 31, 1998, there was no significant balance of loans excluded
from nonperforming loans set forth above, where known information about possible
credit problems of borrowers causes management to have 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 loan portfolio. The allowance is maintained at a level
considered adequate to provide for anticipated loan losses based on management's
assessment of various factors affecting the loan portfolio, including a review
of problem loans, business conditions, historical loss experience, evaluation of
the quality of the underlying collateral, and holding and disposal costs. The
allowance is increased by additional charges to operating income and reduced by
loans charged off, net of recoveries.
The following table sets forth information regarding changes in the
allowance for loan losses for Vail Banks for the periods indicated.
35
<PAGE>
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES ANALYSIS
YEAR ENDED
DECEMBER 31,
-----------------------------------------
1998 1997 1996
---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average total loans.................................................... $ 170,667 $ 115,179 $ 91,583
---------- --------- ----------
---------- --------- ----------
Total loans at end of period........................................... $ 269,191 $ 154,913 $ 106,786
---------- --------- ----------
---------- --------- ----------
Allowance at beginning of year......................................... $ 1,364 $ 823 $ 620
Charge-offs:
Commercial, financial and agricultural.......................... 23 6 83
Real estate--construction....................................... 0 0 0
Real estate--mortgage........................................... 2 0 0
Installment..................................................... 143 52 39
---------- --------- ----------
Total charge-offs......................................... 168 58 122
Recoveries:
Commercial, financial and agricultural.......................... 22 17 167
Real estate--construction....................................... 0 0 0
Real estate--mortgage........................................... 0 0 0
Installment..................................................... 26 7 4
---------- --------- ----------
Total recoveries.......................................... 48 24 171
---------- --------- ----------
Net charge-offs (recoveries) 120 34 (49)
Allowance for loan losses--merger...................................... 1,346 343 0
Provision for loan losses.............................................. 0 232 154
---------- --------- ----------
Allowance at end of year............................................... $ 2,590 $ 1,364 $ 823
---------- --------- ----------
---------- --------- ----------
Net charge-offs (recoveries) to average total loans.................... 0.07% 0.03% (0.05)%
Allowance to total loans at end of year................................ 0.96% 0.88% 0.77%
Allowance to nonperforming loans....................................... 187.27% 637.38% 1,266.15%
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES ANALYSIS
YEAR ENDED
DECEMBER 31,
------------------------
1995 1994
---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Average total loans.................................................... $ 53,172 $ 30,586
---------- ---------
---------- ---------
Total loans at end of period........................................... $ 78,688 $ 32,006
---------- ---------
---------- ---------
Allowance at beginning of year......................................... $ 361 $ 353
Charge-offs:
Commercial, financial and agricultural.......................... 31 0
Real estate--construction....................................... 0 0
Real estate--mortgage........................................... 0 0
Installment..................................................... 7 6
---------- ---------
Total charge-offs......................................... 38 6
Recoveries:
Commercial, financial and agricultural.......................... 54 29
Real estate--construction....................................... 0 0
Real estate--mortgage........................................... 20 106
Installment..................................................... 3 4
---------- ---------
Total recoveries.......................................... 77 139
---------- ---------
Net charge-offs (recoveries) (39) (133)
---------- ---------
Allowance for loan losses--merger...................................... 180 0
Provision for loan losses.............................................. 40 (125)
---------- ---------
Allowance at end of year............................................... $ 620 $ 361
---------- ---------
---------- ---------
Net charge-offs (recoveries) to average total loans.................... (0.07)% (0.43)%
Allowance to total loans at end of year................................ 0.79% 1.13%
Allowance to nonperforming loans....................................... 174.16% NM*
</TABLE>
- ------------------------
* "NM" represents a number that is not calculable because there were no
nonperforming loans.
Net charge-offs during 1998 totaled $120,000 or 0.07% of average loans.
Net charge-offs during 1997 totaled $34,000 or 0.03% of average loans compared
to recoveries of $49,000 or 0.05% of average loans in 1996.
Vail Banks' lending personnel are responsible for ongoing reviews of the
quality of the loan portfolio. Vail Banks' Credit Committee meets weekly to
review all loans over 15 days past due. A list containing any potential problem
loans is updated monthly and reviewed by management and the Board of Directors
monthly. 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, changing historical experience and
changing mix of the loan portfolio between the different types of loans.
State and federal regulatory agencies, as an integral part of their
examination process, review Vail Banks' loans and its allowance for loan losses.
Management believes that Vail Banks' allowance for loan losses is adequate to
cover anticipated losses. There can be no assurance, however, that management
will not need to increase the allowance for loan losses or that regulators, when
reviewing
37
<PAGE>
Vail Banks' loan portfolio in the future, will not require Vail Banks to
increase such allowance, either of which could adversely affect Vail Banks'
earnings. Further, there can be no assurance that Vail Banks' actual loan losses
will not exceed its allowance for loan losses.
The following table sets forth an allocation of the allowance for loan
losses by loan category as of the dates indicated. Portions of the allowance
have been allocated to specific categories based on the analysis of the loan
loss history of particular loan categories; however, a material portion of the
allowance is utilized as a single unallocated allowance available for all loan
types. Vail Banks' loan portfolio contains a significant number of loans that
are real estate--construction and commercial loans, and management assigns
general risks to the portfolio that are common to both categories. These risks
include the economic conditions in the building industry that could effect a
slowdown in the market, resulting in fewer building permits and lower absorption
of newly developed sites, fluctuating land values, building moratoriums by
municipalities, and the overall general economy of Vail Banks' area of
operations. The allocation table should not be interpreted as an indication of
the specific amounts, by loan category, to be charged to the allowance.
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSS ALLOCATION
DECEMBER 31,
------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------- -------------------------- -------------------------
LOANS IN LOANS IN LOANS IN
CATEGORY AS CATEGORY AS CATEGORY AS
AMOUNT OF A PERCENTAGE AMOUNT OF A PERCENTAGE AMOUNT OF A PERCENTAGE
ALLOWANCE OF TOTAL LOANS ALLOWANCE OF TOTAL LOANS ALLOWANCE OF TOTAL LOANS
--------- -------------- --------- -------------- --------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Allocated:
Commercial, financial and
agricultural..................... $ 992 48.54% $ 110 50.23% $ 41 43.87%
Real estate--construction........... 411 20.67 334 16.24 675 22.34
Real estate--mortgage............... 584 18.95 55 20.41 68 29.79
Installment......................... 292 11.84 141 13.12 32 4.00
Unallocated 311 724 7
--------- -------------- --------- -------------- --------- --------------
Total allowance for loan losses.. $ 2,590 100.00% $ 1,364 100.00% $ 823 100.00%
--------- -------------- --------- -------------- --------- --------------
--------- -------------- --------- -------------- --------- --------------
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1995 1994
--------------------------- ----------------------------
LOANS IN LOANS IN
CATEGORY AS CATEGORY AS
AMOUNT OF A PERCENTAGE AMOUNT OF A PERCENTAGE
ALLOWANCE OF TOTAL LOANS ALLOWANCE OF TOTAL LOANS
--------- -------------- --------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Allocated:
Commercial, financial and
agricultural.................... $ 0 43.20% $ 201 46.72%
Real estate--construction........... 351 24.81 0 25.61
Real estate--mortgage............... 84 27.30 28 24.51
Installment........................ 154 4.69 0 3.16
Unallocated 31 132
--------- -------------- --------- -------------
Total allowance for loan losses.... $ 620 100.00% $ 361 100.00%
--------- -------------- --------- -------------
--------- -------------- --------- -------------
</TABLE>
38
<PAGE>
INVESTMENTS. Vail Banks' investment policy is designed primarily to ensure
liquidity and to meet pledging requirements and secondarily to provide
acceptable investment income. Investments are managed centrally to maximize
compliance and effectiveness of overall investment activities. Management's
focus is on maintaining a high quality investment portfolio oriented toward U.S.
Treasury and U.S. government agency securities. None of the securities in the
investment portfolio is classified as "high-risk" as defined by the Federal
Financial Institutions Examinations Council. The determination of the amount and
maturity of securities purchased is a function of liquidity and income
projections based on the existing, and expected, balance sheet and interest rate
forecasts.
Vail Banks accounts for investment securities according to Statement of
Financial Accounting Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES. At the date of purchase, Vail Banks is required to
classify debt and equity securities into one of three categories: held to
maturity, trading or available for sale. Investments in debt securities are
classified as held to maturity and measured at amortized cost in the financial
statements only if management has the positive intent and ability to hold those
securities to maturity. Securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading and measured
at fair value in the statements with unrealized gains and losses included in
earnings. Investments not classified as either held to maturity or trading are
classified as available for sale and measured at fair value in the financial
statements with unrealized gains and losses reported, net of tax, in a separate
component of other comprehensive income until realized. The following table sets
forth information regarding the investment composition of Vail Banks as of the
dates indicated.
<TABLE>
<CAPTION>
INVESTMENT COMPOSITION
DECEMBER 31,
-------------------------------------------------------------------
1998 1997 1996
----------------- ---------------- --------------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- ------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
Estimated market value
U.S. Treasury................. $ 8,491 25.7% $ 1,865 19.4% $ 0 0.0%
U.S. government agencies...... 13,729 41.5 3,843 40.0 3,496 83.1
Mortgage-backed securities.... 812 2.5 0 0.0 0 0.0
State and municipal........... 7,952 24.1 2,978 31.0 0 0.0
Federal Home Loan Bank stock.. 1,090 3.3 500 5.2 433 10.3
Federal Reserve stock......... 764 2.3 371 3.9 280 6.7
Other equity investments...... 184 0.6 50 0.5 0 0.0
-------- ----- ------- ----- -------- -----
Total available for sale.. $ 33,022 100.0% $ 9,607 100.0% $ 4,209 100.0%
-------- ----- ------- ----- -------- -----
-------- ----- ------- ----- -------- -----
HELD TO MATURITY SECURITIES
Amortized cost
U.S. Treasury................. $ 5,986 77.6% $ 7,960 78.6% $ 11,921 81.5%
U.S. government agencies...... 0 0.0 0 0.0 0 0.0
State and municipal........... 50 0.6 85 0.8 220 1.5
Mortgage-backed securities.... 1,677 21.7 2,080 20.5 2,493 17.0
-------- ----- ------- ----- -------- -----
Total held to maturity.... $ 7,713 100.0% $10,125 100.0% $ 14,634 100.0%
-------- ----- ------- ----- -------- -----
-------- ----- ------- ----- -------- -----
</TABLE>
39
<PAGE>
INVESTMENT MATURITIES AND YIELD. The following table sets forth the
estimated market value and approximate yield of the securities in the investment
portfolio by type and maturity at December 31, 1998.
<TABLE>
<CAPTION>
INVESTMENT MATURITIES
DECEMBER 31, 1998
AFTER ONE BUT AFTER FIVE BUT
WITHIN WITHIN
WITHIN ONE YEAR FIVE YEARS TEN YEARS AFTER TEN YEARS TOTAL
--------------- ------------- ---------------- --------------- ---------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES
U.S. Treasury............... $ 6,693 4.64% $ 1,798 5.56% $ 0 0.00% $ 0 0.00% $ 8,491 4.83%
U.S. government agencies.... 7,001 5.30 5,384 5.13 0 0.00 1,344 5.77 13,729 5.28
State and municipal......... 1,778 3.71 4,260 4.02 1,395 4.41 519 4.84 7,952 4.07
Mortgage-backed securities.. 0 0.00 409 5.95 110 6.47 293 5.77 812 5.96
Equity securities(1)........ 0 0.00 0 0.00 0 0.00 2,038 0.00 2,038 --
------- -------- ------- ------- -------
Total available for sale. $15,472 $ 11,851 $ 1,505 $ 4,194 $33,022
------- -------- ------- ------- -------
------- -------- ------- ------- -------
Weighted average yield...... 4.83% 4.82% 4.56% 5.55% 4.87%
HELD TO MATURITY SECURITIES.
U.S. Treasury............... $ 1,997 6.19% $ 3,989 5.40% $ 0 0.00% $ 0 0.00% $ 5,986 5.66%
State and municipal......... 50 5.60 0 0.00 0 0.00 0 0.00 50 5.60
Mortgage-backed securities.. 0 0.00 0 0.00 499 6.75 $ 1,178 7.23 1,677 7.09
------- -------- ------- ------- -------
Total held to maturity... $ 2,047 $ 3,989 $ 499 $ 1,178 $ 7,713
------- -------- ------- ------- -------
------- -------- ------- ------- -------
Weighted average yield...... 6.18% 5.40% 6.75% 7.23% 5.97%
</TABLE>
- --------------------------
(1) Equity securities do not have stated maturity dates.
DEPOSITS. Vail Banks' primary source of funds has historically been
customer deposits, which have experienced significant growth from year to year.
Deposit products are concentrated in business and personal checking accounts,
including interest-bearing and noninterest-bearing accounts. Generally, deposits
are short-term in nature with approximately 40% of deposits having a committed
term less than three months and approximately 82% having a committed term of
less than one year. Vail Banks' resort locations experience a seasonality of
deposits. The percentage decrease in deposits from the year's high, typically in
the first few months of the year, to the low, typically in mid-year, has been
6.9%, 17.2% and 18.1% for 1998, 1997 and 1996, respectively. Deposits in
nonresort-oriented markets serve to reduce such seasonality. Management expects
the effect of the Independent Merger and the Telluride Merger will further
reduce such seasonality because each has locations in nonresort areas.
Total deposits were $377.6 million as of December 31, 1998, an increase
of $171.4 million, or 83.1%, from the December 31, 1997 balance of $206.2
million. The mergers with Independent and Telluride contributed total deposits
of $27.4 million and $119.8 million, respectively. Deposits were $206.2 million
as of December 31, 1997, an increase of $61.9 million, or 42.9%, over the
December 31, 1996 amount of $144.4 million. As of December 31, 1998,
noninterest-bearing deposits comprised 24.2% of total deposits.
The following table sets forth the distribution of Vail Banks' deposits
by type as of December 31, 1998, 1997 and 1996.
40
<PAGE>
<TABLE>
<CAPTION>
DEPOSIT COMPOSITION
DECEMBER 31,
-------------------------------------------------------------
1998 1997 1996
AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Demand, noninterest-bearing... $ 91,510 24.2% $ 56,929 27.6% $ 43,747 30.3%
Demand, interest-bearing...... 151,889 40.2 94,779 46.0 74,147 51.4
Savings....................... 42,165 11.2 13,537 6.6 7,890 5.5
Time, $100,000 and over....... 44,472 11.8 18,961 9.2 7,442 5.2
Other time.................... 47,536 12.6 22,009 10.7 11,124 7.7
-------- ----- -------- ----- -------- -----
Total............... $377,572 100.0% $206,215 100.0% $144,350 100.0%
-------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- -----
</TABLE>
The following table sets forth the amount and maturity of time deposits
that had balances equal to or greater than $100,000 at December 31, 1998.
<TABLE>
<CAPTION>
TIME DEPOSITS EQUAL TO OR GREATER THAN $100,000
REMAINING MATURITY DECEMBER 31, 1998
- ------------------ -----------------
(IN THOUSANDS)
<S> <C>
Three months or less................................................................ $ 22,907
Between three months and six months................................................. 9,036
Between six months and one year..................................................... 7,888
Over one year....................................................................... 4,641
-------
Total..................................................................... $44,472
-------
-------
</TABLE>
CAPITAL RESOURCES
Stockholders' equity as of December 31, 1998 increased $36.5 million, or
204.3%, to $54.4 million from $17.9 million as of December 31, 1997. This
increase was due to the Common Stock issued in connection with the Independent
Merger, Telluride Merger, the retention of current period earnings, a private
offering of $3.0 million in Common Stock, and the stock issued in the Offering.
Shareholder's equity was reduced by $467,000 due to the early conversion payment
upon the required conversion of preferred stock to common stock in connection
with the Offering. After netting the effects of the tax loss carryforward and
the "equivalent taxation" entry, the total increase in shareholders' equity due
to retention of earnings was $3.3 million at December 31, 1998, up $2.6 million
from $748,000 as of December 31, 1997.
Stockholders' equity as of December 31, 1997 increased $8.5 million, or
89.5%, to $17.9 million from $9.4 million as of December 31, 1996. The primary
reason for this increase is due to the Cedaredge merger and the purchase of bank
facilities using preferred stock. As part of the Cedaredge merger, Vail Banks
assumed $1.6 million of Mandatorily Convertible Debentures. Vail Banks issued
$2.96 million of preferred stock, plus $300,000 cash to purchase the remaining
ownership interest (72%) in the Vail office building. Both the debentures and
preferred stock were converted to common stock subsequent to the Offering in
1998. The majority, $274,000, of the remainder of the increase in additional
paid-in capital is attributable to the tax savings created by the use of the NOL
carryforwards. After netting the effects of the NOL carryforward and the
"equivalent taxation" entry, the total increase
41
<PAGE>
in stockholders' equity due to retention of income was $748,000 for the year
ended December 31, 1997, up $141,000 from $607,000 for the year ended 1996.
Vail Banks is subject to various regulatory capital requirements
administered by the various governmental banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on Vail Banks' financial condition. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, Vail Banks
must meet specific guidelines that involve quantitative measures of assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. Vail Banks' 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 of total and Tier 1
capital to risk-weighted assets, and of Tier 1 capital to average assets. See
"Supervision and Regulation" in Item 1 for explanations of these terms and
requirements.
Vail Banks currently maintains, and intends to continue to maintain, Tier 1
capital, Total capital and leverage (Tier 1 capital to average total assets)
ratios in excess of the minimum for a "well capitalized" rating. The following
table sets forth Vail Banks' capital ratios and capital to assets ("leverage")
ratios as of the indicated dates.
<TABLE>
<CAPTION>
RISK-BASED CAPITAL RATIOS
DECEMBER 31,
------------------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital............................ $ 31,996 11.42% $ 12,925 8.26% $ 9,098 8.59%
Tier 1 capital minimum requirement........ 11,207 4.00 6,260 4.00 4,236 4.00
-------- ----- -------- ----- -------- -----
Excess.................................... $ 20,789 7.42% $ 6,665 4.26% $ 4,862 4.59%
-------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- -----
Total capital............................. $ 34,586 12.34% $ 15,889 10.15% $ 9,924 9.37%
Total capital minimum requirement......... 22,414 8.00 12,521 8.00 8,471 8.00
-------- ----- -------- ----- -------- -----
Excess.................................... $ 12,172 4.34% $ 3,368 2.15% $ 1,453 1.37%
-------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- -----
Total Risk adjusted assets................ $280,171 $156,508 $105,890
-------- -------- --------
-------- -------- --------
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1995 1994
----------------- -------------------
AMOUNT RATIO AMOUNT RATIO
------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Tier 1 capital............................ $ 8,855 9.93% $ 6,914 17.22%
Tier 1 capital minimum requirement........ 3,567 4.00 1,606 4.00
-------- ----- ------- -----
Excess.................................... $ 5,288 5.93% $ 5,308 13.22%
-------- ----- ------- -----
-------- ----- ------- -----
Total capital............................. $ 9,475 10.62% $ 7,275 18.12%
Total capital minimum requirement......... 7,135 8.00 3,212 8.00
-------- ----- ------- -----
Excess.................................... $ 2,340 2.62% $ 4,063 10.12%
-------- ----- ------- -----
-------- ----- ------- -----
Total Risk adjusted assets................ $ 89,183 $40,148
-------- -------
-------- -------
</TABLE>
<TABLE>
<CAPTION>
LEVERAGE RATIOS
DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital............................ $ 31,966 7.69% $ 12,925 7.33% $ 9,098 6.23%
Minimum requirement....................... 12,485 3.00 5,292 3.00 4,383 3.00
--------- ---- -------- ---- -------- ----
Excess.................................... $ 19,511 4.69% $ 7,633 4.33% $ 4,715 3.23
--------- ---- -------- ---- -------- ----
--------- ---- -------- ---- -------- ----
Average total assets...................... $ 416,163 $176,390 $146,099
--------- -------- --------
--------- -------- --------
<CAPTION>
----------------------------------------------
DECEMBER 31,
-----------------------------------------
1995 1994
----------------- -------------------
AMOUNT RATIO AMOUNT RATIO
------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Tier 1 capital............................ $ 8,855 7.22% $ 6,914 9.11%
Minimum requirement....................... 3,679 3.00 2,278 3.00
-------- ---- ------- ----
Excess.................................... $ 5,176 4.22% $ 4,636 6.11%
-------- ---- ------- ----
-------- ---- ------- ----
Average total assets...................... $256,544 $75,929
-------- -------
-------- -------
</TABLE>
43
<PAGE>
IMPACT OF THE YEAR 2000 ISSUE
Generally, the year 2000 risk involves computer programs and computer
hardware that are not able to perform without interruption into the year 2000.
The arrival of the year 2000 poses a unique worldwide challenge to the ability
of all systems to correctly recognize the date change from December 31, 1999 to
January 1, 2000. If Vail Banks' systems did not correctly recognize such a date
change, computer applications that rely on the date field could fail or create
erroneous results. Such erroneous results could affect interest, payment or due
dates or could cause the temporary inability to process transactions, send
invoices or engage in similar normal business activities. If it is not
adequately addressed by Vail Banks or its suppliers and borrowers, the year 2000
issue could result in a material adverse impact on Vail Banks' financial
condition and results of operations.
VAIL BANKS' STATE OF READINESS. Since 1995, Vail Banks has been assessing
its year 2000 readiness. It has formed a committee charged with the task of
identifying and remediating date recognition problems in both information
technology ("IT") and non-IT systems that include microcontrollers and other
embedded computer technology. Guided by requirements of and examination by
banking regulators, the committee has developed a comprehensive plan to assess
Vail Banks' year 2000 readiness with respect to both IT and non-IT systems. Its
inventory of such systems is complete, and Vail Banks believes its IT systems
are year 2000 compliant. Primarily for operational reasons, Vail Banks replaced
critical mainframe and PC-based systems in 1996 and 1997, incurring a capital
expenditure of approximately $2 million. The systems vendor certified to Vail
Banks that the systems are year 2000 compliant, and Vail Banks is currently in
the process of validation. Vail Banks' inventory of the year 2000 compliance of
its non-IT systems is also complete, and no mission critical systems were found
to be deficient.
Vail Banks has completed the remediation or replacement of its systems.
Testing has occurred in 1998, and further testing will occur during 1999. Vail
Banks believes that it has identified all major internal business and
operational functions that will be impacted by the year 2000 date change.
COSTS TO ADDRESS YEAR 2000 ISSUES. Vail Banks does not anticipate that the
year 2000 related costs (excluding the $2 million expenditure for the IT system
mentioned above) will be material to its financial condition or results of
operations. Excluding that $2 million expenditure, Vail Banks estimates that its
total costs for the evaluation, remediation and testing of its IT and non-IT
systems in connection with the year 2000 issue will be approximately $200,000,
$130,000 of which has been incurred to date. All of the expected expenditures
are present in Vail Banks' 1998 and 1999 internal budgets.
RISKS OF THIRD-PARTY YEAR 2000 ISSUES. The impact of year 2000
non-compliance by outside parties with whom Vail Banks transacts business cannot
be accurately gauged. Vail Banks has surveyed its major business partners to
ascertain their year 2000 readiness. Although all are not year 2000 compliant at
this date, Vail Banks has received certain assurances that such third parties
will be ready for the year 2000 date change by the end of 1999. Vail Banks
relies upon the Federal Reserve for electronic funds transfers and check
clearing and understands that the Federal Reserve has upgraded its systems to be
year 2000 compliant. Testing of the Federal Reserve systems will be completed
by the end of the third quarter of 1999. If the Federal Reserve does not
successfully complete all modifications required by the date change and is
forced to interrupt automated services to Vail Banks, Vail Banks could
experience significant difficulties. Vail Banks is also aware that its credit
card processing vendor's systems do not yet recognize credit card expiration
dates after 1999, and it must
44
<PAGE>
manually process authorizations for such cards. Vail Banks has received
reasonable assurances from the vendor that its systems will correctly recognize
the date change by year end 1999. Because of the extended timeframe for the
vendor to assure year 2000 compliance, Vail Banks is negotiating with an
alternative vendor for this service. This vendor can assure immediate year 2000
compliance.
Vail Banks has embarked upon a program to educate its depositors and
borrowers regarding year 2000 issues. Vail Banks' educational programs focus on
emphasizing the contractual obligations of its customers despite year 2000
issues.
VAIL BANKS' CONTINGENCY PLANS. Vail Banks has finalized its contingency
planning with respect to the year 2000 date change and believes that should its
own systems fail, it could convert to a manual entry system for a period of
approximately six months without significant losses. The Company believes any
mission critical systems could be recovered and operating within approximately
seven days.
In addition, Vail Banks' preliminary contingency plan takes into account
the risk that the Federal Reserve will not make the necessary modifications that
will enable it to handle electronic funds transfers and check clearing by the
year 2000. So long as Vail Banks is able to obtain the necessary information
from the Federal Reserve in some manner, such as by telephone or facsimile
transmissions, and manually post transactions, Vail Banks does not expect the
resulting impact on its financial condition or result of operations to be
material, unless protracted. In addition, the preliminary contingency plan of
Vail Banks calls for Vail Banks to continue to manually authorize transactions
by credit cards having a date of 2000 or later if its processing vendor does not
appropriately remediate its systems.
LIQUIDITY
SOURCES OF LIQUIDITY. Vail Banks manages its liquidity to provide the
ability to generate funds to support asset growth, meet deposit withdrawals
(both anticipated and unanticipated), fund customers' borrowing needs, satisfy
maturities of short-term borrowings and maintain reserve requirements. Vail
Banks' liquidity needs can be managed using assets or liabilities, or both. On
the asset side, Vail Banks maintains an investment portfolio containing U.S.
government securities, agency securities and state and municipal securities
which are classified as available for sale. On the liabilities side, liquidity
needs are met through the discretionary acquisition of funds on the basis of
interest rate competition. These funds may be obtained from customer deposits,
credit available from third party lenders or capital markets.
Customer deposits are the primary source of funds. Deposits grew $171.4
million, or 83.1%, to $377.6 million as of December 31, 1998. Those funds are
held in various forms with varying degrees of liquidity. Vail Banks generally
does not accept brokered deposits. Vail Banks' securities portfolio, federal
funds sold, and cash and due from banks serve as the primary sources of
liquidity, providing adequate funding for loans during periods of high loan
demand. During periods of decreased lending, funds obtained from the maturing or
sale of investments, loan payments, and new deposits are invested in short-term
earning assets, such as federal funds sold, to serve as a source of funding for
future loan growth. Management believes that Vail Banks' available sources of
funds, including short-term borrowings, will provide adequate liquidity for its
operations in the foreseeable future.
45
<PAGE>
ASSET AND LIABILITY MANAGEMENT. The liquidity position of Vail Banks is
monitored by the Asset/Liability Committee of the Board of Directors. 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
occur when interest rates on those assets, such as loans and investment
securities, change in a different time period from that of the interest rates on
liabilities, such as deposits. Changes in net yield on interest-sensitive assets
result from changes in the mix and volumes of earning assets and
interest-bearing liabilities. These differences, or "gaps," provide an
indication of the extent that net interest income may be affected by future
changes in interest rates.
A positive gap exists when interest-sensitive assets exceed
interest-sensitive liabilities and indicates that a greater volume of assets
than liabilities will reprice during a given time period. With a positive gap,
rising rate environments may enhance earnings, while a declining rate
environment may depress earnings. Conversely, a negative gap exists when
interest-sensitive liabilities exceed interest-sensitive assets. With a negative
gap, rising rate environments may depress earnings, while declining rate
environments may enhance earnings.
The following table sets forth the interest rate sensitivity of Vail Banks'
assets and liabilities as of December 31, 1998, and sets forth the repricing
dates of Vail Banks' interest-earning assets and interest-bearing liabilities as
of that date, as well as Vail Banks' interest rate sensitivity gap percentages
for the periods presented. The table is based on 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 Vail Banks' net interest income.
46
<PAGE>
<TABLE>
<CAPTION>
MATURITY AND REPRICING OF INTEREST EARNING ASSETS AND LIABILITIES
DECEMBER 31, 1998
------------------------------------------------------------------------
OVER THREE OVER ONE
THREE MONTHS YEAR
MONTHS THROUGH THROUGH OVER
OR LESS ONE YEAR FIVE YEARS FIVE YEARS TOTAL
---------- ---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold......................... $ 43,105 $ 0 $ 0 $ 0 $ 43,105
Investment securities...................... 7,812 11,610 14,823 6,490 40,735
Loans...................................... 147,945 34,546 71,284 15,094 268,869
---------- -------- -------- -------- --------
Total interest-earning assets......... 198,862 46,156 86,107 21,584 352,709
Interest-bearing liabilities:
Deposits
Demand, interest-bearing.............. 60,756 60,756 30,378 0 151,889
Savings............................... 16,866 16,866 8,433 0 42,165
Certificates of deposit............... 36,748 41,675 13,540 45 92,008
Securities sold under repurchase
agreements.............................. 0 0 0 0 0
Note payable............................... 828 0 286 0 1,114
Other liabilities.......................... 0 0 0 0 0
---------- -------- -------- -------- --------
Total interest-bearing liabilities.... $ 115,198 $119,297 $ 52,637 $ 45 $287,176
---------- -------- -------- -------- --------
Interest rate gap............................... $ 83,664 $(73,141) $ 33,470 $ 21,539 $ 65,533
Cumulative interest rate gap at December 31,
1998......................................... $ 83,664 $ 10,524 $ 43,994 $ 65,533
---------- -------- -------- --------
---------- -------- -------- --------
Cumulative interest rate gap to total assets.... 19.05% 2.40% 10.02% 14.92%
---------- -------- -------- --------
---------- -------- -------- --------
</TABLE>
EFFECTS OF INFLATION AND CHANGING PRICES
The banking industry is unique in that substantially all of the assets and
liabilities are of a monetary nature. As a result, interest rates have a more
profound effect on a bank's performance than does inflation. Although there is
not always a direct relationship between the movement in the prices of goods and
services and changes in interest rates, increases in inflation generally lead to
increases in interest rates. However, in short periods of time interest rates
may not move in the same direction or magnitude as inflation.
RECENT ACCOUNTING PRONOUNCEMENTS
COMPREHENSIVE INCOME. Vail Banks adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE INCOME ("SFAS No. 130"),
effective January 1, 1998. SFAS No. 130 establishes standards for reporting
comprehensive income and its components (revenues, expenses, gains, and losses).
Components of comprehensive income are net income and all other non-owner
changes in equity. The statement requires that an enterprise (a) classify items
of other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. Reclassification of financial statements for
earlier
47
<PAGE>
periods provided for comparative purposes is required. Vail Banks has chosen to
disclose comprehensive income as a component of its statement of stockholders'
equity and comprehensive income. The only component of comprehensive income
consists of net unrealized holding gains on securities, net of related tax
effects.
EARNINGS PER SHARE. In March 1997, the FASB issued SFAS No. 128, EARNINGS
PER SHARE (SFAS 128) which replaced APB Opinion No. 15 related to standards for
computing and presenting earnings per share (EPS) and applies to entities with
publicly held common stock or potential common stock. SFAS 128 replaces the
presentation of primary EPS with a presentation of basic EPS and requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures. Also, SFAS 128 requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. SFAS 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. SFAS 128 also requires restatement of all
prior period EPS data presented. Due to the antidilutive impact on net income
of preferred stock dividends in calculating diluted earnings per common share,
only basic earnings per share is presented by Vail Banks.
OPERATING SEGMENTS. Vail Banks adopted SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS No. 131") effective
January 1, 1998. This statement establishes standards for reporting information
about segments in annual and interim financial statements. SFAS No. 131
introduces a new model for segment reporting called the "management approach".
The management approach is based on the way the chief operating decision-maker
organizes segments within the company for making operating decisions and
assessing performance. Reportable segments are based on products and services,
geography, legal structure, management structure and any other in which
management disaggregates a company. Based on the "management approach" model,
Vail Banks has determined that its business is comprised of a single operating
segment and that SFAS No. 131 therefore has no impact on its financial
statements.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In June 1998, the
Financial Accounting Standards Board issued Statement No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is required to be adopted
in years beginning after June 15, 1999. Because Vail Banks has not engaged in
the use of derivatives and does not conduct hedging activities, management does
not anticipate that the adoption of the new statement will have a significant
effect on earnings or the financial position of Vail Banks.
ITEM 7. FINANCIAL STATEMENTS.
The response to this item is included in Part IV, Item 13 of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On January 15, 1999, the Audit Committee of the Board of Directors of Vail
Banks, Inc. (the "Company") approved the dismissal of Fortner Bayens Levkulich &
Co., P.C. and the hiring of KPMG LLP. The decision to dismiss Fortner Bayens
Levkulich & Co., P.C. by the Audit Committee was based on the need to hire a
larger accounting firm to meet the Company's needs after the Offering in
December 1998.
48
<PAGE>
The reports of Fortner, Bayens, Levkulich & Co., P.C. on the Company's
financial statements for the past two fiscal years did not contain an adverse
opinion or a disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles.
In connection with the audits of the Company's financial statements for
each of the two fiscal years ended December 31, 1996 and December 31, 1997, and
in the subsequent interim period, there were no disagreements with Fortner,
Bayens, Levkulich & Co., P.C. on any matters of accounting principles or
practices, financial statement disclosure or auditing scope and procedures
which, if not resolved to the satisfaction of Fortner, Bayens, Levkulich & Co.,
P.C., would have caused Fortner, Bayens, Levkulich & Co., P.C. to make reference
to the matter in their report.
During the two most recent fiscal years of the Company and through January
15, 1999, the Company did not consult with KPMG LLP on matters (i) regarding the
application of accounting principles to a specified transaction or the type of
audit opinion that might be rendered on the Company's financial statements, or
(ii) which concerned the subject matter of a disagreement or event identified in
response to paragraph (a) (1) (iv) of Item 304 of Regulation S-B with the former
auditor.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information contained under the headings "Information About Nominees
For Director and Continuing Directors" and "Compliance with Section 16(a) of the
Exchange Act" in the definitive Proxy Statement to be used in connection with
the solicitation of proxies for Vail Banks' annual meeting of shareholders to be
held on May 18, 1999, to be filed with the Securities and Exchange Commission
("SEC"), is incorporated herein by reference. Information regarding executive
officers is included in "Executive Officers of Vail Banks" in Item 1 of this
Form 10-KSB.
ITEM 10. EXECUTIVE COMPENSATION.
The information contained under the heading "Executive Compensation" in the
definitive proxy statement to be used in connection with the solicitation of
proxies for Vail Banks' annual meeting of shareholders to be held on May 18,
1999, to be filed with the SEC, is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained under the heading "Beneficial Ownership of
Securities " in the definitive proxy statement to be used in connection with the
solicitation of proxies for Vail Banks' annual meeting of shareholders to be
held on May 18, 1999, to be filed with the SEC, is incorporated herein by
reference.
49
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the heading "Certain Relationships and
Related Transaction" in the definitive Proxy Statement to be used in connection
with the solicitation of proxies for all Vail Banks' annual meeting of
shareholders to be held on May 18, 1999, to be filed with the SEC, is
incorporated herein by reference.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS.
The following financial statements and notes thereto of Vail Banks
begin on page F-1 of this report.
Independent Auditors' Reports
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements as of December 31, 1998 and 1997
and for the years ended December 31, 1998, 1997, and 1996.
EXHIBITS
The following exhibits are required to be filed with this Report on 10-KSB
by Item 601 of Regulation S-B.
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
2.1 Merger Agreement and Plan of Reorganization by and between Vail
Banks, Inc. and Telluride Bancorp, Ltd., dated April 16, 1998,
as amended*
2.2 Merger Agreement and Plan of Reorganization by and between Vail
Banks, Inc., WestStar Bank, Independent Bankshares, Inc., and
Glenwood Independent Bank, dated March 10, 1998*
3.1 Amended and Restated Articles of Incorporation of the Registrant*
3.2 Amended and Restated Bylaws of the Registrant*
10.1 Stock Purchase Agreement by and between Vail Banks, Inc., WestStar
Bank, Cedaredge Financial Services, Inc., WestStar Community
Bank, and certain Company Shareholders, dated July 3, 1997*
10.2 Loan Agreement by and between Barnett Bank of Southwest Florida and
Bank of Colorado Holding Company, dated December 10, 1993*
10.3 Stock Incentive Plan, as amended*(1)
50
<PAGE>
10.4 Agreement with the Wallach Company, dated April 17, 1997*
10.5 Consulting Agreement between Vail Banks, Inc. and Dillon Schramm
Associates, LTD, dated April 21, 1998*
16.1 Letter of change of certifying accountant*
21.1 Subsidiaries of the Registrant**
24.1 Power of Attorney (on signature page)
27.1 Financial Data Schedule
- ----------------------
(1) Management contract or compensatory plan required to be filed as an
exhibit.
* Incorporated by reference from the Registrant's Form SB-2, as amended,
Commission File No. 333-60347.
** Incorporated by reference from the Registrant's Form SB-2, Commission File
No. 333-74571.
(b) REPORTS ON FORM 8-K.
Vail Banks filed a report on Form 8-K on December 30, 1998 under Item 2 and
at such time the following financial statements were incorporated by reference
from Vail Banks' Form SB-2, Commission File No. 333-60346.
1. Report of Independent Auditors; Accountants Review Report.
2. Consolidated Statements of Financial Condition at September 30, 1998 and
1997 (reviewed) (unaudited), December 31, 1997 and 1996.
3. Consolidated Statements of Income and Comprehensive Income for the Nine
Months Ended September 30, 1998 and 1997 (reviewed) (unaudited) and the
Years Ended December 31, 1997 and 1996.
4. Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1996 and 1997 and the Nine Months Ended September 40,
1998 (reviewed) (unaudited).
5. Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997 (reviewed) (unaudited) and the Years Ended December 31,
1997 and 1996.
6. Notes to Consolidated Financial Statements.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-KSB
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
Town of Vail, State of Colorado, on the 29th of March, 1999.
VAIL BANKS, INC.
(REGISTRANT)
By: /s/ Lisa M. Dillon
-------------------------------------
Title: Lisa M. Dillon, President and
Chief Executive Officer
POWER OF ATTORNEY AND SIGNATURES
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints E.B. Chester, Jr. or Lisa M. Dillon and either of
them (with full power in each to act alone), as true and lawful
attorneys-in-fact, with full power of substitution, for him or her and in his or
her name, place and stead, in any and all capacities, to sign any amendments to
this Report on Form 10-KSB and to file the same, with all exhibits thereto and
other documents in connection therewith, with the SEC, hereby ratifying and
confirming all that said attorney-in-fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1934, this Report on
Form 10-KSB has been signed by the following persons in the capacities indicated
on the 29th day of March, 1999.
52
<PAGE>
SIGNATURE TITLE
- --------- -----
/s/ E.B. Chester, Jr.
- --------------------------------- Chairman
E.B. Chester, Jr.
/s/ Lisa M. Dillon
- --------------------------------- President and Chief Executive Officer,
Lisa M. Dillon director (principal executive officer)
/s/ Joseph S. Dillon
- --------------------------------- Senior Executive Vice President and Chief
Joseph S. Dillon Financial Officer (principal financial and
accounting officer)
/s/ James C. Allen
- --------------------------------- Director
James C. Allen
/s/ Kay H. Chester
- --------------------------------- Director
Kay H. Chester
/s/ Dennis R. Devor
- --------------------------------- Director
Dennis R. Devor
/s/ James G. Flaum
- --------------------------------- Director
James G. Flaum
/s/ S. David Gorsuch
- --------------------------------- Director
S. David Gorsuch
/s/ James M. Griffin
- --------------------------------- Director
James M. Griffin
/s/ Martin T. Hart
- --------------------------------- Director
Martin T. Hart
/s/ Garner F. Hill II
- --------------------------------- Director
Garner F. Hill II
/s/ Robert L. Knous, Jr
- --------------------------------- Director
Robert L. Knous, Jr.
/s/ Kent Myers
- --------------------------------- Director
Kent Myers
/s/ Byron A. Rose
- --------------------------------- Director
Byron A. Rose
/s/ Donald L. Vanderhoof
- --------------------------------- Director
Donald L. Vanderhoof
/s/ E. William Wilto
- --------------------------------- Director
E. William Wilto
53
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Vail Banks, Inc.:
We have audited the accompanying consolidated balance sheet of Vail Banks, Inc.
and subsidiaries as of December 31, 1998, and the related consolidated
statements of income, stockholders' equity and comprehensive income, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The consolidated balance sheet
for the year ended December 31, 1997 and the consolidated statements of income,
stockholders' equity and comprehensive income, and cash flows for the years
ended December 31, 1997 and 1996 were audited by other auditors whose report
thereon, dated February 20, 1998, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Vail Banks, Inc. and
subsidiaries at December 31, 1998, and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
KPMG LLP
Denver, Colorado
March 8, 1999, except as to Note 16,
which is as of March 9, 1999
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Vail Banks, Inc.
Vail, Colorado
We have audited the accompanying consolidated balance sheet of Vail
Banks, Inc. and Subsidiary as of December 31, 1997, and the related
consolidated statements of income, stockholders' equity and comprehensive
income, and cash flows for each of the two years in the period ended December
31, 1997. These financial statements are the responsibility of Vail Banks'
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 financial position of Vail
Banks, Inc., and Subsidiary at December 31, 1997, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ FORTNER, BAYENS, LEVKULICH & CO., P.C.
Denver, Colorado
February 20, 1998
F-2
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1998 1997
----------------- -----------------
<S> <C> <C>
Cash and due from banks $ 28,469 16,680
Federal funds sold 43,105 17,063
Investment securities:
Available for sale, at market value 33,022 9,607
Held to maturity, at amortized cost (market value of $7,814
and $10,128 in 1998 and 1997, respectively) 7,713 10,125
Loans 269,191 154,913
Less allowance for loan losses (2,590) (1,364)
----------------- -----------------
266,601 153,549
----------------- -----------------
Bank premises and equipment, net of accumulated depreciation
and amortization 31,647 17,836
Accrued interest receivable 2,425 1,377
Deferred income taxes 971 403
Intangible assets 22,959 4,149
Other assets 2,211 402
----------------- -----------------
$ 439,123 231,191
----------------- -----------------
----------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand, non-interest bearing $ 91,510 56,929
Demand, interest bearing 151,889 94,779
Savings 42,165 13,537
Time deposits of $100,000 and over 44,472 18,961
Time deposits under $100,000 47,536 22,009
----------------- -----------------
377,572 206,215
Notes payable 1,114 1,200
Repurchase agreements -- 308
Deferred compensation 493 --
Accrued interest payable and other liabilities 4,946 5,034
----------------- -----------------
Total liabilities 384,125 212,757
----------------- -----------------
Minority interest 621 566
----------------- -----------------
Stockholders' equity:
Series A preferred stock - 50,000 shares authorized,
34,258 shares issued and outstanding at December 31, 1997 -- 2,960
Mandatory convertible debentures -- 1,600
Common stock - $1 par value; 20,000,000 shares authorized, 6,040,608 and
2,250,980 shares issued and outstanding at
December 31, 1998 and 1997, respectively 6,041 2,251
Additional paid-in capital 46,772 10,778
Retained earnings 1,522 253
Accumulated other comprehensive income (net of tax effect of
$14 and $9 in 1998 and 1997, respectively) 42 26
----------------- -----------------
Total stockholders' equity 54,377 17,868
----------------- -----------------
$ 439,123 231,191
----------------- -----------------
----------------- -----------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1998, 1997 and 1996
(In thousands, except share data)
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 18,787 12,570 9,993
Interest on investment securities 1,137 956 1,319
Interest on federal funds sold and deposits in banks 1,459 496 343
----------------- ----------------- -----------------
Total interest income 21,383 14,022 11,655
----------------- ----------------- -----------------
Interest expense:
Demand deposits 3,868 2,752 2,476
Savings deposits 430 219 231
Time deposits 3,228 1,280 1,035
Notes payable 111 123 144
Mandatory convertible debentures 141 13 --
Interest on federal funds purchased and other borrowed funds 31 127 324
----------------- ----------------- -----------------
Total interest expense 7,809 4,514 4,210
----------------- ----------------- -----------------
Net interest income 13,574 9,508 7,445
Provision for loan losses -- 232 154
----------------- ----------------- -----------------
Net interest income after provision for loan losses 13,574 9,276 7,291
Other income:
Service charges on deposit accounts 1,404 916 790
Other income 984 357 281
----------------- ----------------- -----------------
2,388 1,273 1,071
Other expenses:
Salaries and employee benefits 6,954 5,086 3,670
Occupancy expense 1,626 1,325 1,185
Furniture and equipment expense 1,151 852 492
Other operating expenses 3,317 2,524 2,393
----------------- ----------------- -----------------
13,048 9,787 7,740
----------------- ----------------- -----------------
Income before income taxes 2,914 762 622
Income tax expense 955 288 257
----------------- ----------------- -----------------
Net income 1,959 474 365
Income tax benefit of net operating loss carryforwards 1,343 274 242
----------------- ----------------- -----------------
Increase in stockholders' equity due to net income and
income tax benefits of net operating loss carryforwards $ 3,302 748 607
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Net income $ 1,959 474 365
Preferred stock dividends 690 -- --
----------------- ----------------- -----------------
Net income available to common stockholders $ 1,269 474 365
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Weighted average common shares 2,691,987 2,100,423 1,778,373
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Net income per common share $ 0.47 0.23 0.21
----------------- ----------------- -----------------
----------------- ----------------- -----------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended December 31, 1998, 1997 and 1996
(In thousands, except share data)
<TABLE>
<CAPTION>
SERIES A COMMON STOCK
PREFERRED STOCK MANDATORY $1 PAR VALUE
----------------------------- CONVERTIBLE ---------------------------------
SHARES AMOUNT DEBENTURES SHARES AMOUNT
-------------- ------------- ------------ ------------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 -- $ -- -- 1,766,050 $ 1,766
Issuance of common stock for services -- -- -- 16,460 16
Dividends - $.22 per share -- -- -- -- --
Comprehensive income:
Net income -- -- -- -- --
Net unrealized change in investment
securities -- -- -- -- --
-------------- ------------- ------------ ------------------ -------------
Total comprehensive income -- -- -- -- --
Income tax benefit credited to stockholders'
equity -- -- -- -- --
-------------- ------------- ------------ ------------------ -------------
Balance at December 31, 1996 -- -- -- 1,782,510 1,782
Issuance of common stock for services -- -- -- 13,580 14
Sale of common stock -- -- -- 454,890 455
Debentures assumed in acquisition -- -- 1,600 -- --
Issuance of preferred stock 34,258 2,960 -- -- --
Comprehensive income:
Net income -- -- -- -- --
Net unrealized change in investment
securities -- -- -- -- --
-------------- ------------- ------------ ------------------ -------------
Total comprehensive income -- -- -- -- --
Income tax benefit credited to stockholders'
equity -- -- -- -- --
-------------- ------------- ------------ ------------------ -------------
Balance at December 31, 1997 34,258 2,960 1,600 2,250,980 2,251
Issuance of common stock for services -- -- -- 34,840 35
8% dividends declared on preferred stock -- -- -- -- --
Issuance of common stock at $10
per share, less selling expenses of $36 -- -- -- 204,540 204
Issuance of common stock in conjunction
with the acquisition of Independent
Bankshares, Inc. -- -- -- 318,770 319
Issuance of common stock in conjunction with
initial public offering at $12 per share
less selling expenses of $2,571 -- -- -- 1,680,000 1,680
Conversion of preferred stock to common
stock including preferred stock dividend
in conjunction with initial public offering
less conversion costs of $20 (34,258) (2,960) -- 342,565 343
Conversion of mandatory convertible debentures
to common stock in conjunction with initial
public offering -- -- (1,600) 300,000 300
Issuance of common stock in
conjunction with the acquisition of
Telluride Bancorp, Ltd. -- -- -- 908,913 909
Comprehensive income:
Net income -- -- -- -- --
Net unrealized change in investment
securities -- -- -- -- --
-------------- ------------- ------------ ------------------ -------------
Total comprehensive income -- -- -- -- --
Income tax benefit credited to stockholders'
equity -- -- -- -- --
-------------- ------------- ------------ ------------------ -------------
Balance at December 31, 1998 -- $ -- -- 6,040,608 $ 6,041
-------------- ------------- ------------ ------------------ -------------
-------------- ------------- ------------ ------------------ -------------
<CAPTION>
ACCUMULATED
ADDITIONAL RETAINED OTHER
PAID-IN EARNINGS COMPREHENSIVE
CAPITAL (DEFICIT) INCOME TOTAL
--------------- ------------ ----------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 7,558 (186) (17) 9,121
Issuance of common stock for services 71 -- -- 87
Dividends - $.22 per share -- (400) -- (400)
Comprehensive income:
Net income -- 365 -- 365
Net unrealized change in investment securities -- -- 14 14
------------- ------------ ----------------- --------------
Total comprehensive income -- 365 14 379
Income tax benefit credited to stockholders' equity 242 -- -- 242
------------- ------------ ----------------- --------------
Balance at December 31, 1996 7,871 (221) (3) 9,429
Issuance of common stock for services 62 -- -- 76
Sale of common stock 2,571 -- -- 3,026
Debentures assumed in acquisition -- -- -- 1,600
Issuance of preferred stock -- -- -- 2,960
Comprehensive income:
Net income -- 474 -- 474
Net unrealized change in investment securities -- -- 29 29
------------- ------------ ----------------- --------------
Total comprehensive income -- 474 29 503
Income tax benefit credited to stockholders' equity 274 -- -- 274
------------- ------------ ----------------- --------------
Balance at December 31, 1997 10,778 253 26 17,868
Issuance of common stock for services 172 -- -- 207
8% dividends declared on preferred stock -- (243) -- (243)
Issuance of common stock at $10
per share, less selling expenses of $36 1,806 -- -- 2,010
Issuance of common stock in conjunction
with the acquisition of Independent Bankshares, Inc. 2,869 -- -- 3,188
Issuance of common stock in conjunction with initial
public offering at $12 per share less selling expenses
of $2,571 15,909 -- -- 17,589
Conversion of preferred stock to common stock including
preferred stock dividend in conjunction with initial
public offering less conversion costs of $20 2,597 (447) -- (467)
Conversion of mandatory convertible debentures to
common stock in conjunction with initial public offering 1,300 -- -- --
Issuance of common stock in
conjunction with the acquisition of Telluride
Bancorp, Ltd. 9,998 -- -- 10,907
Comprehensive income:
Net income -- 1,959 -- 1,959
Net unrealized change in investment securities -- -- 16 16
------------- ------------ ----------------- --------------
Total comprehensive income -- 1,959 16 1,975
Income tax benefit credited to stockholders' equity 1,343 -- -- 1,343
------------- ------------ ----------------- --------------
Balance at December 31, 1998 46,772 1,522 42 54,377
------------- ------------ ----------------- --------------
------------- ------------ ----------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,959 474 365
Adjustments to reconcile net income to net cash provided from
operating activities, net of effects of purchase business
combinations:
Amortization of intangible assets 270 127 120
Depreciation and amortization 1,558 885 497
Provision for loan losses -- 232 154
Net amortization of premiums (accretion of discounts) on
investment securities 11 (82) (102)
Net change in unrealized gain/loss on available for sale
securities 16 29 14
Deferred income tax expense 902 274 255
Changes in operating assets and liabilities:
Decrease (increase) in accrued interest receivable 119 (348) (221)
Decrease (increase) in intangible and other assets (903) 20 (31)
Increase (decrease) in accrued interest payable and
other liabilities (1,406) 3,954 128
Increase in deferred compensation 2 -- --
Other, net -- (34) (37)
----------------- ----------------- -----------------
Net cash provided by operating activities 2,528 5,531 1,142
----------------- ----------------- -----------------
Cash flows from investing activities, net of effects of purchase
business combinations:
Net decrease (increase) in federal funds sold (12,867) (10,403) 5,340
Purchase of investment securities held to maturity -- -- (9,810)
Purchase of investment securities available for sale (575) (238) (263)
Proceeds from maturities of investment securities held to
maturity 7,760 450 3,500
Proceeds from maturities of investment securities available
for sale 2,412 4,610 9,964
Net increase in loans (15,467) (13,943) (28,386)
Purchase of bank premises and equipment (5,389) (2,205) (2,065)
Proceeds from the sale of bank premises and equipment -- -- 355
Proceeds from the sale of real estate acquired through
foreclosure -- -- 464
Cash paid for acquisitions, net of cash acquired (8,259) (1,353) --
----------------- ----------------- -----------------
Net cash used by investing activities (32,385) (23,082) (20,901)
----------------- ----------------- -----------------
Cash flows from financing activities, net of effects of purchase
business combinations:
Net increase in deposits 24,058 19,857 18,786
Net increase (decrease) in repurchase agreements (308) (1,339) 1,308
Proceeds from issuance of common stock 19,806 3,026 --
Cash paid in conversion of preferred stock to common stock (20) -- --
Dividends paid (690) -- (400)
Repayments of notes payable (1,200) (4,765) (200)
----------------- ----------------- -----------------
Net cash provided by financing activities 41,646 16,779 19,494
----------------- ----------------- -----------------
Net increase (decrease) in cash and due from banks 11,789 (772) (265)
Cash and due from banks at beginning of year 16,680 17,452 17,717
----------------- ----------------- -----------------
Cash and due from banks at end of year $ 28,469 16,680 17,452
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest expense $ 7,584 4,360 4,412
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Income taxes $ 71 8 18
----------------- ----------------- -----------------
----------------- ----------------- -----------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of Vail Banks, Inc. (VBI) and its wholly owned
subsidiaries, WestStar Bank (WestStar), the Bank of Telluride
(BOT) and Western Colorado Bank (WCB). WestStar and VBI own a
54.04% interest in Avon 56 Limited which is also included in the
accompanying consolidated financial statements. All entities are
collectively referred to as the Company. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
In 1993, VBI was formed as a bank holding company for WestStar and
is engaged in the management and operation of financial
institutions primarily in the western slope region of Colorado.
Colorado counties served by the Company include Summit, Eagle,
Delta, Garfield, Ouray, San Miguel and Montrose, as well as the
Denver Metropolitan area. The Company offers a full range of loan
and deposit products to local consumers and commercial businesses.
On December 9, 1998, the Company registered and sold shares of its
$1 par value common stock in an initial public offering.
Commensurate with the offering and sale of the Company's common
stock to the public, the Company acquired Telluride Bancorp, Ltd.,
which was merged into VBI, and its two subsidiary banks, BOT and
WCB, which are now subsidiary banks of VBI.
(b) CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company
considers cash equivalents to represent cash and due from banks.
Cash equivalents include uninsured deposits in other financial
institutions approximating $6,597,000 and $2,139,000 at December
31, 1998 and 1997, respectively, other than amounts on deposit at
the Federal Home Loan Bank of Topeka and the Federal Reserve Bank.
(c) INVESTMENT SECURITIES
The Company classifies its investment securities in one of
three categories: trading, available-for-sale and
held-to-maturity. Trading securities are bought and held
principally for the purpose of selling them in the near term.
Held-to-maturity securities are those securities in which the
Company has the ability and intent to hold until maturity. All
securities not classified as either trading or held-to-maturity
are classified as available-for-sale. The Company has no
securities classified as trading. Held-to-maturity securities
are recorded at cost, adjusted for amortization or accretion of
premiums or discounts. Trading and available-for-sale
securities are recorded at fair value. Unrealized gains and
losses on trading securities are included in earnings.
Unrealized gains and losses, net of the related tax effect, on
available-for-sale
F-7
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
securities are reported as a separate component of
stockholders' equity, and the annual change of such gains and
losses are reported as other comprehensive income. Transfer of
securities between categories are recorded at fair value on the
date of transfer.
Realized gains and losses for securities classified as
available-for-sale and held-to-maturity are recognized in earnings
upon sale or redemption at maturity. The specific identification
method is used to determine the cost of securities sold. Discounts
or premiums are accreted or amortized using the level-yield method
to the earlier of call date or maturity of the related
held-to-maturity security.
(d) LOANS AND INTEREST INCOME
Loans are considered impaired when it is probable that the Company
will not fully collect amounts due in accordance with the
contractual terms of the loans. For these loans, the Company
measures the amount of impairment using discounted cash flows,
except when it is determined that the sole source of repayment for
the loan is operation or liquidation of the collateral. In such
case, the current fair value of the collateral, reduced by
estimated selling costs, is used in place of discounted cash
flows. If the measurement of the impaired loan is less than the
recorded investment in the loan, impairment is recognized by
creating or adjusting an existing allocation of the allowance for
losses on loans.
Interest income is accrued daily on the principal balance
outstanding, if such income is deemed collectible. Generally, the
Company stops accruing interest on loans for which payments are
more than 90 days past due as well as any other loans which
management believes it is probable that the Company will not
collect all of its outstanding principal. When placing a loan on
nonaccrual status, interest accrued to date is generally reversed
unless the net realizable value of the underlying collateral is
sufficient to cover principal and accrued interest. 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.
The Company calculates gains or losses on sales of participating
interests in loans receivable by determining the difference
between the weighted average yield of the loans sold and the yield
rate guaranteed to the purchaser, adjusted for estimated cost of
servicing the loans receivable. The resulting premium or discount
is amortized or accreted to interest income using the level-yield
method over the contractual life of the loans. Loans held for sale
are recorded at the lower of cost or estimated market value.
Loan and commitment fees, net of certain loan origination costs,
are deferred and recognized as an adjustment of yield using the
level-yield method over the contractual lives of the loans.
F-8
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(e) PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Company's lending personnel are responsible for the continuous
monitoring of the quality of its loan portfolio. 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. The
allowance for loan losses is based primarily on management's
estimates of possible loan losses from these procedures and
historical experiences. These estimates involve judgments and a
certain level of subjectivity; changes in economic conditions may
necessitate revisions in future years.
Various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance
for loan losses. Such agencies may require the Company to record
additional provisions for potential losses based upon their
evaluation of information available at the time of their
examination.
The Company provides for loan losses by a charge to current year
income based on the character of the loan portfolio, current
economic conditions and such other factors as, in management's
best judgment, deserve current recognition in estimating loan
losses. In addition, recoveries realized on loans previously
charged off are credited to the allowance for loan losses.
(f) CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk arise when a number of
counterparties have similar economic characteristics that would
cause their ability to meet contractual obligations to be
similarly affected by changes in economic or other conditions. The
Company's loan portfolio consists of construction and real estate
loans located in Colorado, making the value of the portfolio more
susceptible to declines in real estate values and other changes in
economic conditions in Colorado. The Company does not believe it
has a significant exposure to any individual customer.
(g) DISCLOSURES OF FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107,
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires the
Company to disclose estimated fair values of its financial
F-9
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
instruments. Fair value estimates are made at a specific point in
time, based on relevant market information. These estimates do not
reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a portion of
the Company's financial instruments, fair value estimates are
based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on financial instruments owned at
December 31, 1998 and 1997 without attempting to estimate the
value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments,
including deferred tax assets and premises and equipment. In
addition, the tax ramifications related to the realization of
unrealized gains and losses can have a significant effect on fair
value estimates and have not been considered in these estimates.
(h) BANK PREMISES AND EQUIPMENT
Bank premises and equipment are recorded at cost less accumulated
depreciation and amortization. Depreciation and amortization are
calculated using the straight-line method over the estimated
useful lives of the related assets.
(i) INTANGIBLE ASSETS
Intangible assets primarily represent goodwill for the cost paid
in purchase transactions in excess of fair value of the net assets
acquired. 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 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Capitalized costs $ 23,545 4,465
Accumulated amortization (586) (316)
----------------- -----------------
$ 22,959 4,149
----------------- -----------------
----------------- -----------------
</TABLE>
The Company assesses the recoverability of intangible assets by
determining whether the amortization of the goodwill balance over
its remaining life can be recovered through undiscounted future
net cash flows of the acquired institutions. The assessment of the
recoverability of goodwill will be impacted if estimated
undiscounted future net cash flows are not achieved.
F-10
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(j) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to
undiscounted future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less estimated costs to sell.
(k) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
book values and tax bases of existing assets and liabilities.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled.
(l) NET INCOME PER COMMON SHARE
In February 1997, the FASB issued SFAS No. 128, EARNINGS PER SHARE
(Statement 128). Statement 128 supersedes APB Opinion No. 15,
EARNINGS PER SHARE, and specifies the computation, presentation
and disclosure requirements for earnings per share for entities
with publicly held common stock. Statement 128 is effective for
periods ending after December 15, 1997. The Company computes two
measures, basic and diluted earnings per share. Basic earnings per
share is computed by dividing net earnings by the weighted-average
number of common shares outstanding during the period. Diluted
earnings per share is computed similar to basic earnings per
share, except that the denominator is increased to include the
number of additional common shares that would have been
outstanding if dilutive potential common shares had been issued.
In addition, the numerator is adjusted for any changes in net
earnings that would have resulted from the assumed conversion of
the potential common shares. Due to the antidilutive impact on net
income of preferred stock dividends in calculating diluted
earnings per share, only basic earnings per share is presented.
Consistent with the requirements of Statement 128, the Company has
restated all prior-period earnings per share data presented,
including interim financial statements and selected quarterly
financial data.
(m) STOCK INCENTIVE PLAN
F-11
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The Company accounts for its stock incentive plan in accordance
with SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
(Statement 123), which permits entities to recognize as expense
over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, Statement 123 also
allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants
made in 1995 and future years as if the fair-value-based method
defined in Statement 123 had been applied. The Company has
elected to continue to apply the provisions of APB Opinion No.
25 and provide the pro forma disclosure provisions of Statement
123.
(n) USE OF ESTIMATES
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the consolidated financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
(o) RECLASSIFICATIONS
Certain reclassifications have been made to the previous financial
statements to conform to their 1998 presentation.
(2) BUSINESS COMBINATIONS
(a) TELLURIDE BANCORP, LTD.
On December 15, 1998, the Company purchased all of the outstanding
stock of Telluride Bancorp, Ltd. (Telluride) and its wholly owned
subsidiaries Bank of Telluride and Western Colorado Bank for
$13,331,000 in cash and 908,913 shares of stock valued at $12.00
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 fair value
of net assets acquired has been recorded as an intangible
asset, which is being amortized over 25 years. The estimated
fair values of assets and liabilities acquired are summarized
as follows (in thousands):
F-12
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
<TABLE>
<S> <C>
Cash and due from banks $ 7,340
Federal funds sold 10,825
Investment securities 23,078
Loans 81,751
Less allowance for loan losses (1,153)
-------------------
80,598
Bank premises and equipment 9,366
Other assets 1,703
Goodwill 14,395
Deposits (119,897)
Note payable (1,114)
Other liabilities (1,510)
-------------------
Consideration and expenses paid $ 24,784
-------------------
-------------------
</TABLE>
(b) INDEPENDENT BANKSHARES, INC.
On July 31, 1998, the Company purchased all of the outstanding
stock of Independent Bankshares, Inc. (Independent) and its
subsidiary bank, Glenwood Independent Bank (Glenwood) for
$3,816,000 in cash and 318,770 shares of stock. Glenwood currently
operates as a branch of WestStar.
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 of $7,120,000 has
been recorded as an intangible asset, which is being amortized
over 25 years.
(c) CEDAREDGE FINANCIAL SERVICES, INC.
On November 30, 1997, the Company purchased all of the outstanding
stock of Cedaredge Financial Services, Inc. (Cedaredge) and its
wholly owned subsidiary, Western Community Bank. These entities
were merged into the Company. The Company paid cash of $3,250,000
and assumed Cedaredge's mandatory convertible debentures
approximating $1,600,000.
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 being
F-13
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
amortized over 25 years. The estimated fair values of assets
and liabilities acquired are summarized as follows (in
thousands):
<TABLE>
<S> <C>
Cash and due from banks $ 2,197
Federal funds sold 1,625
Investment securities 5,629
Loans 34,217
Less allowance for loan losses (342)
-----------------
33,875
Bank premises and equipment 1,579
Other assets 580
Goodwill 1,831
Deposits (42,008)
Other liabilities (458)
Mandatory convertible debentures (1,600)
-----------------
Cash paid $ 3,250
-----------------
-----------------
</TABLE>
The Company has entered into consulting and non-complete
agreements with two of Cedaredge's executives. Under the
agreement, annual payments of $110,000 are payable to these
individuals for five years, beginning in 1997. Future maturities
of the remaining obligation are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING PRINCIPAL
DECEMBER 31, MATURITIES INTEREST TOTAL
------------------------------------ ----------------- ----------------- -----------------
<S> <C> <C> <C>
1999 $ 86 24 110
2000 93 17 110
2002 102 8 110
----------------- ----------------- -----------------
$ 281 49 330
----------------- ----------------- -----------------
----------------- ----------------- -----------------
</TABLE>
(d) VNB BUILDING CORPORATION
In 1994, the Company purchased a 28% interest in Vail 108
Limited (Vail 108), the only asset owned at the time by VNB
Building Corporation (VNB). In December 1997, the Company
acquired the remaining interest in Vail 108 through a merger
with VNB. VNB owned the property in which the Company's Vail
main branch is located. In connection with this merger, the
Company issued 34,258 shares of Series A Preferred Stock for
$2,960,000 and cash of $300,000. Such preferred stock was
converted to common shares on a share-for-share basis upon
completion of the Company's initial public offering.
F-14
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(e) PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
The operating results of the Company's acquisitions are included
in the Company's consolidated results of operations from the dates
of acquisition. The following unaudited pro forma summary presents
the consolidated results of operations as if the acquisitions of
Telluride and Independent had occurred at the beginning of 1997,
after giving effect to certain adjustments, including
depreciation, amortization of intangible assets, debt repayment,
dividends on preferred stock and income taxes. These pro forma
results have been prepared for comparative purposes only and do
not purport to be indicative of what would have occurred had the
acquisition been made as of those dates or of results which may
occur in the future.
<TABLE>
<CAPTION>
1998 1997
------------- -------------
(In thousands)
<S> <C> <C>
Interest income $ 32,053 28,303
Interest expense 11,519 9,801
------------- -------------
20,534 18,502
Provision for loan losses 442 475
------------- -------------
Net interest income after provision for
possible loan losses 20,092 18,027
Other income 3,418 3,181
Other expenses 19,581 19,092
------------- -------------
Income before income taxes 3,929 2,116
Income tax expense 1,464 907
------------- -------------
Net income $ 2,465 1,209
------------- -------------
------------- -------------
</TABLE>
F-15
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(3) INVESTMENT SECURITIES
Investment securities at December 31 consist of (in thousands):
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasuries $ 8,466 27 (2) 8,491
U.S. Government agencies 13,723 8 (2) 13,729
Mortgage backed securities 811 1 -- 812
State and municipal 7,928 29 (5) 7,952
Federal Home Loan Bank,
Federal Reserve Bank and
other stock 2,038 -- -- 2,038
------------ ------------- --------------- ---------------
$ 32,966 65 (9) 33,022
------------ ------------- --------------- ---------------
------------ ------------- --------------- ---------------
Held-to-maturity:
U.S. Treasuries $ 5,986 63 -- 6,049
Mortgage backed securities 1,677 38 -- 1,715
State and municipal 50 -- -- 50
------------ ------------- --------------- ---------------
$ 7,713 101 -- 7,814
------------ ------------- --------------- ---------------
------------ ------------- --------------- ---------------
<CAPTION>
1997
---------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasuries $ 1,864 1 -- 1,865
U.S. Government agencies 3,843 -- -- 3,843
Mortgage backed securities -- -- -- --
State and municipal 2,944 34 -- 2,978
Federal Home Loan Bank,
Federal Reserve Bank and
other stock 921 -- -- 921
------------ ------------- --------------- ---------------
$ 9,572 35 -- 9,607
------------ ------------- --------------- ---------------
------------ ------------- --------------- ---------------
Held-to-maturity:
U.S. Treasuries $ 7,960 -- (22) 7,938
Mortgage backed securities 2,080 24 -- 2,104
State and municipal 85 1 -- 86
------------ ------------- --------------- ---------------
$ 10,125 25 (22) 10,128
------------ ------------- --------------- ---------------
------------ ------------- --------------- ---------------
</TABLE>
F-16
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Expected maturities of investment securities may differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Maturities of
investment securities at December 31, 1998 are as follows (in thousands).
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
--------------------------- --------------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Due within one year $ 15,467 15,472 2,047 2,051
Due after one year through five years 11,800 11,851 3,989 4,048
Due after five years through ten years 1,505 1,505 499 510
Due after ten years 4,194 4,194 1,178 1,205
----------- ------------ ----------- -----------
$ 32,966 33,022 7,713 7,814
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
</TABLE>
Securities with a carrying value of approximately $30,329,000 and
$14,084,000 at December 31, 1998 and 1997, respectively, are pledged as
collateral to secure public deposits and for other purposes as permitted
or required by law.
Securities sold under repurchase agreements of approximately $308,000
at December 31, 1997 were fully collateralized by related securities.
As a member of the FHLB system, the Company is required to maintain an
investment in stock of the FHLB equal to the greater of 1% of certain
residential mortgages or 5% of FHLB advances. The Company has a blanket
pledge with the FHLB and has pledged all of its stock in the FHLB, and
all otherwise unpledged or unencumbered federal funds sold, U.S. agency
securities, certain qualifying loans and mortgaged-backed securities.
(4) LOANS
Loans at December 31, consist of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
<S> <C> <C>
Commercial $ 123,804 75,298
Construction and land 55,642 25,163
Residential real estate 51,000 31,618
Consumer 24,635 15,091
Credit card 2,180 1,540
Revolving lines of credit and overdrafts 5,057 3,700
Agricultural 6,873 2,503
------------------ ------------------
$ 269,191 154,913
------------------ ------------------
------------------ ------------------
</TABLE>
F-17
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Transactions in the allowance for loan losses are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------- -------------- --------------
<S> <C> <C> <C>
Balance at beginning of year $ 1,364 823 620
Provision for loan losses -- 232 154
Loans charged off (168) (58) (122)
Recoveries on loans previously charged off 48 24 171
Acquired through acquisition 1,346 343 --
------------- -------------- --------------
Balance at end of year $ 2,590 1,364 823
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
The principal balance of loans on which the accrual of interest has been
discontinued approximated $322,000 and $136,000 at December 31, 1998 and
1997, respectively. Interest income that would have been recorded for
nonaccrual loans had they been performing in accordance with their
contractual requirements approximated $74,000 and $3,000 for the years
ended December 31, 1998 and 1997, respectively. Actual interest income
recorded for these loans approximated $44,000 and $4,000 for the years
ended December 31, 1998 and 1997, respectively.
The recorded investment in impaired loans and the related impairment
allowance determined under SFAS No. 114, ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN and SFAS No. 118, ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN - INCOME RECOGNITION AND DISCLOSURES (collectively
referred to as Statement 114) (included within the allowance for losses
on loans receivable) at December 31, 1998 $1,616,000 and $350,000,
respectively, and at December 31, 1997 $51,000 and $26,000, respectively.
There were no impaired loans for which a related impairment allowance is
not required.
The majority of impaired loans requiring a Statement 114 allowance are
measured using the fair value of the underlying collateral since these
loans are considered collateral dependent.
The average recorded investment in impaired loans for the years ended
December 31, 1998 and 1997 was $108,000 and $51,000, respectively.
Interest recorded on impaired loans for the years ended December 31, 1998
and 1997 was $266,000 and $5,000, respectively.
F-18
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(5) BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 31 consist of the following
(in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
<S> <C> <C>
Land $ 5,922 3,160
Buildings 19,521 9,962
Leasehold improvements 3,662 3,242
Furniture, fixtures and equipment 8,510 5,872
------------------ ------------------
37,615 22,236
Less accumulated depreciation
and amortization (5,968) (4,400)
------------------ ------------------
Premises and equipment, net $ 31,647 17,836
------------------ ------------------
------------------ ------------------
</TABLE>
Depreciation and amortization expense approximated $1,421,000, $885,000
and $497,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
(6) DEPOSITS
At December 31, 1998, the scheduled maturities of time deposits are as
follows (in thousands):
<TABLE>
<S> <C>
1999 $ 78,423
2000 8,854
2001 2,382
2002 1,558
2003 and thereafter 791
----------
$ 92,008
----------
----------
</TABLE>
(7) RELATED PARTY TRANSACTIONS
The Company had net loans receivable from directors, executive officers
and principal shareholders (more than ten percent ownership through
attribution) of the Company and their related business at December 31 as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
<S> <C> <C>
Directors and principal shareholders $ 322 398
Executive officers 85 43
------------------ ------------------
$ 407 441
------------------ ------------------
------------------ ------------------
</TABLE>
F-19
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
In March 1999, an officer of the Company entered into a contract to
purchase real estate owned by the Company at the property's carrying
value of $175,000.
(8) COMMITMENTS
(a) LEASES
The Company leases facilities and equipment under leases that
expire through the year 2010. Several leases have renewal options.
Future minimum rental commitments under the leases as of December
31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
FACILITIES EQUIPMENT TOTAL
------------ -------------- --------------
<S> <C> <C> <C>
1999 $ 529 68 597
2000 385 56 441
2001 320 22 342
2002 250 -- 250
2003 and thereafter 1,185 -- 1,185
------------ -------------- --------------
$ 2,669 146 2,815
------------ -------------- --------------
------------ -------------- --------------
</TABLE>
Total rental expense for December 31, 1998, 1997 and 1996
approximated $587,000 $749,000 and $621,000, respectively.
(b) YEAR 2000 (UNAUDITED)
The Company is working to resolve the potential impact of the Year
2000 on the ability of the Company's computerized information
systems to accurately process information that may be
date-sensitive. Any of the Company's programs that recognize a
date using "00" as the year 1900 rather than the year 2000 could
result in errors or system failures. The Company has completed its
Year 2000 assessment and has begun the conversion and contingency
efforts in its Year 2000 Plan. The total cost of the Year 2000
Plan is estimated to be $200,000 of which approximately $130,000
has been expensed through December 31, 1998. The Company's
conversion and contingency efforts are expected to be completed by
June 1999. If the Company and third parties upon which it relies
are unable to address this issue in a timely manner, it could
result in a material financial risk to the Company.
F-20
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(9) INCOME TAXES
Income tax expense for the years ended December 31, were allocated as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Income from continuing operations $ 941 279 258
Stockholders' equity for unrealized
holding gain (loss) on debt and equity
securities recognized for financial
reporting purposes 14 9 (1)
-------------- -------------- --------------
$ 955 288 257
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
Income tax expense (benefit) for the years ended December 31, consists of
the following (in thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------------- --------------- --------------
<S> <C> <C> <C>
Year ended December 31, 1998:
U.S. Federal $ 53 960 1,013
State and local -- (58) (58)
------------- --------------- --------------
$ 53 902 955
------------- --------------- --------------
------------- --------------- --------------
Year ended December 31, 1997:
U.S. Federal $ 14 274 288
State and local -- -- --
------------- --------------- --------------
$ 14 274 288
------------- --------------- --------------
------------- --------------- --------------
Year ended December 31, 1996:
U.S. Federal $ 2 255 257
State and local -- -- --
------------- --------------- --------------
$ 2 255 257
------------- --------------- --------------
------------- --------------- --------------
</TABLE>
F-21
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Income tax expense differs from the amounts computed by applying the U.S.
federal income tax rate to pretax earnings as a result of the following
(in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------- -------------- -------------
<S> <C> <C> <C>
Computed "expected" tax expense $ 991 259 211
Decrease in valuation allowance on
deferred tax assets (58) -- --
Tax-exempt interest (53) (8) (7)
Goodwill amortization 93 41 37
Other, net (18) (4) 16
------------- -------------- -------------
$ 955 288 257
------------- -------------- -------------
------------- -------------- -------------
</TABLE>
The significant components of deferred income tax expense attributable to
income from continuing operations for the year ended December 31, are as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ------------- -------------
<C> <C> <C>
Deferred tax expense (exclusive of the
effects of other components below) $ 960 274 255
Decrease in beginning-of-the-year
balance of the valuation allowance for
deferred tax assets (58) -- --
-------------- ------------- -------------
$ 902 274 255
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
F-22
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Temporary differences between financial statement carrying amounts and
tax bases of assets and liabilities resulting in significant components
of deferred income taxes at December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------------ ---------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,349 2,277
Allowance for loan losses 425 --
Other 380 39
------------ ---------------
2,154 2,316
Valuation allowance -- (1,401)
------------ ---------------
Total deferred tax assets 2,154 915
Deferred tax liabilities:
Allowance for loan losses 307 307
Basis of bank premises 815 185
Unrealized gain on securities available
for sale 14 9
Other 47 11
------------ ---------------
Total deferred tax liabilities 1,183 512
------------ ---------------
Net deferred tax asset $ 971 403
------------ ---------------
------------ ---------------
</TABLE>
In conjunction with the acquisition of Telluride, the Company recorded
net deferred tax assets approximating $69,000.
In assessing the realization of deferred tax assets, management considers
the reversal of existing temporary differences and estimated future
taxable income. The ultimate realization of deferred tax assets is
dependent on the generation of future taxable income in the period in
which temporary differences become deductible. The Company believes that
it is more likely than not that the deferred tax assets will be realized.
The Company's net operating loss carryforwards are attributable to the
prior operations of a bank that was merged into the Company in January
1993 for which a quasi reorganization was effected. Therefore, the
realization of such carryforwards are recognized as a direct addition to
stockholders' equity in accordance with SFAS No. 109, ACCOUNTING FOR
INCOME TAXES.
F-23
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
At December 31, 1998, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $2,950,000, the
components of which expire in the years 2004 through 2007. The Company
also has approximately $10,500,000 of additional net operating loss
carryforwards for state income tax purposes, the components of which
expire 2006 through 2010. These net operating loss carryforwards are
subject to separate return limitations.
(10) 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 letters of credit.
Those instruments involve, to a varying degree, elements of credit risk
in excess of the amount recognized in the balance sheet. The contract
amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
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. At December 31, these commitments are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
-------------- ---------------
<S> <C> <C>
Financial instruments whose contractual amounts
represent credit risk:
Commitments to extend credit $ 54,963 30,620
Letters of credit 3,502 1,086
-------------- ---------------
$ 58,465 31,706
-------------- ---------------
-------------- ---------------
</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
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's creditworthiness 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.
F-24
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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.
(11) STOCKHOLDERS' EQUITY
(a) STOCKHOLDERS' AGREEMENTS
During 1996 through 1998, the Company and certain of its
stockholders entered into stockholder agreements containing
terms and conditions affecting the ownership of shares covered by
such agreements. In December 1998, these agreements were
terminated in conjunction with the initial public offering.
In 1998, 1997 and 1996, shares of common stock totaling 34,840,
13,580 and 16,460, respectively, were issued for services under
the agreements. The services were valued at the book value of the
stock issued which approximated $207,000, $76,000 and $87,000,
respectively. These amounts were charged to income in the year
incurred.
(b) STOCK INCENTIVE PLAN
In January 1998, the Company adopted a Stock Incentive Plan (the
Plan) pursuant to which the Compensation Committee of the Board of
Directors may grant incentive stock options, nonqualified stock
options, restricted stock awards and performance share awards to
certain employees, directors and others that perform services for
the Company.
The number of shares available for grant of awards under the Plan,
if any, will be determined by the Company's shareholders. If
granted, outstanding options will be counted against the
authorized pool of shares, regardless of their vested status.
The option price for each grant of a stock option will not be less
than the fair market value on the date the option is granted. The
committee may determine the restrictions and conditions under
which options may be exercised. Options must be exercised within
ten years of the date granted.
F-25
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The Plan provides for the grant of restricted stock awards subject
to restrictions, which the committee may determine. The
restrictions would typically require continued employment in order
to vest in the restricted stock. Vesting may also be based upon
attainment of certain performance measures.
At December 31, 1998, there were 500,000 shares available for
grant under the Plan. The per share weighted-average fair value of
stock options granted during 1998 was $3.30 on the date of grant
using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1998 - expected dividend yield of
0.0%, risk-free interest rate of 5.6%, expected life of 8.2 years,
and expected volatility of the stock over the life of the options
of 19.1%.
The Company applies APB Opinion No. 25 in accounting for options
granted under the Plan and, accordingly, no compensation cost has
been recognized for its stock options in the financial statements.
Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under Statement 123,
the Company's net income would have been reduced to the pro forma
amounts indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
1998
-------------------
<S> <C>
Net income:
As reported $ 1,959
Pro forma 1,855
Net income per common share:
As reported $ 0.47
Pro forma 0.43
</TABLE>
Stock option activity since the Plan's inception in 1998 is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
-------------- ---------------
<S> <C> <C>
Balance at December 31, 1997 -- $ --
Granted 319,000 8.84
Exercised -- --
Forfeited 3,000 8.54
Expired -- --
-------------- --------------
Balance at December 31, 1998 316,000 $ 8.84
-------------- --------------
-------------- --------------
</TABLE>
F-26
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
At December 31, 1998, the range of exercise prices and
weighted-average remaining contractual life of outstanding options
was $8.54 to $9.39 and 5 to 10 years, respectively.
At December 31, 1998, there were no exercisable options.
(c) PHANTOM STOCK PLAN
In conjunction with the Telluride acquisition, the Company
acquired a Phantom Stock Plan (PSP) to reward certain key
employees with a "simulated proprietary interest" in the Company.
Units were granted at the discretion of the Board of Directors,
and are accounted for as awards to be settled in cash. Employees
vested in their units upon completion of the Telluride acquisition
in accordance with the terms of the plan. The Company will not
offer additional units under the PSP. Compensation expense for
the PSP is accrued during the periods in which employees provide
services to the Company over the terms of the units. Accrued
compensation expense approximated $493,000 for the year ended
December 31, 1998.
(d) MANDATORY CONVERTIBLE DEBENTURES
In connection with its acquisition of Cedaredge Financial
Services, Inc. (CFS), the Company assumed mandatory convertible
debentures totaling $1,600,000. In connection with the Company's
initial public offering, the debentures were mandatorily converted
to 300,000 shares of the Company's common stock.
(e) PREFERRED STOCK
In connection with the Company's initial public offering, each
share of preferred stock, both Series A and B, was mandatorily
converted into one share of common stock. Dividends on the stock
were payable quarterly at the rate of 8% in either cash or in
shares of Series B Preferred stock at the option of the Board of
Directors.
(12) NOTES PAYABLE
At December 31, 1998, notes payable consist of three notes with various
maturities ranging from January 1, 1999 to August 29, 2001, and interest
rates ranging from 8.25% to 8.75%. In February 1999, the Company repaid
all outstanding balances on its notes payable.
F-27
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(13) 401(k) PLAN
In August 1996, the Company established a qualified 401(k) Plan (the
Plan) covering all full-time employees, as defined in the Plan. Employees
who are eligible may defer up to 15% of their compensation, subject to
the annual limitations imposed by the Internal Revenue Code. The Company
matches a discretionary percentage of the employees' contributions which
vest ratably over five years. In addition, the Company may make
additional profit sharing contributions. Employers' contributions to the
Plan for the years ended December 31, 1998, 1997 and 1996 approximated
$50,000, $40,000 and $17,000, respectively.
(14) REGULATORY MATTERS
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. 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 Company's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific
capital guidelines that involve quantitative measures of assets,
liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company'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 (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 1998, that the Company meets all capital adequacy
requirements to which it is subject.
The most recent notification from the Federal Reserve categorized the
Company as "well capitalized" under the regulatory framework. To be
categorized as "well capitalized" the Company must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage capital ratios as set
forth in the following table (in thousands, except percentages):
F-28
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
<TABLE>
<CAPTION>
ADEQUATELY WELL
ACTUAL CAPITALIZED CAPITALIZED
----------------------- ------------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- ---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total capital
(to risk weighted assets) $ 34,586 12.34% $ 22,414 =>8.0% $ 28,017 =>10%
Tier 1 capital
(to risk weighted assets) $ 31,996 11.42% $ 11,207 =>4.0% $ 16,810 =>6%
Tier 1 capital
(to average assets) $ 31,996 7.69% $ 12,485 =>3.0% $ 20,808 =>5%
As of December 31, 1997
Total capital
(to risk weighted assets) $ 15,899 10.02% $ 12,543 =>8.0% $ 15,678 =>10.0%
Tier 1 capital
(to risk weighted assets) $ 12,925 8.26% $ 6,271 =>4.0% $ 9,047 =>6.0%
Tier 1 capital
(to average assets) $ 12,925 7.33% $ 4,703 =>3.0% $ 8,828 =>5.0%
</TABLE>
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
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 are valued at their carrying amounts, which are
reasonable estimates of fair value, due to the relatively short period to
maturity of the instruments.
Investments securities are valued based on quoted bid prices, if
available. If a quoted bid prices are not available, fair value is
estimated using quoted market prices for similar securities.
F-29
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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 fair value.
The fair value of demand deposits, savings accounts, NOW accounts and
certain money market deposits is determined to be the amount payable on
demand at the reporting date. 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.
For short-term borrowings, the carrying amount is a reasonable estimate
of fair value.
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.
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.
The carrying amounts and estimated fair values of financial instruments
at December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------------------- -------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Financial assets:
Cash due from banks $ 28,469 28,469 16,680 16,680
Investment securities 40,735 40,837 19,732 19,735
Loans, net 266,601 266,429 153,549 153,730
Financial liabilities:
Deposits, demand and savings 285,564 285,564 165,245 165,245
Deposits with stated maturities 92,008 92,289 40,970 40,979
</TABLE>
F-30
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(16) SUBSEQUENT EVENT
On March 9, 1999, the Company's Board of Directors approved an agreement
to acquire the branch office and approximately $43 million deposits of
World Savings' Glenwood Springs, Colorado branch. The acquisition is
expected to close during the second quarter of 1999, subject to approval
by certain regulatory agencies.
F-31
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(17) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data of the Company for the eight
quarters ended December 31, 1998 are as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------- ------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ --------- ------------ ----------- --------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest income $ 4,645 5,191 5,493 6,054 3,171 3,340 3,478 4,033
Net interest income 2,896 3,318 3,452 3,908 2,053 2,258 2,435 2,762
Provision for loans losses -- -- -- -- -- -- -- 232
Net interest income after
provison for loan losses 2,896 3,318 3,452 3,908 2,053 2,258 2,435 2,530
Income before income taxes 522 758 795 839 166 408 446 (258)
Net income 340 495 510 614 100 256 284 (166)
Net income per common share 0.12 0.19 0.17 0.03 0.05 0.12 0.13 (0.08)
</TABLE>
F-32
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(18) PARENT COMPANY FINANCIAL INFORMATION
Condensed parent company financial information is as follows:
Condensed Balance Sheets
December 31,
(In thousands)
<TABLE>
<CAPTION>
1998 1997
--------- --------
ASSETS
<S> <C> <C>
Cash $ 5,192 127
Investment in subsidiary 49,934 18,917
Other assets 2,712 366
--------- --------
$ 57,838 19,410
--------- --------
--------- --------
LIABILITIES
Note payable $ 1,114 1,200
Other liabilities 2,347 342
--------- --------
3,461 1,542
Stockholder's equity 54,377 17,868
--------- --------
$ 57,838 19,410
--------- --------
--------- --------
</TABLE>
F-33
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Condensed Statements of Income
Years ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Revenue -
Equity in earnings of subsidiary $ 2,386 996 713
Expenses:
Interest 252 136 144
Salaries, benefits and other compensation 248 404 263
Other expenses 120 250 120
-------- ------- -------
620 790 527
-------- ------- -------
Income before income taxes 1,766 206 186
Income tax benefit 193 268 179
-------- ------- -------
Net income $ 1,959 474 365
-------- ------- -------
-------- ------- -------
</TABLE>
F-34
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Condensed Statements of Cash Flows
Years ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
Operating activities:
Net income $ 1,959 474 365
Adjustments to reconcile net income to net
cash provided from operating activities,
net of effects of business combinations:
Investment in subsidiaries (193) (786) 290
Income tax benefit 193 (268) (179)
Depreciation and amortization 19 10 13
Common stock issued for services 207 76 87
Change in other assets and accrued liabilities 105 (19) 5
-------- --------- --------
Net cash provided by (used in)
operating activities 2,290 (513) 581
-------- --------- --------
Investing activities:
Acquisition of subsidiary banks (15,121) (2,160) --
Other investing -- (60) (5)
-------- --------- --------
Net cash used in investing activities (15,121) (2,220) (5)
Financing activities:
Repayments of notes payable (1,200) (200) (200)
Proceeds from issuance of common stock 19,806 3,026 --
Dividends paid (690) -- (400)
Cash paid in conversion of preferred stock to common stock (20) -- --
-------- --------- --------
Net cash provided by (used in)
financing activities 17,896 2,826 (600)
-------- --------- --------
Net increase (decrease) in cash 5,065 93 (24)
Cash - beginning of year 127 34 58
Cash - end of year $ 5,192 127 34
-------- --------- --------
-------- --------- --------
</TABLE>
F-35
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS, CONSOLIDATED STATEMENTS OF INCOME AND NOTES THEREON AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 28,469
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 43,105
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 33,022
<INVESTMENTS-CARRYING> 7,713
<INVESTMENTS-MARKET> 7,814
<LOANS> 269,191
<ALLOWANCE> (2,590)
<TOTAL-ASSETS> 439,123
<DEPOSITS> 377,572
<SHORT-TERM> 0
<LIABILITIES-OTHER> 5,439
<LONG-TERM> 1,114
0
0
<COMMON> 6,041
<OTHER-SE> 48,336
<TOTAL-LIABILITIES-AND-EQUITY> 439,123
<INTEREST-LOAN> 18,787
<INTEREST-INVEST> 1,137
<INTEREST-OTHER> 1,459
<INTEREST-TOTAL> 21,383
<INTEREST-DEPOSIT> 7,526
<INTEREST-EXPENSE> 7,809
<INTEREST-INCOME-NET> 13,574
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 13,048
<INCOME-PRETAX> 2,914
<INCOME-PRE-EXTRAORDINARY> 1,959
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,959
<EPS-PRIMARY> .47
<EPS-DILUTED> .47
<YIELD-ACTUAL> 9.84
<LOANS-NON> 322
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,616
<ALLOWANCE-OPEN> 1,364
<CHARGE-OFFS> (168)
<RECOVERIES> 48
<ALLOWANCE-CLOSE> 2,590
<ALLOWANCE-DOMESTIC> 2,590
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 311
</TABLE>
