U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED September 30, 1999
Commission File Number 000-25081
Vail Banks, Inc.
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(Exact name of small business issuer as specified in its charter)
Colorado 84-1250561
------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
108 South Frontage Road West, Vail, Colorado 81657
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (970) 476-2002
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes /X/ No / /
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
As of October 31, 1999 there were 6,040,608 shares of common stock ($1.00 par
value per share) outstanding.
<PAGE>
VAIL BANKS, INC.
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
<S> <S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheet at September 30, 1999 and December 31, 1998 3
Consolidated Statements of Income for the Three and Nine Months Ended
September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VAIL BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
ASSETS September 30, December 31,
1999 1998
------------ --------
(unaudited)
<S> <C> <C>
Cash and due from banks $ 30,064 28,469
Federal Funds sold -- 43,105
Investment securities:
Available for sale, at market value 34,811 33,022
Held to maturity, at amortized cost 5,445 7,713
Loans 323,750 269,191
Less allowance for loan losses (2,597) (2,590)
--------- --------
Net loans 321,153 266,601
--------- --------
Bank premises and equipment, net of accumulated depreciation
and amortization 33,707 31,647
Accrued interest receivable 2,733 2,425
Deferred income taxes 640 971
Intangible assets, net 24,166 22,959
Other assets 1,538 2,211
--------- --------
$ 454,257 439,123
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand, non-interest bearing $ 84,206 91,510
Demand, interest bearing 165,808 151,889
Savings 34,055 42,165
Time deposits of $100,000 and over 27,443 44,472
Time deposits under $100,000 60,863 47,536
--------- --------
372,375 377,572
Notes Payable -- 1,114
Accrued interest payable and other liabilities 23,853 5,439
--------- --------
Total liabilities 396,228 384,125
--------- --------
Minority interest 643 621
--------- --------
Stockholders' equity:
Common stock 6,041 6,041
Additional paid-in capital 46,772 46,772
Retained earnings 4,971 1,522
Accumulated other comprehensive income (398) 42
--------- --------
Total stockholders' equity 57,386 54,377
--------- --------
$ 454,257 439,123
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
<TABLE>
<CAPTION>
VAIL BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------- -------------- -------------- ------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 8,478 4,886 23,233 13,394
Interest on investment securities 574 291 1,614 815
Interest on federal funds sold 42 316 848 1,120
----------- --------- ---------- ---------
Total interest income 9,094 5,493 25,695 15,329
----------- --------- ---------- ---------
Interest expense:
Demand deposits 1,251 975 3,737 2,886
Savings deposits 265 105 907 302
Time deposits 1,085 885 3,133 2,252
Notes payable -- 28 14 83
Mandatorily convertible debentures -- 37 -- 114
Interest on federal funds purchased
and other borrowed funds 27 11 27 26
----------- --------- ---------- ---------
Total interest expense 2,628 2,041 7,818 5,663
----------- --------- ---------- ---------
Net interest income 6,466 3,452 17,877 9,666
Provision for loan losses 150 -- 230 --
----------- --------- ---------- ---------
Net interest income after provision
for loan losses 6,316 3,452 17,647 9,666
Other income:
Service charges on deposit accounts 640 367 1,788 973
Other income 254 234 732 687
----------- --------- ---------- ---------
894 601 2,520 1,660
Other expenses:
Salaries and employee benefits 2,476 1,718 7,488 4,922
Occupancy expense 456 429 1,358 1,167
Furniture and equipment expense 398 249 1,297 824
Amortization of intangible assets 253 74 728 164
Other operating expenses 1,253 788 3,698 2,174
----------- --------- ---------- ---------
4,836 3,258 14,569 9,251
----------- --------- ---------- ---------
Income before income taxes 2,374 795 5,598 2,075
Income tax expense 894 285 2,149 730
----------- --------- ---------- ---------
Net income $ 1,480 510 3,449 1,345
=========== ========= ========== =========
Unrealized gain (loss) on available for sale securities (78) 56 (440) 55
----------- --------- ---------- ---------
Comprehensive income $ 1,402 566 3,009 1,400
=========== ========= ========== =========
Net income $ 1,480 510 3,449 1,345
Preferred stock dividends -- 59 -- 177
----------- --------- ---------- ---------
Net income available to common stockholders $ 1,480 451 3,449 1,168
=========== ========= ========== =========
Weighted average common shares 6,040,608 2,650,203 6,040,608 2,408,616
=========== ========= ========== =========
Net income per common share (basic) $ 0.25 0.17 0.57 0.48
=========== ========= ========== =========
Net income per common share (diluted) $ 0.24 0.16 0.57 0.47
=========== ========= ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------------------
1999 1998
-------------- ---------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,449 1,345
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Amortization of intangible assets 728 164
Depreciation and amortization 1,624 978
Provision for loan losses 230 ---
Net amortization of premiums (accretion of discounts) on
investment securities 123 (14)
Deferred income tax expense 331 138
Changes in operating assets and liabilities:
Increase in accrued interest receivable (308) (113)
Increase in intangible and other assets (1,259) (6,315)
Decrease in accrued interest payable and other liabilities (2,504) (2,933)
---------------------------------
Net cash provided (used) by operating activities 2,414 (6,750)
---------------------------------
Cash flows from investing activities:
Net decrease in federal funds sold 43,105 3,163
Purchase of investment securities available for sale (16,895) (3,675)
Proceeds from maturities of investment securities held to maturity 2,230 2,089
Proceeds from maturities of investment securities available for sale 14,442 1,524
Net increase in loans (54,782) (29,360)
Purchase of bank premises and equipment (3,683) (4,148)
---------------------------------
Net cash used by investing activities (15,583) (30,407)
---------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits (5,197) 31,232
Net increase in federal funds purchased 21,075 927
Proceeds from issuance of common stock --- 5,714
Dividends paid --- (158)
Repayments of notes payable (1,114) (150)
---------------------------------
Net cash provided by financing activities 14,764 37,565
---------------------------------
Net increase in cash and due from banks 1,595 408
Cash and due from banks at beginning of period 28,469 16,680
=================================
Cash and due from banks at end of period $ 30,064 17,088
=================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense $ 8,050 5,604
=================================
Income taxes $ 1,460 52
=================================
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
Vail Banks, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
As of September 30, 1999
(1) Organization and Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of Vail Banks, Inc. (VBI or the Company) and its wholly owned
subsidiary, WestStar Bank (WestStar). 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 "Vail Banks."
All significant intercompany accounts and transactions have been eliminated in
consolidation.
The accompanying unaudited consolidated financial statements, which are for
interim periods, do not include all disclosures provided in the consolidated
financial statements as of December 31, 1998. These interim consolidated
financial statements and the notes thereto should be read in conjunction with
VBI's Annual Report on Form 10-KSB as of and for the year ended December 31,
1998.
In the opinion of management all adjustments necessary, consisting of only
normal recurring items, have been included for a fair presentation of the
accompanying consolidated financial statements. Operating results for the three
and nine months ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the full year.
(2) Provision and Allowance for Loan Losses
Vail Banks' 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 estimate of possible loan losses from these
procedures and historical experiences. These estimates involve judgements 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 Vail Banks' allowance for loan losses. Such agencies may
require Vail Banks to record additional provisions for potential losses based
upon their evaluation of information available at the time of their examination.
Vail Banks provides for loan losses by a charge to current year income based on
the character of the loan portfolio, current economic conditions and such
factors as, in management's best judgement, deserve current recognition in
estimating loan losses. In addition, recoveries realized on loans previously
charged off are credited to the allowance for loan losses.
(3) Net Income Per Common Share
In March 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (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 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.
(4) Comprehensive Income
Vail Banks adopted SFAS No. 130, Reporting Comprehensive Income (SFAS 130),
effective January 1, 1998. SFAS 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
balance sheet.
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<PAGE>
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The only component of comprehensive income
consists of net unrealized holding gains (losses) on securities, net of related
tax effects.
(5) Operating Segments
Vail Banks adopted SFAS No. 131, Disclosures About Segments of an Enterprise and
Related Information (SFAS 131) effective January 1, 1998. This statement
establishes standards for reporting information about segments in annual and
interim financial statements. SFAS 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 131 therefore has no
impact on its consolidated financial statements.
(6) Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is effective for years beginning after
June 15, 2000. Vail Banks has not engaged in the use of derivatives and does not
conduct hedging activities; thus 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.
(7) Investment Securities
Vail Banks accounts for investment securities according to SFAS 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.
(8) 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.
(9) Merger of Subsidiary Banks
In July 1999, the Division of Banking of the State of Colorado and the Federal
Reserve Bank of Kansas City approved the application for the merger of WestStar
Bank and VBI's other subsidiary banks, Western Colorado Bank and Bank of
Telluride. The mergers closed August 6, 1999, with WestStar Bank as the
surviving entity. The merger was accounted for at historical cost.
(10) Acquisitions
On November 8, 1999, WestStar Bank entered into an agreement to acquire First
Western Mortgage Services, Inc., a Colorado corporation, for consideration that
includes cash, Vail Banks common stock, and installment notes. Subject to
certain regulatory approvals and customary conditions to closing, the sale is
expected to close in the first quarter of 2000 or shortly thereafter.
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
BASIS OF PRESENTATION
The following discussion and analysis provides information regarding Vail
Banks' financial condition as of September 30, 1999 and its historical results
of operations for the three and nine months ended September 30, 1999 in
comparison to the three and nine months ended September 30, 1998. The following
discussion should be read in conjunction with the consolidated financial
statements and related notes included elsewhere in this Quarterly Report on Form
10-QSB.
The following acquisitions occurred which impacted financial results
during the time period between September 30, 1998 and September 30, 1999:
Effective July 31, 1998, Vail Banks consummated the merger with
Independent Bankshares, Inc. ("Independent") 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.
Effective December 15, 1998, Vail Banks consummated the merger with
Telluride Bancorp Ltd. ("Telluride") by paying cash of $13.3 million and issuing
908,913 shares of Vail Banks Common Stock. The cash consideration was paid using
a portion of the proceeds from the IPO. 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.
Effective May 21, 1999, WestStar Bank consummated the purchase of certain
assets and the assumption of certain liabilities from the Glenwood Springs,
Colorado branch of World Savings Bank, FSB, Oakland, California ("World").
Approximately $36.1 million in deposits were acquired in the purchase.
The mergers with Independent and Telluride, and the purchase of assets of
World have been accounted for under the purchase method of accounting, and
accordingly, the purchase price for each has been allocated to the assets
acquired and the liabilities assumed based on their estimated fair values. The
consolidated statements of income include the operations of Independent,
Telluride, and World since the date of the respective transactions. The excess
of purchase price over net assets acquired has been recorded as an intangible
asset, which is being amortized over 25 years. With respect to the merger with
Independent, 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. With respect to the merger with Telluride, the effect on
results of operations for the year 1998 was generally minimal as the transaction
closed with only 16 days remaining in 1998. However, 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. With respect to
the purchase of assets of World, the effect on results of operations for the
first five months of 1999, had the purchase transaction occurred at the
beginning of the year, would not have been material.
OVERVIEW
Net income available to common shareholders was $3,449,000 for the nine
months ended September 30, 1999 up from $1,168,000 for the nine months ended
September 30, 1998, an increase of 195%. Net income available to common
shareholders was $1,480,000 for the quarter ended September 30, 1999 compared
with $1,253,000 for the quarter ended June 30, 1999 and $451,000 for the quarter
ended September 30, 1998, increases of 18% and 228%, respectively.
Net income per common share (diluted) for the nine months ended September
30, 1999 was $0.57 compared to $0.47 for the nine months ended September 30,
1998, an increase of 20%. Net income per common share (diluted) was $0.24 for
the quarter ended September 30, 1999 compared with $0.21 for the quarter ended
June 30, 1999 and $0.16 for the quarter ended September 30, 1998, an increase of
14% and 50%, respectively.
On an operating basis, operating income (defined as net income plus
amortization) totaled $4,177,000 ($0.69 per common share, diluted) and
$1,509,000 ($0.49 per common share, diluted) for the nine months ended September
30, 1999 and September 30, 1998, respectively. Operating income for the quarter
ended September 30, 1999 was $1,733,000 ($0.29 per common share, diluted)
compared with $1,494,000 for the quarter ended June 30, 1999 ($0.25 per common
share, diluted) and $584,000 for the quarter ended September 30, 1998 ($0.17 per
common share, diluted), an increase of 16% and 197%, respectively.
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<PAGE>
Operating income to average tangible assets was 1.0% and 0.6% for the
nine months ending September 30, 1999 and September 30, 1998, respectively.
Operating income to average tangible assets was 0.4% for the quarter ended
September 30, 1999 compared with 0.4% for the quarter ended June 30, 1999 and
0.2% for the quarter ended September 30, 1998.
Net income available to common shareholders to average common
shareholders' equity was 6.2% for the nine months ended September 30, 1999
compared to 6.7% for the nine months ended September 30, 1998. Net income
available to common shareholders to average common shareholders' equity was 2.6%
for the quarter ended September 30, 1999, versus 2.3% for the quarter ended June
30, 1999 and 2.2% for the quarter ended September 30, 1998.
Cash earnings (defined as net income plus depreciation and amortization)
was $5,801,000, or $0.95 per common share (diluted), for the nine months ended
September 30, 1999 versus $2,487,000, or $0.80 per common share (diluted), for
the nine months ended September 30, 1998. Cash earnings for the quarter ended
September 30, 1999 was $2,297,000, or $0.38 per common share (diluted), compared
to $2,058,000, or $0.34 per common share (diluted), for the quarter ended June
30, 1999, and $929,000, or $0.28 per common share (diluted), for the quarter
ended September 30, 1998.
Cash earnings to average shareholders' equity was 10.4% for the nine
months ended September, 1999 and 12.2% for the nine months ended September 30,
1998. Cash earnings to average shareholders' equity was 4.0% for the quarter
ended September 30, 1999 compared to 3.7% for the quarter ended June 30, 1999,
and 3.9% for the quarter ended September 30, 1998.
CONSOLIDATED CONDENSED BALANCE SHEETS
The Company's total assets increased by $15,134,000, or 3%, to
$454,257,000 as of September 30, 1999, from $439,123,000 as of December 31, 1998
and by $186,861,000, or 70%, from $267,396,000 as of September 30, 1998.
A healthy Colorado economy continues to fuel the Company's strong loan
growth, particularly in its Western Slope markets. During the nine months ended
September 30, 1999, the loan portfolio increased by $54,559,000, or 20%, from
$269,191,000 as of December 31, 1998 to $323,750,000, and by $139,344,000, or
76%, from $184,406,000 as of September 30, 1998.
Investment securities were $40,256,000 as of September 30, 1999 compared
to $40,735,000 as of December 31, 1998 (a decrease of 1%) and $19,848,000 as of
September 30, 1998 (an increase of 103%).
Deposits decreased by $5,197,000, or 1%, to $372,375,000 as of September
30, 1999, from $377,572,000 as of December 31, 1998 and increased by
$134,928,000, or 57%, from $237,447,000 as of September 30, 1998. The decrease
in deposits experienced in the first nine months of 1999 was largely
attributable to seasonal factors and management's efforts to reduce higher cost
certificates of deposit.
During 1999, noninterest-bearing deposits decreased by $7,304,000, while
interest-bearing deposits increased by $2,107,000. Noninterest-bearing demand
deposits comprised 23% of total deposits as of September 30, 1999 and 24% of
total deposits as of December 31, 1998, compared to 23% as of September 30,
1998.
Federal funds sold decreased by $43,105,000 in the nine-month period
ending September 30, 1999, while federal funds purchased increased to
$21,075,000, which are included in the accrued interest payable and other
liabilities category on the balance sheet. The decrease in federal funds sold
and the subsequent increase in federal funds purchased is a result of funding
growth in the loan portfolio.
RESULTS OF OPERATIONS
NET INTEREST INCOME. Net interest income was $17,877,000 for the nine
months ended September 30, 1999, an increase of $8,211,000, or 85%, from the
nine-month period ended September 30, 1998. Net interest income was $6,466,000
for the quarter ended September 30, 1999, an increase of $333,000 or 5% compared
with the quarter ended June 30, 1999 and an increase of $3,014,000 or 87%
compared with the quarter ended September 30, 1998. The net interest margin was
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<PAGE>
6.8% for the nine months ended September 30, 1999, compared to 6.3% for the nine
months ended September 30, 1998, and 7.2% for the quarter ended September 30,
1999, up from 7.0% for the quarter ended June 30, 1999 and up from 6.3% for the
quarter ended September 30, 1998. These increases are due primarily to the yield
on an increasing loan portfolio coupled with decreases in the level of higher
cost deposits. Additionally, growth of the Company's average earning assets also
supported the margin increase. Average earning assets increased 66%, or
$141,670,000, to $357,657,000 as of September 30, 1999, from $215,987,000 as of
September 30, 1998.
PROVISION AND ALLOWANCE FOR LOAN LOSSES. Provision expense for the nine
months ending September 30, 1999 totaled $230,000 compared to none recorded in
the nine months ending September 30, 1998. Although down slightly from the
$2,590,000 level as of December 31, 1998, the allowance for loan losses
increased during the third quarter ended September 30, 1999 by $85,000 to
$2,597,000, or 0.80% of loans, from $2,512,000 as of June 30, 1999. The increase
since June 30, 1999 is intended to support the normal potential loss content in
the growth of the Company's loan portfolio. Key indicators of asset quality have
remained positive, while average level of outstanding loans have increased to
$311,778,000 for the quarter ending September 30, 1999 from $286,035,000 for the
quarter ending June 30, 1999.
The allowance for loan and lease losses represents management's
recognition of the risks of extending credit and its evaluation of the potential
loss content of the loan and lease portfolio. The Company maintains an allowance
for loan losses based upon, among other things, such factors as the amount of
problem loans and leases, general economic conditions, historical loss
experience, and the evaluation of the underlying collateral including holding
and disposal costs. Specific allowances are provided for individual loans when
ultimate collection is considered questionable by management. Management
actively monitors the Company's asset quality and will charge off loans against
the allowance for loan losses when appropriate and will provide specific loss
allowances when necessary. Although management believes it uses the best
information available to make determinations with respect to the allowance for
loan losses, future adjustments may be necessary if economic conditions differ
from the assumptions used in making the initial determinations. The following
table presents, for the period indicated, an analysis of the allowance for loan
and lease losses and other related data.
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES ANALYSIS Nine months ended
September 30,
--------------------------------
1999 1998
------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Average total loans $ 288,768 160,714
============= ==============
Total loans at end of period $ 323,750 184,406
============= ==============
Allowance at beginning of period $ 2,590 1,364
Charge-offs (291) (86)
Recoveries 68 27
Provision for loan losses 230 ---
Allowance - merger --- 192
------------- --------------
Allowance at end of period $ 2,597 1,497
============= ==============
Net charge-offs to average total loans 0.08% 0.04%
Allowance to total loans at end of period 0.80% 0.81%
</TABLE>
NONINTEREST INCOME. Total noninterest income increased by $860,000, or
52%, to $2,520,000 for the nine months ended September 30, 1999, from $1,660,000
for the nine months ended September 30, 1998. Total noninterest income increased
by $54,000, or 6%, to $894,000 for the three months ended September 30, 1999,
from $840,000 for the three months ended June 30, 1999 and by $293,000, or 49%,
from $601,000 for the three months ended September 30, 1998. These increases
were primarily attributable to increases in deposit volumes and service charges.
NONINTEREST EXPENSES. Total noninterest expense, before amortization
expense, increased by $4,754,000, or 52%, to $13,841,000 for the nine months
ended September 30, 1999, from $9,087,000 for the nine months ended September
30, 1998. Noninterest expense, before amortization expense, decreased by
$51,000, or 1%, to $4,583,000 for the three months ended September 30, 1999,
from $4,634,000 for the three months ended June 30, 1999 and increased by
$1,399,000, or 44%, from $3,184,000 for the three months ended September 30,
1998.
The efficiency ratio, before amortization expense, decreased to 68% for
the nine months ended September 30, 1999 from 80% for the nine months ended
September 30, 1998. The efficiency ratio, before amortization expense, decreased
to 62% for quarter ended September 30, 1999 from 66% for the quarter ended June
30, 1999 and 79% for the quarter ended September 30, 1998. The efficiency ratio,
including amortization expense, decreased to 71% for the nine months ended
September 30, 1999 from 82% for the nine months ended September 30, 1998. The
efficiency ratio, including amortization expense, decreased to 66% for quarter
ended September 30, 1999 from 70% for the quarter ended June 30, 1999 and 80%
for the quarter ended September 30, 1998.
The increase in noninterest expense from prior year periods is primarily
attributed to recurring personnel, occupancy and other expenses associated with
internal growth and acquisitions made by the Company. Such expenses have been
necessary to accommodate the Company's overall growth. Recent improvements in
the efficiency ratio have been achieved through management's concerted effort to
consolidate operating activities of branches and recently acquired banks.
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.
NONPERFORMING ASSETS. The Company's nonperforming assets consist of
nonaccrual loans, restructured loans, loans past due over 90 days and other real
estate owned. Nonperforming assets were $2,100,000 as of September 30, 1999,
(0.46% of total assets) compared with $1,788,000 as of December 31, 1998, (0.41%
of total assets) and $296,000 as of September 30, 1998 (0.11% of total assets).
The following table presents information regarding nonperforming assets as of
the dates indicated:
<TABLE>
<CAPTION>
NONPERFORMING ASSETS September 30,
--------------------------------
1999 1998
------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Nonaccrual loans $ 1,860 78
Other loans 90 days past due 5 39
Other real estate 235 179
-------------- --------------
Total nonperforming assets $ 2,100 296
============== ==============
Nonaccrual and other loans 90 days past due to total loans 0.58% 0.06%
Nonperforming assets to total loans plus other real estate 0.65% 0.16%
Nonperforming assets to total assets 0.46% 0.11%
</TABLE>
The increase in nonperforming assets is attributable to two loans, both
of which were in Telluride's loan portfolio at the time of acquisition.
-11-
<PAGE>
CAPITAL RESOURCES
Stockholders' equity as of September 30, 1999 increased $32.2 million, or
128%, to $57.4 million from $25.2 million as of September 30, 1998. This
increase was due to the Common Stock issued in connection with the merger with
Independent and Telluride, the retention of current period earnings, and the
stock issued in the IPO. Stockholders' equity was reduced by $467,000 in
December 1998, due to a one-time early conversion payment upon the required
conversion of preferred stock to common stock in connection with the IPO.
Vail Banks currently maintains risk-weighted capital and leverage (Tier 1
capital to average total assets) ratios in excess of the minimum for a "well
capitalized" designation. The company's Tier 1 leverage ratio increased to 8.2%
as of September 30, 1999, from 7.7% as of December 31, 1998 and 6.2% as of
September 30, 1998, while the total risk-based capital ratio decreased to 11.6%
as of September 30, 1999 from 12.3% as of December 31, 1998, but was up from
9.9% as of September 30, 1998. The decrease in the total risk-based capital
ratio experienced in 1999 was largely attributable to a shift from federal funds
to loans, which are assigned a higher risk weight.
LIQUIDITY
The Company's liquidity management objective is to ensure its ability
to satisfy the cash requirements of depositors and borrowers and allow the
Company to meet its own cash needs. Historically, the Company's primary source
of funds has been customer deposits. Scheduled loan repayments are a relatively
stable source of funds. Deposit inflows and unscheduled loan repayments, which
are influenced by fluctuations in the general level of interest rates, returns
available on other investments, competition, economic conditions and other
factors, are relatively unstable. Company borrowing may be used on a short-term
basis to compensate for reductions in other sources of funds (such as deposit
inflows at less than projected levels). Company borrowing may also be used on a
longer-term basis to support expanded lending activities and to match the
maturity or repricing intervals of assets.
DATA PROCESSING AND YEAR 2000 READINESS
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 form 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 the both IT and non-IT systems. Its inventory of such systems is
complete, and Vail Banks believes its IT systems are year 2000 ready. 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 system is year 2000
ready, and Vail Banks continues the validation process. Vail Banks' inventory of
the year 2000 readiness of its non-IT systems is also complete, and no mission
critical systems were found deficient.
Vail Banks has completed the remediation or replacement of its systems.
Testing has occurred in 1998 and further testing will occur during the remainder
of 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.
-12-
<PAGE>
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 the $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 $200,000, all of which as been incurred to
date.
RISK 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. All
major third party providers are year 2000 compliant at this time. 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 ready.
Vail Banks has embarked upon a program to educate its depositors and
borrowers regarding year 2000 issues. Vail Banks' educational programs focus on
emphasizing sound financial preparations for 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 14 days without
significant losses. The Company believes any mission critical systems could be
recovered and operating within approximately seven days.
In addition, Vail Bank's 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 transmission, 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.
FORWARD LOOKING STATEMENTS
The discussion in this report contains forward-looking statements
including, without limitation, statements relating to the Company's Year 2000
compliance, which are made pursuant to the safe harbor provision of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that the
expectations reflected in the forward-looking statements are reasonable, it can
give no assurance that such expectations will be correct or realized. The
forward-looking statements involve risks and uncertainties that affect the
Company's operations, financial performance and other factors and discussed in
the Company's filings with the Securities and Exchange Commission. These risks
include the impact of economic conditions and interest rates, loan losses, risks
related to the execution of the Company's growth strategy, the possible loss of
key personnel, factors that could affect the Company's ability to complete in
its trade areas, changes in regulations and government policies and other
factors discussed in the Company's filing with the Securities and Exchange
Commission. In particular, risks related to the Company's year 2000 compliance
include those discussed under the heading "Data Processing Systems and Year 2000
compliance" in this report.
-13-
<PAGE>
PART II OTHER INFORMATION
ITEM 6. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) Exhibits
--------
The following exhibits are required to be filed with this Report on
10-QSB by Item 601 of Regulation S-B.
Exhibit
No. Description of Exhibit
------- ----------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None
-14-
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report on Form 10-QSB to be signed on its
behalf by the undersigned, thereunto duly authorized.
VAIL BANKS, INC.
(Registrant)
Date: November 15, 1999 /S/ LISA M. DILLON
Lisa M. Dillon,
Title: President and Chief
Executive Officer
Date: November 15, 1999 /S/ KIRK S. COLBURN
Kirk S. Colburn,
Title: Secretary
(principal financial officer)
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001035770
<NAME> VAIL BANKS, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 30,019
<INT-BEARING-DEPOSITS> 45
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34,811
<INVESTMENTS-CARRYING> 5,445
<INVESTMENTS-MARKET> 5,418
<LOANS> 323,750
<ALLOWANCE> 2,597
<TOTAL-ASSETS> 454,257
<DEPOSITS> 372,375
<SHORT-TERM> 21,075
<LIABILITIES-OTHER> 3,421
<LONG-TERM> 0
0
0
<COMMON> 6,041
<OTHER-SE> 51,345
<TOTAL-LIABILITIES-AND-EQUITY> 454,257
<INTEREST-LOAN> 23,233
<INTEREST-INVEST> 1,614
<INTEREST-OTHER> 848
<INTEREST-TOTAL> 25,695
<INTEREST-DEPOSIT> 7,777
<INTEREST-EXPENSE> 7,818
<INTEREST-INCOME-NET> 17,877
<LOAN-LOSSES> 230
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 14,569
<INCOME-PRETAX> 5,598
<INCOME-PRE-EXTRAORDINARY> 3,449
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,449
<EPS-BASIC> 0.57
<EPS-DILUTED> 0.57
<YIELD-ACTUAL> 6.75
<LOANS-NON> 1,860
<LOANS-PAST> 5
<LOANS-TROUBLED> 49
<LOANS-PROBLEM> 3,889
<ALLOWANCE-OPEN> 2,590
<CHARGE-OFFS> 291
<RECOVERIES> 68
<ALLOWANCE-CLOSE> 2,597
<ALLOWANCE-DOMESTIC> 2,597
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,659
</TABLE>
