<PAGE>
As filed with the Securities and Exchange Commission on March 17, 1999
Registration No. 333-
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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VAIL BANKS, INC.
(Name of Small Business Issuer in Its Charter)
6712 84-1250561
Colorado (Primary Standard (I.R.S. Employer
(State or Other Industrial Identification Number)
Jurisdiction of Classification Code
Incorporation or Number)
Organization)
108 S. Frontage Road West
Suite 101
Vail, Colorado 81657
(970) 476-2002
(Address and Telephone Number of Principal Executive Offices)
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E.B. Chester, Jr.
Chairman
108 S. Frontage Road West
Suite 101
Vail, Colorado 81657
(970) 476-2002
(Name, Address and Telephone Number of Agent for Service)
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Copies to:
Jan M. Davidson
Kilpatrick Stockton LLP
1100 Peachtree Street, Suite 2800
Atlanta, Georgia 30309
(404) 815-6500
(404) 815-6555 (fax)
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434
check the following box. [_]
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<TABLE>
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<CAPTION>
Proposed Proposed
Title of each Class of Maximum Maximum Amount of
Securities to be Amount to be Offering Price Aggregate Registration
Registered Registered Per Unit(1) Offering Price Fee
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<S> <C> <C> <C> <C>
Common Stock, $1.00 par
value................. 1,528,860 $12.25 $18,728,535 $5,206.53
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</TABLE>
(1) Determined in accordance with Rule 457(c) under the Securities Act of 1933,
as amended, the average of the high and low prices on the Nasdaq Stock
Market on March 10, 1999.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
1,528,860 Shares
Vail Banks, Inc.
Common Stock
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This Prospectus covers the resale from time to time by existing shareholders
of an aggregate of 1,528,860 shares of Common Stock of Vail Banks, Inc. The
Prospectus also covers the resale of such shares by certain transferees of
those shareholders. Vail Banks, Inc. will not receive any of the proceeds of
the sale of these shares. The shares are quoted on The Nasdaq Stock Market
under the symbol "VAIL." The selling shareholders will pay the fees and
expenses of their counsel and commissions or discounts of underwriters, dealers
or agents in connection with the sale of the shares. All other expenses of this
offering will be paid by Vail Banks, Inc.
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Consider carefully the risk factors beginning on page 6 of this Prospectus.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this Prospectus. Any representation to the contrary is
a criminal offense.
These securities are not deposits and will not be insured by the Federal
Deposit Insurance Corporation, the Bank Insurance Fund, any other government
agency, or otherwise.
March , 1999
<PAGE>
No dealer, salesperson or other person has been authorized in connection with
this offer to give any information other than that contained in this
Prospectus. Neither the delivery of this Prospectus nor any sale made under it
implies that there has been no change in the affairs of Vail Banks, Inc. since
the date of this Prospectus. It also does not imply that the information in
this Prospectus is correct as of any time after the date of this Prospectus.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any of the shares by anyone in any jurisdiction in which such
offer or solicitation is not authorized or is unlawful. It also does not
constitute an offer or solicitation when the person making such offer or
solicitation is not qualified to do so.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
- ---- ----
<S> <C>
Summary.................................................................. 3
Risk Factors............................................................. 6
Risks Involved in Merger and Acquisition Strategy....................... 6
Need for Additional Financing........................................... 6
No Present Intention to Pay Dividends; Restriction on Ability to Pay
Dividends.............................................................. 7
Local Economic Conditions............................................... 7
Dependence on Key Personnel............................................. 7
Certain Anti-Takeover Provisions........................................ 8
Government Regulation................................................... 8
Competition............................................................. 8
Control by Management................................................... 9
No Guarantee of Liquid Market........................................... 9
Shares Eligible for Future Sale......................................... 9
Possible Volatility of Stock Price...................................... 9
Interest Rate Risk...................................................... 9
Year 2000 Compliance.................................................... 10
Recent Mergers........................................................... 11
Unaudited Pro Forma Combined Condensed Financial Statements.............. 13
Price Range of Common Stock.............................................. 20
Dividend Policy.......................................................... 20
Selling Shareholders..................................................... 21
Business................................................................. 24
Selected Financial Data.................................................. 31
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 33
Management............................................................... 55
Principal Shareholders................................................... 59
Certain Transactions..................................................... 60
Shares Eligible for Future Sale.......................................... 62
Supervision and Regulation............................................... 63
Description of Capital Stock............................................. 66
Legal Matters............................................................ 68
Experts.................................................................. 68
Additional Information................................................... 69
Index to Financial Statements............................................ 70
</TABLE>
2
<PAGE>
PROSPECTUS SUMMARY
You should read the financial statements and notes found elsewhere in this
Prospectus together with the following summary.
The Company
General
Vail Banks, Inc. ("Vail Banks") is a bank holding company headquartered in
Vail, Colorado. It had total assets of approximately $267 million at September
30, 1998. On that date it had one banking subsidiary, WestStar Bank
("WestStar"). Vail Banks and WestStar merged on July 31, 1998 with Independent
Bancshares, Inc. ("Independent") and its banking subsidiary, Glenwood
Independent Bank ("Glenwood"). Vail Banks merged on December 15, 1998 with
Telluride Bancorp, Ltd. ("Telluride"). After the merger with Telluride, Vail
Banks has two additional banking subsidiaries, Bank of Telluride and Western
Colorado Bank. Giving effect to the two mergers, Vail Banks had assets of $408
million at September 30, 1998.
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. Vail Banks currently
has offices in the region of Colorado locally referred to as the "Western
Slope" and in Denver. The Western Slope region includes:
. 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).
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 its infrastructure by:
. expanding its capabilities in computer technology;
. entering emerging growth markets by building and staffing new facilities;
and
. centralizing certain administrative, processing, accounting and other
operations functions into regional facilities.
3
<PAGE>
This investment in infrastructure has adversely affected net income since
1994. But management believes that the desired infrastructure is now
substantially in place (1) to absorb growth in existing markets and (2) 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
addition of Bank of Telluride (founded in 1969), Western Colorado Bank (founded
in 1950) and Glenwood (founded in 1955) expands Vail Banks' 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 Directors of
Vail Banks have been associated with those banks for more than ten years. Vail
Banks anticipates that Bank of Telluride, Western Colorado Bank and WestStar
(consolidated with Glenwood) will continue to operate as subsidiaries for the
immediate future. As local acceptance of WestStar as a participant in the new
markets increases and economically beneficial integration plans are developed,
these subsidiaries may be consolidated with WestStar.
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, de novo establishment of retail offices and mergers and
acquisitions. For example, Vail Banks' loan portfolio, excluding acquisitions,
increased from $78.7 million to $137.4 million from December 31, 1995 to
September 30, 1998, a compound average annual growth rate of 22.3%. During the
same period, Vail Banks opened six de novo branches. The merger with Telluride
represented the third acquisition completed by Vail Banks since January 1,
1997.
Vail Banks' principal executive offices are located at 108 S. Frontage Road
West, Suite 101, Vail, Colorado 81657, where its telephone number is (970) 476-
2002.
4
<PAGE>
SUMMARY FINANCIAL DATA
The summary historical data set forth below should be read in conjunction
with "Recent Mergers," "Selected Financial Data," "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 Prospectus.
<TABLE>
<CAPTION>
As of or for the
nine months
ended September 30, As of or for the year ended December 31,
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1998 1997 1997 1996 1995 1994 1993
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(Dollars in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Interest income......... $ 15,329 $ 9,989 $ 14,022 $ 11,655 $ 8,582 $ 5,041 $ 4,417
Interest expense(1)..... 5,663 3,243 4,514 4,210 3,045 1,452 1,256
--------- --------- --------- --------- --------- --------- ---------
Net interest income.... 9,666 6,746 9,508 7,445 5,537 3,589 3,161
Provision for loan loss-
es..................... 0 0 232 154 40 (125) (200)
--------- --------- --------- --------- --------- --------- ---------
Net interest income af-
ter provision for loan
losses................ 9,666 6,746 9,276 7,291 5,497 3,714 3,361
Noninterest income...... 1,660 908 1,273 1,071 911 733 1,052
Noninterest expenses.... 9,251 6,634 9,787 7,740 5,621 3,553 2,989
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Income before income
taxes................. 2,075 1,020 762 622 787 894 1,424
Income tax expense...... 730 380 288 257 266 377 271
--------- --------- --------- --------- --------- --------- ---------
Net income............. 1,345 640 474 365 521 517 1,153
Income tax benefit of
net operating loss
carryforwards.......... 687 358 274 242 264 368 271
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Total increase in
shareholders' equity
after benefit of loss
carryforwards.......... $ 2,032 $ 998 $ 748 $ 607 $ 785 $ 885 $ 1,424
========= ========= ========= ========= ========= ========= =========
Common Share Data(2):
Earnings per common
share (basic).......... $ 0.49 $ 0.31 $ 0.23 $ 0.21 $ 0.30 $ 0.39 $ 0.87
Earnings per share (di-
luted)................. 0.46 0.30 0.21 0.20 0.28 0.37 0.82
Book value per common
share.................. 7.35 6.01 5.91 5.29 5.16 3.95 3.75
Tangible book value per
common share........... 4.41 5.30 4.19 4.35 4.14 3.95 3.75
Cash dividends per com-
mon share.............. 0.00 0.00 0.00 0.22 0.34 0.51 0.00
Weighted average common
shares outstanding (ba-
sic)................... 2,408,616 2,049,685 2,100,423 1,778,373 1,763,021 1,320,390 1,306,930
Weighted average common
shares outstanding (di-
luted)................. 3,143,254 2,141,743 2,220,711 1,870,431 1,855,079 1,412,448 1,398,988
End of period common
shares outstanding..... 2,809,130 2,250,980 2,250,980 1,782,510 1,766,050 1,320,390 1,306,930
Balance Sheet Data (end
of period):
Total assets............ $ 267,396 $ 159,545 $ 231,191 $ 157,194 $ 136,931 $ 82,366 $ 75,165
Investment securities... 19,848 14,720 19,732 18,843 22,094 28,297 29,606
Net loans............... 182,909 116,077 153,549 105,963 78,067 31,896 28,467
Allowance for loan loss-
es..................... 1,497 799 1,364 823 620 361 353
Deposits................ 237,447 142,571 206,215 144,350 125,564 75,028 68,112
Note payable............ 1,050 1,250 1,200 1,400 1,600 1,800 1,950
Shareholders' equity.... 25,202 13,529 17,868 9,429 9,121 5,222 4,904
Performance Ratios:
Return on average as-
sets(3)................ 0.72% 0.55% 0.29% 0.26% 0.49% 0.70% 1.66%
Return on average share-
holders' equity(3)..... 8.82 7.17 3.71 3.94 5.78 10.21 18.52
Net interest margin(3).. 6.31 6.63 6.80 6.14 6.09 4.87 4.55
Operating efficiency ra-
tio(4)................. 81.68 85.37 89.54 84.56 83.84 82.21 70.95
Shareholders' equity to
total assets........... 9.42 8.48 7.73 6.00 6.66 6.34 6.52
Loan to deposit ratio... 77.03 81.42 74.46 73.41 62.17 42.51 41.79
Asset Quality Ratios
(end of period):
Nonperforming assets to
total assets(5)........ 0.11% 0.03% 0.09% 0.04% 0.35% 0.03% 0.58%
Nonperforming loans to
total loans(6)......... 0.06 0.04 0.14 0.06 0.45 0.00 0.18
Net loan charge-offs
(recoveries) to average
total loans............ 0.04 0.02 0.03 (0.05) (0.07) (0.43) (0.79)
Allowance for loan
losses to total loans.. 0.81 0.68 0.88 0.77 0.79 1.12 1.22
Allowance for loan
losses to nonperforming
loans.................. 1,279.49 1,630.61 637.38 1,266.15 174.16 NM* 666.04
Capital Ratios (end of
period)(7):
Leverage ratio.......... 6.18% 7.91% 7.33% 6.23% 7.22% 9.11% 9.70%
Tier 1 risk-based capi-
tal ratio.............. 8.26 10.37 8.26 8.59 9.93 17.22 20.51
Total risk-based capital
ratio.................. 9.87 11.06 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
nonperforming loans.
(1) Includes expenses associated with Series A Preferred Stock and certain
Convertible Notes ("Mandatorily Convertible Debentures") both of which were
converted on December 7, 1998.
(2) Adjusted for the 10-for-one stock split that occurred on December 7, 1998.
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."
5
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a degree
of risk. In addition to the other information in this Prospectus, the following
risk factors should be considered carefully in evaluating an investment in the
Common Stock. This Prospectus 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. 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 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."
Need for Additional Financing
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
6
<PAGE>
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 "Dividend
Policy."
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 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. As of September 30, 1998, an
aggregate of approximately $502,000 was available for payment of dividends by
WestStar to Vail Banks under applicable restrictions. See "Supervision and
Regulation."
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."
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 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."
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.
7
<PAGE>
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. See "Description of Capital Stock--Certain
Provisions of Vail Banks' Articles of Incorporation and Bylaws."
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.
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."
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."
8
<PAGE>
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. See "Principal
Shareholders."
No Guarantee of Liquid Market
Prior to the initial public offering (the "Offering") of Vail Banks in
December 1998, there had been no public market for the shares of Common Stock.
The shares of Common Stock are quoted on The Nasdaq Stock Market under the
symbol "VAIL." Vail Banks cannot assure that an active public market will
develop or be sustained. A public trading market having the desired
characteristics of depth, liquidity and orderliness depends upon the presence
in the marketplace of willing buyers and sellers of the Common Stock at any
given time, which presence is dependent upon the individual decisions of
investors over which neither Vail Banks nor any market maker has any control.
Shares Eligible for Future Sale
Vail Banks has a total of 6,040,608 shares of Common Stock outstanding. Of
these shares, the 1,840,000 shares sold in the Offering are freely tradable
without restrictions under the Securities Act, unless acquired by affiliates.
All of the remaining shares are "restricted securities" as that term is defined
by Rule 144 promulgated under the Securities Act. 1,528,860 of such shares are
being registered for resale under the Registration Statement of which this
Prospectus is part. In addition, the restricted shares will be eligible for
sale beginning in March 1999 in compliance with Rule 144 volume and other
requirements. Shares held by a nonaffiliate for at least two years prior to
sale are freely tradeable under Rule 144(k) without compliance with the volume
and other restrictions of Rule 144. The number of outstanding shares of Common
Stock available for sale in the public market will be limited by lock-up
agreements under which Vail Banks, its executive officers, directors, the
related interests of such directors and executive officers and certain
shareholders have agreed not to sell any of their shares of Common Stock until
early April 1999 without the prior written consent of the underwriters of the
Offering. The Underwriters have indicated that generally they will consent to
the release of shares under the lock-up agreements. Vail Banks also intends to
register for issuance or resale approximately 800,000 shares of Common Stock
reserved for issuance under the Stock Incentive Plan on a registration
statement on Form S-8 approximately 30 days after the date of this Prospectus.
Although the Common Stock is quoted on The Nasdaq Stock Market, there can be
no assurance that an active trading market for the Common Stock will develop or
be sustained. Sales of substantial amounts of Common Stock in the public
market, pursuant to Rule 144, this Prospectus, or otherwise, or even the
potential of such sales, could adversely affect the prevailing market price of
the Common Stock or impair Vail Banks' ability to raise additional capital
through equity issuances. See "Management--Stock Incentive Plan" and "Shares
Eligible for Future Sale."
Possible Volatility of Stock Price
The stock market has from time to time, and particularly in recent months,
experienced price and volume volatility. These market fluctuations may be
unrelated to the operating performance of particular companies whose shares are
traded and may adversely affect the market price of the Common Stock.
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
9
<PAGE>
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 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 $190,000 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."
10
<PAGE>
RECENT MERGERS
The information contained in this Prospectus 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 as
exhibits to the Registration Statement of which this Prospectus is a part.
General
Vail Banks completed the Telluride Merger on December 15, 1998, the
Independent Merger on July 31, 1998 and the merger with Cedaredge Financial
Services, Inc. ("Cedaredge" and 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."
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. The Common Stock
issued to the former shareholders of Telluride is being registered for resale
pursuant to the registration statement of which this Prospectus is part.
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. Bank of Telluride, with assets of
approximately $79 million at September 30, 1998, engages in commercial and
consumer banking activities primarily in San Miguel County. Western Colorado
Bank, with assets of approximately $48 million at September 30, 1998, engages
in commercial and consumer banking activities primarily in Ouray and Montrose
Counties.
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. The Common Stock issued to the former
Independent stockholders is being registered for resale pursuant to the
registration statement of which this Prospectus is part.
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.
11
<PAGE>
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 $550,000 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.
12
<PAGE>
UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements set
forth the consolidated balance sheet at September 30, 1998 and the consolidated
income statements of Vail Banks for the nine month period ended September 30,
1998 and for the year ended December 31, 1997, and adjustments reflecting (1)
the Cedaredge Merger, (2) the 10-for-one Common Stock split effective on
December 7, 1998, (3) the Independent Merger, consummated in July 1998, (4) the
Telluride Merger, (5) the effects of the Offering and the application of the
proceeds thereof, and (6) the pro forma combined information following all such
transactions. The Independent Merger and the Telluride Merger were accounted
for as purchases, and the assets acquired and liabilities assumed in the
Independent Merger and the Telluride Merger were recorded at their estimated
fair values, with the excess of the respective purchase prices over the net
fair values recorded as an intangible asset. None of the pro forma income
statement information regarding Vail Banks for the year ended December 31, 1997
has been adjusted to reflect the merger of VNB Building Corp. into Vail Banks
in December 1997 which, in the opinion of Vail Banks' management, did not have
a material effect on Vail Banks from a financial viewpoint. See "Certain
Transactions." The information with respect to Vail Banks and Telluride as of
September 30, 1998 and the pro forma information are unaudited. The pro forma
balance sheet assumes that the Independent Merger and the Telluride Merger and
the Offering were consummated on the balance sheet date. The pro forma income
statements assume that the Independent Merger and the Telluride Merger and the
Offering were consummated at the beginning of the period indicated. For
purposes of the pro forma financial statements, (1) Vail Banks valued the
shares issued in the Independent Merger at $10.00 per share, the same per share
price as the shares issued in the $2.0 million private offering consummated in
July 1998, and (2) Vail Banks valued the shares to be issued in the Telluride
Merger at the Offering price, $12.00 per share. The pro forma financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto appearing elsewhere in this Prospectus. The pro
forma combined balance sheet and statements of income are not necessarily
indicative of the combined financial position at consummation of the Telluride
Merger or the results of operation following consummation of the Independent
Merger, the Telluride Merger and the Offering.
13
<PAGE>
VAIL BANKS, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
September 30, 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
Adjustments (A)
Vail ------------------ Pro Forma
Banks Telluride Debit Credit Combined
--------------------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks..... $17,088 $ 6,536 $17,589(D) $13,878(B) $25,792
1,050(D)
493(C)
Federal funds sold.......... 13,900 9,245 23,145
Investment securities....... 19,848 23,530 43,378
Loans....................... 184,406 76,973 261,379
Less allowance for loan
losses..................... (1,497) (831) (2,328)
--------- -------- ------- ------- --------
182,909 76,142 259,051
Bank premises and
equipment.................. 21,006 9,137 51(B) 30,194
Accrued interest
receivable................. 1,490 965 2,455
Intangible assets........... 8,246 -- 14,211(B) 22,457
Investment in subsidiary.... -- -- 25,222(B) 25,222(B) --
Other assets................ 2,909 808 3,717
--------- -------- ------- ------- --------
$267,396 $126,363 $57,073 $40,643 $410,189
========= ======== ======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits.................. $237,447 $113,312 $350,759
Note payable by Vail
Banks.................... 1,050 -- $1,050(D) --
Federal funds purchased
and repurchased
agreements............... 1,235 -- 1,235
Other liabilities......... 1,883 2,091 $ 437(B) 4,411
--------- -------- ------- ------- --------
Total liabilities....... 241,615 115,403 1,050 467 356,405
Minority interest........... 579 -- 579
Shareholders' equity
Series A Preferred Stock.. 2,960 -- 2,960(C) --
Series B Preferred Stock.. -- -- --
Mandatorily Convertible
Debentures............... 1,600 -- 1,600(C) --
Common Stock.............. 2,809 19 19(B) 909(B) 6,041
643(C)
1,680(D)
Capital in excess of par
value...................... 16,312 2,320 2,320(B) 9,998(B) 46,136
3,917(C)
15,909(D)
Retained earnings........... 1,440 8,400 8,400(B) 947
493(C)
Accumulated other
comprehensive income....... 81 221 221(B) 81
--------- -------- ------- ------- --------
Total shareholders'
equity................. 25,202 10,960 16,013 33,056 53,205
--------- -------- ------- ------- --------
Total liabilities and
shareholders' equity... $267,396 $126,363 $17,063 $33,493 $410,189
========= ======== ======= ======= ========
</TABLE>
See notes to Unaudited Pro Forma Combined Condensed Financial Statements.
14
<PAGE>
VAIL BANKS, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF EARNINGS
Nine months ended September 30, 1998
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
Adjustments
(A)
Vail --------------- Pro Forma
Banks Independent Telluride Debit Credit Combined
------- ----------- --------- ----- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Interest income
Interest and fees on
loans................ $13,394 $1,159 $6,058 $20,611
Interest on investment
securities........... 815 236 859 1,910
Interest on federal
funds sold and
deposits in banks.... 1,120 41 228 1,389
------- ------ ------ -------
Total interest
income............. 15,329 1,436 7,145 23,910
Interest expense
Deposits.............. 5,440 563 2,656 8,659
Other borrowings...... 223 8 46 $197(G) 80
------- ------ ------ -------
Total interest
expense............ 5,663 571 2,702 8,739
------- ------ ------ -------
Net interest income..... 9,666 865 4,443 15,171
Provision for loan
losses................. -- 9 101 110
------- ------ ------ -------
Net interest income
after provision
for loan losses.... 9,666 856 4,342 15,061
Other income............ 1,660 263 690 2,613
$536(E)
1(F)
Other expenses.......... 9,251 694 3,804 150(H) 14,436
------- ------ ------ -------
Income before income
taxes.............. 2,075 425 1,228 3,238
Income tax expense...... 730 147 358 16(I) -- 1,251
------- ------ ------ -------
NET INCOME.......... 1,345 278 870 1,987
Income tax benefit of
net operating loss
carryforwards.......... 687 -- -- -- 46(I) 733
------- ------ ------ -------
TOTAL INCREASE IN
SHAREHOLDERS' EQUITY
AFTER BENEFIT OF LOSS
CARRYFORWARDS........ $ 2,032 $ 278 $ 870 $ 2,720
======= ====== ====== =======
Net income per common
share.................. $ 0.48 $27.81 $49.75 (J) $ 0.22
Diluted net income per
common share........... 0.47 27.81 49.07 (J) 0.22
Common shares
outstanding (in
thousands)
Weighted average
shares............... 2,409 10 17 (J) 6,041
Dilutive shares....... 3,135 10 18 (J) 6,125
</TABLE>
See notes to Unaudited Pro Forma Combined Condensed Financial Statements.
15
<PAGE>
VAIL BANKS, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF EARNINGS
Year ended December 31, 1997
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
Adjustments (A)
Vail -------------------- Pro Forma
Banks Cedaredge Independent Telluride Debit Credit Combined
------- --------- ----------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income
Interest and fees on
loans................ $12,570 $3,060 $1,850 $7,272 $24,752
Interest on investment
securities........... 956 276 370 1,230 2,832
Interest on federal
funds sold and
deposits in banks.... 496 32 54 137 719
------- ------ ------ ------ -------
Total interest
income............. 14,022 3,368 2,274 8,639 28,303
Interest expense
Deposits.............. 4,251 1,248 836 3,031 9,366
Other borrowings...... 263 144 46 256 $ 274(G) 435
------- ------ ------ ------ -------
Total interest
expense............ 4,514 1,392 882 3,287 9,801
------- ------ ------ ------ -------
Net interest income..... 9,508 1,976 1,392 5,352 18,502
Provision for loan loss-
es..................... 232 79 -- 164 475
------- ------ ------ ------ -------
Net interest income
after provision for
loan losses........ 9,276 1,897 1,392 5,188 18,027
Other income............ 1,273 574 437 897 3,181
$ 907(E)
13(F)
Other expenses.......... 9,787 2,218 1,146 4,871 150(H) 19,092
------- ------ ------ ------ -------
Income before income
taxes.............. 762 253 683 1,214 2,116
Income tax expense...... 288 50 171 360 38(I) 907
------- ------ ------ ------ -------
NET INCOME.......... 474 203 512 854 1,209
Income tax benefit of
net operating loss
carryforwards.......... 274 -- -- -- 135(I) 409
------- ------ ------ ------ -------
TOTAL INCREASE IN
SHAREHOLDERS'
EQUITY AFTER
BENEFIT OF LOSS
CARRYFORWARDS...... $ 748 $ 203 $ 512 $ 854 $ 1,618
======= ====== ====== ====== =======
Net income per common
share.................. $ 0.22 $ 6.92 $51.24 $49.19 (J) $ 0.20
Diluted net income per
common share........... 0.22 (J) 51.24 48.67 (J) 0.20
Common shares
outstanding
(in thousands)
Weighted average
shares............... 2,100 29 10 17 (J) 6,006
Dilutive shares....... 2,154 (J) 10 18 (J) 6,006
</TABLE>
See notes to Unaudited Pro Forma Combined Condensed Financial Statements.
16
<PAGE>
Notes to Unaudited Pro Forma Combined Condensed Financial Statements
(A) Effective December 1, 1997, Vail Banks purchased all of the outstanding
common stock of Cedaredge. The pro forma condensed statement of earnings
for the year ended December 31, 1997 reflects the operations of Cedaredge
for the eleven month period prior to the acquisition. Thus, Vail Banks'
condensed statement of operations for the year ended December 31, 1997
includes one month of operations after the purchase of Cedaredge. On July
31, 1998, Vail Banks purchased all of the outstanding common stock of
Independent. The pro forma condensed statement of earnings for the nine
months ended September 30, 1998 reflects the operations of Independent for
the seven month period prior to the Independent Merger. Thus, Vail Banks'
condensed statement of operations for the nine months ended September 30,
1998 includes two months operations after the Independent Merger.
(B) Merger of Independent and Telluride as follows:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------------------
Telluride Independent Telluride Total
------------------ ----------- --------- -------
<S> <C> <C> <C> <C>
Consideration paid (in
thousands):
Cash
Paid to sellers.......... $13,331 $3,816 $13,331 $17,147
Additional direct merger
costs (estimated)....... 547 100 547 647
------- ------ ------- -------
13,878 3,916 13,878 17,794
Liability assumed under
Phantom Stock Plan........ 437 -- 437 437
Common stock issued to
(giving effect to 10-for-
one stock split)
Independent shareholders
(318,770 shares valued
for accounting purposes
at $10.00 per share).... -- 3,188 -- 3,188
Telluride shareholders
(908,913 shares valued
for accounting purposes
at $12.00 per share).... 10,907 -- 10,907 10,907
------- ------ ------- -------
10,907 3,188 10,907 14,095
------- ------ ------- -------
Total cost of the merg-
ers................... 25,222 7,104 25,222 32,326
Less equity................ 10,960 2,304 9,414 11,718
------- ------ ------- -------
Excess cost................ $14,262 $4,800 $15,808 $20,608
======= ====== ======= =======
Allocation of excess cost
(in thousands):
Land..................... 20 10 20 30
Depreciable assets and
other................... 31 156 31 187
Intangible assets........ 14,211 4,634 15,757 20,391
------- ------ ------- -------
$14,262 $4,800 $15,808 $20,608
======= ====== ======= =======
</TABLE>
The computations reflected above with respect to Telluride are preliminary.
The actual amounts at which the transaction will be recorded are dependent
upon the equity of Telluride as of the date of acquisition and the
allocation of the cost in excess of the net assets of Telluride.
Entries have been made to reflect consolidating adjustments for Independent
and Telluride eliminating equity accounts of acquirees and Vail Banks'
investment.
(C) Conversion of Series A Preferred Stock and the Mandatorily Convertible
Debentures into shares of Common Stock, 342,580 and 300,000 shares,
respectively.
In connection with the conversion of Series A Preferred Stock into Common
Stock, Vail Banks paid a special dividend (See "Certain Transactions"). The
amount of dividends payable subsequent to September 30, 1998 was
approximately $493,000.
17
<PAGE>
(D) Net proceeds from the Offering of $17,589,000 are based on the sale by
Vail Banks of 1,680,000 shares of Common Stock at a price of $12.00 per
share, net of underwriting discounts and commissions of approximately
$1,411,000, and other Offering expenses of $1,160,000.
(E) Estimated amortization of intangible assets acquired in mergers (in
thousands):
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
--------------------------- -------------------------------------
Independent Telluride Total Cedaredge Independent Telluride Total
----------- --------- ----- --------- ----------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Amortization for period
based on a 25 year
life.................. $110 $426 $536 $92 $185 $630 $907
==== ==== ==== === ==== ==== ====
</TABLE>
(F) Depreciation on the excess of the estimated fair market value of bank
premises and equipment over the net book value (in thousands):
<TABLE>
<S> <C>
Nine months ended September 30, 1998.................................... $ 1
===
Year ended December 31, 1997............................................ $13
===
</TABLE>
(G) Adjustments to interest expense to reflect the effect of pro forma
adjustments (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Elimination of interest expense on Mandatorily
Convertible Debentures converted into Common
Stock........................................... $114 $151
Elimination of interest expense on note payable
retired with proceeds of the Offering........... 83 123
---- ----
$197 $274
==== ====
</TABLE>
(H) Estimated one-time expenses related to the Telluride Merger of $150,000.
(I) Adjustments to income tax expense represent the tax effect of the above
adjustments, except for amortization of intangibles which is not
deductible for tax purposes. Income tax loss carryforwards available to
offset pro forma taxable income of Telluride will be restricted. Pro forma
adjustments to the income tax benefit of net operating loss carryforwards
take this factor into account. Pro forma income tax expense was computed
based on 34% of estimated pro forma taxable income.
(J) Pro forma common shares and weighted average and diluted common shares
(used in the determination of earnings per share) for Vail Banks are as
follows:
<TABLE>
<S> <C>
Pro forma Common Shares (excludes 319,000 shares of Common Stock
reserved for outstanding stock options)
Actual shares outstanding as of September 30, 1998................. 2,809,115
Conversion of Series A Preferred Stock into shares of Common
Stock............................................................. 342,580
Conversion of Mandatorily Convertible Debentures into shares of
Common Stock...................................................... 300,000
Common Stock issued to shareholders of Telluride................... 908,913
Common Stock issued in connection with Offering.................... 1,680,000
---------
Pro forma shares of Common Stock outstanding after the Offering.... 6,040,608
=========
</TABLE>
18
<PAGE>
Weighted Average and Diluted Common Shares
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------- -------------------
Actual Pro forma Actual Pro forma
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Actual average shares outstanding
(1)................................. 2,408,616 2,809,115 2,100,423 2,250,980
Shares issued in July 1998 in a
private offering (1)................ -- -- -- 204,540
Conversion of Series A Preferred
Stock into shares of Common Stock
(1)................................. -- 342,580 -- 342,580
Conversion of Mandatorily Convertible
Debentures into shares of Common
Stock (1)........................... -- 300,000 -- 300,000
Common Stock issued to shareholders
of acquirees: (1)
Independent........................ -- -- -- 318,770
Telluride.......................... -- 908,913 -- 908, 913
Common Stock issued in connection
with the Offering (1)............... -- 1,680,000 -- 1,680,000
--------- --------- --------- ---------
Weighted average Common Shares
outstanding......................... 2,408,616 6,040,608 2,100,423 6,005,783
Conversion of Series A Preferred
Stock into shares of Common Stock... 342,580 -- 28,230 --
Conversion of Mandatorily Convertible
Debentures into shares of Common
Stock............................... 300,000 -- 25,000 --
Stock options computed under the
treasury stock method (2)........... 84,016 84,016 -- --
--------- --------- --------- ---------
Diluted Common Shares outstanding.... 3,135,212 6,124,624 2,153,653 6,005,783
========= ========= ========= =========
</TABLE>
--------
(1) For pro forma calculations, shares are assumed to be outstanding during
the entire period.
(2) Stock options were granted in April 1998 to acquire 319,000 shares of
Common Stock. Shares of Common Stock outstanding for the computation of
diluted earnings per share include shares of Common Stock to be issued
under stock options, computed under the treasury stock method, assuming
repurchase at $12.00 per share (the Offering price).
Diluted net income per share for Cedaredge for the eleven months ended
November 30, 1997 has not been presented because SFAS No. 128 was not
applicable during that period.
19
<PAGE>
PRICE RANGE OF COMMON 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 9, 1999).................... $12 7/16 $12 1/8
</TABLE>
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.
DIVIDEND POLICY
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."
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.
20
<PAGE>
SELLING SHAREHOLDERS
Identity, Ownership of Stock, and Related Matters
The following table sets forth the names of the selling shareholders
(individually a "Selling Shareholder" and collectively the "Selling
Shareholders") who are presently known, the number of shares beneficially owned
by each such Selling Shareholder as of February 17, 1999, and the percentage of
the total outstanding Common Stock of the Company owned by each such Selling
Shareholder prior to any offering hereby. All of such shares are covered by
this Prospectus and the registration statement of which it forms a part, and
may be offered for resale by the Selling Shareholders from time to time. Except
as set forth in the footnotes to the table below, no Selling Shareholder has
had any position, office, or other material relationship with the Company or
any of its predecessors or affiliates within the past three years.
<TABLE>
<CAPTION>
Number of
Beneficial Ownership of Known Shares to be
Selling Shareholders as of Sold Under this
January 15, 1999 Prospectus(2)
------------------------------ ----------------
Number of Shares Percentage(1) Number of Shares
---------------- ------------- ----------------
<S> <C> <C> <C>
Norman W. Alpert.............. 6,514 * 6,514
Ann W. Basore................. 5,070 * 5,070
J. Neff Basore, Jr. (3)....... 19,772 * 19,772
J. Neff Basore Jr., Trustee
for 97 Jobann Trust (3)...... 123,606 2.05% 123,606
J. Neff Basore Jr., Trustee
for Trae-K Trust (3)......... 10,203 * 10,203
Robert Campbell............... 14,694 * 14,694
Sally Puff Courtney........... 12,098 * 12,098
Robert C. Cutter.............. 14,820 * 14,820
Mark F. Dalton (4)............ 71,023 * 71,023
Mark F. Dalton, General Part-
ner of DF Partners (4)....... 30,319 * 30,319
Roger T. Dalton............... 979 * 979
Peter Deballi, Jr. ........... 19,592 * 19,592
Peter R. Decker............... 31,201 * 31,201
Ben J. Dempsey................ 6,123 * 6,123
Robert A. Dempsey............. 10,384 * 10,384
Stephanie K. Dempsey.......... 10,384 * 10,384
Richard Fowler, Trustee for
Emily E. Hellstrom (5)....... 8,277 * 8,277
Richard Fowler, Trustee for
Erica C. Hellstrom (5)....... 8,228 * 8,228
Burton O. George, Trustee for
Burton O. George Revocable
Trust........................ 10,140 * 10,140
Cindy George, Trustee for
Cindy George Trust........... 75,001 1.24% 75,001
Paul George, Trustee for Paul
George Trust................. 73,512 1.22% 73,512
Eli W. Gordon, Trustee for Eli
W. Gordon Charitable
Remainder Trust (6).......... 8,013 * 8,013
Eli W. Gordon, Trustee for
Furnistall Profit Sharing
Plan & Trust (6)............. 8,333 * 8,333
Eli W. Gordon, General Partner
of Wolfson/Gordon Limited
Partnership (6).............. 122,662 2.03% 122,662
Garner F. Hill, II
(7)(8)(9)(10)................ 32,345 * 32,345
Dean Witter Reynolds Inc. C/F
Garner F. Hill II IRA (7).... 22,155 * 22,155
T. Leonard Hill II............ 6,612 * 6,612
John W. Hopkins............... 6,612 * 6,612
Glen & Jean Johnson Company
LP........................... 25,280 * 25,280
William Kline................. 16,506 * 16,506
Charles E. Kranich II &
Michael M. Kranich Jr.
JTWROS....................... 1,616 * 1,616
Michael N. Kranich............ 4,898 * 4,898
Lincoln Trust Company FBO Jill
Mallette IRA................. 4,898 * 4,898
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Number of
Beneficial Ownership of Known Shares to be
Selling Shareholders as of Sold Under this
January 15, 1999 Prospectus(2)
------------------------------ ----------------
Number of Shares Percentage(1) Number of Shares
---------------- ------------- ----------------
<S> <C> <C> <C>
John A. Lloyd Jr............... 1,272 * 1,272
David Mallette................. 23,021 * 23,021
Nicholas Massaro............... 8,540 * 8,540
VAR & Co. Trustee for John
Masur First Trust Nat'l Assoc.
Income Collection............. 4,210 * 4,210
John F. Maypole Revocable
Living Trust.................. 32,622 * 32,622
Arthur J. Nagle................ 122,257 2.02% 122,257
Jeffrey V. Puff................ 1,763 * 1,763
Frank H. Reichel III........... 23,658 * 23,658
Frank H. Reichel, Jr........... 67,840 1.12% 67,840
Charles D. Richards............ 3,170 * 3,170
William C. Roberts............. 16,506 * 16,506
Patrick W. Rose, Trustee for
Rose Family Trust............. 32,622 * 32,622
Robert F. Schuler.............. 22,041 * 22,041
Brett Shepard.................. 22,824 * 22,824
Robert A. Shepard.............. 22,824 * 22,824
Joel Siger & Patricia Siger
JTWROS........................ 15,477 * 15,477
Philip S. Slipock.............. 15,183 * 15,183
Casimir Stanislawski & Eliza-
beth Stanislawski JTWROS...... 5,240 * 5,240
Donald L. Vanderhoof
(8)(9)(10).................... 161,040 2.67% 161,040
Eddie Vanderhoof............... 25,570 * 25,570
Steve Vanderhoof............... 79,310 1.31% 79,310
</TABLE>
- --------
*Denotes less than 1%
(1) Based on 6,040,608 outstanding.
(2) All of the shares held are being registered hereunder and may be offered
and resold by the Selling Shareholder pursuant to this Prospectus. There
is no assurance, however, that any of the Selling Shareholders will sell
any or all of such shares.
(3) Mr. Basore's shares exclude shares beneficially owned as trustee for the
97 Jobann Trust and the Trae-K Trust and each trust's shares exclude
shares owned by the other trust and by Mr. Basore individually.
(4) Mr. Dalton's shares exclude shares owned by the partnership, for which he
is general partner and the shares owned by the partnership exclude Mr.
Dalton's shares held individually.
(5) All shares beneficially owned by Mr. Fowler for each of the trusts for
which Mr. Fowler is trustee exclude the shares of the other.
(6) All shares beneficially owned by Mr. Gordon for each of the trusts for
which Mr. Gordon is trustee and the limited partnership for which he is
general partner exclude the shares of the other.
(7) Mr. Hill's shares owned individually exclude shares owned pursuant to the
IRA and the shares owned pursuant to the IRA exclude shares owned by Mr.
Hill individually.
(8) See "Principal Shareholders" for details concerning beneficial ownership.
(9) See "Management" for details concerning positions with Vail Banks.
(10) See "Certain Transactions" for details concerning material relationships
with Vail Banks.
The Selling Shareholders may offer and sell all or a portion of the shares
from time to time, but are under no obligation to offer or sell any of the
shares. See "Manner of Offering". Because the Selling Shareholders may sell
all, none, or any part of the shares from time to time, no estimate can be
given as to the number of shares (or as to the percentage of the total
outstanding Common Stock of the Company) that will be beneficially owned by a
Selling Shareholder upon termination of any offering.
22
<PAGE>
This Prospectus also covers the possible resale of the shares of Common Stock
by certain other currently unknown persons who may become the record or
beneficial owners of such shares as a result of certain types of private
transactions, including but not limited to gifts and transfers pursuant to a
foreclosure or similar proceeding by a lender or other creditor to whom shares
may be pledged as collateral to secure an obligation of a Selling Shareholder.
Each such transferee of a Selling Shareholder is hereby deemed to be a Selling
Shareholder for purposes of making resales of shares using this Prospectus. To
the extent required by applicable law, information about such transferees, if
there shall be any (including the name and number of shares owned and proposed
to be sold), will be set forth in an appropriate supplement to this Prospectus.
Manner of Sale
The shares may be offered and sold by or for the account of a Selling
Shareholder, from time to time as market conditions permit on The Nasdaq Stock
Market or otherwise, at prices and on terms then prevailing or in negotiated
transactions. The shares may be sold by one or more of the following methods,
without limitation: (1) a block trade in which a broker or dealer so engaged
will attempt to sell the shares as agent, but may position and resell a portion
of the block as principal to facilitate the transaction, (2) purchases by a
broker or dealer (including a market maker) as principal and resale by such
broker or dealer for its account pursuant to this Prospectus; (3) ordinary
brokerage transactions and transactions in which the broker solicits purchaser
and (4) face-to-face transactions between sellers and purchasers without a
broker-dealer. In effecting sales, brokers or dealers engaged by the Selling
Shareholders may arrange for other brokers or dealers to participate. Such
brokers or dealers may receive commissions or discounts from the Selling
Shareholders and/or the purchasers of the shares for whom such brokers or
dealers act as agent or to whom they will sell as principals, or both (which
compensation as to a particular broker-dealer might be in excess of customary
commissions), in amounts to be negotiated. At the time a particular offer of
the shares is made by one or more of the Selling Shareholders, a prospectus
supplement, if required, will be distributed that will set forth the aggregate
number of shares being offered and the terms of the offering, including the
name or names of any underwriters, dealers or agents, any discounts,
commissions, and other items constituting compensation from the Selling
Shareholders, and any discounts, commissions, or concessions allowed or
reallocated or paid to dealers, including the proposed selling price to
prospective purchasers. The Selling Shareholders and such brokers and dealers
and any other participating brokers or dealers may be deemed to be
"underwriters", within the meaning of the Securities Act, in connection with
such sales. There can be no assurance, however, that all or any of the shares
will be offered by the Selling Shareholders. Vail Banks knows of no existing
arrangements between the Selling Shareholders and any broker, dealer, finder,
underwriter, or agent relating to the sale or distribution of the shares.
Vail Banks will not receive any of the proceeds of any sales of the shares by
the Selling Shareholders. Vail Banks will bear substantially all expenses of
the offering, including, without limitation, all registration and filing fees,
printing expenses, fees and disbursements of counsel and independent public
accountants for Vail Banks, fees of the NASD, transfer taxes, fees of transfer
agents and registrars, and costs of insurance, if any. All underwriting
discounts, selling commissions, and broker's fees applicable to the sale of any
shares, and fees and expenses of any counsel to the Selling Shareholders or by
such persons other than Vail Banks as agreed by and among the Selling
Shareholders and such other persons.
23
<PAGE>
BUSINESS
General
Vail Banks is a bank holding company headquartered in Vail, Colorado with
total assets of approximately $267 million at September 30, 1998. Vail Banks'
wholly owned subsidiary, 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, a bank holding company, and WestStar
merged with 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, 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. As of September 30, 1998, Telluride had assets of
approximately $126 million. See "Recent Mergers." 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. Giving effect to the
merger with Telluride and the Offering, as of September 30, 1998, the pro forma
total assets of Vail Banks would have been approximately $408 million.
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 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
24
<PAGE>
joined the Board of Vail Banks have also been associated with those banks for
more than ten years. Vail Banks anticipates that Bank of Telluride, Western
Colorado Bank and WestStar (consolidated with Glenwood) will continue to
operate as subsidiaries for the immediate future. As local acceptance of
WestStar as a participant in the new markets increases and economically
beneficial integration plans are developed, these subsidiaries may be
consolidated with WestStar.
In March 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 it 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 $137.4 million from December 31, 1995 to
September 30, 1998, a compound average annual growth rate of 22.3%. During the
same period, Vail Banks opened six de novo branches. The Telluride Merger
represents the third acquisition completed by Vail Banks since January 1, 1997.
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.
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
25
<PAGE>
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 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, 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."
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 September 30, 1998 have a committed term of less than two years.
At September 30, 1998 approximately 40% of loans had an average term greater
than one and less than five years, and less than 16% 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
26
<PAGE>
Independent Merger and the Telluride Merger, 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 on
February 13, 1997 the SBA designated WestStar as one of the top 25 SBA lenders
in Colorado during 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition."
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 "--Facilities."
Management believes that by standardizing products, services and systems and
providing appropriate holding company support, market managers, retail office
managers and other personnel can 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
27
<PAGE>
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 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."
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 WestStar's customers and potential
28
<PAGE>
customers in its markets choose to bank with WestStar 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.
Facilities
The following table sets forth information about Vail Banks' banking offices,
including those acquired in the Telluride merger.
<TABLE>
<CAPTION>
Location Deposits at September 30, 1998
-------- ------------------------------
(Dollars in thousands)
<S> <C>
Avon.................................................$29,601
Basalt.................................................2,437
Breckenridge...........................................5,159
Cedaredge--South Grand................................23,530
Cedaredge--Mercantile.....................................**
Delta.................................................12,829
Denver--17th Street...................................15,655
Denver--Stout Street...................................1,435
Dillon................................................24,898
Eagle..................................................4,098
Edwards................................................6,772
Frisco................................................12,992
Glenwood Springs......................................21,521
Glenwood Springs--City Market..........................4,164
Gypsum.................................................6,035
Montrose--City Market..................................3,780
Montrose--City Market..................................3,600
Montrose..............................................20,207
New Castle.............................................1,681
Norwood...............................................20,413
Telluride.............................................69,114
Vail--Main Office.....................................59,878
Vail--West Vail........................................1,219
Vail--Vail Village.......................................***
</TABLE>
- --------
**Deposits included in Cedaredge--South Grand
***Deposits included in Vail--Main Office
Vail Banks is in the process of constructing a 30,800 square foot operations
facility in Gypsum. All of WestStar's administrative operations in Dillon,
Vail, Avon and Glenwood will be centralized in the new Gypsum facility.
Administrative operations of WestStar located in Delta and those of Telluride
may be centralized in Western Colorado Bank's new 6,000 square foot operations
facility in Montrose.
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.
29
<PAGE>
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 WestStar 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.
30
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for Vail Banks. The
selected historical statements of operations data as of and for each of the
years ended December 31, 1997, 1996, 1995, 1994 and 1993, and the selected
historical balance sheet data as of and for the periods then ended have been
derived from the consolidated financial statements audited by Fortner, Bayens,
Levkulich & Co., P.C., independent public accountants ("Fortner, Bayens"); such
financial statements as of and for each of the years December 31, 1997, 1996
and 1995 appear elsewhere in this Prospectus. The selected historical
statements of operations data as of and for the nine months ended September 30,
1998 and 1997 have been derived from Vail Banks unaudited consolidated
financial statements and include, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the data as of such dates and for such periods. The financial statements as of
and for the nine months ended September 30, 1998 have been reviewed by Fortner,
Bayens, whose report on such financial statements is included elsewhere in this
Prospectus. Operating results for interim periods are not necessarily
indicative of results for the full fiscal year. The selected financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the consolidated financial
statements and notes thereto and other financial data included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
As of or for the
nine months ended As of or for the year ended
September 30, December 31,
------------------- --------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Interest income......... $ 15,329 $ 9,989 $ 14,022 $ 11,655 $ 8,582 $ 5,041 $ 4,417
Interest expense(1)..... 5,663 3,243 4,514 4,210 3,045 1,452 1,256
--------- --------- --------- --------- --------- --------- ---------
Net interest income.... 9,666 6,746 9,508 7,445 5,537 3,589 3,161
Provision for loan
losses................. 0 0 232 154 40 (125) (200)
--------- --------- --------- --------- --------- --------- ---------
Net interest income
after provision for
loan losses........... 9,666 6,746 9,276 7,291 5,497 3,714 3,361
Noninterest income...... 1,660 908 1,273 1,071 911 733 1,052
Noninterest expenses.... 9,251 6,634 9,787 7,740 5,621 3,553 2,989
--------- --------- --------- --------- --------- --------- ---------
Income before income
taxes................. 2,075 1,020 762 622 787 894 1,424
Income tax expense...... 730 380 288 257 266 377 271
--------- --------- --------- --------- --------- --------- ---------
Net income............. 1,345 640 474 365 521 517 1,153
Income tax benefit of
net operating loss
carryforwards.......... 687 358 274 242 264 368 271
--------- --------- --------- --------- --------- --------- ---------
Total increase in
shareholders' equity
after benefit of loss
carryforwards.......... $ 2,032 $ 998 $ 748 $ 607 $ 785 $ 885 $ 1,424
========= ========= ========= ========= ========= ========= =========
Common Share Data(2):
Earnings per common
share (basic).......... $ 0.49 $ 0.31 $ 0.23 $ 0.21 $ 0.30 $ 0.39 $ 0.87
Earnings per share
(diluted).............. 0.46 0.30 0.21 0.20 0.28 0.37 0.82
Book value per common
share.................. 7.35 6.01 5.91 5.29 5.16 3.95 3.75
Tangible book value per
common share........... 4.41 5.30 4.19 4.35 4.14 3.95 3.75
Cash dividends per
common share........... 0.00 0.00 0.00 0.22 0.34 0.51 0.00
Weighted average common
shares outstanding
(basic)................ 2,408,616 2,049,685 2,100,423 1,778,373 1,763,021 1,320,390 1,306,930
Weighted average common
shares outstanding
(diluted).............. 3,143,254 2,141,743 2,220,711 1,870,431 1,855,079 1,412,448 1,398,988
End of period common
shares outstanding..... 2,809,130 2,250,980 2,250,980 1,782,510 1,766,050 1,320,390 1,306,930
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
As of or for the
nine months ended As of or for the year ended
September 30, December 31,
------------------ ----------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- ------- -------
(Dollars in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data (end
of period):
Total assets............ $267,396 $159,545 $231,191 $157,194 $136,931 $82,366 $75,165
Investment securities... 19,848 14,720 19,732 18,843 22,094 28,297 29,606
Net loans............... 182,909 116,077 153,549 105,963 78,067 31,896 28,467
Allowance for loan
losses................. 1,497 799 1,364 823 620 361 353
Deposits................ 237,447 142,571 206,215 144,350 125,564 75,028 68,112
Note payable............ 1,050 1,250 1,200 1,400 1,600 1,800 1,950
Shareholders' equity.... 25,202 13,529 17,868 9,429 9,121 5,222 4,904
Performance Ratios:
Return on average
assets(3).............. 0.72% 0.55% 0.29% 0.26% 0.49% 0.70% 1.66%
Return on average
shareholders'
equity(3).............. 8.82 7.17 3.71 3.94 5.78 10.21 18.52
Net interest margin(3).. 6.31 6.63 6.80 6.14 6.09 4.87 4.55
Operating efficiency
ratio(4)............... 81.68 85.37 89.54 84.56 83.84 82.21 70.95
Shareholders' equity to
total assets........... 9.42 8.48 7.73 6.00 6.66 6.34 6.52
Loan to deposit ratio... 77.03 81.42 74.46 73.41 62.17 42.51 41.79
Asset Quality Ratios
(end of period):
Nonperforming assets to
total assets(5)........ 0.11% 0.03% 0.09% 0.04% 0.35% 0.03% 0.58%
Nonperforming loans to
total loans(6)......... 0.06 0.04 0.14 0.06 0.45 0.00 0.18
Net loan charge-offs
(recoveries) to average
total loans............ 0.04 0.02 0.03 (0.05) (0.07) (0.43) (0.79)
Allowance for loan
losses to total loans.. 0.81 0.68 0.88 0.77 0.79 1.12 1.22
Allowance for loan
losses to nonperforming
loans.................. 1,279.49 1,630.61 637.38 1,266.15 174.16 NM* 666.04
Capital Ratios (end of
period)(7):
Leverage ratio.......... 6.18% 7.91% 7.33% 6.23% 7.22% 9.11% 9.70%
Tier 1 risk-based
capital ratio.......... 8.26 10.37 8.26 8.59 9.93 17.22 20.51
Total risk-based capital
ratio.................. 9.87 11.06 10.15 9.37 10.62 18.12 21.57
</TABLE>
- --------
* "NM" represents a number that is not calculable because there were no
nonperforming 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."
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Basis of Presentation and General
The following discussion and analysis provides information regarding Vail
Banks' historical results of operations and financial condition as of or for
the nine months ended September 30, 1998 and 1997 and as of or for the years
ended December 31, 1997, 1996 and 1995. The following discussion should be read
in conjunction with the consolidated financial statements and related notes
included elsewhere in this Prospectus.
Effective December 1, 1997, Vail Banks consummated the Cedaredge Merger by
paying cash of $3.25 million, and assuming certain obligations of $550,000 and
the Mandatorily Convertible Debentures totaling approximately $1.6 million. As
of the date of the merger, Cedaredge had total assets of $45.5 million, loans
of $34.3 million, total deposits of $42.0 million and equity capital of $3.0
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 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 "Recent
and Proposed Mergers" for further information on this transaction.
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 "Recent
and Proposed Mergers" for further information on this transaction.
The Telluride Merger, which Vail Banks expects to be consummated at
approximately the same time as the Offering, will substantially affect Vail
Banks' future operations and management believes it will have a positive impact
on comparisons of income, expense, and balance sheet items for the 1997 to 1998
fourth quarter period and 1998 to 1999 first, second and third quarter periods.
As a result of the merger, Vail Banks will experience a material increase in
goodwill, goodwill amortization and intangible assets as a percentage of total
equity. Management believes that following the aforementioned merger Vail Banks
will be "well capitalized" for purposes of various banking regulations.
On January 15, 1999, the Audit Committee of the Board of Directors of Vail
Banks approved the dismissal of Fortner, Bayens, Levkulich & Co., P.C. and the
hiring of KPMG Peat Marwick 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 Vail Banks' needs since the Offering.
The reports of Fortner, Bayens, Levkulich & Co., P.C. on Vail Banks'
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 Vail Banks' 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
33
<PAGE>
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 Vail Banks and through January 15,
1999, Vail Banks did not consult with KPMG Peat Marwick LLP on matters (1)
regarding the application of accounting principles to a specified transaction
or the type of audit opinion that might be rendered on Vail Banks' financial
statements, or (2) which concerned the subject matter of an identified
disagreement or event with Fortner, Bayens, Levkulich & Co., P.C.
Overview
Vail Banks' net income for the nine months ended September 30, 1998 increased
$705,000, or 110.2%, to $1.3 million from $640,000 for the nine months ended
September 30, 1997. Net income for the year ended December 31, 1997 increased
$109,000, or 29.9%, to $474,000 from $365,000 in 1996. Net income for the year
ended December 31, 1996 decreased $156,000, or 29.9%, to $365,000 from $521,000
in 1995.
Total assets at September 30, 1998 increased $107.9 million, or 67.6%, to
$267.4 million from $159.5 million at September 30, 1997. Total assets at
December 31, 1997 increased $74.0 million, or 47.1%, from $157.2 million at
December 31, 1996, which was an increase of $20.3 million, or 14.8%, over the
total assets at December 31, 1995.
The annualized return on average assets was 0.72% for the nine months ended
September 30, 1998 compared to 0.55% for the nine months ended September 30,
1997. The return on average assets was 0.29% for the year ended December 31,
1997 compared to 0.26% and 0.49% for the years ended December 31, 1996 and
1995, respectively.
The annualized return on average equity was 8.82% for the nine months ended
September 30, 1998 compared to 7.17 % for the nine months ended September 30,
1997. The return on average equity was 3.71% for the year ended December 31,
1997 compared to 3.94% and 5.78% for the years ended December 31, 1996 and
1995, respectively.
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.
34
<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.
Net Interest Income
<TABLE>
<CAPTION>
Nine months ended September 30,
--------------------------------------------------------- ----------------------------
1998 1997 1997
---------------------------- ---------------------------- ----------------------------
Interest Average Interest Average Interest Average
Average earned or yield or Average earned or yield or Average earned or yield or
balance paid cost balance paid cost balance paid cost
-------- --------- -------- -------- --------- -------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Federal funds
sold.................... $ 27,901 $1,120 5.35% $ 10,333 $ 404 5.21% $ 9,396 $ 496 5.28%
Investment securities
Taxable................ 16,185 708 5.83 16,263 704 5.77 15,780 934 5.92
Tax exempt (1)......... 3,107 107 4.61 220 9 5.58 482 22 4.56
Loans (2)............... 160,714 13,384 11.11 109,611 8,872 10.79 115,179 12,570 10.91
Allowance for
loan losses............. (1,371) (826) (848)
-------- ------ -------- ------ -------- -------
Total interest-
earning assets.......... 206,536 15,329 9.90% 135,601 9,989 9.82% 139,989 14,022 10.02%
Noninterest-
earning assets.......... 40,910 20,079 22,039
-------- -------- --------
Total assets............ $247,446 $155,680 $162,028
======== ======== ========
Liabilities and
Shareholders' Equity
Interest-bearing
liabilities:
Interest-bearing
deposits
Demand,
interest-
bearing................ $101,843 $2,886 3.78% $ 71,845 $2,026 3.76% $ 73,651 $ 2,752 3.74%
Savings................ 14,538 302 2.77 7,713 155 2.68 8,099 219 2.70
Certificates of
deposit................ 52,256 2,252 5.75 21,200 886 5.57 22,775 1,280 5.62
-------- ------ -------- ------ -------- -------
Total interest-bearing
deposits................ 168,637 5,440 4.30% 100,758 3,067 4.06% 104,525 4,251 4.07%
Federal funds sold
and securities sold
under repurchase
agreements.............. 829 24 3.94% 1,657 78 6.33% 1,665 88 5.29%
Note payable............ 1,117 83 9.92 1,317 97 9.83 1,275 123 9.65
Other
liabilities............. 28 2 8.10 16 1 4.98 392 39 9.82
-------- ------ -------- ------ -------- -------
Total interest-bearing
liabilities (3)(4)...... 170,611 5,549 4.34% 103,748 3,243 4.17% 107,857 4,501 4.17%
------ ------ -------
Noninterest-bearing
liabilities............. 56,509 40,027 41,388
-------- -------- --------
Total liabilities (3)... 227,120 143,775 149,245
-------- -------- --------
Shareholders'
equity (3).............. 20,326 11,905 12,783
-------- -------- --------
Total liabilities
and shareholders'
equity.................. $247,446 $155,680 $162,028
======== ======== ========
Net interest
income (4).............. $9,780 $6,746 $ 9,521
====== ====== =======
Net interest
margin.................. 6.31% 6.63% 6.80%
===== ===== =====
Net interest
spread.................. 5.56% 5.65% 5.84%
===== ===== =====
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities............. 121.06% 130.70% 129.79%
<PAGE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1996 1995
---------------------------- ----------------------------
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............. $ 6,609 $ 343 5.19% $ 11,734 $ 802 6.83%
Investment
securities
Taxable......... 23,482 1,300 5.54 26,072 1,431 5.49
Tax exempt (1).. 349 19 5.44 394 27 6.85
Loans (2)........ 91,583 9,993 10.91 53,172 6,322 11.89
Allowance for
loan losses...... (680) (498)
--------- --------- --------- ---------
Total interest-
earning assets... 121,343 11,655 9.61% 90,874 8,582 9.44%
Noninterest-
earning assets... 21,497 16,205
--------- ---------
Total assets..... $142,840 $107,079
========= =========
Liabilities and
Shareholders' Eq-
uity
Interest-bearing
liabilities:
Interest-bearing
deposits
Demand,
interest-
bearing......... $ 66,089 $ 2,476 3.75% $ 47,139 $ . 1,774 3.76%
Savings......... 8,227 231 2.81 6,901 216 3.13
Certificates of
deposit......... 18,595 1,035 5.57 14,363 779 5.42
--------- --------- --------- ---------
Total interest-
bearing
deposits......... 92,911 3,742 4.03% 68,403 2,769 4.05%
Federal funds
sold and
securities sold
under repurchase
agreements....... 4,096 210 5.13% 1,467 113 7.70%
Note payable..... 1,500 144 9.60 1,700 163 9.59
Other
liabilities...... 2,087 114 5.47 0 0 --
--------- --------- --------- ---------
Total interest-
bearing
liabilities (3)
(4).............. 100,594 4,210 4.19% 71,570 3,045 4.25%
--------- ---------
Noninterest-
bearing
liabilities...... 32,973 26,490
--------- ---------
Total liabilities
(3).............. 133,566 98,060
--------- ---------
Shareholders'
equity (3)....... 9,274 9,020
--------- ---------
Total liabilities
and shareholders'
equity........... $142,840 $107,080
========= =========
Net interest
income (4)....... $ 7,445 $ 5,537
========= =========
Net interest
margin........... 6.14% 6.09%
======== ========
Net interest
spread........... 5.42% 5.19%
======== ========
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities...... 120.63% 126.97%
</TABLE>
35
<PAGE>
- --------
(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: September 30, 1998--$1,379,000; September 30, 1997--$816,000;
December 31, 1997--$1,143,000; December 31, 1996--$960,000; December 31,
1995--$783,000.
(3) Mandatorily Convertible Debentures are included in the "Shareholders'
equity" account as the Offering will require 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.
Net interest income, on a nontax-equivalent basis, was $9.8 million for the
nine months ended September 30, 1998, an increase of $3.0 million, or 45.0%,
from $6.7 million for the same period in 1997. Interest income for the nine
month periods ended September 30, 1998 and 1997 was $15.3 million and $10.0
million, respectively. The $5.3 million increase is primarily due to growth of
the loan portfolio. The Cedaredge Merger in December 1997 added approximately
$34.4 million of the $51.1 million increase in average loans reported as of
September 30, 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 increased to 9.90% during
the first nine months of 1998, from 9.82% during the same period in 1997.
Interest expense increased $2.3 million, or 71.1%, to $5.5 million for the
nine months ended September 30, 1998, compared to $3.2 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 $30.0
million increase in the average interest-bearing demand deposit accounts and
approximately $15.9 million of the $31.1 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 4.34% for the nine months ended September 30, 1998,
from 4.17% in the same period of 1997.
The net interest margin and net interest spread for the nine months ended
September 30, 1998 were 6.31% and 5.56%, respectively, compared to 6.63% and
5.65%, respectively for the same period in 1997. The combination of the
improvement in loan yields being offset by a larger 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 nine month periods of 1998 and 1997. However, the net interest
spread narrowed by a lessor 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
36
<PAGE>
these liabilities continued through the nine months ended September 30, 1998.
The average cost of interest-bearing liabilities decreased to 4.17% in 1997
from 4.19% in 1996.
Net interest income, on a nontax-equivalent basis, was $7.4 million for the
year ended December 31, 1996, an increase of $1.9 million, or 34.5%, from $5.5
million in 1995. Interest income for the years ended December 31, 1996 and 1995
was $11.7 million and $8.6 million, respectively. The increase in interest
income from 1995 to 1996 of $3.1 million is primarily due to an increase in the
size of the loan portfolio. Loan growth during this period is largely
attributable to Vail Banks merging with Snow Bancorp in mid-1995, adding $18.5
million in total loans, and opening two de novo branches in mid-1996,
increasing its market breadth and share. The average yield on interest-earning
assets increased to 9.61% in 1996 from 9.44% in 1995.
Interest expense increased $1.2 million, or 38.3%, to $4.2 million for the
year ended December 31, 1996 compared to $3.0 million for 1995. Increases in
the volume of interest-bearing demand deposit accounts accounted for the
majority of increase in interest expense over the periods. The merger with Snow
Bancorp in mid-1995, adding $25.4 in total deposits, and the opening of two de
novo branches in mid-1996, are the primary factors in this increase. The
average cost of interest-bearing liabilities decreased to 4.19% in 1996 from
4.25% in 1995.
The net interest margin and net interest spread for 1997 were 6.80% and
5.84%, respectively, compared to 6.14% and 5.42%, respectively, for 1996. The
net interest margin and net interest spread for 1996 were 6.14% and 5.42%,
respectively, compared to 6.09% and 5.19%, respectively for 1995.
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.
Rate/Volume Analysis of Net Interest Income
<TABLE>
<CAPTION>
For the Nine months For the Year ended For the Year ended
ended September 30, 1998 December 31, 1997 December 31, 1996
compared to 1997 compared to 1996 compared to 1995
-------------------------- -------------------------- ------------------------
Increases (Decreases) Increases (Decreases) Increases (Decreases)
in Net Interest Income in Net Interest Income in Net Interest Income
due to Changes In due to Changes In due to Changes In
-------------------------- -------------------------- ------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
--------- ------- -------- -------- ------ -------- -------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Federal funds sold...... $ 687 $ 29 $ 716 $ 145 $ 8 $ 153 $ (350) $ (109) $ (459)
Investment securities
Taxable................ (3) 7 4 (426) 60 (366) (142) 11 (131)
Tax exempt............. 118 (20) 98 7 (4) 3 (3) (5) (8)
Loans................... 4,136 386 4,522 2,575 2 2,577 4,567 (896) 3,671
-------- ------ -------- -------- ----- -------- ------- ------ -------
Total interest
income:............... 4,938 402 5,340 2,301 66 2,367 4,072 (999) 3,073
-------- ------ -------- -------- ----- -------- ------- ------ -------
Interest expense:
Interest-bearing
deposits
Demand, interest-
bearing............... 846 14 860 283 (7) 276 713 (11) 702
Savings................ 137 10 147 (4) (8) (12) 42 (27) 15
Certificates of
deposit............... 1,298 68 1,366 233 12 245 230 26 256
Federal funds purchased
and securities sold
under repurchase
agreements............. (39) (15) (54) (125) 3 (122) 203 (106) 97
Note payable............ (15) 1 (14) (22) 1 (21) (19) -- (19)
Other liabilities....... 1 0 1 (93) 18 (75) 114 -- 114
-------- ------ -------- -------- ----- -------- ------- ------ -------
Total interest
expense:.............. 2,228 78 2,306 272 19 291 1,283 (118) 1,165
-------- ------ -------- -------- ----- -------- ------- ------ -------
Change in net interest
income................. $ 2,710 $ 324 $ 3,034 $ 2,029 $ 47 $ 2,076 $ 2,789 $(881) $ 1,908
======== ====== ======== ======== ===== ======== ======= ====== =======
</TABLE>
37
<PAGE>
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 nine months ended
September 30, 1998 or September 30, 1997. 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 and $40,000 for the year ended December 31, 1995.
Provisions for these periods were increased to reflect growth in the loan
portfolio and to maintain a target allowance to total loans ratio of .75% to
1.50%.
Noninterest Income. The following table sets forth Vail Banks' noninterest
income for the periods indicated.
Noninterest Income
<TABLE>
<CAPTION>
Nine months
ended Year ended
September 30, December 31,
--------------------------------
1998 1997 1997 1996 1995
------- ------------ ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Service charges............................... $ 330 $ 240 $ 335 $ 320 $275
NSF and returned check charges................ 643 422 581 470 396
Other fee income.............................. 286 178 220 144 163
Rental income................................. 346 0 12 0 0
Other income.................................. 55 68 125 137 77
------- ----- ------ ------ ----
Total noninterest income.................... $ 1,660 $ 908 $1,273 $1,071 $911
======= ===== ====== ====== ====
</TABLE>
During the nine months ended September 30, 1998, total noninterest income
increased $752,000, or 82.8%, to $1.7 million from $908,000 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 income the year ended December 31, 1996 totaled $1.1 million, an
increase of $160,000, from $911,000 for the year ended December 31, 1995. The
primary reason for this increase is due to increases in service charges and
fees on demand deposit accounts in approximate proportion to growth in those
deposit amounts.
38
<PAGE>
Noninterest Expenses. The following table sets forth Vail Banks' noninterest
expenses for the indicated periods.
Noninterest Expenses
<TABLE>
<CAPTION>
Nine months
ended Year ended
September 30, December 31,
------------- --------------------
1998 1997 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits.............. $4,922 $3,353 $5,086 $3,670 $2,511
Occupancy................................... 1,167 1,028 1,325 1,185 959
Furniture and equipment..................... 824 556 852 492 343
Service fees................................ 431 237 366 207 99
Professional fees........................... 216 191 238 178 238
Supplies and printing....................... 293 236 342 336 207
Telephone................................... 266 149 209 130 124
Marketing and promotions.................... 172 211 399 255 256
Postage and freight......................... 142 101 137 125 105
Other....................................... 818 572 833 1,162 779
------ ------ ------ ------ ------
Total noninterest expenses................ $9,251 $6,634 $9,787 $7,740 $5,621
====== ====== ====== ====== ======
</TABLE>
During the nine months ended September 30, 1998, noninterest expenses
increased $2.6 million, or 39.4%, to $9.3 million from $6.6 million for the
comparable period in 1997. This increase is primarily due to salaries and
employee benefits increasing $1.6 million as a result of the addition of eight
retail offices, one through expansion, four from the Cedaredge Merger and three
from the Independent Merger. Furniture and equipment expense increased
$268,000, or 48.2%, due to the expansion and acquisition of operating
facilities. Service fees increased $194,000, or 81.9%, 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 $246,000, or 43.0% 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.
During the year ended December 31, 1996, total noninterest expenses increased
$2.1 million, or 37.7%, from $5.6 million in 1995. Increases in noninterest
expenses over this period are primarily attributable to the opening of two de
novo branches and the internal growth of existing operations. The increase in
the "other" category is primarily due to an unusual charge of $406,000 taken in
1996 as a result of a variance in the cash and due reconciliation.
Federal Income Tax. For approximately five years, Vail Banks has utilized a
tax loss carryforward obtained from a 1993 merger. Under GAAP requirements, net
income includes an equivalent expense which would be paid for taxation. A
federal taxation rate of 34% is used for this purpose. The taxes saved by use
of the tax loss carryforward is then added back to net income "below the line"
to arrive at the "net addition to shareholders' equity." This results in a
depressed retained earnings and an increased capital surplus.
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
39
<PAGE>
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 mergers with Independent and Telluride are expected to initially increase
the mix of loans in the installment category. This initial change in loan type
mix, however, may only be temporary as increased lending capacity is utilized
across all markets and loan types. Therefore, the data below is not necessarily
indicative of trends within a particular category.
Loan Portfolio Composition
<TABLE>
<CAPTION>
September 30, December 31,
-------------- ------------------------------
1998 1997 1996
-------------- -------------- --------------
Amount % Amount % Amount %
-------- ----- -------- ----- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural................. $ 88,551 48.0% $ 77,801 50.2% $ 46,850 43.9%
Real estate--construction..... 34,899 18.9 25,163 16.2 23,852 22.3
Real estate--mortgage......... 35,607 19.3 31,618 20.4 31,815 29.8
Installment................... 25,349 13.7 20,331 13.1 4,269 4.0
-------- ----- -------- ----- -------- -----
Total loans.................. $184,406 100.0% $154,913 100.0% $106,786 100.0%
======== ===== ======== ===== ======== =====
<CAPTION>
December 31,
----------------------------------------------
1995 1994 1993
-------------- -------------- --------------
Amount % Amount % Amount %
-------- ----- -------- ----- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural................. $33,995 43.2% $14,954 46.7% $12,424 43.1%
Real estate--construction..... 19,524 24.8 8,197 25.6 7,010 24.3
Real estate--mortgage......... 21,479 27.3 7,844 24.5 8,438 29.3
Installment................... 3,690 4.7 1,011 3.2 949 3.3
-------- ----- -------- ----- -------- -----
Total loans.................. $78,688 100.0% $32,006 100.0% $28,821 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
As of September 30, 1998, loans were $184.4 million, which was an increase of
$29.5 million, or 19.0%, over $154.9 million as of December 31, 1997. All
categories of loans increased over this period, primarily due to the
acquisition of Glenwood ($17.2 million in loans), the cyclical increase in
construction lending during the first two quarters of the year, as well as core
business growth. This increase was partially offset by the cyclical pay-down of
credit lines by commercial customers at the end of their peak season, which
occurs in the late first quarter and early second quarter. 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 and retail businesses. 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 September 30, 1998, commercial, financial and agricultural loans
represented the largest class of loans at $88.6 million or 48.0% 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 September 30, 1998, real
estate--construction loans totaled $34.9 million or 18.9% of total loans, up
from $25.2 million or 16.2% of total loans at December 31, 1997. Real estate--
construction
40
<PAGE>
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.
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 September 30,
1998, real estate--mortgage loans totaled $35.6 million or 19.3% 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 September 30, 1998, installment loans totaled $25.3 million or
13.7% 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 of WestStar, 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 shareholders 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 Bank's 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.
41
<PAGE>
Loan Maturities. The following tables present, at September 30, 1998 and
December 31, 1997, 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.
Loan Maturities
<TABLE>
<CAPTION>
September 30, 1998
-------------------------------------------------------------------
After one year
through five years After five years
------------------------ ------------------------
One year
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....... $32,741 $16,412 $21,679 $ 7,776 $ 9,943 $ 88,551
Real estate--
construction........... 29,974 990 3,935 0 0 34,899
Real estate--mortgage... 8,938 11,783 6,379 1,458 7,049 35,607
Installment............. 8,919 12,536 857 1,228 1,809 25,349
------- ------- ------- ------- ------- --------
Total loans........... $80,572 $41,721 $32,850 $10,462 $18,801 $184,406
======= ======= ======= ======= ======= ========
<CAPTION>
December 31, 1997
-------------------------------------------------------------------
After one year
through five years After five years
------------------------ ------------------------
One year
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....... $29,593 $17,010 $15,632 $ 8,503 $ 7,063 $ 77,801
Real estate--
construction........... 23,679 909 575 0 0 25,163
Real estate--mortgage... 15,861 9,313 3,295 2,302 847 31,618
Installment............. 7,254 10,752 656 1,412 257 20,331
------- ------- ------- ------- ------- --------
Total loans........... $76,387 $37,984 $20,158 $12,217 $ 8,167 $154,913
======= ======= ======= ======= ======= ========
</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. Vail Banks currently has no restructured loans.
42
<PAGE>
The following table sets forth information concerning the nonperforming
assets of Vail Banks as of the dates indicated.
Nonperforming Assets
<TABLE>
<CAPTION>
December 31,
September 30, ----------------------------
1998 1997 1996 1995 1994 1993
------------- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans.................. $ 78 $136 $ 0 $353 $ 0 $ 53
Other loans 90 days past due...... 39 78 65 3 0 0
Other real estate owned........... 179 0 0 128 23 386
---- ---- ---- ---- ---- ----
Total nonperforming assets........ $296 $214 $ 65 $484 $ 23 $439
==== ==== ==== ==== ==== ====
Nonaccrual and other loans 90 days
past due to total loans.......... 0.06% 0.14% 0.06% 0.45% 0.00% 0.18%
Nonperforming assets to total
loans plus other real estate..... 0.16% 0.14% 0.06% 0.61% 0.07% 1.50%
Nonperforming assets to total
assets........................... 0.11% 0.09% 0.04% 0.35% 0.03% 0.58%
</TABLE>
Nonperforming assets as a percentage of total loans plus other real estate
outstanding as of September 30, 1998 was 0.16%, compared to 0.14%, 0.06%, and
0.61% as of December 31, 1997, 1996, and 1995, respectively. The $78,000 in
nonaccrual loans as of September 30, 1998, is made up of several small loans,
with the largest of these equaling $35,404. Management believes Vail Banks is
adequately collateralized to recover the majority of the balance of these
nonaccrual loans. Other real estate owned is made up of one property with a
book value of $178,587 and a recently appraised value of $248,000. 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 September 30, 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.
43
<PAGE>
The following table sets forth information regarding changes in the allowance
for loan losses for Vail Banks for the periods indicated.
Allowance for Loan Loss Analysis
<TABLE>
<CAPTION>
Nine months Year ended
ended December 31,
September 30, ------------------
1998 1997 1996
------------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Average total loans........................ $160,714 $115,179 $ 91,583
======== ======== ========
Total loans at end of period............... $184,406 $154,913 $106,786
======== ======== ========
Allowance at beginning of year............. $ 1,364 $ 823 $ 620
Charge-offs:
Commercial, financial and agricultural... 0 6 83
Real estate--construction................ 0 0 0
Real estate--mortgage.................... 0 0 0
Installment.............................. 86 52 39
-------- -------- --------
Total charge-offs...................... 86 58 122
Recoveries:
Commercial, financial and agricultural... 18 17 167
Real estate--construction................ 0 0 0
Real estate--mortgage.................... 0 0 0
Installment.............................. 9 7 4
-------- -------- --------
Total recoveries....................... 27 24 171
-------- -------- --------
Net charge-offs (recoveries)............... 59 34 (49)
Allowance for loan loss--merger............ 192 343 0
Provision for loan losses.................. 0 232 154
-------- -------- --------
Allowance at end of period................. $ 1,497 $ 1,364 $ 823
======== ======== ========
Net charge-offs (recoveries) to average
total loans............................... 0.04% 0.03% (0.05)%
Allowance to total loans at end of period.. 0.81% 0.88% 0.77 %
Allowance to nonperforming loans........... 1,279.49% 637.38% 1,266.15 %
</TABLE>
44
<PAGE>
Allowance for Loan Loss Analysis
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1995 1994 1993
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Average total loans............................. $53,172 $30,586 $28,425
======= ======= =======
Total loans at end of period.................... $78,688 $32,006 $28,821
======= ======= =======
Allowance at beginning of year.................. $ 361 $ 353 $ 113
Charge-offs:
Commercial, financial and agricultural........ 31 0 0
Real estate--construction..................... 0 0 0
Real estate--mortgage......................... 0 0 0
Installment................................... 7 6 17
------- ------- -------
Total charge-offs........................... 38 6 17
Recoveries:
Commercial, financial and agricultural........ 54 29 210
Real estate--construction..................... 0 0 0
Real estate--mortgage......................... 20 106 6
Installment................................... 3 4 26
------- ------- -------
Total recoveries............................ 77 139 242
------- ------- -------
Net charge-offs (recoveries).................... (39) (133) (225)
Allowance for loan loss--merger................. 180 0 215
Provision for loan losses....................... 40 (125) (200)
------- ------- -------
Allowance at end of period...................... $ 620 $ 361 $ 353
======= ======= =======
Net charge-offs (recoveries) to average total
loans.......................................... (0.07)% (0.43)% (0.79)%
Allowance to total loans at end of period....... 0.79 % 1.13 % 1.22 %
Allowance to nonperforming loans................ 174.16 % NM * 666.04 %
</TABLE>
- --------
* "NM" represents a number that is not calculable because there were no
nonperforming loans.
Net charge-offs for the nine months ended September 30, 1998 totaled $59,000
or 0.04% 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 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.
45
<PAGE>
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 significant 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.
Allowance for Loan Loss Allocation
<TABLE>
<CAPTION>
December 31,
September 30, ---------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
Loans in Loans in Loans in
category as category as category as
a percentage a percentage a percentage
Amount of of total Amount of of total Amount of of total
allowance loans allowance loans allowance loans
--------- ------------ --------- ------------ --------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Allocated:
Commercial, financial
and agricultural..... $ 374 48.01% $ 110 50.23% $ 41 43.87%
Real estate--
construction......... 148 18.93 334 16.24 675 22.34
Real estate--
mortgage............. 222 19.31 55 20.41 68 29.79
Installment........... 116 13.75 141 13.12 32 4.00
Unallocated:............ 637 724 7
------ ------ ------ ------ ---- ------
Total allowance for
loan losses.......... $1,497 100.00% $1,364 100.00% $823 100.00%
====== ====== ====== ====== ==== ======
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1995 1994 1993
---------------------- ---------------------- ----------------------
Loans in Loans in Loans in
category as category as category as
a percentage a percentage a percentage
Amount of of total Amount of of total Amount of of total
allowance loans allowance loans allowance loans
--------- ------------ --------- ------------ --------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Allocated:
Commercial, financial
and agricultural..... $ 0 43.20% $201 46.72% $130 43.11%
Real estate--
construction......... 351 24.81 0 25.61 0 24.32
Real estate--
mortgage............. 84 27.30 28 24.51 85 29.28
Installment........... 154 4.69 0 3.16 10 3.29
Unallocated:............ 31 132 128
---- ------ ---- ------ ---- ------
Total allowance for
loan losses.......... $620 100.00% $361 100.00% $353 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
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
46
<PAGE>
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 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. At each reporting date, the appropriateness of
each classification is reassessed. 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 shareholders' equity until realized. The following table sets
forth information regarding the investment composition of Vail Banks as of the
dates indicated.
Investment Composition
<TABLE>
<CAPTION>
December 31,
September 30, -------------------------------------------
1998 1997 1996 1995
------------- ------------- ------------- -------------
Amount % Amount % Amount % Amount %
------- ----- ------- ----- ------- ----- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for Sale
Securities
Estimated market value
U. S. Treasury.......... $ 5,296 44.2% $ 1,865 19.4% $ 0 0.0% $ 0 0.0%
U.S. government
agencies............... 1,710 14.3 3,843 40.0 3,496 83.1 6,981 94.2
State and municipal..... 3,637 30.4 2,978 31.0 0 0.0 0 0.0
Federal Home Loan Bank
stock.................. 707 5.9 500 5.2 433 10.3 227 3.1
Federal Reserve stock... 534 4.5 371 3.9 280 6.7 199 2.7
Other equity
investments............ 99 0.8 50 0.5 0 0.0 0 0.0
------- ----- ------- ----- ------- ----- ------- -----
Total available for
sale.................. $11,983 100.0% $ 9,607 100.0% $ 4,209 100.0% $ 7,407 100.0%
======= ===== ======= ===== ======= ===== ======= =====
Held to Maturity
Securities
Amortized cost
U. S. Treasury.......... $ 5,980 76.0% $ 7,960 78.6% $11,921 81.5% $10,248 69.8%
U.S. government
agencies............... 0 0.0 0 0.0 0 0.0 1,127 7.7
State and municipal..... 85 1.1 85 0.8 220 1.5 455 3.1
Mortgage-backed
securities............. 1,800 22.9 2,080 20.5 2,493 17.0 2,857 19.5
Other................... 0 0.0% 0 0.0% 0 0.0% 0 0.0%
------- ----- ------- ----- ------- ----- ------- -----
Total held to
maturity.............. $ 7,865 100.0% $10,125 100.0% $14,634 100.0% $14,687 100.0%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
47
<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 September 30, 1998.
Investment Maturities
September 30, 1998
<TABLE>
<CAPTION>
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
-------- ------- ------- ------ ------- ------- -------- ------- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for Sale
Securities
U.S. Treasury........... $ 4,122 5.93% $ 1,174 6.01% $ 0 0.00% $ 0 0.00% $ 5,296 5.94%
U.S. government
agencies............... 200 4.85 1,094 4.30 0 0.00 0 0.00 1,295 4.38
State and municipal..... 1,034 5.01 2,193 4.95 310 4.95 100 6.25 3,637 5.00
Mortgage-backed
securities............. 0 0.00 0 0.00 92 7.84 325 6.16 416 6.53
Equity securities(1).... 0 0.00 0 0.00 0 0.00 1,340 0.00 1,340 --
-------- ------- ------- -------- -------
Total available for
sale.................. $ 5,356 $ 4,461 $ 402 $ 1,765 $11,984
======== ======= ======= ======== =======
Weighted average yield.. 5.71% 5.07% 5.61% 6.18% 5.46%
Held to Maturity
Securities
U.S. Treasury........... $ 1,992 5.00% $ 3,988 5.25% $ 0 0.00% $ 0 0.00% $ 5,980 5.17%
State and municipal..... 85 5.56 0 0.00 0 0.00 0 0.00 85 5.56
Mortgage-backed
securities............. 0 0.00 0 0.00 524 6.50 1,276 7.00 1,800 6.85
-------- ------- ------- -------- -------
Total held to
maturity.............. $ 2,077 $ 3,988 $ 524 $ 1,276 $ 7,865
======== ======= ======= ======== =======
Weighted average yield.. 5.02% 5.25% 6.50% 7.00% 5.56%
</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 65% of deposits having a committed term
in excess of three months and approximately 20% having a committed term of more
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 17.2%, 18.1% and 19.6% for 1997, 1996 and 1995, 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 $237.4 million as of September 30, 1998, an increase of
$31.2 million, or 15.2%, from the December 31, 1997 amount. The merger with
Glenwood contributed total deposits of $27.4 million. 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 September 30, 1998,
noninterest-bearing deposits comprised 23.1% of total deposits.
48
<PAGE>
The following table sets forth the distribution of Vail Banks' deposits by
type as of September 30, 1998, December 31, 1997, 1996 and 1995.
Deposit Composition
<TABLE>
<CAPTION>
December 31,
September 30, ----------------------------------------------
1998 1997 1996 1995
-------------- -------------- -------------- --------------
Amount % Amount % Amount % Amount %
-------- ----- -------- ----- -------- ----- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Demand, noninterest-
bearing................ $ 54,949 23.1% $ 56,929 27.6% $ 43,747 30.3% $ 35,534 28.3%
Demand, interest-bear-
ing.................... 101,756 42.9 94,779 46.0 74,147 51.4 65,719 52.3
Savings................. 16,063 6.8 13,537 6.6 7,890 5.5 8,058 6.4
Time, $100,000 and
over................... 35,678 15.0 18,961 9.2 7,442 5.2 3,783 3.0
Other time.............. 29,001 12.2 22,009 10.7 11,124 7.7 12,525 10.0
-------- ----- -------- ----- -------- ----- -------- -----
Total................. $237,447 100.0% $206,215 100.0% $144,350 100.0% $125,619 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
The following table sets forth the amount and maturity of time deposits that
had balances equal to or greater than $100,000 at September 30, 1998.
Time Deposits Equal to or Greater Than $100,000
<TABLE>
<CAPTION>
Remaining Maturity September 30, 1998
- ------------------ ------------------
(In thousands)
<S> <C>
Three months or less......................................... $ 8,268
Between three months and six months.......................... 21,203
Between six months and one year.............................. 1,726
Over one year................................................ 4,481
-------
Total...................................................... $35,678
=======
</TABLE>
Capital Resources
Shareholders' equity as of September 30, 1998 increased $11.7 million, or
86.3%, to $25.2 million from $13.5 million as of September 30, 1997. This
increase was due to the Common Stock issued in connection with the Cedaredge
Merger and the Independent Merger, purchase of bank facilities real estate
using preferred stock, the retention of current period earnings, and a private
offering of $3.0 million in Common Stock, for general corporate purposes, which
increased capital in excess of par. As part of the Cedaredge Merger, Vail Banks
assumed $1.6 million of the Mandatorily Convertible Debentures. Vail Banks
issued $2.96 million of preferred stock, plus $300,000 in cash, to purchase the
remaining ownership interest (72%) in Vail Banks' Vail office building. 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 $2.0 million at September 30, 1998, up $1.0 million from $1.0 million as of
September 30, 1997.
Shareholders' equity as of December 31, 1997 increased $8.4 million, or
89.5%, to $17.9 million from $9.4 million as of December 31, 1996. The primary
reason for this increase was also the aforementioned Cedaredge Merger and bank
facility acquisition. The majority, $274,000, of the remainder of the increase
in capital in excess of par is attributable to the tax savings created by the
use of the tax loss carryforwards. 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 $748,000 for the year
ended December 31, 1997, up $141,000 from $607,000 for the year ended 1996.
Shareholders' equity as of December 31, 1996 increased $308,000, or 3.4%, to
$9.4 million from $9.1 million as of December 31, 1995. This increase was
primarily due to the retention of current year earnings, net of the tax loss
carryforward benefit and the absence of dividend payments in 1997.
49
<PAGE>
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" for explanations of these terms and requirements.
Vail Banks currently maintains, and intends to continue to maintain, Tier 1
capital and leverage (Tier 1 capital to average total assets) ratios in excess
of the minimum for a "well capitalized" rating. As a result of the Independent
Merger, Vail Banks' total capital ratio dipped slightly below the minimum to
attain the "well capitalized" rating. Vail Banks expects the total capital
ratio to rise above, and continue to remain above, 10.0% subsequent to the
closing of the Offering and the Telluride Merger. See "Unaudited Pro Forma
Combined Condensed Financial Statements". Subsequent to the aforementioned
transactions, Vail Banks expects to continue to be rated "well capitalized" by
the Federal Reserve. The following table sets forth Vail Banks' capital ratios
and capital to assets ("leverage") ratios as of the indicated dates.
Risk-Based Capital Ratios
<TABLE>
<CAPTION>
September 30, December 31,
-------------- ------------------------------
1998 1997 1996
-------------- -------------- --------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital................ $ 15,854 8.26% $ 12,925 8.26% $ 9,098 8.59%
Tier 1 capital minimum
requirement.................. 7,681 4.00 6,260 4.00 4,236 4.00
-------- ----- -------- ----- -------- -----
Excess........................ $ 8,173 4.26% $ 6,665 4.26% $ 4,862 4.59%
======== ===== ======== ===== ======== =====
Total capital................. $ 18,952 9.87% $ 15,889 10.15% $ 9,924 9.37%
Total capital minimum
requirement.................. 15,362 8.00 12,521 8.00 8,471 8.00
-------- ----- -------- ----- -------- -----
Excess........................ $ 3,590 1.87% $ 3,368 2.15% $ 1,453 1.37%
======== ===== ======== ===== ======== =====
Total risk adjusted assets.... $192,024 $156,508 $105,890
======== ======== ========
<CAPTION>
December 31,
----------------------------------------------
1995 1994 1993
-------------- -------------- --------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital................ $ 8,855 9.93% $ 6,914 17.22% $ 6,825 20.51%
Tier 1 capital minimum re-
quirement.................... 3,567 4.00 1,606 4.00 1,331 4.00
-------- ----- -------- ----- -------- -----
Excess........................ $ 5,288 5.93% $ 5,308 13.22% $ 5,494 16.51%
======== ===== ======== ===== ======== =====
Total capital................. $ 9,475 10.62% $ 7,275 18.12% $ 7,178 21.57%
Total capital minimum require-
ment......................... 7,135 8.00 3,212 8.00 2,662 8.00
-------- ----- -------- ----- -------- -----
Excess........................ $ 2,340 2.62% $ 4,063 10.12% $ 4,516 13.57%
======== ===== ======== ===== ======== =====
Total risk adjusted assets.... $ 89,183 $ 40,148 $ 33,281
======== ======== ========
</TABLE>
50
<PAGE>
Leverage Ratios
<TABLE>
<CAPTION>
December 31,
September 30, ------------------------------
1998 1997 1996
-------------- -------------- --------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital.................... $ 15,854 6.18% $ 12,925 7.33% $ 9,098 6.23%
Minimum requirement............... 8,423 3.00 5,292 3.00 4,383 3.00
-------- ---- -------- ---- -------- ----
Excess............................ $ 7,431 3.18% $ 7,633 4.33% $ 4,715 3.23%
======== ==== ======== ==== ======== ====
Average total assets.............. $256,544 $176,390 $146,099
======== ======== ========
<CAPTION>
December 31,
----------------------------------------------
1995 1994 1993
-------------- -------------- --------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital.................... $ 8,855 7.22% $ 6,914 9.11% $ 6,825 9.70%
Minimum requirement............... 3,679 3.00 2,278 3.00 2,112 3.00
-------- ---- -------- ---- -------- ----
Excess............................ $ 5,176 4.22% $ 4,636 6.11% $ 4,713 6.70%
======== ==== ======== ==== ======== ====
Average total assets.............. $122,635 $ 75,929 $ 70,395
======== ======== ========
</TABLE>
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 system is 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
51
<PAGE>
issue will range from $180,000 to $200,000, $190,000 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 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 customer's 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 and state and municipal securities. 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 $61.9
million, or 42.9%, to $206.2 million during the year ended December 31, 1997
and increased by $31.2 million, or 15.2%, to $237.4 million during the nine
months ended September 30, 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.
52
<PAGE>
Asset and Liability Management. The liquidity position of Vail Banks is
monitored by the Asset/Liability Committee of the Board of Directors of
WestStar. 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 September 30, 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.
Maturity and Repricing of Interest Earning Assets and Liabilities
<TABLE>
<CAPTION>
September 30, 1998
---------------------------------------------------------
Three Over three Over one
months months through year 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.... $ 13,900 $ 0 $ 0 $ 0 $ 13,900
Investment
securities........... 2,961 6,315 7,605 2,967 19,848
Loans................. 103,294 26,739 43,798 10,575 184,406
-------- -------- ------- ------- --------
Total interest-
earning assets..... 120,155 33,054 51,403 13,542 218,154
Interest-bearing
liabilities:
Deposits
Demand, interest-
bearing............ 40,702 40,702 20,352 0 101,756
Savings............. 6,425 6,425 3,213 0 16,063
Certificates of
deposit............ 16,401 36,292 11,865 121 64,679
Securities sold under
repurchase
agreements........... 1,235 0 0 0 1,235
Note payable.......... 1,050 0 0 0 1,050
Other liabilities..... 0 0 0 127 127
-------- -------- ------- ------- --------
Total interest-
bearing
liabilities........ $ 65,814 $ 83,420 $35,429 $ 248 $184,910
-------- -------- ------- ------- --------
Interest rate gap....... $ 54,341 $(50,366) $15,974 $13,294 $ 33,244
======== ======== ======= ======= ========
Cumulative interest rate
gap at September 30,
1998................... $ 54,341 $ 3,976 $19,950 $33,244
======== ======== ======= =======
Cumulative interest rate
gap to total assets.... 20.32% 1.49% 7.46% 12.43%
======== ======== ======= =======
</TABLE>
53
<PAGE>
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 Financial Accounting Standards Board
("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
periods provided for comparative purposes is required. Vail Banks has chosen to
disclose comprehensive income in a separate income statement. The only
component of comprehensive income consists of unrealized holding gains on
securities with no related tax effects.
Earnings Per Share. SFAS 128, Earnings per Share ("SFAS No. 128"), replaces
primary and fully diluted earnings per share with basic and diluted earnings
per share. Under the new requirements, the dilutive effect of stock options is
excluded from the calculation of basic earnings per share. Diluted earnings per
share are calculated similarly to the fully diluted earnings per share. SFAS
No. 128 became effective for Vail Banks' 1997 year-end financial statements.
All prior period earnings per share data presented have been restated to
conform to the provisions of this statement.
Operating Segments. Vail Banks adopted Financial Accounting Standards Board
Statement No. 131, Disclosures About Segments of an Enterprise and Related
Information ("SFAS No. 131") effective January 1, 1998. This statement
establishes standards for reporting information about segments in annual and
interim financial statements. SFAS No. 131 introduces a new model for segment
reporting called the "management approach". The management approach is based on
the way the chief operating decision-maker organizes segments within the
company for making operating decisions and assessing performance. Reportable
segments are based on products and services, geography, legal structure,
management structure and any other in which management disaggregates a company.
Based on the "management approach" model, 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.
54
<PAGE>
MANAGEMENT
Executive Officers and Directors
The executive officers and directors of Vail Banks are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
E.B. Chester, 56 Chairman of the Board of Directors of Vail Banks and
Jr.(1)(2)(3)........... WestStar
Lisa M. Dillon(1)(3).... 45 President and Chief Executive Officer and Director
of Vail Banks and WestStar
Joseph S. Dillon........ 40 Senior Executive Vice President and Chief Financial
Officer of Vail Banks
James C. Allen(3)....... 63 Director
Kay H. Chester.......... 52 Director
Dennis R. Devor......... 48 Director
James G. Flaum.......... 54 Director
S. David Gorsuch(3)..... 60 Director
James M. Griffin........ 52 Director
Martin T. Hart(2)....... 63 Director
Garner F. Hill, II...... 60 Director
Robert L. Knous, 52 Director
Jr.(3).................
Kent Myers.............. 49 Director
Byron A. Rose(1)(2)..... 57 Director
Donald L. Vanderhoof.... 67 Director
E. William Wilto(2)..... 52 Director
</TABLE>
- --------
(1) Member of the Executive Committee
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee
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 Officer of Dillon Technologies, Inc., a
business consulting firm, and was an associate during 1998 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.
Mr. Allen has been a director of Vail Banks since 1997. Mr. Allen, a retired
industrialist and investor, was Chairman of the Board of Directors and Chief
Executive Officer of Falcon Manufacturing Inc., a building insulation
manufacturer, from 1962 to 1997.
55
<PAGE>
Mrs. Chester has been a director of Vail Banks since 1993 and a director of
WestStar since 1992. Mrs. Chester has been active in investing since 1989.
Mr. Devor became a director in February 1999 following the consummation of
the Telluride merger. Mr. Devor is an attorney in Montrose, Colorado. He
previously served on the Western Colorado Bank board of directors, as well as
other bank boards.
Mr. Flaum has been a director of Vail Banks and WestStar since 1996. Mr.
Flaum has been the President of Slifer, Smith & Frampton/Vail Associates Real
Estate, a real estate firm, since 1997. Mr. Flaum started his career with
Slifer, Smith & Frampton/Vail Associates Real Estate in 1987.
Mr. Gorsuch has been a director of Vail Banks since 1993 and has been a
director of WestStar since 1977. Mr. Gorsuch is the President of Gorsuch Ltd.,
a retail clothing and ski equipment business.
Mr. Griffin has been a director of Vail Banks since 1993. Mr. Griffin was
employed by the Estee Lauder Companies in 1979. Before leaving the company in
1996, he served as Executive Vice President and Chief Operating Officer of
Lauder Investments Inc., an investment company affiliated with the Estee Lauder
Companies. Mr. Griffin also served as Senior Vice President and Chief Operating
Officer of First Spring Corporation during 1996. Since 1996 he has been an
independent investor.
Mr. Hart has been a director of Vail Banks since 1997. Since 1969, Mr. Hart
has been an independent investor. Mr. Hart is also a director of T. Netix, PJ
America, MassMutual Corporate Investors, MassMutual Participation Investors,
Schuler Homes, Inc., Optical Securities Corp., and Pacific National Financial
Group.
Mr. Hill became a director of Vail Banks in January 1999, following the
consummation of the Telluride Merger. Mr. Hill is currently a self employed
investor and the Vice President of Ferris Corporation, a company involved in
real estate. Mr. Hill served as the Chairman of the Board of Telluride and the
Bank of Telluride from 1988 through 1999 and served as the Chairman of the
Board of Western Colorado Bank from 1991 through 1999.
Mr. Knous has been a director of Vail Banks and WestStar since 1997. Mr.
Knous is the Managing Partner of East West Partners of Summit County, a real
estate development company, where he has worked since 1993.
Mr. Myers has been a director of Vail Banks and WestStar since 1997. Mr.
Myers is managing partner of the Klein Group, LLC, a local mortgage bank.
Previously he served as Senior Vice President and Chief Operating Officer of
Vail Resorts, a resort management company, where he worked from 1988 to 1997.
Mr. Rose has been a director of Vail Banks since 1993 and a director of
WestStar since 1989. Mr. Rose, who retired in 1987, served as a Managing
Director of Morgan Stanley & Co. from 1978 to 1987.
Mr. Vanderhoof has served as a director of Vail Banks since August 1998. Mr.
Vanderhoof was formerly the Chairman of Glenwood, where he had been employed
since 1956.
Mr. Wilto has been a director of Vail Banks since 1993 and a director of
WestStar since 1985. Mr. Wilto is a realtor and has owned RE/MAX Vail, Inc., a
real estate firm, since 1991.
Mr. and Mrs. Chester are husband and wife, and Mr. and Ms. Dillon are brother
and sister.
Board Committees
Vail Banks' Board of Directors has established three committees, an Audit
Committee, a Compensation Committee and an Executive Committee.
The Audit Committee presently consists of four directors, including three
independent directors, and is responsible for reviewing and monitoring Vail
Banks' financial reports and accounting practices. The Audit Committee is also
responsible for reviewing related party transactions and potential conflicts of
interest involving officers, directors, employees or affiliates of Vail Banks.
56
<PAGE>
The Compensation Committee presently consists of five directors, including
three independent directors, and is responsible for determining the
compensation of Vail Banks' executive officers. The Compensation Committee is
also authorized to administer Vail Banks' Stock Incentive Plan.
The Executive Committee presently consists of three directors, of which one
is an independent director, and is authorized to consider any matter that may
be brought before a meeting of the full Board of Directors, subject to
restrictions under Colorado law.
Executive Compensation
The following table sets forth certain information regarding the annual
compensation for services in all capacities to Vail Banks for the year ended
December 31, 1998 and 1997 with respect to Vail Banks' Chairman and President
and Chief Executive Officer (the "Named Executive Officers"). No other Vail
Banks' executive officer earned more than $100,000 in salary and bonus during
such fiscal years:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
-------------------------------- ------------------------
Salary
and All Other Securities
Directors Annual Underlying All Other
Name and Principal Position Year Fees Bonus Compensation Options/SAR Compensation
- --------------------------- ---- --------- ----- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
E.B. Chester, Jr........ 1998 $150,700 -- * 113,000 $2,876(3)
Chairman 1997 123,700 30,000(1) $10,770(2) -- 2,972(4)
Lisa M. Dillon,......... 1998 140,900 -- * 87,000 2,740(3)
President and Chief 1997 121,700 30,000(1) 10,770(2) -- 2,078(4)
Executive Officer
</TABLE>
- --------
* Does not meet the Securities and Exchange Commission's threshold for
disclosure.
(1) Reflects fair market value at time of award of stock awarded as a bonus.
(2) Reflects cash paid for the payment of taxes.
(3) Reflects 401(k) matching contributions ($1,955 for Mr. Chester and $1,869
for Ms. Dillon) and term life insurance premiums ($921 for Mr. Chester and
$871 for Ms. Dillon).
(4) Reflects 401(k) matching contributions ($1,796 for Mr. Chester and $1,766
for Ms. Dillon) and term life insurance premiums ($1,176 for Mr. Chester
and $312 for Ms. Dillon).
The following options were granted to the Named Executive Officers during
1998.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of Percent of Total
Securities Underlying Options/SARs Granted to Exercise Expiration
Name Options/SARs Granted(1) Employees in Fiscal Year Price Date
---- ----------------------- ------------------------ -------- ----------
<S> <C> <C> <C> <C>
E.B. Chester, Jr. ...... 66,148 25% $9.391 2003
46,852 17% $8.537 2008
Lisa M. Dillon.......... 87,000 32% $8.537 2008
</TABLE>
- --------
(1)The options vest in 25% increments annually, commencing on January 1, 1999.
No options were exercised during 1998.
The following chart shows the value of unexercised options held by the Named
Executive Officers:
FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities Underlying In-The-Money
Unexercised Options/SARs at FY- Options/SARs at FY-End
End (Exercisable/Unexercisable) (Exercisable/Unexercisable)(1)
------------------------------- ------------------------------
<S> <C> <C>
E.B. Chester, Jr........ 0/66,148 0/$184,983
0/46,852 0/$171,033
Lisa M. Dillon.......... 0/87,000 0/$317,333
</TABLE>
- --------
(1) Based on the closing sale price of the Common Stock on The Nasdaq Stock
Market on December 31, 1998--$12 3/16.
57
<PAGE>
Directors Compensation
Each member of the Board of Directors is paid a $2,500 annual retainer, $200
per board meeting at which such member is in attendance, and each member, other
than Mr. Chester and Ms. Dillon, receives $100 per committee meeting at which
such member is in attendance.
Stock Incentive Plan
In April 1998, Vail Banks adopted its Stock Incentive Plan (the "Plan") to
provide selected employees, directors and other persons providing services to
Vail Banks or its subsidiaries an opportunity to purchase Common Stock of Vail
Banks. The Plan promotes the success and enhances the value of Vail Banks by
linking the personal interests of participants to those of Vail Banks'
shareholders, and by providing participants with an incentive for outstanding
performance. Awards under the Plan may be structured in a variety of ways,
including as "incentive stock options" as defined in Section 422 of the
Internal Revenue Code of 1986, as amended ("IRC"), non-qualified stock options
and restricted stock awards.
Incentive stock options ("ISOs") may be granted only to employees of Vail
Banks, including its subsidiaries. All other awards may be granted to any
person employed by or performing services for Vail Banks or its subsidiaries.
The Plan provides for the issuance of options and awards for up to 15% of the
issued and outstanding shares of Common Stock as of the date the option or
award is granted, of which up to 500,000 shares may be subject to ISOs.
ISOs are subject to certain limitations prescribed by the IRC, including the
requirement that such options be granted with an exercise price no less than
the fair market value of the Common Stock at the date of grant and that the
value of stock with respect to which ISOs are exercisable by a participant for
the first time in any year under the terms of the Plan (and any other incentive
stock option plans of Vail Banks and its subsidiaries) may not exceed $100,000,
based on the fair market value of the stock at the date of grant. In addition,
ISOs may not be granted to employees who own more than 10% of the combined
voting power of all classes of voting stock of Vail Banks, unless the option
price is at least 110% of the fair market value of the Common Stock subject to
the option and unless the option is exercisable for no more than five years
from the grant date.
The Compensation Committee or a subcommittee thereof of the Board of
Directors of Vail Banks has discretion, subject to ratification by the full
Board, to set the terms and conditions of options and other awards, including
the term, exercise price and vesting conditions, if any, to select the persons
who receive such grants and awards, and to interpret and administer the Plan.
As of the date of this Prospectus, options to purchase an aggregate of
319,000 shares of Common Stock have been granted under the Plan and were
outstanding, including options for 113,000 shares of Common Stock issued to Mr.
Chester and 87,000 shares of Common Stock issued to Ms. Dillon. Ms. Dillon's
options and 46,852 of Mr. Chester's options have an exercise price of $8.537
per share, determined by the Board of Directors to be the fair market value on
the date of the grant. The remainder of Mr. Chester's options have an exercise
price of 110% of $8.537 per share or $9.391, and those options expire in 2003.
58
<PAGE>
PRINCIPAL SHAREHOLDERS
The table below sets forth certain information regarding the beneficial
ownership of the Common Stock, as of the date of this Prospectus by (1) each
person known to Vail Banks to be the beneficial owner of 5% or more of the
outstanding shares of Common Stock; (2) each director of Vail Banks; (3) each
Named Executive Officer; and (4) all directors and executive officers of Vail
Banks as a group. Unless otherwise indicated, each of the shareholders listed
below has sole voting and investment power with respect to the shares
beneficially owned.
<TABLE>
<CAPTION>
Shares Beneficially
Owned Prior to the
Offering(1)
----------------------
Beneficial Owner Number Percent
---------------- ----------- ----------
<S> <C> <C>
E.B. Chester, Jr.(2)(3).............................. 1,222,227 20.14%
Kay H. Chester(3)(4)................................. 1,222,227 20.14%
Byron A. Rose(5)..................................... 268,075 4.44%
Donald L. Vanderhoof................................. 161,040 2.67%
James M. Griffin(6).................................. 127,822 2.12%
Lisa M. Dillon(7).................................... 104,946 1.73%
James C. Allen(8).................................... 95,840 1.59%
Dennis R. Devor...................................... 1,000 *
Martin T. Hart(9).................................... 80,840 1.34%
Garner F. Hill II.................................... 54,500 *
Kent Myers(10)....................................... 17,170 *
S. David Gorsuch(11)................................. 12,982 *
Robert L. Knous, Jr.(12)............................. 10,210 *
James G. Flaum(13)................................... 10,776 *
E. William Wilto(14)................................. 3,182 *
All directors and executive officers as a group (16
persons)............................................ 2,171,610 35.19%
</TABLE>
- --------
* Denotes less than 1%
(1) Based on 6,040,608 shares outstanding on January 15, 1999.
(2) Includes (i) 432,877 shares beneficially owned by Mr. Chester's wife, Kay
H. Chester, as to which he disclaims beneficial ownership, and (ii)
currently exercisable options for 28,250 shares.
(3) Mr. and Mrs. Chester's address is care of Vail Banks, Inc., 108 S.
Frontage Road West, Suite 101, Vail, Colorado 81657.
(4) Includes (i) 789,350 shares beneficially owned by Mrs. Chester's husband,
E.B. Chester, Jr., as to which she disclaims beneficial ownership, and
(ii) currently exercisable options for 1,250 shares.
(5) Includes currently exercisable options for 1,250 shares.
(6) Includes currently exercisable options for 1,250 shares.
(7) Includes currently exercisable options for 21,750 shares.
(8) Includes currently exercisable options for 1,250 shares and 15,000 shares
owned by Mr. Allen's wife, Barbara A. Allen.
(9) Includes currently exercisable options for 1,250 shares.
(10) Includes currently exercisable options for 1,250 shares and 1,500 shares
held by Mr. Myers as custodian for his daughter, Allison Myers, and 1,500
shares held by Mr. Myers as custodian for his son, Brad Myers.
(11) Includes currently exercisable options for 1,250 shares.
(12) Includes currently exercisable options for 1,250 shares.
(13) Includes currently exercisable options for 1,250 shares and 4,260 shares
owned jointly with Mr. Flaum's wife, Ronna J. Flaum.
(14) Includes currently exercisable options for 1,250 shares.
59
<PAGE>
CERTAIN TRANSACTIONS
On December 1, 1997, VNB Building Corp. ("VNB"), owned by E.B. Chester, Jr.,
Chairman of Vail Banks, and Byron A. Rose, a principal shareholder of Vail
Banks, merged into Vail Banks. As a result of the merger, Vail Banks acquired
the building and property of the main office of WestStar and a 53% interest in
the building and property of the Avon retail office. As consideration in the
merger, Vail Banks issued shares of its Series A Preferred Stock to Messrs.
Chester and Rose. Upon consummation of the Offering, Messrs. Chester's and
Rose's shares of Series A Preferred Stock were converted into 274,060 and
68,516 shares of Common Stock, respectively, and dividends of $394,127 and
$98,532 were paid to Messrs. Chester and Rose, respectively. During 1997 Vail
Banks made rental payments, excluding common area maintenance and taxes, of
$362,465 to limited partnerships of which VNB was the general partner for the
Vail and Avon bank facilities.
In July 1997, Lisa M. Dillon, President and Chief Executive Officer of Vail
Banks and WestStar, entered into an Agreement of Limited Partnership which
formed VBI Employee Limited Partnership (defined elsewhere in this Prospectus
as "VBILP") and was designated general partner, with James G. Flaum, a
director, and several other employees of WestStar as limited partners. VBILP
acquired from E.B. Chester, Jr. 181,543 shares of Common Stock in consideration
for VBILP's promissory note dated July 8, 1997 (the "Promissory Note"). The
Promissory Note, in the principal amount of $1.275 million, bore interest at a
floating rate equal to the U.S. Bank reference rate plus 0.125%. Accrued
interest on the Promissory Note was payable by the employee general and limited
partners of VBILP to Mr. Chester quarterly, and the principal on the Promissory
Note was repaid in December 1998 with the proceeds of the sale of 120,000
shares of Common Stock in the Offering. VBILP granted to Mr. Chester a proxy to
vote Common Stock owned by VBILP until the Promissory Note in favor of Mr.
Chester was paid in full.
Vail Banks entered into an agreement with Dillon Schramm Associates Ltd.
("DSAL"), pursuant to which DSAL rendered certain consulting services in
connection with the Offering, the Telluride Merger and certain other matters.
Joseph S. Dillon was an associate of DSAL. On June 25, 1998, Mr. Dillon was
elected by the Board of Directors as Senior Executive Vice President and Chief
Financial Officer of Vail Banks. As of October 21, 1998, Mr. Dillon commenced
receiving a salary in connection with his position. Vail Banks paid DSAL an
aggregate fee of $307,200 as compensation for its services a portion of which
was paid by DSAL to Mr. Dillon.
In July 1998, pursuant to a private offering of 204,540 shares of Common
Stock at $10.00 per share, primarily to existing shareholders, Vail Banks sold
an aggregate of 81,780 shares of Common Stock to 12 executive officers and
directors of Vail Banks. The purpose of the offering was to raise capital to
maintain Vail Banks' capital ratios at the well capitalized level after the
Independent Merger.
Pursuant to the Independent Merger consummated on July 31, 1998, Vail Banks
issued 161,040 shares of Common Stock to Donald Vanderhoof, a director of Vail
Banks, who owned approximately 48% of Independent.
Pursuant to the Telluride Merger consummated on December 15, 1998, Vail Banks
issued 54,505 shares of Common Stock and approximately $768,000 cash to
Garner F. Hill II, a director of Vail Banks, who beneficially owned
approximately 6% of Telluride.
On December 31, 1998, VBILP was dissolved. Lisa M. Dillon, President and
Chief Executive Officer of Vail Banks, received 35,594 shares of Common Stock
in consideration for her interest in VBILP, and James Flaum, a director of Vail
Banks, received 5,266 shares of Common Stock in consideration for his interest
in VBILP.
Vail Banks and its bank subsidiaries have had, and expect to have in the
future, banking transactions in the ordinary course of business with, directors
and officers of Vail Banks and its bank subsidiaries and their
60
<PAGE>
associates, including corporations in which such officers or directors are
shareholders, directors and/or officers, on the same terms (including interest
rates and collateral) as then prevailing at the time for comparable
transactions with other persons. Such transactions have not involved more than
the normal risk of collectibility or presented other unfavorable features.
61
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices and unpaid Vail Banks' ability to
raise capital through the sale of equity securities. Vail Banks has outstanding
6,040,608 shares of Common Stock. The 1,840,000 shares sold in the Offering are
freely tradeable without restrictions or further registration under the
Securities Act, unless acquired by "affiliates" of Vail Banks, as that term is
defined in Rule 144 under the Securities Act ("Rule 144"), in which case these
shares will be subject to the resale limitations of Rule 144. In addition, the
shares sold by the Selling Shareholders pursuant to this Prospectus will be
freely tradeable by purchasers who are not affiliates of Vail Banks. The
Selling Shareholders are subject to lock-up agreements. These agreements
provide that the shareholders will not, directly or indirectly, offer, pledge,
sell, contract to sell, or otherwise dispose of or grant any options or other
rights with respect to, any shares of Common Stock or any securities that are
convertible into or exchangeable or exercisable for Common Stock owned by them
until early April, 1999 without the prior written consent of the underwriters
of the Offering. The underwriters have indicated that generally they will
consent to the release of shares under the lock-up agreements.
The outstanding shares of Common Stock not sold in the Offering were issued
and sold by Vail Banks in private transactions in reliance upon the exemption
from registration contained in Section 4(2) of the Securities Act and are
restricted securities under Rule 144. These shares may not be sold unless they
are registered under the Securities Act pursuant to the registration statement
of which this Prospectus is part or otherwise or are sold pursuant to an
applicable exemption from registration, including the exemption pursuant to
Rule 144. In general, under Rule 144 as currently in effect, beginning 90 days
after the Offering, a person who has beneficially owned any such shares for at
least one year, including "affiliates" of Vail Banks, would be entitled to sell
in broker's transactions or to market makers within any three-month period a
number of shares that does not exceed the greater of one percent of the then
outstanding shares of Common Stock or the average weekly trading volume of the
Common Stock on The Nasdaq Stock Market during the four calendar weeks
preceding the date on which notice of the sale is filed with the Commission.
Sales under Rule 144 are also subject to certain manner of sale restrictions
and notice requirements and to the availability of current public information
concerning Vail Banks. A person (or persons whose shares are aggregated) who is
not an "affiliate" of Vail Banks at any time during the 90 days preceding a
sale, and who has beneficially owned such shares for at least two years, would
be entitled to sell such shares under Rule 144(k) without regard to the
availability of current public information, volume limitations, manner of sale
provisions, or notice requirements. The above is a summary of Rule 144 and is
not intended to be a complete description thereof.
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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.
General. Vail Banks is a registered multi-bank holding company subject to
regulation by the Federal Reserve 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 its banking
subsidiaries 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 corporate
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.
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.
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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 to WestStar. At September 30, 1998,
net assets available from WestStar, Bank of Telluride and Western Colorado Bank
to pay dividends without prior approval from regulatory authorities totaled
approximately $502,000, $460,000 and $961,000, 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 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.
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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, WestStar exceeded "well capitalized" minimum
requirements in terms of Tier 1 capital and "adequately capitalized" in terms
of total capital at September 30, 1998.
Set forth below are pertinent capital ratios for Vail Banks as of September
30, 1998:
<TABLE>
<CAPTION>
Minimum Capital Required for
Requirement well capitalized Actual
--------------- ---------------- ------
<S> <C> <C> <C>
Tier 1 Capital to Risk Based
Assets............................. 4.00% 6.00% 8.26%
Total Capital to Risk Based Assets.. 8.00% 10.00% 9.87%
Leverage Ratio (Tier 1 Capital to
Average Total Assets).............. 3.00% 5.00% 6.18%
</TABLE>
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 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;
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(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. 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.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Vail Banks consists of 20,000,000 shares of
Common Stock, $1.00 par value and 2,250,000 shares of Preferred Stock, $1.00
par value. 6,040,608 shares of Common Stock are issued and outstanding, and no
shares of Preferred Stock are issued and outstanding.
The following summary of Vail Banks' capital stock does not purport to be
complete and is qualified in its entirety by reference to the Articles of
Incorporation, as amended and restated, and Bylaws, as amended and restated of
Vail Banks that are included as exhibits to the Registration Statement of which
this Prospectus forms a part, and the applicable provisions of the Colorado
Business Corporation Act.
Common Stock
Holders of Common Stock are entitled to one vote per share on any issue
submitted to a vote of the shareholders and do not have cumulative voting
rights in the election of directors. Accordingly, the holders of a majority of
the outstanding shares of Common Stock voting in an election of directors can
elect all of the directors then standing for election, if they choose to do so.
Subject to any outstanding shares of Preferred Stock, all shares of Common
Stock are entitled to share equally in such dividends as the Board of Directors
of Vail Banks may, in its discretion, declare out of sources legally available
therefor. See "Dividend Policy." Upon dissolution, liquidation, or winding up
of Vail Banks, holders of Common Stock are entitled to receive on a ratable
basis, after payment or provision for payment of all debts and liabilities of
Vail Banks and any preferential amount due with respect to outstanding shares
of Preferred Stock, if any, all assets of Vail Banks available for
distribution, in cash or in kind. Holders of shares of Common Stock do not have
preemptive or other subscription rights, conversion or redemption rights, or
any rights to share in any sinking fund. All currently outstanding shares of
Common Stock are, and the shares offered hereby (when sold in the manner
contemplated by this Prospectus) will be, fully paid and nonassessable.
Preferred Stock
Pursuant to Vail Banks' Articles of Incorporation, the Board of Directors,
from time to time, may authorize the issuance of shares of Preferred Stock in
one or more series, may establish the number of shares to be included in any
such series, and may fix the designations, powers, preferences, and rights
(including voting rights) of the shares of each such series and any
qualifications, limitations, or restrictions thereon. No shareholder
authorization is required for the issuance of shares of Preferred Stock unless
imposed by then
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applicable law. Shares of Preferred Stock may be issued for any general
corporate purposes, including mergers and acquisitions. The Board of Directors
could issue a series of Preferred Stock with rights more favorable with regard
to dividends and liquidation than the rights of holders of Common Stock. Such a
series of Preferred Stock also could be used for the purpose of preventing a
hostile takeover of Vail Banks that is considered to be desirable by the
holders of the Common Stock, could otherwise adversely affect the voting power
of the holders of Common Stock, and could serve to perpetuate the directors'
control of Vail Banks under certain circumstances. No transaction is now
contemplated that would result in the issuance of any such shares of Preferred
Stock.
Certain Provisions of Vail Banks' Articles of Incorporation and Bylaws
Staggered Board of Directors; Removal; Filling Vacancies. The Articles of
Incorporation provide that the Board of Directors will consist of between 10
and 18 directors. The Board currently consists of 15 directors. The Board of
Directors is divided into three classes of directors serving staggered three-
year terms. In addition, directors may be removed by the shareholders only for
cause. The classification of directors and the limitation on removal only for
cause has the effect of making it more difficult for shareholders to change the
composition of the Board of Directors. Vail Banks believes, however, that the
longer time required to elect a majority of a classified Board of Directors
will help to ensure the continuity and stability of Vail Banks' management and
policies. The classification provisions could also have the effect of
discouraging a third party from accumulating large blocks of Vail Banks' stock
or attempting to obtain control of Vail Banks, even though such an attempt
might be beneficial to Vail Banks and its shareholders. Accordingly,
shareholders could be deprived of certain opportunities to sell their shares of
Common Stock at a higher market price than might otherwise be the case. See
"Risk Factors--Certain Anti-Takeover Provisions." The shareholders will be
entitled to vote on the election or removal of directors, with each share
entitled to one vote.
The Bylaws provide that, unless the Board of Directors otherwise determines,
any vacancies will be filled by the affirmative vote of a majority of the
remaining directors, even if less than a quorum. A director may be removed only
with cause by the vote of the holders of a majority of the shares entitled to
vote for the election of directors at a meeting of the shareholders called for
the purpose of removing such director. A vacancy resulting from an increase in
the number of directors may be filled by action of the Board of Directors.
Indemnification and Limitations on Liability of Officers and Directors
Vail Banks' Articles of Incorporation provide for indemnification of
directors to the full extent permitted by Colorado law and, to the extent
permitted by such law, eliminate or limit the personal liability of directors
to Vail Banks and its shareholders for monetary damages for certain breaches of
fiduciary duty and the duty of care. Such indemnification may be available for
liabilities arising in connection with this Offering. Insofar as
indemnification for liabilities under the Securities Act may be permitted to
directors, officers or persons controlling Vail Banks pursuant to the foregoing
provisions, Vail Banks has been informed that, in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. Pursuant to its Articles of
Incorporation, Vail Banks may indemnify its officers, employees, agents and
other persons to the fullest extent permitted by Colorado law. Vail Banks has
entered into indemnification agreements with its directors and executive
officers pursuant to which Vail Banks has agreed to indemnify such persons in
certain circumstances.
Vail Banks' Bylaws also provide that Vail Banks shall have the power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of Vail Banks, or who, while a director,
officer, employee or agent, is or was serving as a director, officer, trustee,
general partner, employee or agent of one of Vail Banks' subsidiaries or, at
the request of Vail Banks, of any other organization, against any liability
asserted against such person or incurred by such person in any such capacity,
whether Vail Banks would have the power to indemnify such person against such
liability under Colorado law. Vail Banks intends to purchase and maintain
insurance on behalf of all of its directors and executive officers.
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Registration Rights
Vail Banks has granted best efforts registration rights to certain employee
shareholders. Such registration rights grant the holders thereof the right to
have Vail Banks use its best efforts to register the Common Stock in connection
with any registration statements (including the Registration Statement of which
this Prospectus is part) filed by the Company. All such holders of the
aforementioned shares of Common Stock have signed a waiver which precludes
utilization of the best efforts registration rights pursuant to this
Prospectus.
In addition, Vail Banks agreed to use its best efforts to register for resale
the Common Stock issued in exchange for Telluride common stock as a result of
the Telluride Merger. Certain shares registered under the registration
statement of which this Prospectus is part were issued pursuant to the
Telluride Merger.
Other Matters
The shares of Common Stock are quoted on The Nasdaq Stock Market under the
symbol "VAIL."
The transfer agent and registrar for Vail Banks' Common Stock is American
Securities Transfer & Trust, Inc., Denver, Colorado.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby will be passed upon for Vail Banks by Kilpatrick Stockton
LLP, Atlanta, Georgia.
EXPERTS
The audited financial statements of Vail Banks at December 31, 1995, 1996 and
1997 in this Prospectus and elsewhere in the Registration Statement have been
audited by Fortner, Bayens, Levkulich & Co., P.C., independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon giving said reports and upon the authority of
said firm as experts in accounting and auditing. The financial statements of
Vail Banks for the nine months ended September 30, 1998 have been reviewed by
Fortner, Bayens, Levkulich & Co., P.C. as stated in their report included
herein.
The audited financial statements of Cedaredge at November 30, 1997 in this
Prospectus and elsewhere in the Registration Statement have been audited by
Dalby, Wendland & Co., P.C., independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon
giving said reports and upon the authority of said firm as experts in
accounting and auditing.
The audited financial statements of Independent at December 31, 1996 and 1997
in this Prospectus and elsewhere in the Registration Statement have been
audited by GRA, Thompson, White & Co., P.C., independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon giving said reports and upon the authority of said firm as
experts in accounting and auditing.
The audited financial statements of Telluride at December 31, 1996 and 1997
in this Prospectus and elsewhere in the Registration Statement have been
audited by Dalby, Wendland & Co., P.C., independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon giving said reports and upon the authority of said firm as
experts in accounting and auditing. The financial statements of Telluride for
the nine months ended September 30, 1998 and 1997 have been reviewed by Dalby,
Wendland & Co., P.C., as stated in their report included herein.
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ADDITIONAL INFORMATION
Vail Banks has filed with the Commission a Registration Statement on Form SB-
2 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus, which is a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto. For further information with respect to Vail Banks and the
Common Stock, reference is made to the Registration Statement, including the
exhibits and schedules thereto. Statements contained in this Prospectus
concerning the contents of any contract or any other document are not
necessarily complete. With respect to each such contract or document filed as
an exhibit to the Registration Statement, reference is made to such exhibit for
a more complete description of the matters involved, and each statement shall
be deemed qualified in its entirety by such reference to the copy of the
applicable document filed with the Commission. A copy of the Registration
Statement, including the exhibits thereto, may be inspected without charge at
the Public Reference section of the commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the following regional
offices of the Commission: New York Regional Office, 7 World Trade Center, 13th
Floor, New York, New York 10048; and Chicago Regional Office, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of the Registration
Statement and the exhibits and schedules thereto can be obtained from the
Public Reference Section of the Commission upon payment of prescribed fees. The
Commission maintains an Internet web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission. A copy of the Registration Statement,
including the exhibits thereto, is available on the Commission's Internet web
site. The address of that site is http://www.sec.gov.
Vail Banks is subject to the informational and periodic reporting
requirements of the Securities Exchange Act of 1934 (the "Exchange Act"), and
in accordance therewith files periodic reports, proxy statements, and other
information with the Commission. Such periodic reports, proxy statements, and
other information are available for inspection and copying at the public
reference facilities and other regional offices and the Commission's Internet
web site referred to above. Vail Banks intends to furnish its shareholders with
annual reports containing audited financial statements and such other reports
as may be required from time to time by law or The Nasdaq Stock Market.
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INDEX TO THE FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Vail Banks, Inc.
Independent Auditors' Report.............................................. F-1
Accountants' Review Report................................................ F-2
Consolidated Balance Sheets at September 30, 1998 (reviewed) (unaudited)
and December 31, 1997 and 1996........................................... F-3
Consolidated Statements of Income for the Nine Months Ended September 30,
1998 (reviewed) (unaudited) and 1997 (unaudited) and the Years Ended
December 31, 1997, 1996 and 1995......................................... F-4
Consolidated Statements of Comprehensive Income for the Nine Months Ended
September 30, 1998 (reviewed) (unaudited) and 1997 (unaudited) and the
Years Ended December 31, 1997, 1996 and 1995............................. F-5
Consolidated Statement of Shareholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997 and for the Nine Months Ended September
30, 1998 (reviewed) (unaudited).......................................... F-6
Consolidated Statements of Cash Flows of the Nine Months Ended September
30, 1998 (reviewed) (unaudited) and 1997 (unaudited) and the Years Ended
December 31, 1997, 1996 and 1995......................................... F-7
Notes to Consolidated Financial Statements................................ F-8
Cedaredge Financial Services, Inc.
Report of Independent Auditors............................................ F-35
Consolidated Statements of Financial Condition at November 30, 1997 and
December 31, 1996 (restated)............................................. F-36
Consolidated Statement of Income for the Period Ended November 30, 1997... F-37
Consolidated Statement of Changes in Shareholders' Equity for the Period
Ended November 30, 1997.................................................. F-38
Consolidated Statement of Cash Flows for the Period Ended November 30,
1997..................................................................... F-39
Notes to the Consolidated Statements of Financial Condition............... F-40
Independent Bankshares, Inc.
Independent Auditors' Report.............................................. F-52
Consolidated Balance Sheets at June 30, 1998 and 1997 (unaudited) and
December 31, 1997........................................................ F-53
Consolidated Statements of Income and Comprehensive Income for the Six
Months Ended June 30, 1998 and 1997 (unaudited) and the Years Ended
December 31, 1997 and 1996............................................... F-54
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1996 and 1997 and the Six Months Ended June 30, 1998
(unaudited).............................................................. F-55
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
1998 and 1997 (unaudited) and the Years Ended December 31, 1997 and
1996..................................................................... F-56
Notes to Consolidated Financial Statements................................ F-57
Telluride Bancorp, Ltd.
Report of Independent Auditors............................................ F-64
Accountants' Review Report................................................ F-65
Consolidated Statements of Financial Condition at September 30, 1998 and
1997 (reviewed) (unaudited), December 31, 1997 and 1996.................. F-66
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................................... F-67
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1996 and 1997 and the Nine Months Ended September 30,
1998 (reviewed) (unaudited).............................................. F-68
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............................................................ F-69
Notes to Consolidated Financial Statements................................ F-71
</TABLE>
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INDEPENDENT AUDITORS' REPORT
Board of Directors
Vail Banks, Inc.
Vail, Colorado
We have audited the accompanying consolidated balance sheets of Vail Banks,
Inc. and Subsidiary as of December 31, 1997 and 1996 and the related
consolidated statements of income, comprehensive income, shareholders' equity
and cash flows for each of the three 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 1996, and the results of their
operations and cash flows for each of the three 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-1
<PAGE>
ACCOUNTANTS' REVIEW REPORT
Board of Directors
Vail Banks, Inc.
Vail, Colorado
We have reviewed the accompanying consolidated balance sheet of Vail Banks,
Inc. and Subsidiary as of September 30, 1998, and the related consolidated
statements of income, comprehensive income, shareholders' equity and cash flows
for the nine months then ended, in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants. All information included in these consolidated financial
statements in the representation of the management of Vail Banks.
A review consists principally of inquiries of Company personnel and
analytical procedures applied to financial data. It is substantially less in
scope than an audit in accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion regarding the
consolidated financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements in order
for them to be in conformity with generally accepted accounting principles.
/s/ FORTNER, BAYENS, LEVKULICH & CO., P.C.
Denver, Colorado
November 5, 1998
F-2
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
September 30, --------------------
1998 1997 1996
------------- -------- ----------
(Reviewed) (Restated)
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks..................... $ 17,088 $ 16,680 $ 17,452
Federal funds sold.......................... 13,900 17,063 5,035
Investment securities
Available for sale........................ 11,983 9,607 4,209
Held to maturity.......................... 7,865 10,125 14,634
Loans....................................... 184,406 154,913 106,786
Less allowance for loan losses.............. (1,497) (1,364) (823)
-------- -------- --------
182,909 153,549 105,963
Bank premises and equipment................. 21,006 17,836 5,964
Investment in real estate partnership....... -- -- 685
Accrued interest receivable................. 1,490 1,377 1,029
Deferred income taxes....................... 436 403 370
Intangible assets........................... 8,246 3,883 1,680
Other assets................................ 2,473 668 173
-------- -------- --------
$267,396 $231,191 $157,194
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Demand, non-interest bearing............ $ 54,949 $ 56,929 $ 43,747
Demand, interest bearing................ 101,756 94,779 74,147
Savings................................. 16,063 13,537 7,890
Time, $100,000 and over................. 35,678 18,961 7,442
Other time.............................. 29,001 22,009 11,124
-------- -------- --------
237,447 206,215 144,350
Note payable.............................. 1,050 1,200 1,400
Federal funds purchased and securities
sold under repurchase agreements......... 1,235 308 1,647
Accrued interest payable and other
liabilities.............................. 1,883 5,034 368
-------- -------- --------
Total liabilities..................... 241,615 212,757 147,765
Minority interest........................... 579 566 --
Shareholders' equity
Series A preferred stock--50,000 shares
authorized, 34,258 shares issued and
outstanding.............................. 2,960 2,960 --
Series B preferred stock--authorized
200,000 shares, no shares issued......... -- -- --
Mandatorily convertible debentures........ 1,600 1,600 --
Common stock--$1 par value; 20,000,000
shares authorized, 2,809,130, 2,250,980
and 1,782,510 shares issued and
outstanding at September 30, 1998 and
December 31, 1997 and 1996, respectively
(note X)................................. 2,809 2,251 1,782
Capital in excess of par value............ 16,312 10,778 7,871
Retained earnings......................... 1,440 253 (221)
Accumulated other comprehensive income.... 81 26 (3)
-------- -------- --------
25,202 17,868 9,429
-------- -------- --------
$267,396 $231,191 $157,194
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30, Years ended December 31,
----------------------- -----------------------------
1998 1997 1997 1996 1995
----------- ----------- ------- ---------- ----------
(Reviewed) (Unaudited) (Restated) (Restated)
(Unaudited)
<S> <C> <C> <C> <C> <C>
Interest income
Interest and fees on
loans................. $13,394 $8,872 $12,570 $9,993 $6,322
Interest on investment
securities
Taxable................ 708 704 934 1,300 1,431
Tax exempt............. 107 9 22 19 27
Interest on federal funds
sold and deposits in
banks................... 1,120 404 496 343 802
------- ------ ------- ------ ------
Total interest
income.............. 15,329 9,989 14,022 11,655 8,582
Interest expense
Demand deposits........ 2,886 2,026 2,752 2,476 1,774
Savings deposits....... 302 155 219 231 216
Time deposits.......... 2,252 886 1,280 1,035 779
Note payable........... 83 97 123 144 163
Mandatory convertible
debentures............ 114 -- 13 -- --
Interest on federal
funds purchased and
other borrowed funds.. 26 79 127 324 113
------- ------ ------- ------ ------
Total interest
expense............. 5,663 3,243 4,514 4,210 3,045
------- ------ ------- ------ ------
Net interest income...... 9,666 6,746 9,508 7,445 5,537
Provision for loan
losses.................. -- -- 232 154 40
------- ------ ------- ------ ------
Net interest income
after provision for
loan losses......... 9,666 6,746 9,276 7,291 5,497
Other income
Service charges on
deposit accounts...... 973 662 916 790 671
Other income........... 687 246 357 281 240
------- ------ ------- ------ ------
1,660 908 1,273 1,071 911
Other expenses
Salaries and employee
benefits.............. 4,922 3,353 5,086 3,670 2,511
Occupancy expenses of
premises.............. 1,167 1,028 1,325 1,185 959
Furniture and equipment
expense............... 824 556 852 492 343
Other operating
expenses.............. 2,338 1,697 2,524 2,393 1,808
------- ------ ------- ------ ------
9,251 6,634 9,787 7,740 5,621
------- ------ ------- ------ ------
Income before income
taxes................... 2,075 1,020 762 622 787
Income tax expense....... 730 380 288 257 266
------- ------ ------- ------ ------
NET INCOME............... 1,345 640 474 365 521
Income tax benefit of net
operating loss
carryforwards........... 687 358 274 242 264
------- ------ ------- ------ ------
TOTAL INCREASE IN
SHAREHOLDERS' EQUITY
AFTER BENEFIT OF LOSS
CARRYFORWARDS........... $ 2,032 $ 998 $ 748 $ 607 $ 785
======= ====== ======= ====== ======
Net income applicable to
common equity........... $ 1,345 $ 640 $ 474 $ 365 $ 521
======= ====== ======= ====== ======
Net income per common
share (note P).......... $ 0.49 $ 0.31 $ 0.23 $ 0.21 $ 0.30
Diluted net income per
common share (note P)... $ 0.46 $ 0.30 $ 0.21 $ 0.20 $ 0.28
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30, Years ended December 31,
----------------------- --------------------------
1998 1997 1997 1996 1995
----------- ----------- ---- ---------- ----------
(Reviewed) (Unaudited) (Restated) (Restated)
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net income.................. $1,345 $640 $474 $365 $521
Other comprehensive income
Unrealized gains (losses)
on investment securities
available for sale....... 55 1 29 14 (73)
------ ---- ---- ---- ----
Comprehensive income........ $1,400 $641 $503 $379 $448
====== ==== ==== ==== ====
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Three years ended December 31, 1997
and nine months ended September 30, 1998 (Reviewed) (Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Accumulated
Series A Mandatory Capital other
Preferred convertible Common in excess of Retained comprehensive
stock debentures stock par value earnings income Total
--------- ----------- ------ ------------ -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1995................... $ -- $ -- $1,320 $ 3,953 $ (107) $ 56 $ 5,222
Issuance of 11,380
shares of common stock
for services........... -- -- 11 34 -- -- 45
Sale of 434,280 shares
of common stock........ -- -- 435 3,307 -- -- 3,742
Dividends paid--$.34 per
share.................. -- -- -- -- (600) -- (600)
Comprehensive income
Net income............ -- -- -- -- 521 -- 521
Other comprehensive
income............... -- -- -- -- -- (73) (73)
Income tax benefit
credited to capital
surplus................ -- -- -- 264 -- -- 264
------ ------ ------ ------- ------ ---- -------
Balance at December 31,
1996................... -- -- 1,766 7,558 (186) (17) 9,121
Issuance of 16,460
shares of common stock
for services........... -- -- 16 71 -- -- 87
Dividends paid and
accrued--$.22 per
share.................. -- -- -- -- (400) -- (400)
Comprehensive income
Net income............ -- -- -- -- 365 -- 365
Other comprehensive
income............... 14 14
Income tax benefit
credited to capital
surplus................ -- -- -- 242 -- -- 242
------ ------ ------ ------- ------ ---- -------
Balance at December 31,
1996................... -- -- 1,782 7,871 (221) (3) 9,429
Issuance of 13,580
shares of common stock
for services........... -- -- 14 62 -- -- 76
Sale of 454,890 shares
of common stock........ -- -- 455 2,571 -- -- 3,026
Debentures assumed in
acquisition of
Cedaredge Financial
Services, Inc.......... -- 1,600 -- -- -- -- 1,600
Issuance of 34,258
shares of preferred
stock.................. 2,960 -- -- -- -- -- 2,960
Comprehensive income
Net income............ -- -- -- -- 474 -- 474
Other comprehensive
income............... 29 29
Income tax benefit
credited to capital
surplus................ -- -- -- 274 -- -- 274
------ ------ ------ ------- ------ ---- -------
Balance at December 31,
1997................... 2,960 1,600 2,251 10,778 253 26 17,868
Issuance 34,840 shares
of common stock for
bonuses accrued as of
December 31, 1997...... -- -- 35 172 -- -- 207
8% cash dividends paid
on preferred stock..... -- -- -- -- (158) -- (158)
Issuance of 204,540
shares of common stock
at $10 per share, less
selling expenses of
$36,000................ -- -- 204 1,806 -- -- 2,010
Issuance of 318,770
shares of common stock
in connection with the
acquisition of
Independent Bankshares,
Inc.................... -- -- 319 2,869 -- -- 3,188
Comprehensive income
Net income............ -- -- -- -- 1,345 -- 1,345
Other comprehensive
income............... 55 55
Income tax benefit
credited to capital
surplus................ -- -- -- 687 -- -- 687
------ ------ ------ ------- ------ ---- -------
Balance at September 30,
1998................... $2,960 $1,600 $2,809 $16,312 $1,440 $ 81 $25,202
====== ====== ====== ======= ====== ==== =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30, Years ended December 31,
----------------------- -------------------------------
1998 1997 1997 1996 1995
----------- ----------- -------- ---------- ----------
(Reviewed) (Unaudited) (Restated) (Restated)
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities
Net income............. $ 1,345 $ 640 $ 474 $ 365 $ 521
Adjustments to
reconcile net income
to net cash provided
from operating
activities
Amortization of
intangible assets..... 168 105 126 120 70
Depreciation........... 947 558 885 497 354
Provision for loan
losses................ -- -- 232 154 40
Net (discount
accretion) premium
amortization on
investment
securities............ (14) (32) (82) (102) 264
Stock dividends
received.............. (26) (15) (34) (24) --
Equity in operations of
partnership........... -- -- (18) (6) 63
Income tax benefit of
net operating loss
carryforwards......... 687 358 274 242 264
Common stock issued for
services.............. 207 76 76 87 45
Changes in deferrals
and accruals, net of
acquisitions accounted
for under the purchase
method of accounting
Accrued interest
receivable........... 82 11 77 (221) 203
Other assets, net..... (1,058) (242) 20 (31) (60)
Accrued interest
payable and other
liabilities.......... (3,381) 268 4,210 61 (26)
-------- -------- -------- -------- --------
Net cash provided by
(used in) operating
activities............. (1,043) 1,727 6,240 1,142 1,738
Cash flows from
investing activities
Net (increase) decrease
in federal funds
sold.................. 5,513 3,150 (10,403) 5,340 (343)
Purchase of investments
held to maturity...... -- -- -- (9,810) (4,201)
Purchase of investments
available for sale.... (344) (119) (174) (263) (208)
Proceeds from
maturities of
investments held to
maturity.............. 2,280 4,289 450 3,500 14,830
Proceeds from
maturities of
investments available
for sale.............. 5,281 -- 4,610 9,964 --
Net (increase) decrease
in loans.............. (12,543) (10,114) (13,943) (28,386) (28,127)
Purchases of property
and equipment......... (3,091) (1,654) (2,215) (2,065) (1,505)
Proceeds from the sale
of property and
equipment............. -- -- 355 11
Proceeds from sale of
real estate acquired
through foreclosure... -- -- 464 59
Acquisition costs and
other intangible
assets................ (245) -- (764) -- --
Acquisition of
companies under the
purchase method of
accounting, net of
cash and due from
banks acquired........ (1,404) -- (1,353) -- (404)
-------- -------- -------- -------- --------
Net cash used in
investing activities... (4,553) (4,448) (23,792) (20,901) (19,888)
Cash flows from
financing activities
Net increase (decrease)
in deposits........... 3,829 (1,779) 19,858 18,786 25,821
Net increase (decrease)
in securities sold
under repurchase
agreements............ 927 (88) (1,339) 1,308 338
Issuance of common
stock for cash........ 2,010 3,026 3,026 -- 3,742
Deferred stock offering
costs................. (454) -- -- -- --
Dividends paid on
common stock.......... -- -- -- (400) (672)
Dividends paid on
preferred stock....... (158) -- -- -- --
Payments on notes
payable............... (150) (150) (4,765) (200) (200)
-------- -------- -------- -------- --------
Net cash provided by
financing activities... 6,004 1,009 16,780 19,494 29,029
-------- -------- -------- -------- --------
Net increase (decrease)
in cash and due from
banks.................. 408 (1,712) (772) (265) 10,879
Cash and due from banks
at beginning of
period................. 16,680 17,452 17,452 17,717 6,838
-------- -------- -------- -------- --------
Cash and due from banks
at end of period....... $ 17,088 $ 15,740 $ 16,680 $ 17,452 $ 17,717
======== ======== ======== ======== ========
Supplemental disclosures
of cash flow
information
Cash paid during the
year for:
Interest expense....... $ 5,494 $ 3,235 $ 4,360 $ 4,412 $ 3,024
Income taxes........... 52 8 8 18 5
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1998 has been reviewed)
NOTE A--SUMMARY OF ACCOUNTING POLICIES
Organization and Basis of Presentation
Vail Banks, Inc. ("VBI") owns 100% of the outstanding common stock of
WestStar Bank ("the Bank"). The entities are collectively referred to as "the
Company". The accompanying consolidated financial statements include the
consolidated totals of the accounts of VBI and the Bank. Intercompany accounts
and transactions have been eliminated in consolidation.
Basis of Financial Statement Presentation
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Significant estimates and assumptions
are disclosed in the accompanying notes.
Interim Financial Statements
The unaudited interim financial statements as of and for the nine months
ended September 30, 1997 have been prepared in conformity with generally
accepted accounting principles and include all adjustments which are, in the
opinion of management, normal and recurring in nature and necessary to a fair
presentation of the interim period presented. Results of operations for the
nine months ended September 30, 1998 are not necessarily indicative of the
results to be expected for the full year.
Investment Securities
The designation of a security as held to maturity or available for sale is
made at the time of acquisition. The held to maturity classification includes
debt securities that the Company has the positive intent and ability to hold to
maturity which are carried at amortized cost. The available for sale
classification includes debt and equity securities that are carried at fair
value. Unrealized gains and losses on securities available for sale are
included as a separate component of shareholders' equity. Gains or losses on
sales of securities are recognized by the specific identification method.
Loans and Allowance for Loan Losses
The Company provides a full range of banking and mortgage services to
individual and corporate customers principally in the Eagle, Summit and Delta
County areas, as well as, in the Denver area. The Company has a diversified
loan portfolio, and a substantial portion of its loans is underwritten based on
the value of real estate in these communities. The value of real estate in
these areas is dependent on factors not directly associated with borrowers and
these communities.
The accrual of interest on loans is discontinued when management believes
that interest or principal may not be collectible or recoverable. Generally,
loans that are 90 days past due as to interest, principal, or both; loans that
are not 90 days past due but where the likelihood of collecting the interest,
principal, or both within 90 days is unlikely; and loans which have been
partially charged off will be placed on nonaccrual status. When placing a loan
in nonaccrual status, interest accrued to date is generally reversed 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 loans losses. All other
interest reversed on nonaccrual loans is charged against current year interest
income. A loan is returned to accrual status when principal and interest are no
longer past due and collectibility is no longer doubtful. Restructured loans
are those on which concessions in terms have been made as a result of
deterioration in a borrower's financial condition. Interest on these loans is
accrued under the new terms.
F-8
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of September 30, 1998 has been reviewed)
NOTE A--SUMMARY OF ACCOUNTING POLICIES--(Continued)
Impaired loans are all specifically identified commercial and real estate
loans for which it is probable that the Company will not collect all amounts
due according to the contractual terms of the loan agreement. Included in
impaired loans are all nonaccrual and restructured loans. Loan impairment is
measured based on the present value of expected future cash flows discounted at
the loan's original effective interest rate. As practical expedient, impairment
may be measured based on the loan's observable market price or the fair value
of the collateral if the loan is collateral dependent. When the measure of the
impaired loan is less than the recorded investment in the loan, the impairment
is recorded through a valuation allowance. The valuation allowance is a
component of the allowance for loan losses.
Generally, commercial and real estate loans that are 180 days past due as to
principal, interest, or both, or are not 180 days past due, but collection of
either principal or interest within 180 days is not probable, or the loans on
nonaccrual status for 90 days will be charged off. Consumer loans that are 90
days past due as to principal, interest, or both will generally be charged off.
Any excess of the carrying value of impaired loans over amounts realized from
the liquidation of collateral and other sources is charged to the allowance for
loan losses.
Loan fees and commitment fees are recognized as income when received since a
major portion of these represent recoveries of direct origination costs.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses. In
connection with the determination of the allowance for loan losses, management
obtains independent appraisals for significant properties and assesses
estimated future cash flows from borrowers' operations and the liquidation of
loan collateral.
Management believes that the allowance for loans losses is adequate. While
management uses available information to recognize loan losses, changes in
economic conditions may necessitate revisions in future years. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to recognize additional losses based on the facts
surrounding any given loan at the time of their examination.
The Company provides for possible 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. Recoveries realized on loans
previously charged off are credited to the allowance for possible loan losses.
Premises and Equipment
Premises and equipment are stated at cost. Depreciation and amortization is
provided for in amounts, principally on the straight-line method, sufficient to
relate the cost of depreciable assets to operations over their estimated
service lives.
Income Taxes
Provisions for income taxes are based on taxes payable or refundable for the
current year (after exclusion of non-taxable income such as interest on state
and municipal securities) and deferred taxes on temporary differences between
the amount of taxable income and pretax financial income and between the tax
bases of assets and liabilities and their reported amounts in the financial
statements. A deferred tax asset is included in the financial statements at
currently enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred
F-9
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of September 30, 1998 has been reviewed)
NOTE A--SUMMARY OF ACCOUNTING POLICIES--(Continued)
tax assets and liabilities are adjusted through the provision for income taxes.
The Bank files consolidated tax returns with VBI.
Investment in Real Estate Partnership
The Company has accounted for its investment in Vail 108 Limited on the
equity method. Under this method, the investment is stated at initial cost and
adjusted for the Company's share of undistributed earnings from the date of
acquisition.
Intangible Assets
Included in intangible assets is the cost in excess of fair value of the net
assets acquired in purchase transactions. 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 are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
September 30, --------------
1998 1997 1996
------------- ------ ------
<S> <C> <C> <C>
Capitalized costs.............................. $8,347 $3,626 $1,869
Accumulated amortization....................... (464) (315) (189)
------ ------ ------
$7,883 $3,311 $1,680
====== ====== ======
</TABLE>
Deferred Stock Issuance Costs
The Company has recorded in other assets direct costs incurred in connection
with its initial public offering of common stock. If the offering is
successful, these costs will be charged to equity against the proceeds of the
offering. If the offering is not successful, these costs will be charged to
operations.
Statement of Cash Flows
For purposes of the Statement of Cash Flows, the Company has defined cash
equivalents as those amounts included in the balance sheet caption "Cash and
Due from Banks."
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, (APB 25) and related interpretations
in accounting for its employee stock options. Under APB 25, because the
exercise price of employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recorded. The
Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, (SFAS
No. 123).
Per Share Calculations
Basic earnings per share is calculated by dividing net income (less preferred
stock dividends) by the weighted average number of common shares outstanding
during the year. Diluted earnings per share is calculated by adjusting income
and outstanding shares, assuming conversion of all potentially dilutive
securities, using the treasury stock method.
F-10
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of September 30, 1998 has been reviewed)
NOTE B--ACCOUNTING CHANGES
Comprehensive Income
The Company adopted Financial Accounting Standards Board 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 periods provided for
comparative purposes is required.
The Company has chosen to disclose comprehensive income in a separate income
statement.
The only component of comprehensive income consists of unrealized holding
gains on securities with no related tax effects.
Earnings Per Share
SFAS 128, Earnings per Share, replaces primary and fully diluted earnings per
share with basic and diluted earnings per share. Under the new requirements,
the dilutive effect of stock options is excluded from the calculation of basic
earnings per share. Diluted earnings per share are calculated similarly to the
fully diluted earnings per share. SFAS 128 became effective for the Company's
1997 year-end financial statements. All prior period earnings per share data
presented have been restated to conform to the provisions of this statement.
Operating Segments
The Company adopted Financial Accounting Standards Board Statement No. 131,
Disclosures About Segments of an Enterprise and Related Information, (SFAS No.
131) effective January 1, 1998. This statement establishes standards for
reporting information about segments in annual and interim financial
statements. SFAS No. 131 introduces a new model for segment reporting called
the "management approach". The management approach is based on the way the
chief operating decision-maker organizes segments within the company for making
operating decisions and assessing performance. Reportable segments are based on
products and services, geography, legal structure, management structure and any
other in which management disaggregates a company. Based on the "management
approach" model, the Company has determined that its business is comprised of a
single operating segment and that SFAS No. 131 therefore has no impact on its
financial statements.
F-11
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of September 30, 1998 has been reviewed)
NOTE C--INVESTMENT SECURITIES
The Company had securities with the following amortized cost and estimated
fair market values (in thousands):
<TABLE>
<CAPTION>
September 30, 1998
-----------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Securities available for sale
U.S. Treasury.................. $ 5,269 $ 27 $-- $ 5,296
U.S. government agencies....... 1,270 24 -- 1,294
State and municipal............ 3,610 27 -- 3,637
Mortgage backed securities..... 414 2 -- 416
Federal Home Loan Bank and
Federal Reserve Bank stock.... 1,340 -- -- 1,340
------- ---- ---- -------
$11,903 $ 80 $-- $11,983
======= ==== ==== =======
Securities held to maturity
U.S. Treasury securities....... $ 5,980 $ 56 $-- $ 6,036
State and municipal............ 85 -- -- 85
Mortgage backed securities..... 1,800 47 -- 1,847
------- ---- ---- -------
$7,865 $103 $-- $7,968
======= ==== ==== =======
<CAPTION>
December 31, 1997
-----------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Securities available for sale
U.S. Treasury.................. $ 1,864 $ 1 $-- $ 1,865
U.S. government agencies....... 3,843 -- -- 3,843
State and municipal............ 2,953 25 -- 2,978
Federal Home Loan Bank and
Federal Reserve Bank stock.... 921 -- -- 921
------- ---- ---- -------
$ 9,581 $ 26 $-- $ 9,607
======= ==== ==== =======
Securities held to maturity
U.S. Treasury securities....... $ 7,960 $-- $(22) $ 7,938
State and municipal............ 85 1 -- 86
Mortgage backed securities..... 2,080 24 -- 2,104
------- ---- ---- -------
$10,125 $ 25 $(22) $10,128
======= ==== ==== =======
</TABLE>
F-12
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of September 30, 1998 has been reviewed)
NOTE C--INVESTMENT SECURITIES--(Continued)
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Securities available for sale
U.S. government agencies....... $ 3,499 $ 1 $ (4) $ 3,496
Federal Home Loan Bank and
Federal Reserve Bank stock.... 713 -- -- 713
------- --- ----- -------
$ 4,212 $ 1 $ (4) $ 4,209
======= === ===== =======
Securities held to maturity
U.S. Treasury securities....... $11,921 $21 $ (98) $11,844
State and municipal............ 220 4 -- 224
Mortgage backed securities..... 2,493 1 (30) 2,464
------- --- ----- -------
$14,634 $26 $(128) $14,532
======= === ===== =======
</TABLE>
The carrying value and estimated market value of debt securities by
contractual maturity are shown below (in thousands). Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
September 30, 1998
---------------------------------------
Available for Sale Held to Maturity
------------------- -------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Due in one year or less............... $ 5,345 $ 5,356 $ 2,077 $ 2,086
Due after one year through five
years................................ 4,395 4,461 3,988 4,035
Due after five years through ten
years................................ 309 310 -- --
Due after ten years................... 100 100 -- --
Mortgage backed securities............ 414 416 1,800 1,847
------- ------- ------- -------
$10,563 $10,643 $ 7,865 $ 7,968
======= ======= ======= =======
<CAPTION>
December 31, 1997
---------------------------------------
Available for Sale Held to Maturity
------------------- -------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Due in one year or less............... $ 5,460 $ 5,356 $ 2,035 $ 2,038
Due after one year through five
years................................ 3,200 3,330 6,010 5,986
Mortgage backed securities............ -- -- 2,080 2,104
------- ------- ------- -------
$ 8,660 $ 8,686 $10,125 $10,128
======= ======= ======= =======
</TABLE>
The Company realized no gains or losses on the sales of investment securities
during 1998, 1997, 1996, or 1995.
Securities included in the accompanying balance sheet at September 30, 1998,
December 31, 1997 and 1996 with a carrying value of $9,073,000, $14,084,000 and
$12,413,000, respectively, are pledged as collateral for public deposits and
for other purposes as permitted or required by law.
Securities sold under repurchase agreements of $1,494,000, $309,000 and
$339,000 as of September 30, 1998, December 31, 1997 and 1996, respectively,
were fully collateralized by related securities.
F-13
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of September 30, 1998 has been reviewed)
NOTE D--LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Loans consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
September 30, -----------------
1998 1997 1996
------------- -------- --------
<S> <C> <C> <C>
Commercial, financial and agricultural..... $ 88,551 $ 77,801 $ 46,850
Real estate, construction.................. 34,899 26,056 24,312
Real estate, mortgage...................... 35,607 30,725 31,355
Installment................................ 25,349 20,331 4,269
-------- -------- --------
$184,406 $154,913 $106,786
======== ======== ========
</TABLE>
Transactions in the allowance for loan losses are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Nine months Years ended
ended December 31,
September 30, -------------------
1998 1997 1996 1995
------------- ------ ----- ----
<S> <C> <C> <C> <C>
Beginning balance.......................... $1,364 $ 823 $ 620 $361
Provision for loan losses.................. -- 232 154 40
Recoveries on loans previously charged
off....................................... 27 24 171 77
Loans charged off.......................... (86) (58) (122) (38)
Allowance of banks assumed through
acquisitions.............................. 192 343 -- 180
------ ------ ----- ----
Ending balance............................. $1,497 $1,364 $ 823 $620
====== ====== ===== ====
</TABLE>
At September 30, 1998, December 31, 1997 and 1996, the principal balance of
loans with payments delinquent more than sixty days amounted to approximately
$139,000, $227,000 and $118,000, respectively. The Company had no restructured
loans as of September 30, 1998, December 31, 1997, 1996 or 1995.
Nonaccrual loans at September 30, 1998, December 31, 1997, 1996 and 1995
amounted to approximately $78,000, $136,000, $0, $353,000, respectively.
Information relative to impaired loans is as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
September 30, --------------
1998 1997 1996 1995
------------- ---- ---- ----
<S> <C> <C> <C> <C>
Total impaired loans at end of period........... $ 78 $136 $-- $353
Average impaired loans during the period........ 104 140 352 346
Allowance for loan losses relative to impaired
loans.......................................... 8 6 -- 2
Amount of impaired loans for which no allowance
for loan losses is recorded because of the net
realizable value of loan collateral and other
factors........................................ 70 130 -- 351
</TABLE>
No material amounts of interest income were recognized on these loans during
the period that they were impaired.
F-14
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of September 30, 1998 has been reviewed)
NOTE E--PREMISES AND EQUIPMENT
Premises and equipment, less accumulated depreciation, consisted of the
following (in thousands):
<TABLE>
<CAPTION>
September 30, 1998
-----------------------------
Accumulated Net book
Cost depreciation value
------- ------------ --------
<S> <C> <C> <C>
Furniture, fixtures and equipment.............. $ 6,971 $3,710 $ 3,261
Leasehold improvements......................... 3,733 924 2,809
Buildings...................................... 11,447 663 10,784
Land........................................... 4,152 -- 4,152
------- ------ -------
$26,303 $5,297 $21,006
======= ====== =======
<CAPTION>
December 31, 1997
-----------------------------
Accumulated Net book
Cost depreciation value
------- ------------ --------
<S> <C> <C> <C>
Furniture, fixtures and equipment.............. $ 5,872 $2,845 $ 3,027
Leasehold improvements......................... 3,242 843 2,399
Buildings...................................... 9,962 712 9,250
Land........................................... 3,160 -- 3,160
------- ------ -------
$22,236 $4,400 $17,836
======= ====== =======
<CAPTION>
December 31, 1996
-----------------------------
Accumulated Net book
Cost depreciation value
------- ------------ --------
<S> <C> <C> <C>
Furniture, fixtures and equipment.............. $ 4,849 $2,478 $ 2,371
Leasehold improvements......................... 2,393 735 1,658
Buildings...................................... 1,917 510 1,407
Land........................................... 528 -- 528
------- ------ -------
$ 9,687 $3,723 $ 5,964
======= ====== =======
</TABLE>
NOTE F--DEPOSITS
The scheduled maturities of time deposits are as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
1998.............................................. $16,401 $31,621
1999.............................................. 38,356 7,988
2000.............................................. 6,064 1,361
2001.............................................. 1,468 --
2002.............................................. 1,504 --
2003.............................................. 765 --
Thereafter........................................ 121 --
------- -------
$64,679 $40,970
======= =======
</TABLE>
F-15
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of September 30, 1998 has been reviewed)
NOTE G--FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE
Federal funds purchased and securities sold under agreements to repurchase,
which are classified as borrowings, generally mature within one to four days
from the transaction date.
Securities sold under agreements to repurchase are reflected at the amount of
cash received in connection with the transaction. The Company monitors the fair
value of the underlying securities on a daily basis. Information concerning
securities sold under agreements to repurchase is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Average balance during the period...... $ 829,000 $1,519,000 $ 817,000
Average interest rate during the
period................................ 3.94% 5.22% 4.15%
Maximum month-end balance during the
period................................ $1,335,000 $1,559,000 $1,183,000
</TABLE>
NOTE H--INVESTMENT IN REAL ESTATE PARTNERSHIP
Through November 1997, the Company had a limited partnership interest of
approximately 28% in Vail 108 Limited (Vail 108) which it acquired for a cash
contribution to the partnership of $750,000. VNB Building Corp. (VNB)
contributed net rental property assets to the partnership in exchange for an
interest of approximately 72% (including a 1% general partnership interest).
The owners of VNB are also shareholders and directors of the Company.
The Company's cash contribution and the appraised value of net rental
property assets were the basis for determining the relative ownership of Vail
108. Information relative to the Company's investment in Vail 108 based on the
historical cost of the assets contributed to the partnership as of December 31,
1996 (in thousands) follows:
<TABLE>
<S> <C>
Equity in net assets................................................... $750
Equity in loss of subsidiary........................................... (65)
----
$685
====
</TABLE>
Amortization of the excess of cost over net book value of assets acquired was
based on depreciation of the excess of the appraised value of the rental
building over its historical cost basis. The principal components of the
building had a remaining life of approximately 25 years as of the date of
formation of the partnership.
The Company leased space for its main facility from Vail 108.
Vail 108 acquired a limited partnership interest of approximately 53% in Avon
56 Limited (Avon 56) for a cash contribution of $750,000. VNB acquired a 1%
general partnership interest for a cash contribution of $14,141. The
partnership was formed to construct, own, and operate a commercial rental
property in Avon, Colorado. The Company leases space for a branch facility from
Avon 56.
As discussed in note N, as of December 1, 1997, VNB was merged into the
Company and was liquidated. Assets of VNB included the remaining 72% interest
in Vail 108. As of the date of the merger, Vail 108 was dissolved.
F-16
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of September 30, 1998 has been reviewed)
NOTE I--RELATED PARTY TRANSACTIONS
The Company had net loans receivable from directors, officers and principal
shareholders (more than ten percent ownership through attribution) of the
Company and their related business interests as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
September 30, -------------
1998 1997 1996
------------- ------ ------
<S> <C> <C> <C>
Directors and principal shareholders of parent
company stock.................................... $ 358 $ 398 $ 183
Officers.......................................... 1,032 423 135
------ ------ ------
$1,390 $ 821 $ 318
====== ====== ======
</TABLE>
Other related party transactions are described in notes H and N.
NOTE J--LEASE COMMITMENTS
The Company leases facilities and equipment under leases that expire through
the year 2010. A number of the leases have renewal options. Approximate future
minimum annual rental commitments under the leases as of December 31, 1997 are
as follows (in thousands):
<TABLE>
<CAPTION>
Facilities Equipment Total
---------- --------- ------
<S> <C> <C> <C>
1998............................................. $ 870 $ 37 $ 907
1999............................................. 827 37 864
2000............................................. 728 30 758
2001............................................. 687 20 707
2002............................................. 648 -- 648
Thereafter....................................... 3,479 -- 3,479
------ ---- ------
$7,239 $124 $7,363
====== ==== ======
</TABLE>
Total rental expense for 1998, 1997, 1996 and 1995 was $889,000, $988,000,
$790,000 and $643,000, respectively.
The Company has not entered into any significant leases since December 31,
1997.
NOTE K--INCOME TAXES
As of December 31, 1997, the Company had net operating loss carryforwards
totaling approximately $5,500,000, the components of which expire in the years
2004 through 2007. The Company accrued alternative minimum tax expense of
$43,000, $14,000, $15,000 and $2,000 in 1998, 1997, 1996, and 1995,
respectively. This tax may be carried forward as a credit against taxes on
income in the future years.
F-17
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of September 30, 1998 has been reviewed)
NOTE K--INCOME TAXES--(Continued)
Deferred income taxes relate to temporary differences in tax bases for
financial reporting and income tax purposes. Components of deferred income
taxes are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
September 30, ---------------
1998 1997 1996
------------- ------ -------
<S> <C> <C> <C>
Deferred tax assets
Net operating loss carryforwards............... $1,177 $1,894 $ 2,264
Other.......................................... 43 10 --
------ ------ -------
1,220 1,904 2,264
Valuation allowance.............................. (272) (989) (1,202)
------ ------ -------
Total deferred tax assets.................... 948 915 1,062
Deferred tax liabilities
Allowance for loan losses...................... 307 307 502
Basis of bank premises......................... 185 185 184
Other.......................................... 20 20 6
------ ------ -------
Total deferred tax liabilities............... 512 512 692
------ ------ -------
Net deferred tax asset........................... $ 436 $ 403 $ 370
====== ====== =======
</TABLE>
The deferred tax assets reflect a portion of the benefit of loss
carryforwards to the extent that they offset estimated future income during the
following one-year period. Realization is dependent on generating sufficient
taxable income prior to expiration of the loss carryforwards. Management
believes that the recorded deferred tax asset will be realized.
Cherry Creek National Bank--17th Street (CCNB) was merged into the Company
effective January 1, 1993. CCNB had effected a quasi reorganization under which
its assets and liabilities were adjusted to estimated fair values and the
deficit in its undivided profit account was charged to the capital surplus
account. The Company's net operating loss carryforwards are attributable to the
past operations of CCNB.
The Company has recognized tax benefits of loss carryforwards of $687,000,
$274,000, $242,000 and $264,000 as an addition to capital surplus in 1998,
1997, 1996 and 1995, respectively. Also presented herein on the Statement of
Income is the effect of such loss carryforward as it combines with net income
to increase total shareholders' equity.
NOTE L--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 statement of financial position. 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
F-18
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of September 30, 1998 has been reviewed)
NOTE L--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK--(Continued)
conditional obligations as it does for on-balance sheet instruments. These
commitments are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
September 30, ---------------
1998 1997 1996
------------- ------- -------
<S> <C> <C> <C>
Financial instruments whose contract amounts
represent credit risk
Commitments to extend credit.............. $23,363 $30,620 $30,847
Letters of credit......................... 1,720 1,086 822
------- ------- -------
$25,083 $31,706 $31,669
======= ======= =======
</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 Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained if deemed
necessary by the Bank 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.
Letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
NOTE M--DIVIDENDS
The approval of the Bank's primary regulator is required for the Bank to pay
dividends in any calendar year which exceed the Bank's net profit for that year
combined with its retained profits for the preceding two years. Permissible
dividends may be further limited, however, by the minimum capital constraints
imposed on all banks by state and/or federal regulatory authorities.
NOTE N--ACQUISITIONS
Independent Bankshares, Inc.
On July 31, 1998, the Company purchased all of the outstanding stock of
Independent Bankshares, Inc. ("Independent ") and its wholly-owned subsidiary,
Glenwood Independent Bank. These entities were merged into the Company. The
Company paid cash of $3,816,000 and issued 318,770 shares of its common stock
(on a post-stock split basis) to shareholders of Independent. The issued stock
was valued by the Company at $10 per share (on a post-stock split basis).
F-19
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of September 30, 1998 has been reviewed)
NOTE N--ACQUISITIONS--(Continued)
The acquisition has been accounted for under the purchase method of
accounting, and accordingly, the purchase price has generally been allocated to
the assets acquired and the liabilities assumed based on the estimated fair
value at the date of acquisition. The excess of purchase price over the net
assets acquired has been recorded as an intangible asset, which is amortized
over 25 years. The estimated fair values of assets and liabilities acquired are
summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
--------------
<S> <C>
Cash and due from banks..................................... $ 2,412
Federal funds sold.......................................... 2,350
Investment securities....................................... 7,238
Loans....................................................... 17,189
Less allowance for loan losses.............................. (193)
--------
16,996
Bank premises and equipment................................. 1,171
Other assets................................................ 272
Goodwill.................................................... 4,298
Deposits.................................................... (27,403)
Other liabilities........................................... (230)
--------
Cash paid, direct costs of acquisition and value of common
stock issued............................................... $ 7,104
========
</TABLE>
Cedaredge Financial Services, Inc.
Effective December 1, 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
mandatorily convertible debentures totaling approximately $1,600,000 (see note
M).
The acquisition has been accounted for under the purchase method of
accounting, and accordingly, the purchase price has generally been allocated to
the assets acquired and the liabilities assumed based on the estimated fair
value at the date of acquisition. The excess of purchase price over the net
assets acquired has been recorded as an intangible asset, which is amortized
over 25 years. The estimated fair values of assets and liabilities acquired are
summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
--------------
<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)
Mandatorily convertible debentures............................ (1,600)
--------
Cash paid..................................................... $ 3,250
========
</TABLE>
F-20
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of September 30, 1998 has been reviewed)
NOTE N--ACQUISITIONS--(Continued)
The Company has entered into consulting and non-compete agreements with two
of Cedaredge's executives. Under the agreements, a total of $110,000 is payable
annually to these individuals for five years. Payments commenced in 1997. For
financial reporting purposes, the Company has included the discounted present
value of this obligation ($470,000) as a component of the purchase price. This
obligation is included in accrued interest payable and other liabilities on the
accompanying consolidated balance sheet. Future maturities of the remaining
obligation are as follows:
<TABLE>
<CAPTION>
Year ending Principal
December 31, maturities Interest Total
------------ ---------- -------- -----
(In thousands)
<S> <C> <C> <C>
1998............................................. $ 79 $31 $110
1999............................................. 86 24 110
2000............................................. 93 17 110
2001............................................. 102 8 110
---- --- ----
$360 $80 $440
==== === ====
</TABLE>
VNB Building Corp.
In 1994, the Company purchased a 28% interest in Vail 108 Limited ("Vail
108"), the only asset owned at the time by VNB Building Corp. ("VNB") for
$750,000, which valued Vail 108, and therefore VNB, at approximately
$2,679,000.
As of December 1, 1997, the Company increased its ownership in Vail 108 from
28% to 100%, through a merger with VNB. The owners of VNB are also shareholders
and directors of the Company.
The Company paid cash to the sellers of $300,000 and issued 34,258 shares of
Series A Preferred stock (convertible into 342,580 shares on a post-stock split
basis) with a value of $2,960,000. The purchase price was determined based on
the fair market value of the net assets acquired. The number of shares of
preferred stock issued was determined based on the same ratio of sales price to
book value as the shares of common stock which were sold for cash earlier in
1997.
Vail 108 owned rental property in which the Company's main facility is
located. Vail 108 also owned a 53% partnership interest in Avon 56 Limited
("Avon 56"). Avon 56 owns rental property in which a branch banking facility is
located. The Company has recorded the fair market value of the assets acquired
and liabilities assumed and has recognized the minority interest of other
investors in Avon 56. These are summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
--------------
<S> <C>
Property and equipment, net of previously recorded
investment in Vail 108.................................... $ 8,288
Other assets and liabilities, net.......................... 102
Real estate mortgages...................................... (4,565)
Minority interest.......................................... (565)
Series A Preferred stock................................... (2,960)
-------
Cash paid................................................ $ 300
=======
</TABLE>
The fair value of the real estate exceeds the net book value of these assets
by approximately $1,588,000. In December 1997, the Company repaid the mortgages
on the real estate.
F-21
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of September 30, 1998 has been reviewed)
NOTE N--ACQUISITIONS--(Continued)
Pro Forma Results of Operations
The operating results of the Independent, Cedaredge and VNB 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 acquisition of Independent had
occurred at the beginning of 1997 and as if the acquisitions of Cedaredge and
VNB had occurred at the beginning of 1996, 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>
Nine months Year ended
ended December 31,
September 30, ---------------
1998 1997 1996
------------- ------- -------
(In thousands)
<S> <C> <C> <C>
Interest income.............................. $16,765 $19,664 $14,728
Interest expense............................. 6,234 7,005 5,867
------- ------- -------
Net interest income.......................... 10,531 12,659 8,861
Provision for loan losses.................... 9 311 383
------- ------- -------
Net interest income after provision for
possible loan losses........................ 10,522 12,348 8,478
Other income................................. 1,923 3,124 2,792
Other expenses............................... 10,055 13,783 10,238
------- ------- -------
Income before income taxes................... 2,390 1,689 1,032
Income tax expense........................... 877 703 431
------- ------- -------
NET INCOME................................... 1,513 986 601
Income tax benefit of net operating loss
carryforwards............................... 862 689 416
------- ------- -------
TOTAL INCREASE IN SHAREHOLDERS' EQUITY AFTER
BENEFIT OF LOSS CARRYFORWARDS............... $ 2,375 $ 1,675 $ 1,017
======= ======= =======
</TABLE>
Snow Bank, N.A.
Effective June 1, 1995, the Company purchased all of the outstanding stock of
Snow Bancorp, Inc. for $3,597,190. Snow Bancorp, Inc. was then liquidated. The
remaining asset, 91.2% of the common stock of The Snow Bank, N.A. (Snow Bank),
was contributed to the Bank. Simultaneously, the Bank purchased 8.8% of Snow
Bank common stock from other shareholders for $348,000. The Snow Bank was
merged into the Bank and became a branch facility.
F-22
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of September 30, 1998 has been reviewed)
NOTE N--ACQUISITIONS--(Continued)
The acquisition has been accounted for under the purchase method of
accounting, and accordingly, the purchase price has generally 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 goodwill, which is amortized over 25
years. The estimated fair values of assets and liabilities acquired are
summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
--------------
<S> <C>
Cash and due from banks....................................... $ 3,541
Investment securities......................................... 4,555
Loans......................................................... 18,393
Less allowance for loan losses................................ (182)
--------
18,211
Bank premises and equipment................................... 1,918
Other assets.................................................. 279
Goodwill...................................................... 1,795
Deposits...................................................... (24,715)
Other liabilities............................................. (1,639)
--------
Cash paid................................................... $ 3,945
========
</TABLE>
The operating results of this acquisition are included in the Company's
consolidated results of operations from the date of acquisition. The following
unaudited pro forma summary presents the consolidated results of operations as
if the acquisition had occurred at the beginning of 1995, after giving effect
to certain adjustments, including depreciation, amortization of goodwill 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>
Year ended
December 31,
1995
--------------
(In thousands)
<S> <C>
Interest income............................................. $9,436
Interest expense............................................ 3,312
------
Net interest income......................................... 6,124
Provision for loan losses................................... (40)
------
Net interest income after provision for possible loan
losses..................................................... 6,084
Other income................................................ 1,087
Other expenses.............................................. 6,334
------
Income before income taxes.................................. 837
Income tax expense.......................................... 266
------
NET INCOME................................................ 571
Income tax benefit of net operating loss carryforwards...... 264
------
TOTAL INCREASE IN SHAREHOLDERS' EQUITY AFTER BENEFIT OF
LOSS CARRYFORWARDS....................................... $ 835
======
</TABLE>
F-23
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of September 30, 1998 has been reviewed)
NOTE O--EQUITY ACCOUNTS
Significant matters related to certain equity accounts are as follows:
Preferred Stock
Series A Preferred Stock has a par value equal to 135% of the book value of
a share of common stock at the time of its issuance. Dividends on the stock
are 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.
Each share of preferred stock, both Series A and B, will be mandatorily
converted into one share of common stock upon the occurrence of certain events
including an initial public offering of common stock or a sale to or merger
with another company. Holders of mandatorily convertible preferred stock,
which has been outstanding for less than three years, are entitled to receive,
as a minimum, an amount equal to three full years of dividends, less dividend
payments actually paid during such three-year period. At the option of the
Board of Directors, the payment may be made in cash or shares of Series B
Preferred Stock, each share of which will have a par value equal to 75% of the
book value of a share of common stock at the time of issuance.
Each share of preferred stock has one vote in any matter voted on by the
holders of common stock and, for the purposes of any such vote, the total
shares outstanding are the sum of the outstanding common and preferred shares.
Preferred stock has preference over common stock in liquidation.
Mandatorily Convertible Debentures
In connection with its acquisition of Cedaredge Financial Services, Inc.
("CFS"), the Company assumed mandatorily convertible debentures totaling
approximately $1,600,000. Under an agreement entered into at the time of the
merger, which amended the existing debenture agreement, the debentures are
subject to mandatory conversion to 300,000 shares of the Company's common
stock on a post-stock split basis. The conversion date is defined as the
earliest of the following occurrences:
. ten years,
. any public offering of common stock,
. a sale of all or substantially all of the assets or stock of the Company,
. a sale of all or substantially all of the shares of the Company owned by
the Company's Chairman, his wife, or his lineal descendants, or
. any merger, consolidation, or other reorganization which results in the
shareholders of the Company owning less than fifty percent of the
outstanding stock of the surviving entity.
Private Placement
In July, 1998, the Company sold 204,540 shares of common stock under a
private placement at a price of $10 per share on a post-stock split basis.
F-24
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of September 30, 1998 has been reviewed)
NOTE P--EARNINGS PER SHARE
The components of earnings per share were:
<TABLE>
<CAPTION>
Nine months ended Years ended
September 30, December 31,
----------------------- --------------------------------
1998 1997 1997 1996 1995
---------- ----------- ---------- ---------- ----------
(Reviewed) (Unaudited)
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Earnings per share
Net income............. $ 1,345 $ 640 $ 474 $ 365 $ 521
Preferred dividends.... (158) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income to common
shareholders......... $ 1,187 $ 640 $ 474 $ 365 $ 521
========== ========== ========== ========== ==========
Average shares
outstanding........... 2,408,616 2,049,685 2,100,423 1,778,373 1,763,021
========== ========== ========== ========== ==========
Earnings per share..... $ 0.49 $ 0.31 $ 0.23 $ 0.21 $ 0.30
========== ========== ========== ========== ==========
Diluted earnings per
share
Net income............. $ 1,345 $ 640 $ 474 $ 365 $ 521
Interest expense on
convertible
securities............ 114 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income to common
shareholders......... $ 1,459 $ 640 $ 474 $ 365 $ 521
========== ========== ========== ========== ==========
Average shares
outstanding........... 2,408,616 2,049,685 2,100,423 1,778,373 1,763,021
Conversion of preferred
stock................. 342,580 -- 28,230 -- --
Other convertible
securities............ 300,000 -- -- -- --
Stock options computed
under the treasury
stock method.......... 92,058 92,058 92,058 92,058 92,058
---------- ---------- ---------- ---------- ----------
Dilutive common shares
outstanding.......... 3,143,254 2,141,743 2,220,711 1,870,431 1,855,079
========== ========== ========== ========== ==========
Diluted earnings per
share.................. $ 0.46 $ 0.30 $ 0.21 $ 0.20 $ 0.28
========== ========== ========== ========== ==========
</TABLE>
Share amounts have been adjusted to reflect a planned ten for one common
stock split.
Stock options were granted in April 1998 to acquire a total of 319,000 shares
of common stock. Options for 206,000 shares have an exercise price of $8.537
per share, and options for 113,000 shares have an exercise price of $9.391 per
share. Common shares outstanding for the computation of diluted earnings per
share during each of the periods include shares to be acquired under stock
options, computed under the treasury stock method, assuming repurchase at
$12.00 per share (the public offering price).
F-25
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of September 30, 1998 has been reviewed)
NOTE Q--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
For these short-term instruments, the carrying amount approximates fair
value.
Investments
For securities held as investments, fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities. The carrying amount of
accrued interest receivable approximates its fair value.
Loans
The fair value of fixed rate loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
For variable rate loans, the carrying amount is a reasonable estimate of fair
value. For loans where collection of principal is in doubt, an allowance for
losses has been estimated. Loans with similar characteristics were aggregated
for purposes of the calculations. The carrying amount of accrued interest
approximates its fair value.
Deposits
The fair value of demand deposits, savings accounts, NOW accounts, and
certain money market deposits is the amount payable on demand at the reporting
date (i.e. their carrying amount). The fair value of fixed maturity time
deposits is estimated using a discounted cash flow calculation that applies the
rates currently offered for deposits of similar remaining maturities. The
carrying amount of accrued interest payable approximates its fair value.
Short-term Borrowings
For short-term borrowings, the carrying amount is a reasonable estimate of
fair value.
Long-term Borrowings
The fair value of long-term borrowings is estimated by discounting the future
cash flows using the current rate at which a similar loan could be financed.
Commitments to Extend Credit, Standby Letters of Credit and Lines of Credit
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of
the agreements and the present credit worthiness of the counterparts. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
letters of credit and lines of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counterparts at the reporting date.
F-26
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of September 30, 1998 has been reviewed)
NOTE Q--FAIR VALUE OF FINANCIAL INSTRUMENTS--(Continued)
Financial instruments for which the carrying amount differs from estimated
fair value are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------------
September 30,
1998 1997 1996
---------------- ----------------- -----------------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
-------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Financial assets
Investment securities
held to maturity..... $ 7,865 $ 7,968 $ 10,125 $ 10,128 $ 14,634 $ 14,533
Loans, less allowance
for loan losses...... 182,909 183,436 153,549 153,730 105,963 106,102
Financial liabilities
Deposits with stated
maturities........... 64,679 65,237 40,970 40,979 18,566 18,566
</TABLE>
There is no material difference between the notional amount and the estimated
fair value of loan commitments and letters of credit. In addition, fees
collected from these arrangements are considered immaterial.
NOTE R--STOCK AGREEMENTS
Shareholders' Agreement
The Company and certain of its shareholders have entered into Shareholder
Agreements containing terms and conditions affecting the ownership of shares
covered by such Agreements. Agreements with non-employee shareholders provide
that employees may acquire shares not to exceed five percent of the outstanding
shares of the Company provided such employee shareholders own such shares
subject to an Employee Shareholder Agreement. Such Employee Shareholder
Agreements provide the Company the option to reacquire such stock should such
employee cease employment with the Company. Such Employee Shareholder
Agreements include restrictions related to sales, assignment or pledging of
shares owned thereunder.
In 1997, 1996, and 1995, shares of common stock totaling 13,580, 16,460, and
11,380, respectively, were issued for services on a post-stock split basis. The
services were valued at the book value of the stock issued; $76,000, $87,000,
and $45,000, respectively. These amounts were charged to current year income.
Additionally, as of December 31, 1997, the Company accrued $208,000 for stock
bonuses. A total of 34,840 shares of common stock were issued in 1998 on a
post-stock split basis as payment for these awards. The agreement expires in
2004.
Stock Incentive Plan
In January 1998, the Company adopted a Stock Incentive Plan. The Plan permits
the grant of 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 Compensation Committee of the
Board of Directors will determine which individuals are eligible to receive
awards, subject to Board ratification.
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.
F-27
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of September 30, 1998 has been reviewed)
NOTE R--STOCK AGREEMENTS--(Continued)
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, except that
options issued to owners of 10% or more of the outstanding Common Stock must be
exercised within five years of the date granted.
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.
Options Granted (Unaudited)
On April 21, 1998, the Board of Directors, subject to shareholder approval,
granted 319,000 options (after giving effect to the ten for one stock split).
Options for 206,000 shares have an exercise price of $8.537 per share, the
estimated fair market value of the Company's common stock on the dated granted.
Options for 113,000 shares have an exercise price of $9.391 per share (110% of
the estimated fair market value of the Company's common stock). The options
vest at 25% per year over a four-year period commencing January 1, 1998.
Pro forma information regarding net income and earnings per share is required
by SFAS No. 123, and has been determined as if the Company had accounted for
its stock options under the fair value method of that statement. The fair value
for these options was estimated at the date of grant using the Black-Scholes
option-pricing model with the following assumptions for the nine months ended
September 30, 1998:
<TABLE>
<S> <C>
Risk-free interest rate................................................ 5.43%
Dividend yield......................................................... 0.00%
Average expected life in years......................................... 4
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
unaudited pro forma net earnings and earnings per share for the nine months
ended September 30, 1998 are as follows:
<TABLE>
<CAPTION>
As reported Pro forma
------------- ------------
(Thousands of dollars
except per share amounts)
<S> <C> <C>
Net income.................................... $ 1,345 $ 1,235
Net income per common share................... 0.49 0.45
Diluted net income per common share........... 0.46 0.36
</TABLE>
NOTE S--NOTE PAYABLE TO BANK
The note bears interest at one percent above the prime rate. Principal
payments of $50,000 plus interest are due quarterly. The note matures in
December 1998. The note is collateralized by all of the common stock of
WestStar Bank.
F-28
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of September 30, 1998 has been reviewed)
NOTE T--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 September 30, 1998 and December
31, 1997, 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 table. As of
September 30, 1998, the Company was in the "adequately capitalized" category.
<TABLE>
<CAPTION>
Actual Adequately capitalized
------------- -------------------------------------------------------------------
Amount Ratio Amount Ratio
------- ----- ---------------------------------- -------------------------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
As of September 30, 1998
Total capital (to risk
weighted assets).......... $18,952 9.9% (Greater than or equal to) $15,362 (Greater than or equal to) 8.0%
Tier 1 capital (to risk
weighted assets).......... 15,854 8.3 (Greater than or equal to) 7,681 (Greater than or equal to) 4.0
Tier 1 capital (to average
assets).................. 15,854 6.2 (Greater than or equal to) 11,231 (Greater than or equal to) 4.0
As of December 31, 1997
Total capital (to risk
weighted assets).......... $15,889 10.2% (Greater than or equal to) $12,521 (Greater than or equal to) 8.0%
Tier 1 capital (to risk
weighted assets).......... 12,925 8.3 (Greater than or equal to) 6,260 (Greater than or equal to) 4.0
Tier 1 capital (to average
assets).................. 12,925 7.3 (Greater than or equal to) 7,056 (Greater than or equal to) 4.0
As of December 31, 1996
Total capital (to risk
weighted assets)......... $ 9,924 9.4% (Greater than or equal to) $ 8,471 (Greater than or equal to) 8.0%
Tier 1 capital (to risk
weighted assets)......... 9,098 8.6 (Greater than or equal to) 4,236 (Greater than or equal to) 4.0
Tier 1 capital (to average
assets).................. 9,098 6.2 (Greater than or equal to) 5,844 (Greater than or equal to) 4.0
<CAPTION>
Well capitalized
--------------------------------------------------------------------
Amount Ratio
---------------------------------- --------------------------------
(Amounts in thousands)
<S> <C> <C>
As of September 30, 1998
Total capital (to risk
weighted assets).......... (Greater than or equal to) $19,202 (Greater than or equal to) 10.0%
Tier 1 capital (to risk
weighted assets).......... (Greater than or equal to) 11,521 (Greater than or equal to) 6.0
Tier 1 capital (to average
assets).................. (Greater than or equal to) 14,038 (Greater than or equal to) 5.0
As of December 31, 1997
Total capital (to risk
weighted assets).......... (Greater than or equal to) $15,651 (Greater than or equal to) 10.0%
Tier 1 capital (to risk
weighted assets).......... (Greater than or equal to) 9,390 (Greater than or equal to) 6.0
Tier 1 capital (to average
assets).................. (Greater than or equal to) 8,820 (Greater than or equal to) 5.0
As of December 31, 1996
Total capital (to risk
weighted assets)......... (Greater than or equal to) $10,589 (Greater than or equal to) 10.0%
Tier 1 capital (to risk
weighted assets)......... (Greater than or equal to) 6,353 (Greater than or equal to) 6.0
Tier 1 capital (to average
assets).................. (Greater than or equal to) 7,305 (Greater than or equal to) 5.0
</TABLE>
The Federal Reserve Board requires banks to maintain reserve balances
composed of cash on hand and balances maintained at the Federal Reserve Bank.
These reserve balances are based primarily on deposit levels and totaled
approximately $4,500,000 and $3,407,000 at September 30, 1998 and December 31,
1997, respectively.
F-29
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of September 30, 1998 has been reviewed)
NOTE U--PARENT COMPANY FINANCIAL INFORMATION
Condensed parent company only financial information follows:
Balance Sheets
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
September 30, ------------------
1998 1997 1996
------------- ------- ----------
(Reviewed) (Restated)
<S> <C> <C> <C>
Assets
Cash...................................... $ 236 $ 127 $ 34
Investment in subsidiary.................. 25,396 18,917 10,775
Deferred stock offering costs............. 454 -- --
Other assets.............................. 223 366 50
------- ------- -------
$26,309 $19,410 $10,859
======= ======= =======
Liabilities
Note payable.............................. $ 1,050 $ 1,200 $ 1,400
Other liabilities......................... 57 342 30
------- ------- -------
1,107 1,542 1,430
Shareholders' equity........................ 25,202 17,868 9,429
------- ------- -------
$26,309 $19,410 $10,859
======= ======= =======
</TABLE>
Statements of Income
(Amounts in thousands)
<TABLE>
<CAPTION>
Nine months ended Years ended
September 30, December 31,
--------------------------------------
1998 1997 1997 1996 1995
----------- -------------- ----- -----
(Reviewed)(Unaudited) (Restated)
<S> <C> <C> <C> <C> <C>
Revenue
Equity in earnings of subsidiary.. $ 1,657 $ 949 $996 $ 713 $ 831
Interest income................... -- -- -- -- 98
----------- --------- ---- ----- -----
1,657 949 996 713 929
Expenses
Interest.......................... 194 94 136 144 163
Salaries, benefits and other
compensation..................... 209 265 404 263 206
Other expenses.................... 65 106 250 120 171
----------- --------- ---- ----- -----
468 465 790 527 540
----------- --------- ---- ----- -----
Income before income taxes.......... 1,189 484 206 186 389
Income tax benefit.................. 156 156 268 179 132
----------- --------- ---- ----- -----
NET INCOME...................... $ 1,345 $ 640 $474 $ 365 $ 521
=========== ========= ==== ===== =====
</TABLE>
F-30
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of September 30, 1998 has been reviewed)
NOTE U--PARENT COMPANY FINANCIAL INFORMATION--(Continued)
Statements of Cash Flows
(Amounts in thousands)
<TABLE>
<CAPTION>
Nine months ended Years ended
September 30, December 31,
----------------------- -----------------------
1998 1997 1997 1996 1995
---------- ----------- ------- ----- -------
(Reviewed)(Unaudited) (Restated)
<S> <C> <C> <C> <C> <C>
Operating activities
Net income.............. $ 1,345 $ 640 $ 474 $ 365 $ 521
Adjustments to reconcile
net income to net cash
provided from operation
activities
Equity in earnings of
subsidiary, less than
(in excess of)
dividends received..... 1,797 (739) (786) 290 301
Income tax benefit...... (156) (156) (268) (179) (132)
Depreciation and
amortization........... 27 6 10 13 16
Common stock issued for
services............... -- 76 76 87 45
Change in other assets
and accrued
liabilities............ (76) (15) (19) 5 (7)
---------- ----------- ------- ----- -------
Net cash provided by
(used in)
operating activities.. 2,937 (188) (513) 581 744
Investing activities
Purchases of property
and equipment.......... (15) (9) (47) (5) (30)
Capital investment in
subsidiary............. (3,816) (1,900) (1,900) -- (3,638)
Acquisition costs and
other intangible
assets................. (245) (140) (260) -- --
Investment in joint
venture................ -- -- (13) -- --
---------- ----------- ------- ----- -------
Net cash used in
investing
activities........... (4,076) (2,049) (2,220) (5) (3,668)
Financing activities
Payments on note
payable................ (150) (150) (200) (200) (200)
Issuance of common stock
for cash............... 2,010 3,026 3,026 -- 3,742
Deferred stock offering
costs.................. (454) -- -- -- --
Dividends paid.......... (158) -- -- (400) (672)
---------- ----------- ------- ----- -------
Net cash provided by
(used in)
financing activities.. 1,248 2,876 2,826 (600) 2,870
---------- ----------- ------- ----- -------
Net increase (decrease) in
cash..................... 109 639 93 (24) (54)
Cash--beginning of
period................... 127 34 34 58 112
---------- ----------- ------- ----- -------
Cash--end of period....... $ 236 $ 673 $ 127 $ 34 $ 58
========== =========== ======= ===== =======
</TABLE>
F-31
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of September 30, 1998 has been reviewed)
NOTE V--OPERATIONAL LOSSES
The Bank detected unusual operational losses which occurred in 1996 and 1995
totaling $406,000 and $139,000, respectively. These losses related primarily to
reconciling items for due from bank and other accounts that were not cleared in
the normal course of business and could not be cleared. Of the 1996 operational
losses, $123,000 was identified in 1997. The 1996 and 1995 financial statements
have been restated to give effect to these additional losses as follows (in
thousands):
<TABLE>
<CAPTION>
Years ended
December 31,
----------------------------------------
1996 1995
------------------- -------------------
As As
previously As previously As
reported restated reported restated
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Total interest income.............. $11,655 $11,655 $ 8,582 $ 8,582
Total interest expense............. (4,210) (4,210) (3,045) (3,045)
------- ------- ------- -------
Net interest income................ 7,445 7,445 5,537 5,537
Provision for loan losses.......... (154) (154) (40) (40)
------- ------- ------- -------
Net interest income after
provision for loan losses....... 7,291 7,291 5,497 5,497
Other income....................... 1,071 1,071 911 911
Other expenses..................... (7,617) (7,740) (5,482) (5,621)
------- ------- ------- -------
Income before income taxes......... 745 622 926 787
Income tax expense................. (299) (257) (313) (266)
------- ------- ------- -------
NET INCOME......................... 446 365 613 521
Income tax benefit of net operating
loss carryforwards................ 284 242 312 264
------- ------- ------- -------
TOTAL INCREASE IN SHAREHOLDERS'
EQUITY AFTER BENEFIT OF LOSS
CARRYFORWARDS..................... $ 730 $ 607 $ 925 $ 785
======= ======= ======= =======
Net income per common share........ $ .25 $ .21 $ .35 $ .30
Diluted net income per common
share............................. .23 .20 .32 .28
</TABLE>
These operational losses have been included in other operating expenses in
the Consolidated Statements of Income for 1996 and 1995.
NOTE W--PROPOSED ACQUISITION (UNAUDITED)
In April 1998, the Company entered into an agreement to acquire Telluride
Bancorp, Ltd. ("Telluride"), a bank holding company with two wholly-owned
subsidiaries, Bank of Telluride and Western Colorado Bank. The agreement was
amended in October, 1998.
The purchase price will be determined based on formulas included in the
amended agreement. An amount equaling 45% of the purchase price will be paid in
cash and the remainder with the issuance of the Company's common stock. The
Company has also agreed to continue Telluride's Phantom Stock Plan,
substituting the Company's common stock for Telluride common stock. Amounts
accruable under the Plan will directly reduce the cash and stock components of
the purchase price. For purposes of the acquisition, the value of the stock
issued by the Company will be at the initial public offering price.
The merger will be accounted for under the purchase method of accounting and,
accordingly, the assets and liabilities of Telluride will be recorded at their
fair values, with the remaining purchase price allocated to intangible assets.
F-32
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of September 30, 1998 has been reviewed)
NOTE W--PROPOSED ACQUISITION (UNAUDITED)--(Continued)
The merger has received regulatory approval. The Company estimates that the
transaction will close in December 1998.
The following are balance sheets of Telluride as of September 30, 1998 and
December 31, 1997 and statements of income for the nine months ended September
30, 1998 and year ended December 31, 1997:
CONDENSED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Reviewed)
<S> <C> <C>
ASSETS
Cash and due from banks........................... $ 6,536 $ 5,963
Federal funds sold................................ 9,245 240
Investment securities............................. 23,530 17,491
Loans, net........................................ 76,142 70,974
Property and equipment, net....................... 9,137 7,772
Other assets...................................... 1,773 1,901
-------- --------
$126,363 $104,341
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits........................................ $113,312 $ 93,747
Other liabilities............................... 2,091 1,180
-------- --------
Total liabilities............................. 115,403 94,927
Shareholders' equity.............................. 10,960 9,414
-------- --------
$126,363 $104,341
======== ========
</TABLE>
F-33
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of September 30, 1998 has been reviewed)
NOTE W--PROPOSED ACQUISITION (UNAUDITED)--(Continued)
CONDENSED STATEMENTS OF INCOME
(Amounts in thousands)
<TABLE>
<CAPTION>
Nine months Year
ended ended
September 30, December 31,
1998 1997
------------- ------------
(Reviewed)
<S> <C> <C>
Interest income................................. $7,145 $8,639
Interest expense................................ 2,702 3,287
------ ------
Net interest income........................... 4,443 5,352
Provision for loan losses....................... 101 164
------ ------
Net interest income after provision for loan
losses....................................... 4,342 5,188
Other income.................................... 690 897
Other expenses.................................. 3,804 4,871
------ ------
Income before income taxes.................... 1,228 1,214
Income tax expense.............................. 358 360
------ ------
Net income.................................... $ 870 $ 854
====== ======
</TABLE>
NOTE X--STOCK SPLIT
As part of its strategy in completing an initial public offering of common
stock, the Company has increased the number of authorized shares of its common
stock to 20,000,000 shares and has approved a plan to affect a ten-for-one
stock split. The Company plans to affect the stock split immediately prior to
the issuance of stock under the public offering. References in the accompanying
financial statements to numbers of shares of common stock, convertible
securities, and per share amounts have been retroactively restated to reflect
the stock split.
F-34
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Cedaredge Financial Services, Inc.
We have audited the accompanying consolidated statements of financial
condition of Cedaredge Financial Services, Inc. and its subsidiary as of
November 30, 1997 and December 31, 1996, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
eleven months ended November 30, 1997. 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 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 report dated September 22, 1997, we expressed an opinion that the
Company's December 31, 1996 statement of financial condition did not fairly
present its financial position in conformity with generally accepted accounting
principles because the Company understated its estimate of future loan losses
by $149,103. As described in Note 16, the Company has changed its method of
accounting for these estimates and has restated its December 31, 1996 statement
of financial condition to conform with generally accepted accounting
principles. Accordingly, our present opinion on the Company's statement of
financial condition as of December 31, 1996, as presented herein, is different
from that expressed in our previous report.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cedaredge
Financial Services, Inc. and its subsidiary as of December 31, 1996 and
November 30, 1997, and the consolidated results of their operations and cash
flows for the eleven months ended November 30, 1997 in conformity with
generally accepted accounting principles.
/s/ Dalby, Wendland & Co., P.C.
Montrose, Colorado
December 30, 1997
F-35
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
12/31/96
11/30/97 As Restated
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks.................................. $ 2,197,207 $ 2,747,882
Federal funds sold....................................... 1,625,000 --
Securities held to maturity.............................. 5,594,435 5,553,580
Equity securities available for sale..................... 60,905 45,762
Loans receivable net of allowance for loan losses and
deferred loan fees...................................... 33,874,920 31,802,919
Accrued interest receivable.............................. 425,893 312,781
Property, equipment and leasehold improvements net of
accumulated depreciation................................ 1,465,701 1,633,478
Prepaid income taxes..................................... 48,397 3,968
Intangible assets net of amortization.................... 82,538 94,667
Repossessions and other real estate owned and in process
of foreclosure.......................................... 19,606 331,961
Deferred tax asset....................................... 39,000 44,000
Other assets............................................. 40,060 91,219
----------- -----------
TOTAL ASSETS......................................... $45,473,662 $42,662,217
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS
Demand deposits--noninterest bearing................... 8,776,049 7,649,445
Demand deposits--interest bearing...................... 10,831,614 8,003,776
Savings................................................ 6,465,744 6,860,603
Certificates of deposits............................... 15,934,315 15,828,799
----------- -----------
TOTAL DEPOSITS....................................... 42,007,722 38,342,623
OTHER LIABILITIES
Federal funds purchased................................ -- 1,070,000
Accrued interest payable............................... 254,760 249,618
Deferred insurance commissions......................... 137,500 134,005
Other liabilities...................................... 113,686 118,129
----------- -----------
TOTAL LIABILITIES.................................... 42,513,668 39,914,375
----------- -----------
SHAREHOLDERS' EQUITY
Common stock, no par value, 100,000 shares authorized,
29,340 shares issued and outstanding.................. 293,400 293,400
Mandatorily convertible debentures..................... 1,600,099 1,600,099
Paid in capital........................................ 374,727 374,727
Retained earnings...................................... 672,394 469,221
Net unrealized gains on securities available for sale
net of applicable deferred taxes of $11,500 and
$5,300, respectively.................................. 19,374 10,395
----------- -----------
TOTAL SHAREHOLDERS' EQUITY........................... 2,959,994 2,747,842
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $45,473,662 $42,662,217
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-36
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
Period Ended November 30, 1997
<TABLE>
<S> <C>
INTEREST INCOME
Loans receivable................................................... $3,060,280
Securities held to maturity........................................ 276,316
Federal funds sold................................................. 31,577
----------
TOTAL INTEREST INCOME........................................... 3,368,173
----------
INTEREST EXPENSE
Deposits........................................................... 1,247,643
Debentures......................................................... 138,167
Federal funds purchased............................................ 6,627
----------
TOTAL INTEREST EXPENSE.......................................... 1,392,437
----------
NET INTEREST INCOME........................................... 1,975,736
PROVISION FOR LOAN LOSSES........................................... 78,669
----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES............... 1,897,067
----------
NONINTEREST INCOME
Service charges and fees........................................... 620,921
Rental income...................................................... 1,640
Gain on sale of assets............................................. 36,795
Loss on disposition of assets...................................... (85,569)
Other income....................................................... 37
----------
TOTAL OTHER INCOME.............................................. 573,824
----------
NONINTEREST EXPENSES
Salaries and employee benefits..................................... 1,164,567
General and administrative......................................... 683,283
Occupancy.......................................................... 358,035
Amortization of intangibles........................................ 12,129
----------
TOTAL OTHER EXPENSES............................................ 2,218,014
----------
INCOME BEFORE INCOME TAXES....................................... 252,877
PROVISION FOR INCOME TAXES.......................................... 49,704
----------
NET INCOME.................................................... $ 203,173
==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-37
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Period Ended November 30, 1997
<TABLE>
<CAPTION>
Net Unrealized
Gains
Common Stock Mandatory Additional On Securities
--------------- Convertible Paid In Retained Available
Shares Amount Debentures Capital Earnings For Sale Total
------ -------- ----------- ---------- --------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE--December 31,
1996................... 29,430 $293,400 $1,600,099 $374,727 $ 569,324 $10,395 $2,847,945
Adjustment to restate
prior period.......... -- -- -- -- (100,103) -- (100,103)
------ -------- ---------- -------- --------- ------- ----------
Restated balances
December 31, 1996..... 29,430 293,400 1,600,099 374,727 469,221 10,395 2,747,842
Net income............. -- -- -- -- 203,173 -- 203,173
Net change in
unrealized gains and
losses on available
for sale securities,
net of taxes of
$6,200................ -- -- -- -- -- 8,979 8,979
------ -------- ---------- -------- --------- ------- ----------
BALANCE--November 30,
1997................... 29,430 $293,400 $1,600,009 $374,727 $ 672,394 $19,374 $2,959,994
====== ======== ========== ======== ========= ======= ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-38
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
Period Ended November 30, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................................... $ 203,173
-----------
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses....................................... 78,669
Provision for depreciation...................................... 152,469
Provision for deferred tax...................................... (1,200)
Amortization of premium and discount on investments............. 4,524
Amortization of core deposits................................... 12,129
Gain on sale of assets.......................................... (35,359)
Gain on sale of OREO............................................ (1,436)
Loss on disposition of assets................................... 85,569
Change in assets and liabilities:
Decrease in other assets....................................... 51,159
Increase in accrued interest receivable........................ (113,112)
Increase in prepaid taxes...................................... (44,429)
Increase in interest payable................................... 5,142
Increase in deferred income.................................... 3,495
Decrease in other liabilities.................................. (4,443)
-----------
Total adjustments.............................................. 193,177
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES..................... 396,350
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of held to maturity securities.......................... (1,005,379)
Proceeds from maturities of available for sale securities........ 36
Proceeds from maturities of held to maturity securities.......... 960,000
Purchase of property and equipment............................... (103,273)
Proceeds from sale of assets..................................... 404,174
Net change in loans made to customers............................ (2,172,682)
-----------
NET CASH USED BY INVESTING ACTIVITIES......................... (1,917,124)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits............................................. 3,665,099
Redemption of federal funds purchased............................ (1,070,000)
-----------
NET CASH PROVIDED BY FINANCING ACTIVITIES..................... 2,595,099
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS......................... 1,074,325
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................... 2,747,882
-----------
CASH AND CASH EQUIVALENTS AT END OF YEAR.......................... $ 3,822,207
===========
Cash and cash equivalents are classified in the balance sheet as
follows:
Cash and due from banks......................................... $ 2,197,207
Federal funds sold.............................................. 1,625,000
-----------
Total cash and cash equivalents................................ $ 3,822,207
===========
SUPPLEMENTAL INFORMATION:
Interest paid on deposits........................................ $ 1,230,927
Interest paid on debentures...................................... 149,741
Income taxes paid................................................ 96,000
</TABLE>
The accompanying notes are an integral part of this statement.
F-39
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Cedaredge Financial Services, Inc. (the Company) was incorporated in the
State of Colorado on November 19, 1982. The Company became a bank holding
company in June of 1983, when it acquired 100% of the outstanding stock of the
First National Bank of Cedaredge. In 1993 the Company's subsidiary changed its
name to Western Community Bank (the Bank). The Bank has offices in Cedaredge,
Basalt, Delta and Montrose, Colorado. The Bank is state chartered and a member
of the Federal Deposit Insurance Corporation (FDIC).
A summary of significant accounting policies applied in preparation of the
Company's financial statements is as follows:
Principles of Consolidation
The consolidated financial statements include the accounts of Cedaredge
Financial Services, Inc. and its subsidiary, Western Community Bank.
Significant intercompany accounts and transactions have been eliminated.
Cash
The Company's subsidiary has deposit accounts with the Federal Reserve Bank
and other correspondent institutions. At times some of those deposits are in
excess of the portion insured by the FDIC. Uninsured deposits were
approximately $1,100,000 at November 30, 1997 and $1,589,000 at December 31,
1996.
Investment Securities
Trading Securities: Securities that are held for short-term resale are
classified as trading account securities and recorded at their fair values.
Realized and unrealized gains and losses on trading account securities are
included in other income.
Securities Held to Maturity: Government, Federal agency, and corporate debt
securities that management has the positive intent and ability to hold to
maturity are reported at cost, adjusted for amortization of premiums and
accretion of discounts that are recognized in interest income using methods
approximating the interest method over the period to maturity.
Securities Available for Sale: Available for sale securities consist of
investment securities not classified as trading securities nor as held to
maturity securities. Unrealized holding gains and losses, net of tax, on
available for sale securities are reported as a net amount in a separate
component of shareholders' equity until realized. Gains and losses on the sale
of available for sale securities are determined using the specific-
identification method. The amortization of premiums and the accretion of
discounts are recognized in interest income using methods approximating the
interest method over the period to maturity.
Declines in the fair value of individually held to maturity and available
for sale securities below their cost that are other than temporary, result in
write-downs of the individual securities to their fair value. The related
write-downs are included in earnings as realized losses.
As of November 30, 1997 and December 31, 1996 all securities, other than
equity securities, held by the Company or its subsidiary were classified as
held to maturity. During the years ended November 30, 1997 and December 31,
1996, no securities were classified as trading securities.
F-40
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--(Continued)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--
(Continued)
Loans Receivable
Loans are stated at unpaid principal balances, less the allowance for loan
losses and net deferred loan fees and unearned discounts.
Loan origination and commitment fees are deferred and amortized as a yield
adjustment over the lives of the related loans using straight-line methods.
Amortization of deferred loan fees is discontinued when a loan is placed on
nonaccrual status.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest income
on other impaired loans is recognized only to the extent of interest payments
received.
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, economic conditions and other risks inherent in the portfolio.
Allowances for impaired loans are generally determined based on collateral
values or the present value of estimated cash flows. The allowance is increased
by a provision for loan losses, which is charged to expense, and reduced by
charge-offs, net of recoveries.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost less
accumulated depreciation, with one exception. The building occupied by the
subsidiary's Delta branch is recorded at fair market value. Costs include the
net amount of interest costs associated with significant capital additions.
Gains and losses on dispositions are reflected in current operations.
Expenditures which materially add to the useful lives of property and
equipment are capitalized. All other maintenance and repair costs are charged
to current operations.
Depreciation for financial accounting purposes is computed using straight-
line or accelerated methods over the estimated useful life of each asset.
Estimated useful lives range from 3 to 40 years.
For income tax purposes, accelerated methods of depreciation are generally
used; deferred income taxes are provided for the difference between
depreciation expense for financial accounting purposes and for income tax
purposes.
Other Real Estate Owned and Repossessed Assets
Real estate and other assets acquired by actual or in-substance foreclosure
are carried at cost or fair value, whichever is lower. Fair value is based on
independent appraisals and other relevant factors. At the time of acquisition,
any excess of cost over fair value is charged to the allowance for loan losses.
Subsequent declines in fair value are charged to current income and credited to
the carrying value of the properties. Operating expenses are charged to other
noninterest expense.
Gains on sales of other real estate are recognized at the time of sale or
deferred for recognition in future periods, as appropriate, based on the nature
of the transaction. Losses on such sales are recognized at the time of the
sale.
F-41
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--(Continued)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--
(Continued)
Core Deposits and Branch Acquisition Costs
In 1993, the Bank acquired assets and liabilities of the institution which
became the Montrose Branch of Western Community Bank. $82,284 of the purchase
price was allocated to the core deposit base acquired, while $57,478 was
allocated to branch acquisition costs. These costs are being amortized over an
estimated useful life of 10 years.
Income Taxes
For income tax purposes, the Company files a consolidated income tax return
with its subsidiary. An agreement between the Company and its subsidiary
provides that any current tax liability of its subsidiary, computed on a
separate entity basis, will be paid by the subsidiary to the Company. Tax
refunds attributable to the operations of the subsidiary will be refunded to
the subsidiary to the extent it can offset income of the Consolidated Group.
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of assets and liabilities
for financial and income tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are recovered
or settled. Deferred taxes are also recognized for operating losses that are
available to offset future taxable income and tax credit carryforwards that may
be used to reduce future tax liabilities.
Use of Estimates
The preparation of 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, disclosure of
contingent assets and liabilities at the date of the financial statements, and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Effect of New Accounting Standards
On January 1, 1996, the Company adopted Financial Accounting Standards Board
(FASB) Statement No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of (FAS 121). The statement prescribes
the accounting for the impairment of long-lived assets and goodwill related to
those assets. The new rules specify when assets should be reviewed for
impairment, how to determine whether an asset or group of assets is impaired,
how to measure an impairment loss, and what financial statement disclosures are
necessary. Also prescribed is the accounting for long-lived assets and
identifiable intangibles of which a company plans to dispose, other than those
that are a part of a discontinued operation. Any impairment of a long-lived
asset resulting from management's review is to be recognized as a component of
noninterest expense. The adoption of FAS 121 did not have a material effect on
the Company's consolidated financial statements.
In June 1996, the FASB issued Statement No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities (FAS 125). The
standard provides that, following a transfer of financial assets, an entity is
to recognize the financial and servicing assets it controls and the liabilities
it has incurred, derecognize financial assets when control has been
surrendered, and derecognize liabilities when extinguished. The Statement is
effective for transactions occurring after December 31, 1996. The FASB also
subsequently issued FAS No. 127 that delayed until January 1, 1998, the
effective date of certain provisions of FAS 125. Transactions subject to the
later effective date include securities lending, repurchase agreements, dollar
rolls, and similar secured financing arrangements. Application of the new rules
is not expected to have a material impact on the Company's consolidated
financial statements.
F-42
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--(Continued)
NOTE 2--DEBT AND EQUITY SECURITIES
The amortized cost and estimated fair value of securities at November 30,
1997 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Held to Maturity Securities:
U.S. Treasury securities..... $1,948,686 $15,923 $ (1,468) $1,963,141
Obligations of U.S.
government agencies......... 346,908 -- (3,928) 342,980
Obligations of state and
political subdivisions...... 3,298,841 15,988 (10,094) 3,304,735
---------- ------- -------- ----------
$5,594,435 $31,911 $(15,490) $5,610,856
---------- ------- -------- ----------
Available for Sale Securities:
Equity securities............ $ 30,031 $30,874 $ -- $ 60,905
========== ======= ======== ==========
</TABLE>
The amortized cost and estimated fair value of securities at December 31,
1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Held to Maturity Securities:
U.S. Treasury securities...... $2,198,384 $ 8,688 $(12,982) $2,194,090
Obligations of U.S. government
agencies..................... 100,000 -- (3,000) 97,000
Obligations of state and
political subdivisions....... 3,255,196 21,232 (23,816) 3,252,612
---------- ------- -------- ----------
$5,553,580 $29,920 $(39,798) $5,543,702
---------- ------- -------- ----------
Available for Sale Securities:
Equity securities............. $ 30,067 $15,695 $ -- $ 45,762
========== ======= ======== ==========
</TABLE>
Equity securities include 200 shares of Delta Federal Savings owned by the
Company and 737 shares of common stock in Bankers Bank of the West Bancorp,
Inc. (BBWB) owned by Western Community Bank. The stock of BBWB is not publicly
traded and its market value is not readily available. Currently, if Western
Community Bank chose to sell its stock back to BBWB, it would be entitled to
receive current book value for each of its shares as valued by BBWB. The fair
market value of these equity securities is reported at the book value of BBWB
stock at September 30, 1997 and December 31, 1996.
The Company's policy prohibits its subsidiary bank from owning investment
derivatives.
The Company had pledged, as collateral for public funds on deposit,
securities in the principal amount of $2,910,000 as of November 30, 1997 and
$1,946,000 as of December 31, 1996.
The amortized cost and estimated market value of securities (other than
equity securities), by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
At November 30, 1997 At December 31, 1996
--------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Held to Maturity Securities:
Due in one year or less...... $1,634,908 $1,632,907 $1,412,844 $1,410,855
Due after one year through
five years.................. 3,959,527 3,977,949 4,140,736 4,132,847
---------- ---------- ---------- ----------
$5,594,435 $5,610,856 $5,553,580 $5,543,702
========== ========== ========== ==========
</TABLE>
F-43
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--(Continued)
NOTE 3--LOANS RECEIVABLE
Loans consist of the following:
<TABLE>
<CAPTION>
November 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Real estate loans.................................. $12,593,770 $11,735,791
Agriculture loans.................................. 2,516,135 1,509,474
Commercial loans................................... 6,797,464 5,319,191
Individual loans................................... 11,390,544 11,912,818
Mortgage loans warehoused.......................... 643,687 1,386,201
Ready reserve and overdrafts....................... 373,776 331,801
----------- -----------
34,315,376 32,195,276
Less:
Allowance for loan losses........................ 340,002 300,000
Deferred loan fees............................... 100,454 92,357
----------- -----------
$33,874,920 $31,802,919
=========== ===========
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
November 30,
1997
------------
<S> <C>
Balance at the beginning of the year......................... $300,000
Provision for possible loan losses charged to operations..... 78,669
Loan charge-offs............................................. (42,061)
Loan recoveries.............................................. 3,394
--------
Balance at the end of the year............................... $340,002
========
</TABLE>
Non-accrual loans were approximately $12,100 at November 30, 1997 and $83,900
at December 31, 1996.
NOTE 4--BANK PROPERTY AND EQUIPMENT
Fixed assets consisted of the following:
<TABLE>
<CAPTION>
November 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Bank buildings and improvements.................... $1,078,244 $1,064,102
Furniture, fixtures and equipment................ 888,132 1,096,277
Vehicles......................................... 32,000 32,000
---------- ----------
1,998,376 2,192,379
Less accumulated depreciation...................... (850,191) (895,101)
---------- ----------
1,148,185 1,297,278
Land............................................... 317,516 336,200
---------- ----------
$1,465,701 $1,633,478
========== ==========
</TABLE>
In 1996 the Company's shareholders sold to the Company a building occupied by
its subsidiary Bank in Delta at a cost of $400,000 which was approximately
$170,300 below the property's fair market value (FMV). The building was
recorded at its FMV of $595,000 with the difference between purchase price and
FMV, less
F-44
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--(CONTINUED)
NOTE 4--BANK PROPERTY AND EQUIPMENT--(CONTINUED)
the deferred tax effect, recognized as a contribution to capital by the
shareholders. The Company sold the building to its subsidiary Bank for
$400,000. The excess of the building's FMV over the purchase price was
recorded by the Bank as a contribution to capital.
The space not occupied by the Bank is leased under two operating leases with
terms of five years expiring in 1999 and contain provisions for one renewal
option of five years and annual adjustments to the base rent reflecting
increases in the consumer price index.
The following is a schedule of the minimum future rental revenues payable to
the Company under the terms of these leases prior to any deductions for
operating expenses:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
------------------------
<S> <C>
1997.............................................................. $ 1,238
1998.............................................................. 14,860
1999.............................................................. 12,383
-------
Total minimum future rentals...................................... $28,481
=======
</TABLE>
NOTE 5--OPERATING LEASE COMMITMENTS
Cedaredge Branch
The Bank's Cedaredge branch leases a vehicle from Eagle Motors, Inc. The
lease has a term of four years and requires total payments of $19,152, payable
in monthly installments of $399. The lease expires March, 1999.
Basalt Branch
The Bank's Basalt branch is located inside the City Market grocery store at
140 Basalt Center Circle. The Bank leases space within the City Market grocery
store under a four-year operating lease with total payments of $54,240,
payable in monthly installments of $1,130. The lease expires June 30, 1999.
Insurance and maintenance costs on the Bank's personal property are the
responsibility of the Bank. Insurance and maintenance on the building as well
as lighting, heating and air conditioning for the space are the responsibility
of the lessor. All other utilities used by the Bank are its responsibility.
This branch also leases ATM space in the City Market grocery store. The
lease has a term of three years and requires total rent payments of $9,000,
payable in monthly installments of $250. The lease expires December 31, 1997
and may be renewed for an additional two years. The lessee is responsible for
utilities, maintenance, insurance, personal property taxes and communication
and servicing costs for the ATM.
Delta Branch
The Bank's Delta branch leases ATM space in the City Market grocery store
located at 122 Gunnison River Drive. The lease has a term of three years and
requires total rent payments of $13,600, payable in monthly installments of
$350. The lease expires December 31, 1997 and may be renewed for an additional
two years. The lessee is responsible for utilities, maintenance, insurance,
personal property taxes and communication and servicing costs for the ATM.
F-45
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--(Continued)
NOTE 5--OPERATING LEASE COMMITMENTS--(Continued)
Montrose Branch
The Bank's Montrose branch leases space within the City Market grocery store
located at 16362 Highway 550 under a five-year operating lease which may be
renewed for three additional terms of five years each. Under the terms of the
lease, the Bank pays a monthly licensing fee of $2,000 plus a nickel for each
ATM transaction. The first 4,000 ATM transactions are excluded from the
calculation. The initial lease expires August, 2001. Insurance and maintenance
costs on the Bank's personal property are the responsibility of the Bank.
Insurance and maintenance on the building as well as lighting, heating and air
conditioning for the space are the responsibility of the lessor. All other
utilities used by the Bank are its responsibility.
This branch also leases ATM space in the Wal-Mart store located at 2201 S.
Townsend. The lease has a term of three years and requires total base rent
payments of $9,000, payable in monthly installments of $250. In addition to the
base monthly rent, the branch is required to pay a dime for each ATM
transaction in excess of the first 3,000 transactions per month. The lease
expires June, 1998.
Future minimum rental payments under existing leases as of November 30, 1997
are as follows:
<TABLE>
<CAPTION>
Montrose Montrose
Basalt Basalt Delta Space & Wal-Mart
Vehicle Space ATM ATM ATM ATM
------- ------- ------ ----- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1997--December only........... $ 399 $ 1,130 $250 $350 $ 2,000 $ 250
1998.......................... 4,788 13,560 -- -- 24,000 1,500
1999.......................... 798 6,780 -- -- 24,000 --
2000.......................... -- -- -- -- 24,000 --
2001.......................... -- -- -- -- 15,867 --
------ ------- ---- ---- ------- ------
Total....................... $5,985 $21,470 $250 $350 $89,867 $1,750
====== ======= ==== ==== ======= ======
</TABLE>
NOTE 6--MANDATORY CONVERTIBLE DEBENTURES
During 1993 and 1994 the Company issued Mandatory Convertible Debentures
which convert to common stock in the year 2003. The debentures bear interest
equal to the prime rate of Bankers Bank of the West plus one percent payable
semi-annually until converted to common stock.
In the year 2003 the debentures will convert to 75,122 shares of common
stock. This represents a conversion factor of $21.30 per share.
The debentures outstanding are as follows:
<TABLE>
<CAPTION>
November 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Burton O. George Revocable Trust................... $ 792,126 $ 792,126
Joannco Partnership................................ 272,107 272,107
Joe N. Basore...................................... 196,045 196,045
Joe N. Basore/Ann W. Basore........................ 127,928 127,928
Ann W. Basore...................................... 117,627 117,627
J. Neff Basore, Jr................................. 78,418 78,418
Charles Richards................................... 15,848 15,848
---------- ----------
$1,600,099 $1,600,099
========== ==========
</TABLE>
F-46
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--(Continued)
NOTE 7--RELATED PARTY TRANSACTIONS
Banking transactions between the Company's subsidiary bank and its directors,
executive officers and their related interests are considered to be between
related parties. It is the Company's policy that the terms of such transactions
be made on substantially the same basis, including interest rate and
collateral, as those extended at the time to unrelated bank customers. The
amount of loans outstanding to related parties was approximately $136,000 at
November 30, 1997 and $333,000 at December 31, 1996. The amount of deposits for
related parties was approximately $134,300 at November 30, 1997 and $32,000 at
December 31, 1996.
NOTE 8--INCOME TAXES
The provision for income taxes consists of the following components as of
November 30, 1997:
<TABLE>
<S> <C>
Current income tax expense:
Federal........................................................ $48,262
State.......................................................... 2,642
--------
Total Current Income Tax Expense............................. 50,904
Deferred federal and state income tax expense.................... (1,200)
--------
Total Income Tax Expense..................................... $49,704
========
The provision for income tax expense differs from the amount computed by
applying the statutory federal income tax rate of 34% to income before income
taxes due to the following at November 30, 1997:
Income tax expense at the statutory rate....................... $ 86,000
Interest disallowed under Section 291.......................... 7,000
Tax-exempt interest............................................ (48,000)
Other items.................................................... 4,704
--------
Income Tax Expense........................................... $ 49,704
========
</TABLE>
F-47
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--(Continued)
NOTE 8--INCOME TAXES--(Continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effect of these
temporary differences as of November 30, 1997 and December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
November 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Fixed assets................................... $111,500 $119,100
Unrealized gain on securities available for
sale.......................................... 11,500 5,300
Prepaid state tax.............................. 4,500 --
-------- --------
127,500 124,400
-------- --------
Deferred tax assets:
Allowance for loan losses...................... 105,000 $ 83,300
Accrued items not recognized for tax purposes.. 49,400 65,300
Core deposits and branch acquisition costs..... 6,300 11,200
Federal net operating loss carryforwards....... 15,800 18,400
Colorado net operating loss carryforwards...... 3,200 3,500
Colorado business tax credit carryforwards..... 300 2,700
Repossessions.................................. -- 6,700
Other.......................................... 5,800 1,900
-------- --------
185,800 193,000
Deferred tax asset valuation allowance......... (19,300) (24,600)
-------- --------
Deferred tax asset............................. 166,500 168,400
-------- --------
Net deferred tax asset....................... $ 39,000 $ 44,000
======== ========
</TABLE>
As of November 30, 1997, the Company and its subsidiary have net operating
loss (NOL) carryforwards of approximately $46,500 federal and $673,000 state.
Limitations exist on the utilization of these net operating loss carryforwards
under IRS Code Section 382. As a result of these limitations and future
expiration of these carryforwards, the Company and its subsidiary will realize
no more than approximately $65,000 of the state NOL benefit. The federal and
state NOL and business tax credit carryforwards begin to expire as follows:
<TABLE>
<CAPTION>
Year
----
<S> <C>
Federal NOL carryforwards............................................. 2004
Colorado NOL carryforwards............................................ 2000
Colorado business tax credit carryforwards............................ 1998
</TABLE>
The valuation allowance as of November 30, 1997 and December 31, 1996 relates
to the deferred tax assets for federal and Colorado net operating loss
carryforwards and Colorado general business tax credit carry forwards which may
be applied against future tax liabilities, if any. A portion of these assets
have been reserved because of the uncertainty as to whether the Company will
benefit from these carryforwards before they expire. The valuation allowance
was decreased in 1997 as a result of various decreases in the tax credit
carryforwards and net operating loss carryforwards in the current period.
F-48
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--(Continued)
NOTE 9--TIME DEPOSITS
Time deposits consist of certificates of deposit, with the following
maturities as of November 30, 1997:
<TABLE>
<CAPTION>
CD's
CD's Under $100,000
$100,000 and Over Total
----------- ---------- -----------
<S> <C> <C> <C>
Maturing within:
0 to 3 months........................... $ 2,814,700 $1,684,800 $ 4,499,500
4 to 12 months.......................... 4,272,000 2,976,000 7,248,000
1 to 5 years............................ 3,468,100 718,400 4,186,500
----------- ---------- -----------
Total................................. $10,554,800 $5,379,200 $15,934,000
=========== ========== ===========
</TABLE>
NOTE 10--REGULATORY MATTERS
The Company's subsidiary is subject to various regulatory capital
requirements administered by its primary federal regulator, the Federal Deposit
Insurance Corporation (FDIC). Failure to meet the minimum regulatory capital
requirements can initiate certain mandatory, and possible additional
discretionary actions by regulators, that if undertaken, could have a direct
material affect on the subsidiary's financial statements. Under the regulatory
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the subsidiary must meet specific capital guidelines involving
quantitative measures of the subsidiary's assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices. The
subsidiary's capital amounts and classification under the prompt corrective
action guidelines 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 subsidiary to maintain minimum amounts and ratios of total risk-
based capital and Tier I capital to risk-weighted assets (as defined in the
regulations), and Tier I capital to adjusted total assets (as defined).
Management believes, as of November 30, 1997, that the subsidiary meets all the
capital adequacy requirements to which it is subject.
WESTERN COMMUNITY BANK
<TABLE>
<CAPTION>
To Be Well Capitalized
under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
---------------- -------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ----- ----------- -------------------- ----------
<S> <C> <C> <C> <C> <C> <C>
As of November 30, 1997:
Total Risk-Based
Capital
(to Risk-Weighted
Assets)............... $3,144,756 9.5% $ 2,652,134 8.0% $ 3,315,168 10.0%
Tier I Capital
(to Risk-Weighted
Assets)............... $2,804,754 8.5% $ 1,326,067 4.0% $ 1,989,101 6.0%
Tier I Capital
(to Adjusted Total
Assets)............... $2,804,754 6.4% $ 1,740,646 4.0% $ 2,175,807 5.0%
As of December 31, 1996
as restated:
Total Risk-Based
Capital
(to Risk-Weighted
Assets)............... $2,850,623 9.4% $ 2,415,203 8.0% $ 3,019,003 10.0%
Tier I Capital
(to Risk-Weighted
Assets)............... $2,550,623 8.4% $ 1,207,601 4.0% $ 1,811,402 6.0%
Tier I Capital
(to Adjusted Total
Assets)............... $2,550,623 6.1% $ 1,662,373 4.0% $ 2,077,967 5.0%
</TABLE>
F-49
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--(Continued)
NOTE 11--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 standby
letters of credit. Those instruments involve, to varying degrees, 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 uses
the same credit policies in making commitments and conditional obligations as
it does for on-balance sheet instruments.
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 of one year or less 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 credit worthiness on a case-by-case basis. The amount of collateral
obtained as considered necessary by the Company upon extension of credit is
based on management's credit evaluation of the counter-party. Collateral held
varies, but may include accounts receivable, inventory, property, plant and
equipment and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support private borrowing arrangements. Most standby
letters of credit are issued for one year or less. The credit risk involved in
issuing letters of credit is essentially the same as extending loans to
customers. Collateral requirements vary, but in general follow the requirements
for other loan facilities.
A summary of the Company's commitments consists of the following:
<TABLE>
<CAPTION>
November 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Standby letters of credit.......................... $ 11,040 $ 180,000
Commitments to extend credit:
Loans............................................ 1,305,438 1,435,469
Ready reserve.................................... 492,296 439,351
---------- ----------
Total.......................................... $1,808,774 $2,054,820
========== ==========
</TABLE>
NOTE 12--CONTINGENT LIABILITIES
In the normal course of business, the Company's subsidiary is involved in
various legal actions arising from their lending and collection activities. In
the opinion of management, the outcome of these legal actions will not
significantly affect the financial position of the Company.
NOTE 13--EMPLOYEE BENEFIT PLANS
Retirement Plan
The Company adopted in January, 1994, a paired profit sharing plan that
provides benefits for employees who have had at least one year of service. In a
defined contribution plan, benefits depend solely on amounts contributed to the
plan plus investment earnings. Eligible employees who elect to participate may
contribute up to 15% of their salaries to the plan on a pre-tax basis. The
employer will contribute by matching one fourth of the first 8% of each
employee's contribution and may also make discretionary contributions which
would be
F-50
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--(Continued)
NOTE 13--EMPLOYEE BENEFIT PLANS--(Continued)
allocated to each participant based on the fraction of the individual's annual
pay to the total annual pay of all participants. For the period ended November
30, 1997 and the year ended December 31, 1996, the Company's contribution on
behalf of its employees to the plan was approximately $9,000 and $8,570,
respectively.
NOTE 14--CONCENTRATION OF CREDIT RISK
The majority of the Company's loan portfolio and collateral for those loans
is concentrated in Delta, Montrose, and Eagle Counties in Western Colorado. The
risks of lending, therefore, reflect local economic conditions.
NOTE 15--MERGER
Effective November 30, 1997, Vail Banks, Inc. purchased all of the
outstanding stock of the Company. Immediately after the acquisition, the
Company and its subsidiary were merged into Vail Banks, Inc. Under the terms of
the purchase agreement, Vail Banks, Inc. paid $ 3,250,000 for all of the
Company's outstanding shares and assumed its liability for $1,600,099 of
mandatory convertible debentures the Company had previously issued.
NOTE 16--CHANGE IN ACCOUNTING METHOD
In the period ending November 30, 1997, the Company changed its approach of
recognizing future loan losses to a generally accepted accounting method. As a
result of this adoption, its statement of financial condition as of December
31, 1996 has been restated to reflect this change. The following balances as of
December 31, 1996 were affected by this restatement:
<TABLE>
<CAPTION>
As Previously As
Reported Adjustment Restated
------------- ---------- -----------
<S> <C> <C> <C>
Loans receivable, net................. $31,952,022 $(149,103) $31,802,919
Loan loss reserve..................... 150,897 149,103 300,000
Deferred tax asset.................... (5,000) 49,000 44,000
Undivided profits..................... 569,324 (100,103) 469,221
Total assets.......................... 42,767,320 (105,103) 42,662,217
Total equity.......................... 2,847,945 (100,103) 2,747,842
</TABLE>
F-51
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Independent Bankshares, Inc.
Glenwood Springs, Colorado
We have audited the accompanying consolidated balance sheet of Independent
Bankshares, Inc. and Subsidiary as of December 31, 1997, and the related
consolidated statements of income and comprehensive income, shareholders'
equity and cash flows for the years ended December 31, 1997 and 1996. These
financial statements are the responsibility of management. Our responsibility
is to express an opinion on these financial statements based on our audit.
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 Independent
Bankshares, Inc. and Subsidiary as of December 31, 1997, and the results of
their operations and cash flows for the years ended December 31, 1997 and 1996
in conformity with generally accepted accounting principles.
/s/ Gra, Thompson, White & Co., P.C.
Englewood, Colorado
May 21, 1998
F-52
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30, December 31,
1998 1997 1997
----------- ----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks.................. $ 2,088,727 $ 2,150,921 $ 2,198,367
Federal funds sold....................... 1,250,000 1,200,000 600,000
Interest bearing deposit accounts........ 199,000 397,000 397,000
Available for sale securities............ 4,904,162 2,985,562 4,209,833
Held to maturity securities.............. 2,717,037 2,671,719 2,760,938
Restricted equity securities............. 26,000 26,000 26,000
Net loans................................ 17,048,569 15,914,922 17,431,164
Premises and equipment, net.............. 993,079 1,009,465 1,004,492
Accrued interest receivable and other
assets.................................. 361,480 343,168 333,903
----------- ----------- -----------
$29,588,054 $26,698,757 $28,961,697
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits............................... $26,658,149 $24,045,982 $26,114,272
Notes payable.......................... 258,014 458,014 433,014
Accrued interest payable and other
liabilities........................... 127,507 137,266 110,782
----------- ----------- -----------
Total liabilities.................... 27,043,670 24,641,222 26,658,068
----------- ----------- -----------
Shareholders' equity
Common stock, $2 par value; 1,000,000
shares authorized, 10,000 shares
issued and outstanding................ 20,000 20,000 20,000
Additional paid-in capital............. 1,066,102 1,066,102 1,066,102
Retained earnings...................... 1,455,535 973,948 1,214,201
Accumulated other comprehensive
income................................ 2,747 (2,515) 3,326
----------- ----------- -----------
Total shareholders' equity........... 2,544,384 2,057,535 2,303,629
----------- ----------- -----------
$29,588,054 $26,698,757 $28,961,697
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-53
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, December 31,
------------------------ ----------------------
1998 1997 1997 1996
----------- ----------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income
Loans........................ $ 952,580 $ 849,684 $1,850,249 $1,556,033
Investments.................. 198,865 170,820 370,220 307,785
Federal funds sold........... 31,801 24,819 53,680 69,769
---------- ---------- ---------- ----------
1,183,246 1,045,323 2,274,149 1,933,587
---------- ---------- ---------- ----------
Interest expense
Deposits..................... 482,307 378,232 835,787 684,181
Other borrowings............. 7,080 22,237 45,825 47,751
---------- ---------- ---------- ----------
489,387 400,469 881,612 731,932
---------- ---------- ---------- ----------
Net interest income........ 693,859 644,854 1,392,537 1,201,655
Provision for loan losses...... 5,000 40,000 0 40,000
---------- ---------- ---------- ----------
Net interest income after
provision for loan
losses.................... 688,859 604,854 1,392,537 1,161,655
---------- ---------- ---------- ----------
Other income
Service charges on deposit
accounts.................... 45,947 48,579 97,203 83,780
Overdraft and other fees..... 85,440 94,648 185,976 154,829
Other........................ 120,026 81,403 153,775 94,606
---------- ---------- ---------- ----------
251,413 224,630 436,954 333,215
---------- ---------- ---------- ----------
Other expenses
Salaries and employee
benefits.................... 287,906 257,474 539,384 461,661
Occupancy.................... 77,498 50,797 119,086 71,487
Office....................... 34,474 46,615 95,909 72,042
Equipment.................... 26,408 35,130 77,429 60,129
Other........................ 151,762 140,484 314,539 208,368
---------- ---------- ---------- ----------
578,048 530,500 1,146,347 873,687
---------- ---------- ---------- ----------
Income before income
taxes..................... 362,224 298,984 683,144 621,183
Income tax expense............. 120,890 86,831 170,738 232,101
---------- ---------- ---------- ----------
Net income................. 241,334 212,153 512,406 389,082
Other comprehensive income, net
of tax
Unrealized loss on available
for sale securities......... (579) (13,909) (8,068) (35,044)
---------- ---------- ---------- ----------
Comprehensive income....... $ 240,755 $ 198,244 $ 504,338 $ 354,038
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-54
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income Total
------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... $20,000 $1,066,102 $ 540,222 $ 46,438 $1,672,762
Net income............ -- -- 389,082 -- 389,082
Dividends............. -- -- (110,009) -- (110,009)
Other comprehensive
income............... -- -- -- (35,044) (35,044)
------- ---------- ---------- -------- ----------
Balance at December 31,
1996................... 20,000 1,066,102 819,295 11,394 1,916,791
Net income............ -- -- 512,406 -- 512,406
Dividends............. -- -- (117,500) -- (117,500)
Other comprehensive
income............... -- -- -- (8,068) (8,068)
------- ---------- ---------- -------- ----------
Balance at December 31,
1997................... 20,000 1,066,102 1,214,201 3,326 2,303,629
Net income
(unaudited).......... -- -- 241,334 -- 241,334
Other comprehensive
income............... -- -- -- (579) (579)
------- ---------- ---------- -------- ----------
Balance at June 30, 1998
(Unaudited)............ $20,000 $1,066,102 $1,455,535 $ 2,747 $2,544,384
======= ========== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-55
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, December 31,
------------------------ ------------------------
1998 1997 1997 1996
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities
Net income................ $ 241,334 $ 212,153 $ 512,406 $ 389,082
Adjustments to reconcile
net earnings to net cash
provided by operating
activities:
Provision for loan
losses.................. 5,000 40,000 0 40,000
Net amortization of
premiums and (accretion)
of discounts............ 247 (1,102) 474 8,945
Depreciation and
amortization expense.... 33,681 31,573 90,686 57,769
Change in:
Accrued interest
receivable and other
assets................. (32,144) 15,339 17,439 (39,020)
Accrued interest payable
and other liabilities.. 16,725 (33,566) (55,854) (5,280)
----------- ----------- ----------- -----------
Net cash provided by
operating activities.. 264,843 264,397 565,151 451,496
----------- ----------- ----------- -----------
Cash flows from investing
activities
Net (increase) decrease in
federal funds sold....... (650,000) 100,000 700,000 1,850,000
Purchases of securities
available for sale....... (1,500,000) (1,200,000) (3,200,000) (3,059,222)
Proceeds from maturities
of securities available
for sale................. 804,793 1,606,152 2,390,731 1,699,956
Purchase of securities
held to maturity......... 0 (606,063) (762,628) (403,573)
Proceeds from maturities
of securities held to
maturity................. 0 225,000 250,000 306,126
Proceeds from paydowns of
securities held to
maturity................. 43,654 30,218 70,988 74,576
Proceeds from maturities
of interest bearing
deposits................. 198,000 0 0 199,015
Loans originated, net of
principal collections,
charge-offs and
recoveries............... 377,595 (884,824) (2,361,066) (3,810,046)
Net additions to premises
and equipment............ (17,402) (101,487) (155,627) (258,038)
----------- ----------- ----------- -----------
Net cash used in
investing activities.. (743,360) (831,004) (3,067,602) (3,401,206)
----------- ----------- ----------- -----------
Cash flows from financing
activities
Net increase in deposits.. 543,877 1,423,410 3,491,700 3,116,873
Dividends................. 0 (57,500) (117,500) (110,009)
Principal payment on notes
payable.................. (175,000) 0 (25,000) (66,986)
----------- ----------- ----------- -----------
Net cash provided by
financing activities.. 368,877 1,365,910 3,349,200 2,939,878
----------- ----------- ----------- -----------
Increase (decrease) in
cash and cash equiva-
lents.................... (109,640) 799,303 846,749 (9,832)
Cash and cash equiva-
lents--beginning of peri-
od....................... 2,198,367 1,351,618 1,351,618 1,361,450
----------- ----------- ----------- -----------
Cash and cash equiva-
lents--end of period..... $ 2,088,727 $ 2,150,921 $ 2,198,367 $ 1,351,618
=========== =========== =========== ===========
Supplemental disclosure of
cash flow information
Cash paid during period
for interest............. $ 487,916 $ 392,355 $ 822,832 $ 731,491
=========== =========== =========== ===========
Cash paid during period
for income taxes......... $ 88,553 $ 118,633 $ 229,033 $ 276,553
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-56
<PAGE>
INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
1. Summary of Significant Accounting Policies
a. Organization and Operations
Independent Bankshares, Inc. (Company) is a one bank holding company
providing bank and bank-related services through its subsidiary, Glenwood
Independent Bank (Bank). The Company was incorporated in the State of Colorado
on December 8, 1993 and is subject to regulation by the Federal Reserve Bank.
The Bank operates under a state bank charter and provides full banking
services through it's three locations in Glenwood Springs and New Castle,
Colorado. As a state bank, the Bank is subject to regulation of the Federal
Deposit Insurance Corporation and the Colorado Division of Banking. The area
served by Glenwood Independent Bank is the region surrounding Glenwood Springs,
Colorado.
b. Principals of Consolidation
The consolidated financial statements include the accounts of Independent
Bankshares, Inc. and its wholly owned subsidiary, Glenwood Independent Bank.
All significant intercompany transactions have been eliminated.
c. Estimates
The preparation of 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 at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
d. Investment Securities
Glenwood Independent Bank adopted Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities which requires that investments be classified in three categories
and accounted for as follows: held to maturity securities reported at amortized
cost, trading securities reported at fair value, with unrealized gains and
losses included in earnings, and available for sale securities reported at fair
value, with unrealized gains and losses shown as a separate component of
shareholders' equity.
Restricted equity securities are reported at the lower of cost or estimated
fair value.
Gains and losses on sales of securities are determined on a specific
identification method.
Premiums and discounts are recognized as interest income using the interest
method over the expected period to maturity.
e. Loans
Loans are stated at outstanding principal balances. Interest income on loans
is accrued and credited to operations based on the principal amount
outstanding. The accrual of interest is reduced or discontinued if
collectibility is considered doubtful, and all previously accrued but unpaid
interest is reversed at that time. Payments received on impaired loans are
recorded as a reduction to the recorded investment in such loans until the
recorded investment is recovered. Payments received subsequent to the recovery
of the recorded investment are recorded as income until the full amount of
contractual payments have been made.
F-57
<PAGE>
INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Summary of Significant Accounting Policies (continued)
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield on the related loans.
f. Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes the collectibility of the principal is
unlikely. The allowance is an amount management believes will be adequate to
absorb probable losses on existing loans that may become uncollectible, based
on evaluations of the collectibility of loans and prior loan loss experience.
The evaluations take into consideration such factors as changes in the nature
and volume of the loan portfolio, overall portfolio quality, review of
specific problem loans, and current economic conditions and trends that may
affect the borrowers' ability to pay.
g. Premises and Equipment
Premises and equipment are stated at cost, less accumulated amortization and
depreciation. Depreciation and amortization are computed using the straight-
line method based on the estimated useful lives of the related assets.
h. Income Taxes
Income taxes are accounted for under the asset and liability method. Income
tax expense is reported as the total of current income taxes payable and the
net change in deferred income taxes provided for temporary differences.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying values of assets and liabilities for financial reporting
purposes and the values used for income tax purposes. Deferred income taxes
are recorded at the statutory Federal and state tax rates in effect at the
time that the temporary differences are expected to reverse.
The parent and subsidiary file a consolidated Federal income tax return. The
parent is reimbursed from the subsidiary for any current income tax benefits
derived.
i. Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers cash on
hand and amounts due from banks to be cash and cash equivalents.
j. Earnings per Common Share
Basic earnings per share is calculated by dividing net income by the
weighted average number of Common Shares outstanding during the period.
2. Investment Securities
The amortized cost and estimated fair value of investment securities are
summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Available for Sale at December
31, 1997
U.S. Treasury and agency secu-
rities........................ $4,204,792 $ 5,084 $ (43) $4,209,833
---------- ------- -------- ----------
Totals....................... $4,204,792 $ 5,084 $ (43) $4,209,833
========== ======= ======== ==========
Held to Maturity at December
31, 1997
U.S. Treasury and agency secu-
rities........................ $1,739,780 $ 5,801 $(45,017) $1,700,564
Obligations of states and po-
litical subdivisions.......... 1,021,158 19,070 -- 1,040,228
---------- ------- -------- ----------
Totals....................... $2,760,938 $24,871 $(45,017) $2,740,792
========== ======= ======== ==========
</TABLE>
F-58
<PAGE>
INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Investment Securities (continued)
The carrying value and estimated fair value of investments in restricted
equity securities at December 31, 1997 amounted to $26,000.
The amortized cost and estimated fair value of debt securities at December
31, 1997, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
--------------------- ---------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less........ $2,799,342 $2,802,005 $ 444,967 $ 444,266
Due after one year through five
years......................... 1,405,450 1,407,878 1,024,562 1,019,430
Due after five years through
ten years..................... -- -- 804,173 791,987
Due after ten years............ -- -- 487,236 485,109
---------- ---------- ---------- ----------
$4,204,792 $4,209,833 $2,760,938 $2,740,792
========== ========== ========== ==========
</TABLE>
At December 31, 1997, investment securities with a carrying value of
$1,802,066 were pledged to secure public deposits and for other purposes.
3. Loans and Allowance for Loan Losses
Loans are summarized as follows:
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
Commercial real estate........................................ $ 5,432,632
Residential real estate....................................... 5,645,250
Commercial.................................................... 1,999,270
Consumer...................................................... 4,046,988
Credit Card................................................... 520,078
-----------
$17,644,218
Allowance for loan losses..................................... (213,054)
-----------
$17,431,164
===========
</TABLE>
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Balance, beginning of year............................. $256,282 $223,034
Provision for loan losses.............................. -- 40,000
Charge-offs, net of recoveries......................... (43,228) (6,752)
-------- --------
$213,054 $256,282
======== ========
</TABLE>
F-59
<PAGE>
INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Premises and Equipment
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Land........................................................... $ 170,000
Building....................................................... 300,000
Leasehold improvements......................................... 372,859
Furniture, fixtures and equipment.............................. 566,915
Automobile..................................................... 29,925
----------
1,439,699
Accumulated depreciation and amortization...................... (435,207)
----------
$1,004,492
==========
</TABLE>
5. Deposits
Deposits are summarized as follows:
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
Demand
Noninterest-bearing.......................................... $ 4,679,190
Interest-bearing
NOW.......................................................... 2,153,400
Money market................................................. 4,503,993
-----------
11,336,583
Savings........................................................ 2,605,883
Time........................................................... 12,171,806
-----------
$26,114,272
===========
</TABLE>
Time deposits include certificates of deposit of $100,000 and over totalling
approximately $4,834,000 at December 31, 1997.
Remaining maturities of time deposits at December 31, 1997 are as follows:
<TABLE>
<S> <C>
Less than one year............................................. $ 8,123,572
One to two years............................................... 2,402,090
Two to three years............................................. 940,875
Three to four years............................................ 265,812
Four to five years............................................. 389,391
Five years and over............................................ 50,066
-----------
$12,171,806
===========
</TABLE>
6. Notes Payable
On April 15, 1994, Independent Bankshares, Inc. borrowed $250,000 from a
correspondent Bank. The note payable had a maturity date of July 2004 and had
an interest rate of Prime (8.5% as of December 31, 1997). The note required
annual principal payments of $25,000 and quarterly interest payments. The note
was secured by common stock of the Bank. As of December 31, 1997, the balance
of this note was $175,000, however, the note was paid in full in January, 1998.
In addition, the Bank is obligated under a capital lease which requires a
payment of approximately $258,000 at the termination of the lease. The lease
terminates 11 months after the death of the lessor or November 1, 2032,
whichever occurs first. Monthly interest of $2,500 is required under this
obligation. Approximately $470,000 is recorded as Land and Building as a result
of the capital lease.
F-60
<PAGE>
INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Available Line of Credit
The Bank has established a Federal funds line of credit with Bankers' Bank of
the West in the amount of $1,100,000 which expires on July 31, 1998. The line
is to be used to purchase Federal funds and was granted on an unsecured basis.
As of December 31, 1997, the line was undrawn.
8. Income Taxes
Income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
1997 Current Deferred Total
---- -------- -------- --------
<S> <C> <C> <C>
Federal........................................ $190,402 $(40,514) $149,888
State.......................................... 15,431 5,419 20,850
-------- -------- --------
$205,833 $(35,095) $170,738
======== ======== ========
<CAPTION>
1996 Current Deferred Total
---- -------- -------- --------
<S> <C> <C> <C>
Federal........................................ $199,882 $ 9,519 $209,401
State.......................................... 20,631 2,069 22,700
-------- -------- --------
$220,513 $ 11,588 $232,101
======== ======== ========
</TABLE>
The sources of deferred tax assets and liabilities are summarized as follows:
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Deferred tax assets:
Allowance for loan losses....................................... $55,731
Other........................................................... 17,595
-------
Total deferred tax assets..................................... 73,326
-------
Deferred tax liabilities:
Premises and equipment.......................................... (2,418)
Unrealized gain on securities available for sale................ (1,880)
-------
Total deferred tax liabilities................................ (4,298)
-------
Net deferred tax assets....................................... $69,028
=======
</TABLE>
A reconciliation of expected Federal tax expense to actual tax expense is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
Amount % Amount %
-------- ---- -------- ----
<S> <C> <C> <C> <C>
Expected Federal income tax expense........ $232,269 34.0 $211,202 34.0
State tax, net of Federal income tax
benefit................................... 13,761 2.0 14,982 2.4
Municipal interest......................... (13,751) (2.0) (10,684) (1.7)
Other, net................................. (61,541) (9.0) 16,601 2.7
-------- ---- -------- ----
$170,738 25.0 $232,101 37.4
======== ==== ======== ====
</TABLE>
9. Employee Benefits
The Bank has established a pre-tax savings plan under Section 401(k) of the
Internal Revenue Code. Under the plan, eligible employees are able to
contribute up to 10% of their compensation (some limitations apply to highly
compensated employees). Total matching expense for 1997 and 1996 was
approximately $7,000 and $5,300, respectively.
F-61
<PAGE>
INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Operating Leases
The Bank's two branch locations, Glenwood Springs and New Castle, are leased
from a supermarket chain under operating leases. Both leases have five year
terms with automatic renewals of three additional five year terms. The
operating lease for the Glenwood Branch is cancelable in 1999, while the New
Castle lease is cancelable in 2000.
The lease for the Glenwood branch requires minimum rental payments through
the year 2001, and the lease for the New Castle branch requires minimum rental
payments through the year 2002. Total rent expense for December 31, 1997 and
1996, was approximately $37,000 and $16,000, respectively. Future minimum
rental payments under these operating leases are as follows:
<TABLE>
<S> <C>
1998.............................................................. $ 48,000
1999.............................................................. 48,000
2000.............................................................. 48,000
2001.............................................................. 32,000
2002.............................................................. 12,000
--------
$188,000
========
</TABLE>
Included in rent is a $.05 transaction fee for every ATM transaction,
excluding the first 4,000 transactions each month.
11. Financial Instruments with Off-Balance Sheet Risk
Financial instruments which represent off-balance sheet credit risk consist
of open commitments to extend credit. Open commitments to extend credit
amounted to $4,782,956 at December 31, 1997. Such agreements require the Bank
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. Since many of the commitments are expected to
expire without being fully drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained (if deemed necessary by the Bank upon extension of credit) is based on
management's credit evaluation of the customer. Collateral held varies, but may
include accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
12. Concentration of Credit Risk
The Bank grants residential and commercial real estate loans to customers in
the Bank's market area. Although the Bank has a diversified loan portfolio, a
substantial portion of the Bank's debtors' ability to honor their contracts is
dependent upon the real estate economic sector. The concentrations of credit by
type of loan are set forth in Note 3.
13. Related Party Transactions
The Bank makes loans to officers, directors, principal shareholders and their
affiliates in the normal course of business under substantially the same terms
as it does to others. At December 31, 1997, direct loans to such parties
aggregated $252,000. During 1997, new loans to related parties amounted to
$214,000 and repayments totaled $116,000.
Related parties maintained deposit account balances of approximately $819,000
at December 31, 1997.
F-62
<PAGE>
INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Regulatory Capital Requirements
The Bank 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
Banks financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications 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 ratios of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined) of 8% and 4%,
respectively, and of Tier I capital to average assets (as defined) of 4%. As of
December 31, 1997, the Bank meets all capital adequacy requirements to which it
is subject. The Bank's total capital to risk-weighted assets was 15.06%, Tier I
capital to risk-weighted assets was 13.88% and the Tier I capital ratio was
8.80%.
The most recent notification from the Federal Deposit Insurance Corporation
(FDIC) categorized the Bank as well-capitalized under the regulatory framework
for prompt corrective action. To be categorized as well-capitalized the Bank
must maintain minimum total risk-based, Tier I risk-based, and Tier I capital
ratios of 10%, 6% and 5%, respectively. There are no conditions or events since
that notification that management believes have changed the institution's
category.
15. Restrictions on Dividends
State banking regulations include various restrictions which limit the extent
to which dividends may be declared by the Bank. The approval of the Colorado
Banking Board is required for the Bank to declare dividends in any calendar
year which exceed the Bank's net income for that year combined with its
retained earnings for the preceding two years.
16. Subsequent Event
On March 10, 1998, subsequent to our audit date, the shareholders of
Independent Bankshares, Inc. and Vail Banks, Inc. entered into a merger
agreement. The merger is pending regulatory approval which is expected by July,
1998.
17. Earnings per share
In accordance with SFAS No. 128, "Earnings per Share," the calculation of
basic earnings per share is presented below. No potentially dilutive common
shares existed during any period presented in the financial statements.
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, December 31,
----------------------- -----------------
1998 1997 1997 1996
----------- ----------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net income.......................... $241,334 $212,153 $512,406 $389,082
-------- -------- -------- --------
Average Common Shares Issued........ 10,000 10,000 10,000 10,000
-------- -------- -------- --------
Earnings per Common Share........... $ 24.13 $ 21.22 $ 51.24 $ 38.91
</TABLE>
F-63
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Telluride Bancorp, Ltd.
Report of Independent Auditors
We have audited the accompanying consolidated statements of financial
condition of Telluride Bancorp, Ltd. and its subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of income and
comprehensive income, changes in stockholders' equity and cash flows for the
years 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 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Telluride
Bancorp, Ltd. and its subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ Dalby, Wendland & Co., P.C.
Montrose, Colorado
February 27, 1998
F-64
<PAGE>
ACCOUNTANTS' REVIEW REPORT
Board of Directors and Stockholders
Telluride Bancorp, Ltd.
Accountants' Review Report
We have reviewed the accompanying consolidated statements of financial
condition of Telluride Bancorp, Ltd. and its subsidiaries as of September 30,
1998 and 1997 and the related consolidated statements of income and
comprehensive income, changes in stockholders' equity and cash flows for the
periods then ended, in accordance with Statements on Standards for Accounting
and Review Services issued by the American Institute of Certified Public
Accountants. All information included in these consolidated financial
statements is the representation of the Company's management.
A review consists principally of inquiries of Company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective
of which is the expression of an opinion regarding the consolidated financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements in order
for them to be in conformity with generally accepted accounting principles.
/s/ Dalby, Wendland & Co., P.C.
Montrose, Colorado
November 4, 1998
F-65
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
See Accountants' Report
<TABLE>
<CAPTION>
September 30, September 30, December 31, December 31,
1998 1997 1997 1996
------------- ------------- ------------ ------------
(Reviewed) (Reviewed)
<S> <C> <C> <C> <C>
ASSETS
Cash and due from
banks.................. $ 6,535,908 $ 4,190,767 $ 5,962,697 $ 5,669,250
Federal funds sold...... 9,245,000 4,255,000 240,000 --
Interest bearing
balances............... 98,912 -- -- --
Securities available for
sale................... 23,175,177 19,367,546 17,490,951 22,248,272
Loans receivable, net of
allowance for loan
losses and deferred
loan fees.............. 76,142,023 66,146,369 70,973,516 63,628,947
Accrued interest
receivable............. 964,682 797,023 812,706 790,070
Property, equipment and
leasehold improvements,
net.................... 9,136,970 7,650,248 7,771,797 7,626,687
Prepaid income taxes.... 57,967 298,534 146,288 200,855
Intangible asset for
core deposits acquired,
net of accumulated
amortization........... 33,630 43,770 41,235 51,375
Other real estate owned
and in process of
foreclosure............ 225,988 462,658 306,358 165,000
Restricted investment
securities............. 355,000 278,500 396,200 274,100
Other assets............ 392,094 134,017 199,224 366,763
------------ ------------ ------------ ------------
TOTAL ASSETS......... $126,363,351 $103,624,432 $104,340,972 $101,021,319
============ ============ ============ ============
LIABILITIES AND STOCK-
HOLDERS' EQUITY DEPOS-
ITS
Demand--non-interest
bearing............... $ 26,405,519 $ 17,514,285 $ 20,155,136 $ 18,327,321
Demand--interest
bearing............... 32,083,727 26,216,066 27,080,384 25,160,320
Savings................ 26,274,283 21,524,811 20,911,270 23,683,915
Time................... 28,548,039 25,672,902 25,600,641 19,668,846
------------ ------------ ------------ ------------
TOTAL DEPOSITS....... 113,311,568 90,928,064 93,747,431 86,840,402
OTHER LIABILITIES
Federal funds
purchased............. -- -- -- 2,225,000
Accrued interest
payable............... 402,433 395,921 327,889 240,762
Notes payable.......... 1,031,452 2,605,756 395,972 2,715,756
Deferred income tax
liability............. 326,765 201,059 218,408 153,142
Other liabilities...... 331,522 261,988 237,719 363,575
------------ ------------ ------------ ------------
TOTAL LIABILITIES.... 115,403,740 94,392,788 94,927,419 92,538,637
------------ ------------ ------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $1 par
value, 100,000 shares
authorized, 17,356
shares issued at
December 31, 1997 and
1996 and September 30,
1997; 18,556 shares
were outstanding at
September 30, 1998.... 18,556 17,356 17,356 17,356
Additional paid-in
capital............... 2,319,687 1,799,367 1,799,367 1,799,367
Retained earnings...... 8,400,446 7,374,932 7,530,410 6,676,602
Accumulated other
comprehensive income.. 220,922 39,989 66,420 (10,643)
------------ ------------ ------------ ------------
TOTAL STOCKHOLDERS'
EQUITY.............. 10,959,611 9,231,644 9,413,553 8,482,682
------------ ------------ ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS'
EQUITY.............. $126,363,351 $103,624,432 $104,340,972 $101,021,319
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-66
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
See Accountants' Report
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
--------------------------- -------------------------
September 30, September 30, December 31, December 31,
1998 1997 1997 1996
------------- ------------- ------------ ------------
(Reviewed) (Reviewed)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable....... $6,058,065 $5,382,066 $7,271,774 $6,688,249
Securities available
for sale.............. 859,082 958,216 1,229,819 1,495,839
Federal funds sold..... 227,912 86,471 136,710 149,028
---------- ---------- ---------- ----------
TOTAL INTEREST
INCOME.............. 7,145,059 6,426,753 8,638,303 8,333,116
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits............... 2,655,902 2,230,303 3,031,301 3,009,889
Notes payable.......... 35,706 195,360 246,651 270,122
Federal funds
purchased............. 10,643 9,076 9,076 32,590
---------- ---------- ---------- ----------
TOTAL INTEREST
EXPENSE............. 2,702,251 2,434,739 3,287,028 3,312,601
---------- ---------- ---------- ----------
NET INTEREST INCOME.. 4,442,808 3,992,014 5,351,275 5,020,515
PROVISION FOR LOAN
LOSSES.................. 101,000 48,250 163,750 161,350
---------- ---------- ---------- ----------
NET INTEREST INCOME
AFTER PROVISION FOR
LOAN LOSSES ........ 4,341,808 3,943,764 5,187,525 4,859,165
---------- ---------- ---------- ----------
NONINTEREST INCOME
Service charges and
fees.................. 584,071 602,885 808,574 631,714
Rental income.......... 57,303 47,642 59,314 63,240
Gain (Loss) on sale of
assets................ (24,767) 4,162 (9,091) 44,772
Other income........... 73,248 9,439 38,412 18,483
---------- ---------- ---------- ----------
TOTAL OTHER INCOME... 689,855 664,128 897,209 758,209
---------- ---------- ---------- ----------
NONINTEREST EXPENSES
Salaries and employee
benefits.............. 2,097,839 2,030,674 2,732,283 2,534,320
General and
administrative........ 959,902 863,981 1,189,501 1,401,651
Occupancy.............. 738,477 679,306 918,301 919,764
Reduction in carrying
value of assets....... -- 13,797 20,396 --
Amortization of core
deposits.............. 7,605 7,605 10,140 10,140
---------- ---------- ---------- ----------
TOTAL OTHER
EXPENSES............ 3,803,823 3,595,363 4,870,621 4,865,875
---------- ---------- ---------- ----------
INCOME BEFORE INCOME
TAXES............... 1,227,840 1,012,529 1,214,113 751,499
PROVISION FOR INCOME
TAXES................... 357,804 314,199 360,305 175,292
---------- ---------- ---------- ----------
NET INCOME........... 870,036 698,330 853,808 576,207
OTHER COMPREHENSIVE
INCOME,
net of tax:
Unrealized holding
gains (losses) on
available for sale
securities arising
during the period..... 154,502 50,632 77,063 (150,551)
---------- ---------- ---------- ----------
COMPREHENSIVE
INCOME.............. $1,024,538 $ 748,962 $ 930,871 $ 425,656
========== ========== ========== ==========
Earnings per Common
Share................... $ 49.75 $ 40.24 $ 49.19 $ 33.20
---------- ---------- ---------- ----------
Earnings per Common Share
assuming dilution....... $ 49.07 $ 39.83 $ 48.67 $ 33.02
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-67
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
See Accountants' Report (Reviewed)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
--------------- Paid In Retained Comprehensive Treasury
Shares Amount Capital Earnings Income Stock Total
------ ------- ---------- ---------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE--January 1,
1996................... 18,539 $18,539 $1,934,320 $6,100,395 $ 139,908 $(136,136) $ 8,057,026
Comprehensive Income:
Net income.............. -- -- -- 576,207 -- -- 576,207
Other comprehensive
income................. -- -- -- -- (150,551) -- (150,551)
Treasury stock retired.. (1,183) (1,183) (134,953) -- -- 136,136 --
------ ------- ---------- ---------- --------- --------- -----------
BALANCE--December 31,
1996................... 17,356 17,356 1,799,367 6,676,602 (10,643) -- 8,482,682
Comprehensive Income:
Net income.............. -- -- -- 698,330 -- -- 698,330
Other comprehensive
income................. -- -- -- -- 50,632 -- 50,632
------ ------- ---------- ---------- --------- --------- -----------
BALANCE--September 30,
1997................... 17,356 17,356 1,799,367 7,374,932 39,989 -- 9,231,644
Comprehensive Income:
Net income.............. -- -- -- 155,478 -- -- 155,478
Other comprehensive
income................. -- -- -- -- 26,431 -- 26,431
------ ------- ---------- ---------- --------- --------- -----------
BALANCE--December 31,
1997................... 17,356 17,356 1,799,367 7,530,410 66,420 -- 9,413,553
Stock Options Exer-
cised.................. 1,200 1,200 520,320 -- -- -- 521,520
Comprehensive Income:
Net income.............. -- -- -- 870,036 -- -- 870,036
Other comprehensive
income................. -- -- -- -- 154,502 -- 154,502
------ ------- ---------- ---------- --------- --------- -----------
BALANCE--September 30,
1998................... 18,556 $18,556 $2,319,687 $8,400,446 $ 220,922 $ -- $10,959,611
====== ======= ========== ========== ========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-68
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See Accountants' Report
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
--------------------------- -------------------------
September 30, September 30, December 31, December 31,
1998 1997 1997 1996
------------- ------------- ------------ ------------
(Reviewed) (Reviewed)
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income.............. $ 870,036 $ 698,330 $ 853,808 $ 576,207
----------- ---------- ---------- ----------
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Provision for loan
losses................ 101,000 48,250 163,750 161,350
Provision for
depreciation.......... 353,074 259,045 398,965 403,500
Provision for deferred
tax................... 48,617 17,800 19,421 (24,597)
Amortization of premium
and discount on
investments........... 7,812 (2,412) (548) (23,084)
Amortization of core
deposits.............. 7,605 7,605 10,140 10,140
Amortization of non-
compete premium....... 7,319 -- -- --
Reduction in the
carrying value of
other property........ -- 13,797 20,396 --
Stock dividends
received.............. (22,300) (4,400) (14,300) (16,800)
Loss (Gain) on sale of
assets................ 24,767 (4,162) 9,091 (44,772)
Gain on sale of SBA
loans................. (37,882) -- -- --
Change in assets and
liabilities:
Decrease (Increase) in
other assets......... (223,189) 190,725 146,713 (39,479)
Decrease (Increase) in
accrued interest
receivable........... (151,976) (6,953) (22,636) 113,374
Decrease (Increase) in
prepaid taxes........ 88,321 (97,679) 54,567 (33,533)
Increase in interest
payable.............. 74,544 155,159 87,127 14,678
Increase in current
tax liability........ 70,866 -- -- --
Increase (Decrease) in
other liabilities.... 22,935 (101,587) (125,856) 61,882
----------- ---------- ---------- ----------
Total adjustments.... 371,513 475,188 746,830 582,659
----------- ---------- ---------- ----------
NET CASH PROVIDED BY
OPERATING
ACTIVITIES.......... 1,241,549 1,173,518 1,600,638 1,158,866
----------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of available
for sale securities.... (10,651,908) (3,474,577) (3,726,543) (9,928,359)
Purchase of Federal Home
Loan Bank stock........ (11,600) -- (107,800) --
Proceeds from Federal
Home Loan Bank stock
being called........... 75,100 -- -- --
Proceeds from maturities
of available for sale
securities............. 5,174,112 6,438,464 8,607,320 6,942,058
Purchase of property and
equipment.............. (1,719,238) (290,476) (551,945) (228,758)
Proceeds from sale of
assets................. 254,594 244,242 460,854 805,378
Proceeds from sale of
SBA loans.............. 572,957 -- -- --
Net (increase) decrease
in loans made to
customers.............. (5,979,582) (3,067,316) (8,111,322) 414,201
----------- ---------- ---------- ----------
NET CASH USED BY
INVESTING
ACTIVITIES.......... (12,285,565) (149,663) (3,429,436) (1,995,480)
----------- ---------- ---------- ----------
</TABLE>
F-69
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
See Accountants' Report
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
---------------------------- --------------------------
September 30, September 30, December 31, December 31,
1998 1997 1997 1996
------------- ------------- ------------ ------------
(Reviewed) (Reviewed)
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES
Increase (Decrease) in
deposits............... 19,564,139 4,087,662 6,907,029 (1,063,113)
Net change in federal
funds purchased........ -- (2,225,000) (2,225,000) 1,725,000
Note advances........... 1,267,000 -- -- --
Principal payments on
note payable........... (631,520) (110,000) (2,319,784) (892,828)
Stock options
exercised.............. 521,520 -- -- --
------------ ----------- ----------- -----------
NET CASH PROVIDED
(USED) BY FINANCING
ACTIVITIES.......... 20,721,139 1,752,662 2,362,245 (230,941)
------------ ----------- ----------- -----------
NET INCREASE
(DECREASE) IN CASH
AND CASH
EQUIVALENTS......... 9,677,123 2,776,517 533,447 (1,067,555)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR ... 6,202,697 5,669,250 5,669,250 6,736,805
------------ ----------- ----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR.......... $ 15,879,820 $ 8,445,767 $ 6,202,697 $ 5,669,250
============ =========== =========== ===========
Cash and cash
equivalents are
classified in the
balance sheet as
follows:
Cash and due from
banks................. $ 6,535,908 $ 4,190,767 $ 5,962,697 $ 5,669,250
Interest bearing
balances.............. 98,912 -- -- --
Federal funds sold..... 9,245,000 4,255,000 240,000 --
------------ ----------- ----------- -----------
Total cash and cash
equivalents......... $ 15,879,820 $ 8,445,767 $ 6,202,697 $ 5,669,250
============ =========== =========== ===========
SUPPLEMENTAL INFORMATION:
Interest paid on
deposits.............. $ 2,587,950 $ 2,070,892 $ 2,908,326 $ 2,989,467
Interest paid on
outstanding debt...... 56,636 190,860 282,499 238,206
Income taxes paid...... 150,000 379,000 394,000 395,000
</TABLE>
The accompanying notes are an integral part of these statements.
F-70
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
See Accountants' Report
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization History
Telluride Bancorp, Ltd. (the Company) was incorporated in the State of
Colorado in December 1987 and became a bank holding company in October 1988,
when it acquired controlling interest of the Bank of Telluride. In August 1991,
the Company acquired San Miguel Investment Company and San Miguel Basin State
Bank. In 1992 San Miguel Basin State Bank changed its name to The Bank of
Norwood and in 1995 the Bank's name was changed to Western Colorado Bank. On
December 31, 1995, San Miguel Investment Company, a wholly-owned subsidiary of
the Company, was merged into the Company. Its only asset at the date of the
merger was its 94.17% ownership of Western Colorado Bank. The Company's
subsidiary banks are members of the Federal Deposit Insurance Corporation
(FDIC) and are subject to its regulations and the banking regulations of the
State of Colorado.
The Company's subsidiaries have bank facilities in Telluride, Norwood and
Montrose, Colorado.
A summary of significant accounting policies applied in preparation of the
Company's financial statements is as follows:
Principles of Consolidation
The consolidated financial statements include the accounts of Telluride
Bancorp, Ltd. and its wholly owned subsidiaries, the Bank of Telluride and
Western Colorado Bank. Significant intercompany accounts and transactions have
been eliminated.
Cash and Cash Equivalents
For purposes of presentation in the consolidated statement of cash flow, cash
and cash equivalents are defined as those amounts included in the balance sheet
captions "cash and due from banks," "interest bearing balances" and "federal
funds sold."
The Company's subsidiaries have deposit accounts with the Federal Reserve
Bank and other correspondent institutions. At times some of those deposits are
in excess of the portion insured by the FDIC. Uninsured deposits (approximate
amounts) were as follows:
<TABLE>
<S> <C>
September 30, 1998 (reviewed)................................. $5,110,000
September 30, 1997 (reviewed)................................. $1,175,000
December 31, 1997............................................. $1,314,000
December 31, 1996............................................. $1,951,000
</TABLE>
Investment Securities
Trading Securities: Securities that are held for short-term resale are
classified as trading account securities and recorded at their fair values.
Realized and unrealized gains and losses on trading account securities are
included in other income.
Securities Held to Maturity: Government, Federal agency, and corporate debt
securities that management has the positive intent and ability to hold to
maturity are reported at cost, adjusted for amortization of premiums and
accretion of discounts that are recognized in interest income using methods
approximating the interest method over the period to maturity. Mortgage-backed
securities represent participating interests in pools of long-
F-71
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
See Accountants' Report
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
term first mortgage loans originated and serviced by issuers of the securities.
Mortgage-backed securities are carried at unpaid principal balances, adjusted
for unamortized premiums and unearned discounts. Premiums and discounts are
amortized using methods approximating the interest method over the remaining
period to contractual maturity, adjusted for anticipated prepayments.
Securities Available for Sale: Available for sale securities consist of
investment securities not classified as trading securities nor as held to
maturity securities. Unrealized holding gains and losses, net of tax, on
available for sale securities are reported as a net amount in a separate
component of stockholders' equity until realized. Gains and losses on the sale
of available for sale securities are determined using the specific-
identification method. The amortization of premiums and the accretion of
discounts are recognized in interest income using methods approximating the
interest method over the period of maturity.
Declines in the fair value of individually held to maturity and available for
sale securities below their cost that are other than temporary, result in
write-downs of the individual securities to their fair value. The related
write-downs are included in earnings as realized losses.
During the first nine months of 1998, and the years 1997 and 1996 all
securities held by the Company were classified as available for sale.
Loans Receivable
Loans are stated at unpaid principal balances, less the allowance for loan
losses and net deferred loan fees and unearned discounts.
Unearned discounts on loans purchased are recognized as income over the term
of the loans using a method that approximates the interest method.
Loan origination and commitment fees are deferred and amortized as a yield
adjustment over the lives of the related loans using the interest and straight-
line methods. Amortization of deferred loan fees is discontinued when a loan is
placed on nonaccrual status.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest income
on other impaired loans is recognized only to the extent of interest payments
received.
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, economic conditions and other risks inherent in the portfolio.
Allowances for impaired loans are generally determined based on collateral
values or the present value of estimated cash flows. The allowance is increased
by a provision for loan losses, which is charged to expense, and reduced by
charge-offs, net of recoveries.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost less
accumulated depreciation. Costs include the net amount of interest costs
associated with significant capital additions. Profit and losses on
dispositions are reflected in current operations.
F-72
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
See Accountants' Report
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Expenditures which materially add to the useful lives of property and
equipment are capitalized. All other maintenance and repair costs are charged
to current operations.
Depreciation for financial accounting purposes is computed using straight-
line or accelerated methods over the estimated useful life of each asset.
Estimated useful lives range from 3 to 50 years.
For income tax purposes, accelerated methods of depreciation are generally
used; deferred income taxes are provided for the difference between
depreciation expense for financial accounting purposes and for income tax
purposes.
Other Real Estate Owned and Repossessed Assets
Real estate and other assets acquired in actual or in-substance foreclosure
are carried at cost or fair value, whichever is lower. Fair value is based on
independent appraisals and other relevant factors. At the time of acquisition,
any excess of cost over fair value is charged to the allowance for loan losses.
Subsequent declines in fair value are charged to the current income provision
and credited to the carrying value of the properties. Operating expenses are
charged to other noninterest expense.
Gains on sales of other real estate are recognized at the time of sale or
deferred for recognition in future periods, as appropriate, based on the nature
of the transaction. Losses on such sales are recognized at the time of the
sale.
Core Deposits Acquired
As a result of the Company acquiring a controlling interest in Western
Colorado Bank, $105,595 of the purchase price was allocated to the core deposit
base acquired. These costs are being amortized over an estimated useful life of
10 years.
Account Reclassifications
Certain 1996 balances have been reclassified for comparative purposes.
Income Taxes
For income tax purposes, the Company files a consolidated income tax return
with its subsidiaries. Agreements between the Company and its subsidiaries
provide that any current tax liability of its subsidiaries, computed on a
separate entity basis, will be paid by the subsidiaries to the Company. Tax
refunds attributable to the operations of the subsidiaries will be refunded to
the subsidiaries to the extent they can offset income of the Consolidated
Group.
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of assets and liabilities
for financial and income tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are recovered
or settled. Deferred taxes also are recognized for operating losses that are
available to offset future taxable income and tax credits that are available to
offset future federal income taxes.
F-73
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
See Accountants' Report
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The preparation of 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 at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Per Share Calculation
Basic earnings per share is determined by dividing net income for the period
by the weighted average number of common shares outstanding during the period.
Diluted earnings per share is calculated by adjusting net income and shares
outstanding assuming that all potentially dilutive securities have been
converted to common stock.
Effect of New Accounting Standards
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, Earnings Per Share (FAS 128). The statement established
standards for computing and presenting earnings per share. Under the new
requirements the presentation of primary earnings per share is replaced with
basic earnings per share which excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of
common shares outstanding for the period. The standard also required dual
presentation of basic and diluted earnings per share on the face of the income
statement for all entities with complex capital structure and requires a
reconciliation of the numerator and denominator of basic earnings per share
computation to the numerator and denominator of the diluted earnings per share
computation. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issued common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. This statement became
effective for the Company's 1997 year end financial statements. The statement
requires restatement of all prior period EPS data presented.
On January 1, 1998, the Company adopted Financial Accounting Standards Board
(FASB) Statement No. 130, Reporting Comprehensive Income (FAS 130). The
statement prescribes the standards for reporting of comprehensive income and
its components. Comprehensive income is defined as the change in equity of a
business enterprise during the period from transactions and other events and
circumstances from non owner sources. The components of comprehensive income
consists of net income and other comprehensive income.
The pronouncement requires the Company to classify items of other
comprehensive income by their nature in a financial statement and 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 condition.
The Company has chosen to report comprehensive income in the consolidated
statement of income and comprehensive income.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
F-74
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
See Accountants' Report
NOTE 2--SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of securities at September 30,
1998 (reviewed) are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available for Sale Securities:
U.S. Treasury securities....... $ 5,524,885 $ 46,991 $ -- $ 5,571,876
Obligations of U.S. government
agencies...................... 11,184,116 67,392 (109) 11,251,399
Obligations of state and
political subdivisions........ 4,941,544 147,886 -- 5,089,430
Mortgaged-back securities...... 1,165,955 8,541 (28) 1,174,468
Equity securities.............. 38,500 49,504 -- 88,004
----------- -------- -------- -----------
Totals....................... $22,855,000 $320,314 $(137) $23,175,177
=========== ======== ======== ===========
The amortized cost and estimated fair value of securities at September 30,
1997 (reviewed) are as follows:
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available for Sale Securities:
U.S. Treasury securities....... $ 6,513,300 $ 18,240 $ (4,198) $ 6,527,342
Obligations of U.S. government
agencies...................... 7,328,195 9,137 (34,032) 7,303,300
Obligations of state and
political subdivisions........ 3,765,151 76,245 -- 3,841,396
Mortgaged-back securities...... 1,658,623 3,185 (4,800) 1,657,008
Equity securities.............. 38,500 -- -- 38,500
----------- -------- -------- -----------
Totals....................... $19,303,769 $106,807 $(43,030) $19,367,546
=========== ======== ======== ===========
The amortized cost and estimated fair value of securities at December 31,
1997 are as follows:
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available for Sale Securities:
U.S. Treasury securities....... $ 5,264,106 $ 17,994 $ (3,271) $ 5,278,829
Obligations of U.S. government
agencies...................... 6,679,840 9,525 (14,936) 6,674,429
Obligations of state and
political subdivisions........ 3,850,362 96,250 -- 3,946,612
Mortgaged-back securities...... 1,552,208 2,216 (1,843) 1,552,581
Equity securities.............. 38,500 -- -- 38,500
----------- -------- -------- -----------
Totals....................... $17,385,016 $125,985 $(20,050) $17,490,951
=========== ======== ======== ===========
</TABLE>
F-75
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
See Accountants' Report
NOTE 2--SECURITIES AVAILABLE FOR SALE (Continued)
The amortized cost and estimated fair value of securities at December 31,
1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available for Sale Securi-
ties:
U.S. Treasury securities.. $ 9,478,035 $ 50,247 $ (8,452) $ 9,519,830
Obligations of U.S.
government agencies...... 7,128,931 9,753 (92,718) 7,045,966
Obligations of state and
political subdivisions... 3,694,768 47,503 (7,029) 3,735,242
Mortgaged-back
securities............... 1,925,010 1,260 (17,536) 1,908,734
Equity securities......... 38,500 -- -- 38,500
----------- -------- --------- -----------
Totals.................. $22,265,244 $108,763 $(125,735) $22,248,272
=========== ======== ========= ===========
</TABLE>
The Company's subsidiaries have designated all securities as available for
sale. Interest income for all securities has been combined for reporting
purposes.
The Company's policy prohibits its subsidiary banks from owning investment
derivatives.
The Company had pledged as collateral for public funds on deposit securities
in the principal amounts as follows:
<TABLE>
<S> <C>
September 30, 1998 (reviewed)................................. $18,265,000
September 30, 1997 (reviewed)................................. $12,985,000
December 31, 1997............................................. $12,670,000
December 31, 1996............................................. $14,654,000
</TABLE>
The amortized cost and estimated market value of securities (other than
equity securities) at September 30, 1998 (reviewed), by contractual maturity,
are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
----------- -----------
<S> <C> <C>
Available for Sale Securities:
Due in one year or less......................... $10,626,022 $10,669,267
Due after one year through five years........... 8,352,739 8,459,069
Due after five years through ten years.......... 1,527,455 1,609,939
Due after ten years............................. 1,144,329 1,174,430
----------- -----------
21,650,545 21,912,705
Mortgaged-backed securities....................... 1,165,955 1,174,468
----------- -----------
$22,816,500 $23,087,173
=========== ===========
</TABLE>
F-76
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
See Accountants' Report
NOTE 3--LOANS RECEIVABLE
Loans consist of the following:
<TABLE>
<CAPTION>
September 30, September 30, December 31, December 31,
1998 1997 1997 1996
------------- ------------- ------------ ------------
(Reviewed) (Reviewed)
<S> <C> <C> <C> <C>
Real estate and
construction loans..... $53,526,660 $48,087,818 $54,297,552 $49,773,693
Commercial loans........ 16,515,582 14,817,650 13,442,077 12,413,783
Installment and consumer
loans.................. 5,944,615 3,264,098 3,183,785 1,466,611
Overdrafts, credit cards
and other loans........ 1,132,430 915,106 1,049,184 987,858
----------- ----------- ----------- -----------
77,119,287 67,084,672 71,972,598 64,641,945
Less:
Allowance for loan
losses............... (831,498) (797,051) (843,279) (835,042)
Deferred loan fees.... (145,766) (141,252) (155,803) (177,956)
----------- ----------- ----------- -----------
$76,142,023 $66,146,369 $70,973,516 $63,628,947
=========== =========== =========== ===========
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
September 30, September 30, December 31, December 31,
1998 1997 1997 1996
------------- ------------- ------------ ------------
(Reviewed) (Reviewed)
<S> <C> <C> <C> <C>
Balance at the beginning
of the year............ $ 843,279 $ 835,042 $ 835,042 $ 765,860
Provision for possible
loan losses charged to
operations............. 101,000 48,250 163,750 161,350
Loan charge-offs........ (133,540) (120,073) (206,269) (160,738)
Loan recoveries......... 20,759 33,832 50,756 68,570
--------- --------- --------- ---------
Balance at the end of
the year............... $ 831,498 $ 797,051 $ 843,279 $ 835,042
========= ========= ========= =========
</TABLE>
The Company had pledged as collateral for public funds on deposit, mortgage
loans as follows:
<TABLE>
<S> <C>
September 30, 1998 (reviewed).................................... $ --
September 30, 1997 (reviewed).................................... $2,252,000
December 31, 1997................................................ $1,916,000
December 31, 1996................................................ $4,176,000
</TABLE>
Non-accrual loans were as follows:
<TABLE>
<S> <C>
September 30, 1998 (reviewed).................................... $ 62,000
September 30, 1997 (reviewed).................................... $ 643,000
December 31, 1997................................................ $ 443,260
December 31, 1996................................................ $1,017,000
</TABLE>
F-77
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
See Accountants' Report
NOTE 4--BANK PROPERTY AND EQUIPMENT
Fixed assets consisted of the following:
<TABLE>
<CAPTION>
September 30, September 30, December 31, December 31,
1998 1997 1997 1996
------------- ------------- ------------ ------------
(Reviewed) (Reviewed)
<S> <C> <C> <C> <C>
Bank buildings and
improvements........... $ 7,044,034 $ 5,365,982 $ 5,391,894 $ 5,420,712
Furniture, fixtures and
equipment.............. 2,001,094 1,830,490 1,864,836 1,754,469
Vehicles................ 155,012 164,687 155,012 189,541
----------- ----------- ----------- -----------
9,200,140 7,361,159 7,411,742 7,364,722
Less accumulated
depreciation........... (1,647,326) (1,562,578) (1,638,596) (1,307,695)
----------- ----------- ----------- -----------
7,552,814 5,798,581 5,773,146 6,057,027
Construction in
progress............... -- 282,007 428,991 --
Land.................... 1,584,156 1,569,660 1,569,660 1,569,660
----------- ----------- ----------- -----------
$ 9,136,970 $ 7,650,248 $ 7,771,797 $ 7,626,687
=========== =========== =========== ===========
</TABLE>
Depreciation expense was as follows:
<TABLE>
<S> <C>
Period Ended September 30, 1998 (reviewed)......................... $353,074
Period Ended September 30, 1997 (reviewed)......................... $259,045
Year Ended December 31, 1997....................................... $398,965
Year Ended December 31, 1996....................................... $403,500
</TABLE>
Telluride Facility
In April of 1995, the Company completed construction of its new facility
located at 238 East Colorado in Telluride, Colorado. The facility is four
stories with approximately 15,000 square feet of office space, 5,500 square
feet of underground parking and a penthouse on the top floor with 4,400 square
feet. Approximately 3,000 square feet of the office space is rented to
unrelated tenants with the remaining space on the bottom three floors occupied
by the Company's subsidiary, the Bank of Telluride.
The space not occupied by the Bank is leased with terms from three to four
years and generally contain provisions for three renewal options of three years
each and annual adjustments to the base rent reflecting increases in the
consumer price index. The Company has hired a property management company to
lease and manage the units.
The following is a schedule of the minimum future rental revenues payable to
the Company under the terms of these leases prior to any deductions for
property management fees and operating expenses:
<TABLE>
<CAPTION>
Year Ending December 31:
------------------------
<S> <C>
1998 (3 months).................................................... $ 8,220
1999............................................................... 3,750
--------
Total minimum future rentals....................................... $ 11,970
========
</TABLE>
In March of 1996, the Company sold the penthouse on the top floor of the
Telluride facility to an unrelated party for $830,000. The net proceeds from
the sale, approximately $783,000, were applied against the Company's
outstanding long-term debt. The gain realized on the sale of the unit was
approximately $41,000.
F-78
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
See Accountants' Report
NOTE 4--BANK PROPERTY AND EQUIPMENT (Continued)
Total capitalized interest related to the new facility was $212,147 prior to
opening of the facility in 1995.
In December 1997, the Company sold its ownership interest in the Telluride
facility to its subsidiary, Bank of Telluride, for $3,000,000. The purchase
price was determined based on an appraisal of the units in the building that
were sold. The Company, on a separate entity basis, reported a gain on the sale
of $968,537 and a deferred tax expense of $361,000. The net effect of the
transaction was to increase the Company's net income by $607,537. These
amounts, gain on sale, deferred tax expense and increase to net income, have
been eliminated in determining consolidated net income.
Proceeds from the sale were used to pay off an outstanding note with a
principal balance of $2,209,784 and provide funds for future capital
contributions to the Company's subsidiary, Western Colorado Bank.
Montrose Facilities
The Company's subsidiary, Western Colorado Bank, has three branch locations,
one in Norwood, Colorado and two in Montrose, Colorado. The Montrose facilities
are located at 1500 East Oak Grove Road and inside the City Market grocery
store at 128 South Townsend Avenue.
Western Colorado Bank entered into an agreement in October, 1997 for the
construction of its new bank facility located at East Oak Grove Road. The
building was completed and occupied as of August 24, 1998. The total cost of
the new building was $1,710,000.
Capitalized interest related to the new facility was as follows:
<TABLE>
<S> <C>
September 30, 1998 (reviewed)....................................... $35,362
</TABLE>
The Bank leases space within the City Market grocery store under a five-year
operating lease which may be renewed for three additional terms of five years
each. Under the terms of the lease, the Bank pays a monthly licensing fee of
$2,000 a month plus a nickel for each ATM transaction. The first 4,000 ATM
transactions are excluded from the calculation.
The future minimum lease payments for the branch located in the City Market
store are as follows:
<TABLE>
<CAPTION>
Year Ending December 31:
------------------------
<S> <C>
1998 (3 months)..................................................... $ 6,000
1999................................................................ 24,000
2000................................................................ 22,000
-------
Total future minimum lease payments................................. $52,000
=======
</TABLE>
F-79
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEE ACCOUNTANTS' REPORT
NOTE 4--BANK PROPERTY AND EQUIPMENT (CONTINUED)
VEHICLE LEASE
During 1997, the Company's subsidiary, Western Colorado Bank, leased a 1998
Ford Explorer. The Bank leases the vehicle under a two-year lease requiring
monthly lease payments of $643. At the termination of the lease, the Bank has
the option to purchase the vehicle for approximately $19,000. The future
minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
------------------------
<S> <C>
1998 (3 months)...................................................... $1,929
1999................................................................. 5,787
------
Total future minimum lease payments.................................. $7,716
======
</TABLE>
NOTE 5--RELATED PARTY TRANSACTIONS
Banking transactions between the Company's subsidiary banks and their
directors, executive officers and their related interests are considered to be
between related parties. It is the Company's policy that the terms of such
transactions be made on substantially the same basis, including interest rate
and collateral, as those extended at the time to unrelated bank customers. The
amounts of loans outstanding to related parties were as follows:
<TABLE>
<S> <C>
September 30, 1998 (reviewed)...................................... $ 99,000
September 30, 1997 (reviewed)...................................... $135,000
December 31, 1997.................................................. $132,000
December 31, 1996.................................................. $277,000
</TABLE>
F-80
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEE ACCOUNTANTS' REPORT
NOTE 6--NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996
------------- ------------- ------------ ------------
(REVIEWED) (REVIEWED)
<S> <C> <C> <C> <C>
Note payable to Bankers
Bank of the West,
bearing interest at 1%
above national prime
rate (9.25% at
September 30, 1998).
The note matures on
August 29, 2001, with
interest payable
quarterly and a $60,000
principal reduction due
August 29 of each year
until the note matures.
The note is secured by
the capital stock of
the Bank of Telluride.. $ 159,995 $ 219,995 $219,995 $ 279,995
Note payable to Bankers
Bank of the West,
bearing interest at 1%
above national prime
rate (9.25% at
September 30, 1998).
The note matures on
August 29, 2001, with
interest payable
quarterly and a $50,000
principal reduction due
August 29 of each year
until the note matures.
The note is secured by
the capital stock of
the Bank of Telluride.. 125,977 175,977 175,977 225,977
Note payable to Bankers
Bank of the West,
bearing interest at 1%
above national prime
rate. The note was paid
in full December, 1997.
The note was secured by
the capital stock of
the Bank of Telluride
and Western Colorado
Bank................... -- 2,209,784 -- 2,209,784
Note payable to Bankers
Bank of the West,
bearing interest at
1/2% above national
prime rate (8.75% at
September 30, 1998).
The note matures on
January 1, 1999, with
interest payable
quarterly until the
note matures. The note
is secured by the
capital stock of the
Bank of Telluride and
Western Colorado Bank.
The Company can borrow
up to $1.5 million..... 745,480 -- -- --
---------- ---------- -------- ----------
Total................. $1,031,452 $2,605,756 $395,972 $2,715,756
========== ========== ======== ==========
</TABLE>
Principal maturities as of September 30, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1998 (3 months)................................................. $ --
1999............................................................ 855,480
2000............................................................ 110,000
2001............................................................ 65,972
----------
TOTAL......................................................... $1,031,452
==========
</TABLE>
F-81
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
See Accountants' Report
NOTE 7--RESTRICTED INVESTMENT SECURITIES
The Company's subsidiaries have lines of credit for short-term purposes with
the Federal Home Loan Bank. No advances were outstanding for any of the periods
presented. Mortgage loans were eligible as collateral for advances at September
30, 1998. To establish the lines of credit, the Company's subsidiaries were
required to purchase stock in the Federal Home Loan Bank. The shares are
carried at cost plus the amount of stock dividends received. The number of
shares owned are as follows:
<TABLE>
<S> <C>
September 30, 1998 (reviewed).......................................... 3,550
September 30, 1997 (reviewed).......................................... 2,785
December 31, 1997...................................................... 3,962
December 31, 1996...................................................... 2,741
</TABLE>
NOTE 8--INCOME TAX
The provision for income taxes consists of the following components as of:
<TABLE>
<CAPTION>
September 30, September 30, December 31, December 31,
1998 1997 1997 1996
------------- ------------- ------------ ------------
(Reviewed) (Reviewed)
<S> <C> <C> <C> <C>
Current income tax
expense:
Federal............... $348,791 $281,799 $323,314 $199,889
State................. (39,604) 14,600 17,570 --
-------- -------- -------- --------
Total Current Income
Tax Expense........ 309,187 296,399 340,884 199,889
Deferred federal and
state income tax
expense................ 48,617 17,800 19,421 (24,597)
-------- -------- -------- --------
Total Income Tax
Expense............ $357,804 $314,199 $360,305 $175,292
======== ======== ======== ========
</TABLE>
The provision for income tax expense differs from the amount computed by
applying the statutory federal income tax rate of 34% to income before income
taxes due to the following:
<TABLE>
<CAPTION>
September 30, September 30, December 31, December 31,
1998 1997 1997 1996
------------- ------------- ------------ ------------
(Reviewed) (Reviewed)
<S> <C> <C> <C> <C>
Income tax expense at
the statutory rate..... $417,500 $344,000 $413,000 $255,500
Tax-exempt interest..... (55,000) (48,000) (66,000) (72,000)
Other items............. (4,696) 18,199 13,305 (8,208)
-------- -------- -------- --------
Income Tax Expense.. $357,804 $314,199 $360,305 $175,292
======== ======== ======== ========
</TABLE>
F-82
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
See Accountants' Report
NOTE 8--INCOME TAX (Continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effect of these
temporary differences are as follows:
<TABLE>
<CAPTION>
September 30, September 30, December 31, December 31,
1998 1997 1997 1996
------------- ------------- ------------ ------------
(Reviewed) (Reviewed)
<S> <C> <C> <C> <C>
Deferred tax
liabilities:
Fixed assets.......... $535,000 $525,000 $537,000 $522,000
Market adjustment for
available for sale
securities........... 99,255 23,785 39,513 --
Accrued items not
recognized for tax
purposes............. -- -- -- 9,000
Stock dividends on
investments not
taxed................ 20,000 7,000 11,600 6,000
-------- -------- -------- --------
Gross deferred tax
liabilities........ 654,255 555,785 588,113 537,000
-------- -------- -------- --------
Deferred tax assets:
Allowance for loan
losses............... 285,000 285,000 300,000 287,500
Market adjustment for
available for sale
securities........... -- -- -- 6,300
Other real estate
owned................ -- 14,000 12,000 13,900
Core deposits
acquired............. 8,000 7,000 7,000 6,200
Deferred compensation
and severance pay
accrued.............. 15,000 8,000 15,000 38,000
Net operating loss
carryforward--State.. 32,000 52,000 52,000 52,000
General business tax
credit carryforward.. 16,000 24,000 24,000 23,000
Other................. 1,490 8,726 3,705 4,958
-------- -------- -------- --------
357,490 398,726 413,705 431,858
Deferred tax asset
valuation allowance.. (30,000) (44,000) (44,000) (48,000)
-------- -------- -------- --------
Net deferred tax
asset................ 327,490 354,726 369,705 383,858
-------- -------- -------- --------
Net deferred tax
liability.......... $326,765 $201,059 $218,408 $153,142
======== ======== ======== ========
</TABLE>
The valuation allowance for all dates presented relates to the deferred tax
assets for Colorado net operating loss carryforwards and general business tax
credit carryforwards which may be applied against future state tax liabilities,
if any. A portion of these assets have been reserved because of the uncertainty
as to whether the Company will benefit from these carryforwards before they
expire. The valuation allowance was decreased in 1997 and 1998 as a result of
the Company benefiting from certain state operating loss carryforwards and
credits being applied against current tax.
The Company has Colorado net operating loss (NOL) carryforwards of
approximately $800,000 which begin to expire in the year 2000. The amount of
the NOL which may be utilized in future years is limited because a portion of
the carryforward was acquired as a result of a corporate acquisition.
F-83
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
See Accountants' Report
NOTE 9--TIME DEPOSITS
Time deposits consist of certificates of deposit with the following
maturities as of September 30, 1998 (reviewed):
<TABLE>
<CAPTION>
CD's
CD's Under $100,000
$100,000 and Over Total
----------- ----------- -----------
<S> <C> <C> <C>
Maturing within:
0 to 3 months.......................... $ 3,718,665 $ 4,457,261 $ 8,175,926
4 to 12 months......................... 11,076,498 6,321,708 17,398,206
1 to 5 years........................... 2,262,281 550,000 2,812,281
Over 5 years........................... 48,828 -- 48,828
----------- ----------- -----------
Total................................ $17,106,272 $11,328,969 $28,435,241
=========== =========== ===========
</TABLE>
NOTE 10--REGULATORY MATTERS
The Company's two subsidiaries are subject to various regulatory capital
requirements administered by its primary federal regulator, the Federal Deposit
Insurance Corporation (FDIC). Failure to meet the minimum regulatory capital
requirements can initiate certain mandatory, and possible additional
discretionary actions by regulators, that if undertaken, could have a direct
material affect on the subsidiaries' financial statements. Under the regulatory
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the subsidiaries must meet specific capital guidelines involving
quantitative measures of the subsidiaries' assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The subsidiaries' capital amounts and classification under the prompt
corrective action guidelines 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 subsidiaries to maintain minimum amounts and ratios of total risk-
based capital and Tier I capital to risk-weighted assets (as defined in the
regulations), and Tier I capital to adjusted total assets (as defined).
Management believes, as of September 30, 1998, that both subsidiaries meet all
the capital adequacy requirements to which they are subject.
As of September 30, 1998, in the most current communications with the FDIC,
both subsidiaries were categorized as well capitalized under the regulatory
framework for prompt corrective action. To remain categorized as well
capitalized, the subsidiaries will have to maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as disclosed in the table on the
following page. There are no conditions or events since the most recent
communication that management believes have changed the subsidiaries prompt
corrective action category.
F-84
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
See Accountants' Report
NOTE 10--REGULATORY MATTERS (Continued)
BANK OF TELLURIDE
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
------------------------------------------- ------------------------------------
Amount Ratio Amount
---------- ------------------------------- ------------------------------------
<S> <C> <C> <C>
As of September 30,
1998 (reviewed):
Total Risk-Based
Capital (to
Risk-Weighted
Assets).......... $7,602,000 (Greater than or equal to)14.7% (Greater than or equal to)$4,150,000
Tier I Capital (to
Risk-Weighted
Assets)............ $7,123,000 (Greater than or equal to)13.7% (Greater than or equal to)$2,075,000
Tier I Capital (to
Adjusted Total
Assets)............ $7,123,000 (Greater than or equal to) 9.2% (Greater than or equal to)$3,087,000
As of September 30,
1997 (reviewed):
Total Risk-Based
Capital (to
Risk-Weighted
Assets).......... $7,200,000 (Greater than or equal to)16.2% (Greater than or equal to)$3,546,000
Tier I Capital (to
Risk-Weighted
Assets)............ $6,646,000 (Greater than or equal to)15.0% (Greater than or equal to)$1,773,000
Tier I Capital (to
Adjusted Total
Assets)............ $6,646,000 (Greater than or equal to)10.2% (Greater than or equal to)$2,607,000
As of December 31,
1997:
Total Risk-Based
Capital (to
Risk-Weighted
Assets).......... $7,395,636 (Greater than or equal to)14.9% (Greater than or equal to)$3,957,644
Tier I Capital (to
Risk-Weighted
Assets)............ $6,787,178 (Greater than or equal to)13.7% (Greater than or equal to)$1,978,822
Tier I Capital (to
Adjusted Total
Assets)............ $6,787,178 (Greater than or equal to)10.4% (Greater than or equal to)$2,615,400
As of December 31,
1996:
Total Risk-Based
Capital (to
Risk-Weighted
Assets)........... $7,012,435 (Greater than or equal to)16.0% (Greater than or equal to)$3,512,170
Tier I Capital (to
Risk-Weighted
Assets)............ $6,462,922 (Greater than or equal to)14.7% (Greater than or equal to)$1,756,085
Tier I Capital (to
Adjusted Total
Assets)............ $6,462,922 (Greater than or equal to) 9.2% (Greater than or equal to)$2,801,000
<CAPTION>
For Capital To Be Well Capitalized under Prompt
Adequacy Purposes Corrective Action Provisions
------------------------------ ---------------------------------------------------------------------
Ratio Amount Ratio
------------------------------ ------------------------------------ -------------------------------
<S> <C> <C> <C>
As of September 30,
1998 (reviewed):
Total Risk-Based
Capital (to
Risk-Weighted
Assets).......... (Greater than or equal to)8.0% (Greater than or equal to)$5,187,000 (Greater than or equal to)10.0%
Tier I Capital (to
Risk-Weighted
Assets)............ (Greater than or equal to)4.0% (Greater than or equal to)$3,112,000 (Greater than or equal to) 6.0%
Tier I Capital (to
Adjusted Total
Assets)............ (Greater than or equal to)4.0% (Greater than or equal to)$3,859,000 (Greater than or equal to) 5.0%
As of September 30,
1997 (reviewed):
Total Risk-Based
Capital (to
Risk-Weighted
Assets).......... (Greater than or equal to)8.0% (Greater than or equal to)$4,432,000 (Greater than or equal to)10.0%
Tier I Capital (to
Risk-Weighted
Assets)............ (Greater than or equal to)4.0% (Greater than or equal to)$2,659,000 (Greater than or equal to) 6.0%
Tier I Capital (to
Adjusted Total
Assets)............ (Greater than or equal to)4.0% (Greater than or equal to)$3,259,000 (Greater than or equal to) 5.0%
As of December 31,
1997:
Total Risk-Based
Capital (to
Risk-Weighted
Assets).......... (Greater than or equal to)8.0% (Greater than or equal to)$4,947,055 (Greater than or equal to)10.0%
Tier I Capital (to
Risk-Weighted
Assets)............ (Greater than or equal to)4.0% (Greater than or equal to)$2,968,233 (Greater than or equal to) 6.0%
Tier I Capital (to
Adjusted Total
Assets)............ (Greater than or equal to)4.0% (Greater than or equal to)$3,269,250 (Greater than or equal to) 5.0%
As of December 31,
1996:
Total Risk-Based
Capital (to
Risk-Weighted
Assets)........... (Greater than or equal to)8.0% (Greater than or equal to)$4,390,213 (Greater than or equal to)10.0%
Tier I Capital (to
Risk-Weighted
Assets)............ (Greater than or equal to)4.0% (Greater than or equal to)$2,634,128 (Greater than or equal to) 6.0%
Tier I Capital (to
Adjusted Total
Assets)............ (Greater than or equal to)4.0% (Greater than or equal to)$3,501,250 (Greater than or equal to) 5.0%
</TABLE>
F-85
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEE ACCOUNTANTS' REPORT
NOTE 10--REGULATORY MATTERS (CONTINUED)
WESTERN COLORADO BANK
<TABLE>
<CAPTION>
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
------------------------------------------ -----------------------------------
AMOUNT RATIO AMOUNT
---------- ------------------------------- -----------------------------------
<S> <C> <C> <C>
As of September 30, 1998
(reviewed):
Total Risk-Based
Capital
(to Risk-Weighted
Assets)............... $4,079,000 (greater than or equal to)11.3% (greater than or equal to)$2,897,000
Tier I Capital
(to Risk-Weighted
Assets)................ $3,726,000 (greater than or equal to)10.3% (greater than or equal to)$1,449,000
Tier I Capital
(to Adjusted Total
Assets)................ $3,726,000 (greater than or equal to) 7.8% (greater than or equal to)$1,919,000
As of September 30, 1997
(reviewed):
Total Risk-Based
Capital
(to Risk-Weighted
Assets)............... $2,880,000 (greater than or equal to)10.7% (greater than or equal to)$2,155,000
Tier I Capital
(to Risk-Weighted
Assets)................ $2,637,000 (greater than or equal to) 9.8% (greater than or equal to)$1,078,000
Tier I Capital
(to Adjusted Total
Assets)................ $2,637,000 (greater than or equal to) 7.0% (greater than or equal to)$1,497,000
As of December 31, 1997:
Total Risk-Based
Capital
(to Risk-Weighted
Assets)............... $3,001,131 (greater than or equal to)10.3% (greater than or equal to)$2,334,049
Tier I Capital
(to Risk-Weighted
Assets)................ $2,693,139 (greater than or equal to) 9.2% (greater than or equal to)$1,167,024
Tier I Capital
(to Adjusted Total
Assets)................ $2,693,139 (greater than or equal to) 6.8% (greater than or equal to)$1,584,631
As of December 31, 1996:
Total Risk-Based
Capital
(to Risk-Weighted
Assets)............... $2,467,978 (greater than or equal to)11.5% (greater than or equal to)$1,718,011
Tier I Capital
(to Risk-Weighted
Assets)................ $2,241,394 (greater than or equal to)10.4% (greater than or equal to)$ 859,006
Tier I Capital
(to Adjusted Total
Assets)................ $2,241,394 (greater than or equal to) 6.7% (greater than or equal to)$1,346,825
TO BE WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE ACTION
ADEQUACY PURPOSES PROVISIONS
------------------------------ ------------------------------------------------------------------------
RATIO AMOUNT RATIO
------------------------------ ------------------------------------ --------------------------------
<S> <C> <C> <C>
As of September 30, 1998
(reviewed):
Total Risk-Based
Capital
(to Risk-Weighted
Assets)............... (greater than or equal to)8.0% (greater than or equal to)$3,621,000 (greater than or equal to)10.0%
Tier I Capital
(to Risk-Weighted
Assets)................ (greater than or equal to)4.0% (greater than or equal to)$2,173,000 (greater than or equal to)6.0%
Tier I Capital
(to Adjusted Total
Assets)................ (greater than or equal to)4.0% (greater than or equal to)$2,399,000 (greater than or equal to)5.0%
As of September 30, 1997
(reviewed):
Total Risk-Based
Capital
(to Risk-Weighted
Assets)............... (greater than or equal to)8.0% (greater than or equal to)$2,694,000 (greater than or equal to)10.0%
Tier I Capital
(to Risk-Weighted
Assets)................ (greater than or equal to)4.0% (greater than or equal to)$1,617,000 (greater than or equal to)6.0%
Tier I Capital
(to Adjusted Total
Assets)................ (greater than or equal to)4.0% (greater than or equal to)$1,347,000 (greater than or equal to)5.0%
As of December 31, 1997:
Total Risk-Based
Capital
(to Risk-Weighted
Assets)............... (greater than or equal to)8.0% (greater than or equal to)$2,917,561 (greater than or equal to)10.0%
Tier I Capital
(to Risk-Weighted
Assets)................ (greater than or equal to)4.0% (greater than or equal to)$1,750,536 (greater than or equal to)6.0%
Tier I Capital
(to Adjusted Total
Assets)................ (greater than or equal to)4.0% (greater than or equal to)$1,980,788 (greater than or equal to)5.0%
As of December 31, 1996:
Total Risk-Based
Capital
(to Risk-Weighted
Assets)............... (greater than or equal to)8.0% (greater than or equal to)$2,147,514 (greater than or equal to)10.0%
Tier I Capital
(to Risk-Weighted
Assets)................ (greater than or equal to)4.0% (greater than or equal to)$1,288,509 (greater than or equal to)6.0%
Tier I Capital
(to Adjusted Total
Assets)................ (greater than or equal to)4.0% (greater than or equal to)$1,683,531 (greater than or equal to)5.0%
</TABLE>
F-86
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
See Accountants' Report
NOTE 11--OTHER COMPREHENSIVE INCOME
Other comprehensive income recognized by the Company consists of unrealized
holding gains and losses on available for sale securities. The amounts
recognized for each period are as follows:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
--------------------------- -------------------------
September 30, September 30, December 31, December 31,
1998 1997 1997 1996
------------- ------------- ------------ ------------
(Reviewed) (Reviewed)
<S> <C> <C> <C> <C>
Unrealized holding gains
and (losses) arising
during the period
before tax............. $214,242 $ 80,749 $122,907 $(232,809)
Income tax (expense)
benefit................ (59,740) (30,117) (45,844) 82,258
-------- -------- -------- ---------
Other comprehensive
income net of tax...... $154,502 $ 50,632 $ 77,063 $(150,551)
======== ======== ======== =========
</TABLE>
During the nine months ended September 30, 1998, the Company changed its
calculation of deferred taxes for unrealized holding gains and losses on
available for sale securities by reducing the effective tax rate recognized
from 37.3% to 31%.
During the periods reported, the Company did not sell any securities. As a
result, no holding gains or losses were realized as current income.
NOTE 12--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 standby
letters of credit. Those instruments involve, to varying degrees, 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 uses
the same credit policies in making commitments and conditional obligations as
it does for on-balance sheet instruments.
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 of one year or less 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 credit worthiness on a case-by-case basis. The amount of collateral
obtained as considered necessary by the Company upon extension of credit is
based on management's credit evaluation of the counter-party. Collateral held
varies, but may include accounts receivable, inventory, property, plant and
equipment and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support private borrowing arrangements. Most standby
letters of credit are issued for one year or less. The credit risk involved in
issuing letters of credit is essentially the same as extending loans to
customers. Collateral requirements vary, but in general follow the requirements
for other loan facilities.
F-87
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
See Accountants' Report
NOTE 12--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (Continued)
A summary of the Company's commitments consists of the following at:
<TABLE>
<CAPTION>
September 30, September 30, December 31, December 31,
1998 1997 1997 1996
------------- ------------- ------------ ------------
(Reviewed) (Reviewed)
<S> <C> <C> <C> <C>
Standby letters of
credit................. $ 1,025,000 $ 1,788,000 $ 1,307,952 $ 3,181,846
Commitments to extend
credit:
Loans................. 11,419,236 7,832,901 10,033,818 5,698,693
Credit cards.......... 1,129,000 1,112,000 996,360 901,170
Ready reserve......... 607,764 559,099 557,758 566,833
----------- ----------- ----------- -----------
Total............... $14,181,000 $11,292,000 $12,895,888 $10,348,542
=========== =========== =========== ===========
</TABLE>
NOTE 13--FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Company's financial
instruments are presented below. Certain assets, the most significant being
premises and equipment, do not meet the definition of a financial instrument
and are excluded from this disclosure. Similarly, core deposits base and other
customer relationship intangibles are not considered financial instruments and
are not discussed below. Fair value estimates are based on existing financial
instruments without attempting to estimate the value of anticipated future
business. Accordingly, this fair value information is not intended to, and does
not, represent the Company's underlying value. Many of the assets and
liabilities subject to the disclosure requirements are not actively traded,
requiring fair values to be estimated by management. These estimates
necessarily involve the use of judgment about a wide variety of factors,
including but not limited to, relevancy of market prices of comparable
instruments, expected future cash flows, and appropriate discount rates.
The terms and short-term nature of certain assets and liabilities result in
their carrying value approximating fair value. These include cash and due from
banks and federal funds purchased and sold. Loan commitments and letters of
credit generally have short-term, variable rate features and contain clauses
which limit the Company's exposure to changes in customer credit quality.
Accordingly, their carrying values, which are immaterial at the respective
balance sheet dates, are reasonable estimates of fair value. The following
methods and assumptions were used by the Company to estimate the fair value of
the remaining classes of financial instruments:
Fair values of securities available for sale are based on quoted market
prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
For variable rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying amounts. The fair
values for other loans are estimated using a discounted cash flow analysis,
based on interest rates currently offered for loans with similar terms to
borrowers of similar credit quality. Loan fair value estimates include
judgments regarding future expected loss experience and risk characteristics.
By definition, fair values of deposits with no stated maturities, such as
demand deposits, savings and NOW accounts and money market deposit accounts are
equal to the amounts payable on demand at the reporting date. The fair values
of all other fixed rate deposits are based on discounted cash flows using rates
currently offered for deposits of similar remaining maturities.
The fair values of the Company's variable rate long-term debt approximates
fair value.
F-88
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
See Accountants' Report
NOTE 13--FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of the Company's significant financial instruments
were as follows (in thousands):
<TABLE>
<CAPTION>
September 30, September 30,
1998 (Reviewed) 1997 (Reviewed)
----------------- ----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks.................... $ 6,536 $ 6,536 $ 4,191 $ 4,191
Interest bearing balances.................. 99 99 -- --
Federal funds sold......................... 9,245 9,245 4,255 4,255
Securities available for sale.............. 23,175 23,175 19,368 19,368
Loans receivable........................... 76,142 76,252 66,146 66,415
Financial Liabilities:
Deposits................................... 113,312 113,250 90,928 90,990
Notes payable.............................. 1,031 1,031 2,606 2,606
Federal funds purchased.................... -- -- -- --
</TABLE>
The amounts reported for fair value as of September 30, 1998 and 1997 for
loans receivable and deposits were extrapolated based on amounts calculated as
of December 31, 1997 and 1996.
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
---------------- ----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks..................... $ 5,963 $ 5,963 $ 5,669 $ 5,669
Federal funds sold.......................... 240 240 -- --
Securities available for sale............... 17,887 17,887 22,522 22,522
Loans receivable............................ 70,974 71,203 63,629 64,017
Financial Liabilities:
Deposits.................................... 93,747 93,747 86,840 86,923
Notes payable............................... 396 396 2,716 2,716
Federal funds purchased..................... -- -- 2,225 2,225
</TABLE>
NOTE 14--CONTINGENT LIABILITIES
In the normal course of business, the Company's subsidiaries are involved in
various legal actions arising from their lending and collection activities. In
the opinion of management, the outcome of these legal actions will not
significantly affect the financial position of the Company.
As a result of constructing the new bank facility in Telluride, the town
required the Company's subsidiary, the Bank of Telluride, to issue letters of
credit equaling $218,500 in the town's name. The letters of credit will be
canceled upon the Bank's completion of the relocation and restoration of a
historic miner's cottage, repairs to Colorado Avenue and future underground and
alley improvements. Management believes the approximate cost of completing
these projects will not exceed $125,000.
F-89
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
See Accountants' Report
NOTE 15--EMPLOYEE BENEFIT PLANS
Retirement Plan
The Company adopted in 1990, a contributory profit sharing plan that provides
benefits for employees who have had at least one year of service. In a defined
contribution plan, benefits depend solely on amounts contributed to the plan
plus investment earnings. Eligible employees who elect to participate may
contribute up to 10% of their salaries to the plan on a pre-tax basis. The
employer will contribute by matching half of the first 4% of each employee's
contribution and may also make discretionary contributions which would be
allocated to each participant based on the fraction of the individual's annual
pay to the total annual pay of all participants. The Company's contribution on
behalf of its employees to the plan was as follows:
<TABLE>
<S> <C>
September 30, 1998 (reviewed)....................................... $58,701
September 30, 1997 (reviewed)....................................... $57,649
December 31, 1997................................................... $79,174
December 31, 1996................................................... $43,500
</TABLE>
The discretionary contribution for 1998 had not been approved as of September
30, 1998.
Deferred Compensation
The Company maintains a Non-Qualified Deferred Compensation plan for the
purpose of attracting and retaining key employees. Under the provisions of the
plan, key employees are granted stock appreciation units which are recognized
as compensation by the employee upon the employee's termination or as a result
of a "change in control" of the Company. The amount of the compensation is
calculated based on the number of units granted times the appreciation of each
unit. The appreciation of each unit reflects the change in fair market value of
the Company's common stock from the date each unit was granted to the date of
termination or change of control. If there has not been a change of control or
the stock is not publicly traded, fair market value of the units is defined by
the plan as book value of the Company's common stock calculated as if all units
outstanding are outstanding shares of common stock on the date the book value
is calculated. In the case of a change of control, the fair market value of
each unit is calculated by dividing the sum of the total consideration as a
result of the change of control transaction payable to holders of common stock,
plus the aggregate unit grant price for all units outstanding, divided by the
total number of shares of common stock outstanding on the effective date of the
change of control, plus the total number of stock appreciated units
outstanding. If in the future the Company's stock was publicly traded, fair
market value would be determined under the plan as the price at which the last
sale of common stock occurred. If the consideration to be paid to common
shareholders is other than cash, participants will receive their proportion of
the same type of consideration. The Company had accrued as deferred
compensation the following amounts:
<TABLE>
<S> <C>
September 30, 1998 (reviewed)....................................... $39,100
September 30, 1997 (reviewed)....................................... $ 7,802
December 31, 1997................................................... $15,300
December 31, 1996................................................... $76,500
</TABLE>
The amounts paid under the terms of the plan are recognized as expense by the
Company unless the payments result from a change of control. In the case of a
change of control, the amount paid to participants is included in the total
consideration paid under the terms of the change of control.
F-90
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
See Accountants' Report
NOTE 16--NON-QUALIFIED STOCK OPTIONS
In December 1995, the Company's board of directors approved a non-qualified
stock option plan for outside directors of its subsidiary banks. During 1996,
options to purchase 1,200 shares (300 shares to 4 different directors) of the
Company's common stock were awarded under the plan. In accordance with the
provisions of SFAS No. 123, the Company applies APB Opinion 25 and related
interpretations in accounting for its stock option plan and, accordingly, no
compensation costs have been recognized for the stock option plan. If the
Company had elected to recognize compensation cost based on the fair value of
the options awarded at their grant date as prescribed by SFAS No. 123, net
income would have been reduced to the proforma amounts indicated below (in
thousands):
<TABLE>
<CAPTION>
Proforma Net Income
Net As
Income Reported
-------- ----------
<S> <C> <C>
For the nine months ended September 30, 1998
(reviewed)........................................... $870 $870
For the nine months ended September 30, 1997
(reviewed)........................................... 698 698
For the year ended December 31, 1997.................. 854 854
For the year ended December 31, 1996.................. 418 576
</TABLE>
The fair value of each option awarded is estimated on the date it was granted
using the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<S> <C>
Expected dividend yield............................................. 0.0%
Risk-free interest rate............................................. 5.4%
Option price........................................................ $434.60
Estimated fair value per share...................................... $544.00
Life of the option.................................................. 5 years
</TABLE>
During August 1998, all of the options were exercised.
F-91
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
See Accountants' Report
NOTE 17--RESTATEMENT OF BALANCES PREVIOUSLY REPORTED
During 1998, the Company's subsidiary, the Bank of Telluride, detected that
certain ATM expenses amounting to $48,316 had been incurred by the Bank prior
to 1997, but never recognized as expense. The Company's 1996 financial
statements have been restated in this report to correct for this error. A
summary of the account balances that were required to be restated is as
follows:
<TABLE>
<CAPTION>
As
Previously Correction
Reported of Error As Restated
------------ ---------- ------------
<S> <C> <C> <C>
Consolidated Statement of Financial
Condition
Prepaid income tax................ $ 184,428 $ 16,427 $ 200,855
Total assets...................... 101,004,892 16,427 101,021,319
Other liabilities................. 315,259 48,316 363,575
Retained earnings................. 6,708,491 (31,889) 6,676,602
Total stockholders' equity........ 8,514,571 (31,889) 8,482,682
Total liabilities and
stockholders' equity............. 101,004,892 16,427 101,021,319
Consolidated Statement of Income
General and administrative
expenses......................... 1,353,335 48,316 1,401,651
Provision for income tax.......... 191,719 (16,427) 175,292
Net income........................ 608,096 (31,889) 576,207
Consolidated Statement of Cash
Flows
Net income........................ 608,096 (31,889) 576,207
Decrease (Increase) in prepaid
taxes............................ (17,106) (16,427) (33,533)
Increase in other liabilities..... 13,566 48,316 61,882
</TABLE>
NOTE 18--CONCENTRATION OF CREDIT RISK
The majority of the Company's loan portfolio and collateral for those loans
is concentrated in Montrose and San Miguel Counties in Western Colorado.
However, obligors and counterparties are diversified nationally. Because of
this, the risks of lending reflect both national and local economic conditions.
NOTE 19--PROPOSED MERGER
In April 1998, the Company entered into a merger and plan of reorganization
agreement whereby it will be merged with and into Vail Banks, Inc.
Under the terms of the agreement, the purchase price for 100% of the
outstanding shares of the Company will be the lesser of 300% of its
stockholders' equity immediately prior to the sale, or $33,000,000. At the
completion of the transaction, the Company's shareholders will receive in
exchange for their shares, cash equal to 45% of the purchase price allocated to
their ownership percentage, with the remainder of their percentage of the
purchase price being paid in stock of Vail Banks, Inc.
The merger is subject to regulatory approval and the approval of the
Company's shareholders. The Company estimates that the transaction will close
in December 1998.
F-92
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
See Accountants' Report
NOTE 20--EARNINGS PER SHARE
Basic earnings per share and diluted earnings per share were calculated as
follows:
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, 1998
-----------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic Earnings Per Share:
Income available to common stockholders
(net income)............................. $870,036 $17,488 $49.75
------
Effect of Dilutive Securities:
Stock options............................. -- 243
-------- -------
Diluted Earnings Per Share:
Income available to common stockholders
plus assumed conversions................. $870,036 $17,731 $49.07
-------- ------- ------
<CAPTION>
For the Nine Months Ended
September 30, 1997
-----------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic Earnings Per Share:
Income available to common stockholders
(net income)............................. $698,330 $17,356 $40.24
------
Effect of Dilutive Securities:
Stock options............................. -- 177
-------- -------
Diluted Earnings Per Share:
Income available to common stockholders
plus assumed conversions................. $698,330 $17,533 $39.83
-------- ------- ------
<CAPTION>
For the Year Ended December 31,
1997
-----------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic Earnings Per Share:
Income available to common stockholders
(net income)............................. $853,808 $17,356 $49.19
------
Effect of Dilutive Securities:
Stock options............................. -- 188
-------- -------
Diluted Earnings Per Share:
Income available to common stockholders
plus assumed conversions................. $853,808 $17,544 $48.67
-------- ------- ------
<CAPTION>
For the Year Ended December 31,
1996
-----------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic Earnings Per Share:
Income available to common stockholders
(net income)............................. $576,207 $17,356 $33.20
------
Effect of Dilutive Securities:
Stock options............................. -- 96
-------- -------
Diluted Earnings Per Share:
Income available to common stockholders
plus assumed conversions................. $576,207 $17,452 $33.02
-------- ------- ------
</TABLE>
F-93
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
See Accountants' Report
NOTE 20--EARNINGS PER SHARE (Continued)
Stock options were granted in January 1996 to acquire 1,200 shares at an
option price of $435 per share. Shares outstanding used to compute diluted
earnings per share for each period includes the shares to be acquired as a
result of the stock options, computed using the treasury stock method, assuming
a repurchase price equal to the average book value of the Company's common
stock for each period. The Company's management has elected to used book value
to approximate fair market value because historically stock transactions
between the Company and its shareholders were at the Company's book value.
F-94
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Vail Banks' Articles of Incorporation provides for indemnification of
directors to the full extent permitted by Colorado law and, to the extent
permitted by such law, eliminate or limit the personal liability of directors
to Vail Banks and its shareholders for monetary damages for certain breaches of
fiduciary duty and the duty of care. Such indemnification may be available for
liabilities arising in connection with this Offering. Insofar as
indemnification for liabilities under the Securities Act may be permitted to
directors, officers or persons controlling Vail Banks pursuant to the foregoing
provisions, Vail Banks has been informed that, in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. Pursuant to its Articles of
Incorporation, Vail Banks may indemnify its officers, employees, agents and
other persons to the fullest extent permitted by Colorado law.
Vail Banks' Bylaws also provide that Vail Banks shall have the power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of Vail Banks, or who, while a director,
officer, employee or agent, is or was serving as a director, officer, trustee,
general partner, employee or agent of one of Vail Banks' subsidiaries or, at
the request of Vail Banks, of any other organization, against any liability
asserted against such person or incurred by such person in any such capacity,
whether Vail Banks would have the power to indemnify such person against such
liability under Colorado law. Vail Banks intends to purchase and maintain
insurance on behalf of all of its directors and executive officers.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the approximate amount of the fees and
expenses (other than underwriting commissions and discounts) payable by Vail
Banks in connection with the issuance and distribution of the shares of Common
Stock.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee........... $ 5,206.53
Printing and Engraving Expenses............................... 12,000.00
Legal Fees and Expenses....................................... 20,000.00
Accounting Fees and Expenses.................................. 550.00
----------
Total..................................................... $37,756.53
==========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Vail Banks has issued the following securities since January 1, 1996 in
transactions exempt under Section 4(2) of the Securities Act.
<TABLE>
<CAPTION>
Security No. Shares Aggregate Consideration Date of Issuance
-------- ---------- ----------------------- ----------------
<C> <C> <S> <C>
Common Stock......... 908,913 Consideration for merger December 15, 1998
of Telluride Bancorp,
Ltd.
Common Stock......... 34,258 Conversion of Series A December 7, 1998
Preferred Stock
Common Stock......... 300,000 Conversion of December 7, 1998
Mandatorily Convertible
Debentures
Common Stock......... 318,770 Consideration for merger July 31, 1998
of Independent
Bankshares, Inc.
Common Stock......... 204,540 $2.0 million July 24, 1998
Common Stock......... 454,890 $3.0 million April 30, 1997
Series A Preferred... 34,258 Consideration for merger December 1, 1997
of VNB Building Corp.
Mandatorily
Convertible N/A $1.6 million; assumed in December 1, 1997
Debentures.......... acquisition of
Cedaredge
</TABLE>
II-1
<PAGE>
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
------- ----------------------
<C> <S>
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*
5.1 Opinion of Kilpatrick Stockton LLP
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*
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*
21.1 Subsidiaries of the Registrant
23.1 Consent of Fortner, Bayens, Levkulich & Co., P.C.
23.2 Consent of Dalby, Wendland & Co., P.C.
23.3 Consent of GRA, Thompson, White & Co., P.C.
23.4 Consent of Kilpatrick Stockton LLP, included in opinion filed as
Exhibit 5.1
24.1 Power of Attorney (on signature page)
</TABLE>
- --------
* Incorporated by reference from the Registrant's Form SB-2, as amended,
Commission File No. 333-60347.
(b) Financial Statement Schedules
None required
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question as to
whether such indemnification by it is against public policy as expressed in the
Securities Act, and will be governed by the final adjudication of such issue.
II-2
<PAGE>
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on form SB-2 and authorizes this
Registration Statement to be signed on its behalf by the undersigned, in the
city of Vail, State of Colorado, on the 17th day of March, 1999.
Vail Banks, Inc.
/s/ Lisa M. Dillon
By: _________________________________
Lisa M. Dillon,
President
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints E.
B. Chester and Lisa M. Dillon and either of them, his or her true and lawful
attorney-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 and all
amendments (including post-effective amendments) to this Registration
Statement, and to sign a Registration Statement pursuant to Rule 462(b) under
the Securities Act of 1993 and to cause the same to be filed, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby granting to said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing whatsoever
requisite or desirable to be done in and about the premises, as fully to all
intents and purposes as the undersigned might or could do in person, hereby
ratifying and confirming all acts and things that said attorneys-in-fact and
agents, or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons on the 17th day of March,
1999, in the capacities indicated.
<TABLE>
<CAPTION>
Signature Position
--------- --------
<C> <S>
/s/ E.B. Chester, Jr. Chairman
______________________________________
E.B. Chester, Jr.
/s/ Lisa M. Dillon President and Chief Executive Officer,
______________________________________ director (principal executive officer)
Lisa M. Dillon
/s/ Joseph S. Dillon Senior Executive Vice President and
______________________________________ Chief Financial Officer (principal
Joseph S. Dillon 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
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Signature Position
--------- --------
<C> <S>
/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
</TABLE>
II-5
<PAGE>
[LETTERHEAD OF KILPATRICK STOCKTON LLP APPEARS HERE]
March 17, 1999
EXHIBIT 5.1
Vail Banks, Inc.
108 South Frontage Road West
Vail, Colorado 81657
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form SB-2,
File No. 333-___________, (the "Registration Statement"), filed by Vail Banks,
Inc. (the "Company"), a Colorado corporation, with the Securities and Exchange
Commission with respect to the registration under the Securities Act of 1933, as
amended, of 1,528,860 shares of Common Stock, par value $1.00 per share, of the
Company (the "Common Stock"), to be sold from time to time by certain
shareholders of the Company (the "Selling Shareholders").
As your counsel, and in connection with the preparation of the Registration
Statement, we have examined the originals or copies of such documents, corporate
records, certificates of public officials and officers of the Company, and other
instruments related to the authorization and issuance of the Common Stock as we
deemed relevant or necessary for the opinion expressed herein.
Based upon the foregoing, it is our opinion that the shares of Common Stock
to be sold by the Selling Shareholders have been validly issued and fully paid
for and are nonassessable, and that such shares may be sold and delivered by the
Selling Shareholders in the manner and under the terms and conditions described
in the Registration Statement without affecting adversely their status as
validly issued, fully paid, and nonassessable.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and further consent to the use of our name in the "Legal
Matters" section of the Registration Statement, including the Prospectus
constituting a part thereof, and any amendments thereto.
Very truly yours,
KILPATRICK STOCKTON LLP
By: /s/ Jan Davidson
------------------------
Jan M. Davidson, A Partner
<PAGE>
EXHIBIT 21.1
Subsidiaries
------------
1. WestStar Bank
2. Bank of Telluride
3. Western Colorado Bank
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Registration Statement of Vail Banks,
Inc. on Form SB-2 of our report on the financial statements of Vail Banks, Inc.
and Subsidiary as of December 31, 1997 and 1996 and for each of the three years
ended December 31, 1997, dated February 20, 1998, and the reviewed financial
statements of Vail Banks, Inc. and Subsidiary as of September 30, 1998 and for
the nine months then ended, dated November 5, 1998, appearing in the Prospectus,
which is part of this Registration Statement.
We also consent to the reference to us under the headings "Selected
Financial Data" and "Experts" in such Prospectus.
/s/ Fortner Bayens Levhulich & Co., P.C.
- ----------------------------------------
Denver, Colorado
March 10, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Registration Statement of Vail Banks,
Inc. on Form SB-2 of our reports on the financial statements of Cedaredge
Financial Services, Inc., and its subsidiary, dated as of December 30, 1997, and
Telluride Bancorp, Ltd. and its subsidiaries, dated February 27, 1998, and the
reviewed financial statements of Telluride Bancorp, Ltd. and its subsidiaries
dated November 4, 1998, appearing in the Prospectus, which is part of this
Registration Statement.
We also consent to the reference to us under the headings "Experts" in such
Prospectus.
/s/ Dalby, Wendland & Co., P.C.
- -------------------------------
Montrose, Colorado
March 11, 1999
<PAGE>
EXHIBIT 23.3
[LETTERHEAD OF
GRA, THOMPSON, WHITE & CO., P.C.]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Registration Statement of Vail Banks,
Inc. on Form SB-2 of our report on the financial statements of Independent
Bankshares, Inc. and Subsidiary, dated May 21, 1998, appearing in the
Prospectus, which is part of this Registration Statement.
We also consent to the reference to our Firm under the heading "Experts" in
such Prospectus.
/s/ GRA, Thompson, White & Co., P.C.
Englewood, Colorado
March 11, 1999
