U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED June 30, 1999
Commission File Number 000-25081
VAIL BANKS, INC.
(Exact name of small business issuer as specified in its charter)
Colorado 84-1250561
---------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
108 South Frontage Road West, Vail, Colorado 81657
--------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (970) 476-2002
--------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes /X/ No / /
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
As of July 31, 1999 there were 6,040,608 shares of common stock ($1.00 par value
per share) outstanding.
<PAGE>
VAIL BANKS, INC.
<TABLE>
<CAPTION>
INDEX
<S> <C> <S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at June 30, 1999 and December 31, 1998 3
Consolidated Statements of Income for the Three and Six Months
Ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1999 and 1998 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VAIL BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
1999 1998
------------------ ----------------
(unaudited)
<S> <C> <C>
Cash and due from banks $ 24,092 28,469
Federal Funds sold 13,650 43,105
Investment securities:
Available for sale, at market value 38,222 33,022
Held to maturity, at amortized cost 5,497 7,713
Loans 300,443 269,191
Less allowance for loan losses (2,512) (2,590)
------------------ ----------------
Net loans 297,931 266,601
------------------ ----------------
Bank premises and equipment, net of accumulated depreciation
and amortization 33,957 31,647
Accrued interest receivable 2,499 2,425
Deferred income taxes 281 971
Intangible assets, net 24,027 22,959
Other assets 1,671 2,211
================== ================
$ 441,827 439,123
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand, non-interest bearing $ 83,355 91,510
Demand, interest bearing 159,930 151,889
Savings 47,418 42,165
Time deposits of $100,000 and over 25,629 44,472
Time deposits under $100,000 66,432 47,536
------------------ ----------------
382,764 377,572
Notes Payable --- 1,114
Accrued interest payable and other liabilities 2,443 5,439
------------------ ----------------
Total liabilities 385,207 384,125
------------------ ----------------
Minority interest 636 621
------------------ ----------------
Stockholders' equity:
Common stock 6,041 6,041
Additional paid-in capital 46,772 46,772
Retained earnings 3,491 1,522
Accumulated other comprehensive income (320) 42
------------------ ----------------
Total stockholders' equity 55,984 54,377
================== ================
$ 441,827 439,123
================== ================
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
VAIL BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
Three months ended June 30, Six months ended June 30,
------------------------------- -----------------------------------
1999 1998 1999 1998
-------------- ------------- --------------- ----------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 7,858 4,534 14,755 8,508
Interest on investment securities 547 238 1,040 524
Interest on federal funds sold 282 419 806 804
------------- ------------ ------------- ------------
Total interest income 8,687 5,191 16,601 9,836
------------- ------------ ------------- ------------
Interest expense:
Demand deposits 1,250 982 2,486 1,911
Savings deposits 332 95 642 197
Time deposits 972 718 2,048 1,367
Notes payable --- 26 14 55
Mandatorily convertible debentures --- 39 --- 77
Interest on federal funds purchased
and other borrowed funds --- 13 --- 15
------------- ------------ ------------- ------------
Total interest expense 2,554 1,873 5,190 3,622
------------- ------------ ------------- ------------
Net interest income 6,133 3,318 11,411 6,214
Provision for loan losses 80 --- 80 ---
------------- ------------ ------------- ------------
Net interest income after provision
for loan losses 6,053 3,318 11,331 6,214
Other income:
Service charges on deposit accounts 609 309 1,148 606
Other income 231 292 478 453
------------- ------------ ------------- ------------
840 601 1,626 1,059
Other expenses:
Salaries and employee benefits 2,399 1,598 5,012 3,204
Occupancy expense 472 470 902 738
Furniture and equipment expense 460 312 899 575
Amortization of intangible assets 241 45 475 90
Other operating expenses 1,303 736 2,445 1,386
------------- ------------ ------------- ------------
4,875 3,161 9,733 5,993
------------- ------------ ------------- ------------
Income before income taxes 2,018 758 3,224 1,280
Income tax expense 765 263 1,255 445
------------- ------------ ------------- ------------
Net income $ 1,253 495 1,969 835
============= ============ ============= ============
Other comprehensive income $ (365) (16) (362) (1)
============= ============ ============= ============
Net income $ 1,253 495 1,969 835
Preferred stock dividends --- 59 --- 118
------------- ------------ ------------- ------------
Net income available to common stockholders $ 1,253 436 1,969 717
============= ============ ============= ============
Weighted average common shares 6,040,608 2,285,820 6,040,608 2,285,820
============= ============ ============= ============
Net income per common share (basic) $ 0.21 0.19 0.33 0.31
============= ============ ============= ============
Net income per common share (diluted) $ 0.21 0.18 0.32 0.30
============= ============ ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------------------
1999 1998
-------------- ---------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,969 835
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Amortization of intangible assets 475 90
Depreciation and amortization 978 604
Provision for loan losses 80 ---
Net amortization of premiums (accretion of discounts) on
investment securities 82 (6)
Deferred income tax expense 690 171
Changes in operating assets and liabilities:
Decrease (increase) in accrued interest receivable (74) 42
Decrease (increase) in intangible and other assets (1,000) (1,122)
Increase (decrease) in accrued interest payable and other (2,798) (3,267)
liabilities
-------------- ---------------
Net cash provided (used) by operating activities 402 (2,653)
-------------- ---------------
Cash flows from investing activities:
Net decrease (increase) in federal funds sold 29,455 (2,387)
Purchase of investment securities available for sale (16,873) (348)
Proceeds from maturities of investment securities held to maturity 2,178 2,000
Proceeds from maturities of investment securities available for sale 11,080 1,524
Net decrease (increase) in loans (31,410) (7,427)
Purchase of bank premises and equipment (3,287) (2,055)
-------------- ---------------
Net cash provided (used) by investing activities (8,857) (8,693)
-------------- ---------------
Cash flows from financing activities:
Net increase (decrease) in deposits 5,192 10,358
Net increase (decrease) in repurchase agreements --- 775
Proceeds from issuance of common stock --- 248
Dividends paid --- (99)
Repayments of notes payable (1,114) (100)
-------------- ---------------
Net cash provided (used) by financing activities 4,078 11,182
-------------- ---------------
Net decrease in cash and due from banks (4,377) (164)
Cash and due from banks at beginning of period 28,469 16,680
-------------- ---------------
Cash and due from banks at end of period $ 24,092 16,516
============== ===============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense $ 5,356 3,524
============== ===============
Income taxes $ 490 12
============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
Vail Banks, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
As of June 30, 1999
(1) Organization and Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of Vail Banks, Inc. (VBI or the Company) and its wholly owned
subsidiaries, WestStar Bank (WestStar), the Bank of Telluride (BOT) and Western
Colorado Bank (WCB). WestStar and VBI own a 54.04% interest in Avon 56 Limited
which is also included in the accompanying consolidated financial statements.
All entities are collectively referred to as "Vail Banks." All significant
intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements, which are for
interim periods, do not include all disclosures provided in the consolidated
financial statements as of December 31, 1998. These interim consolidated
financial statements and the notes thereto should be read in conjunction with
VBI's Annual Report on Form 10-KSB as of and for the year ended December 31,
1998.
In the opinion of management all adjustments necessary, consisting of only
normal recurring items, have been included for a fair presentation of the
accompanying consolidated financial statements. Operating results for the three
and six months ended June 30, 1999 are not necessarily indicative of the results
that may be expected for the full year.
(2) Net Income Per Common Share
In March 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share (SFAS 128)
which replaced APB Opinion No. 15 related to standards for computing and
presenting earnings per share (EPS) and applies to entities with publicly held
common stock or potential common stock. SFAS 128 requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures. Also, SFAS 128 requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. SFAS 128 also requires restatement of all prior period EPS data
presented.
(3) Comprehensive Income
Vail Banks adopted SFAS No. 130, Reporting Comprehensive Income (SFAS 130),
effective January 1, 1998. SFAS 130 establishes standards for reporting
comprehensive income and its components (revenues, expenses, gains, and losses).
Components of comprehensive income are net income and all other non-owner
changes in equity. The statement requires that an enterprise (a) classify items
of other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
balance sheet. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The only component of
comprehensive income consists of net unrealized holding gains on securities, net
of related tax effects.
(4) Operating Segments
Vail Banks adopted SFAS No. 131, Disclosures About Segments of an Enterprise and
Related Information (SFAS 131) effective January 1, 1998. This statement
establishes standards for reporting information about segments in annual and
interim financial statements. SFAS 131 introduces a new model for segment
reporting called the "management approach." The management approach is based on
the way the chief operating decision-maker organizes segments within the company
for making operating decisions and assessing performance. Reportable segments
are based on products and services, geography, legal structure, management
structure and any other in which management disaggregates a company. Based on
the "management approach" model, Vail Banks has determined that its business is
6
<PAGE>
comprised of a single operating segment and that SFAS 131 therefore has no
impact on its consolidated financial statements.
(5) Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is effective for years beginning after
June 15, 2000. Vail Banks has not engaged in the use of derivatives and does not
conduct hedging activities; thus management does not anticipate that the
adoption of the new statement will have a significant effect on earnings or the
financial position of Vail Banks.
(6) Investment Securities
Vail Banks accounts for investment securities according to SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. At the date of
purchase, Vail Banks is required to classify debt and equity securities into one
of three categories: held to maturity, trading or available for sale.
Investments in debt securities are classified as held to maturity and measured
at amortized cost in the financial statements only if management has the
positive intent and ability to hold those securities to maturity. Securities
that are bought and held principally for the purpose of selling them in the near
term are classified as trading and measured at fair value in the statements with
unrealized gains and losses included in earnings. Investments not classified as
either held to maturity or trading are classified as available for sale and
measured at fair value in the financial statements with unrealized gains and
losses reported, net of tax, in a separate component of other comprehensive
income until realized.
(7) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the book values and tax bases of existing
assets and liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
(8) Merger of Subsidiary Banks
In July 1999, the Division of Banking of the State of Colorado and the Federal
Reserve Bank of Kansas City approved the application for the merger of WestStar
Bank and VBI's other subsidiary banks, Western Colorado Bank and Bank of
Telluride. The merger is expected to close during the third quarter of 1999 with
WestStar Bank as the surviving entity.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
BASIS OF PRESENTATION
The following discussion and analysis provides information regarding Vail
Banks' financial condition as of June 30, 1999 and its historical results of
operations for the three and six months ended June 30, 1999 in comparison to the
three and six months ended June 30, 1998. The following discussion should be
read in conjunction with the consolidated financial statements and related notes
included elsewhere in this Quarterly Report on Form 10-QSB.
The following acquisitions occurred which impacted financial results during
the time period between June 30, 1998 and June 30, 1999:
Effective July 31, 1998, Vail Banks consummated the merger with Independent
Bankshares, Inc. ("Independent") by paying cash of $3.8 million and issuing
318,770 shares of Vail Banks Common Stock. As of the merger date, Independent
had total assets of $30.3 million, net loans of $17.0 million, total deposits of
$27.4 million and equity capital of $2.6 million.
Effective December 15, 1998, Vail Banks consummated the merger with
Telluride Bancorp Ltd. ("Telluride") by paying cash of $13.3 million and issuing
908,913 shares of Vail Banks Common Stock. The cash consideration was paid using
a portion of the proceeds from the IPO. As of the merger date, Telluride had
total assets of $132.9 million, net loans of $80.6 million, total deposits of
$119.9 million and equity capital of $10.8 million.
Effective May 21, 1999, WestStar Bank consummated the purchase of certain
assets and the assumption of certain liabilities from the Glenwood Springs,
Colorado branch of World Savings Bank, FSB, Oakland, California ("World").
Approximately $36.1 million in deposits were acquired in the purchase.
The mergers with Independent and Telluride, and the purchase of assets of
World have been accounted for under the purchase method of accounting, and
accordingly, the purchase prices for each have been allocated to the assets
acquired and the liabilities assumed based on their estimated fair values. The
consolidated statements of income include the operations of Independent,
Telluride, and World since the date of the respective transactions. The excess
of purchase price over net assets acquired has been recorded as an intangible
asset, which is being amortized over 25 years. With respect to the merger with
Independent, the effect on results of operations for the first seven months of
1998, had the purchase transaction occurred at the beginning of the year, would
have been material. With respect to the merger with Telluride, the effect on
results of operations for the year 1998 was generally minimal as the transaction
closed with only 16 days remaining in 1998. However, the effect on results of
operations for the first eleven months of 1998, had the purchase transaction
occurred at the beginning of the year, would have been material. With respect to
the purchase of assets of World, the effect on results of operations for the
first five months of 1999, had the purchase transaction occurred at the
beginning of the year, would not have been material.
OVERVIEW
Net income available to common shareholders was $1,969,000 for the six
months ended June 30, 1999 up from $717,000 for the six months ended June 30,
1998, an increase of 175%. Net income available to common shareholders was
$1,253,000 for the quarter ended June 30, 1999 compared with $716,000 for the
quarter ended March 31, 1999 and $436,000 for the quarter ended June 30, 1998,
increases of 75% and 187%, respectively.
Net income per common share (diluted) for the six months ended June 30,
1999 was $0.32 compared to $0.30 for the six months ended June 30, 1998,
an increase of 6.7%. Net income per common
share (diluted) was $0.21 for the
quarter ended June 30, 1999 compared with $0.12 for the quarter ended March 31,
1999 and $0.18 for the quarter ended June 30, 1998, an increase of 75% and 17%,
respectively.
8
<PAGE>
On an operating basis, operating income (defined as net income plus
amortization) totaled $2,444,000 ($0.40 per common share, diluted) and $925,000
($0.31 per common share, diluted) for the six months ended June 30, 1999 and
June 30, 1998, respectively. Operating income for the quarter ended June 30,
1999 was $1,494,000 ($0.25 per common share, diluted) compared with $950,000 for
the quarter ended March 31, 1999 ($0.16 per common share, diluted) and $540,000
for the quarter ended June 30, 1998 ($0.18 per common share, diluted), an
increase of 57% and 177%, respectively.
Operating income to average tangible assets was 0.6% and 0.4% for the six
months ending June 30, 1999 and June 30, 1998, respectively. Operating income to
average tangible assets was 0.4% for the quarter ended June 30, 1999 compared
with 0.2% for both quarters ended March 31, 1999 and June 30, 1998.
Net income to average common shareholders' equity was 3.6% for the six
months ended June 30, 1999 compared to 4.9% for the six months ended June 30,
1998. Net income to average common shareholders' equity was 2.3% for the quarter
ended June 30, 1999, versus 1.3% for the quarter ended March 31, 1999 and 2.9%
for the quarter ended June 30, 1998.
Cash earnings (defined as net income plus depreciation and amortization)
was $3,504,000, or $0.57 per common share (diluted), for the six months ended
June 30, 1999 versus $1,558,000, or $.53 per common share (diluted), for the six
months ended June 30, 1998. Cash earnings for the quarter ended June 30, 1999
was $2,058,000, or $0.34 per common share (diluted), compared to $1,446,000, or
$0.24 per common share (diluted), for the quarter ended March 31, 1999, and
$879,000, or $0.29 per common share (diluted), for the quarter ended June 30,
1998.
Cash earnings to average common shareholders' equity was 6.4% for the six
months ended June 30, 1999 and 9.2% for the six months ended June 30, 1998. Cash
earnings to average common shareholders' equity was 3.7% for the quarter ended
June 30, 1999 compared to 2.6% for the quarter ended March 31, 1999, and 5.1%
for the quarter ended June 30, 1998.
CONSOLIDATED CONDENSED BALANCE SHEETS
The Company's total assets increased by $2,704,000, or 1%, to $441,827,000
as of June 30, 1999, from $439,123,000 as of December 31, 1998 and by
$201,714,000, or 84%, from $240,113,000 as of June 30, 1998.
A healthy Colorado economy continues to fuel the Company's strong loan
growth, particularly in its Western Slope markets. During the six months ended
June 30, 1999, the loan portfolio increased by $31,252,000, or 12%, from
$269,191,000 as of December 31, 1998 to $300,443,000, and by $138,132,000, or
85%, from $162,311,000 as of June 30, 1998.
Investment securities were $43,719,000 as of June 30, 1999 compared to
$40,735,000 as of December 31, 1998, an increase of 1%, and $16,546,000 as of
June 30, 1998, an increase of 164%.
Deposits increased by $5,192,000, or 1%, to $382,764,000 as of June 30,
1999, from $377,572,000 as of December 31, 1998 and by $166,191,000, or 77%,
from $216,573,000 as of June 30, 1998.
During 1999, noninterest-bearing deposits decreased by $8,155,000, while
interest-bearing deposits increased by $13,347,000. Non interest bearing demand
deposits comprised 22% of total deposits as of June 30, 1999 and 24% of total
deposits as of both December 31, 1998 and June 30, 1998.
Federal funds sold decreased by $29,455,000 in the six-month period ending
June 30, 1999. Federal funds sold decreased during the six month period ended
June 30, 1999 as funds were utilized in funding growth of the loan and
investment portfolios. The nominal deposit growth during 1999 resulted from a
combination of the acquisition of the deposits of the Glenwood Springs branch of
9
<PAGE>
World Savings, which added $36,100,000 to deposits, offset by normal seasonal
decreases in resort market deposits.
RESULTS OF OPERATIONS
NET INTEREST INCOME. Net interest income was $11,411,000 for the six months
ended June 30, 1999, an increase of $5,197,000, or 84%, from the six-month
period ended June 30, 1998. Net interest income was $6,133,000 for the quarter
ended June 30, 1999, an increase of $855,000 or 16% compared with the quarter
ended March 31, 1999 and an increase of $2,815,000 or 85% compared with the
quarter ended June 30, 1998. The net interest margin was 6.5% for the six months
ended June 30, 1999, compared to 6.2% for the six months ended June 30, 1998,
and 7.0% for the quarter ended June 30, 1999, up from 6.1% for the quarter ended
March 31, 1999 and up from 6.6% for the quarter ended June 30, 1998. These
increases are due primarily to the yield on an increasing loan volume coupled
with decreases in the level of higher cost deposits. Growth of the Company's
average earning assets also supported the margin increase. Average earning
assets increased 75%, or $150,328,000, to $352,061,000 as of June 30, 1999, from
$201,733,000 as of June 30, 1998.
PROVISION AND ALLOWANCE FOR LOAN LOSSES. Provision expense for the six
months ending June 30, 1999 totaled $80,000 compared to none recorded in the six
months ending June 30, 1998. Although down slightly from the $2,590,000 level as
of December 31, 1998, the allowance for loan losses increased during the second
quarter ended June 30, 1999 by $68,000 to $2,512,000, or 0.84% of loans, from
$2,444,000 as of March 31, 1999. The increase since March 31, 1999 is intended
to support the normal potential loss content in the growth of the Company's loan
portfolio. Key indicators of asset quality have remained positive, while average
outstanding loan amounts have increased to $286,035,000 for the quarter ending
June 30, 1999 from $268,010,000 for the quarter ending March 31, 1999.
The allowance for loan and lease losses represents management's recognition
of the risks of extending credit and its evaluation of the potential loss
content of the loan and lease portfolio. The Company maintains an allowance for
loan losses based upon, among other things, such factors as the amount of
problem loans and leases, general economic conditions, historical loss
experience, and the evaluation of the underlying collateral including holding
and disposal costs. Specific allowances are provided for individual loans when
ultimate collection is considered questionable by management. Management
actively monitors the Company's asset quality and will charge off loans against
the allowance for loan losses when appropriate and will provide specific loss
allowances when necessary. Although management believes it uses the best
information available to make determinations with respect to the allowance for
loan losses, future adjustments may be necessary if economic conditions differ
from the assumptions used in making the initial determinations. The following
table presents, for the period indicated, an analysis of the allowance for loan
and lease losses and other related data.
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES ANALYSIS Six months ended June 30,
--------------------------------
1999 1998
------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Average total loans $ 277,072 153,015
============= ==============
Total loans at end of period $ 300,443 162,311
============= ==============
Allowance at beginning of period $ 2,590 1,364
Charge-offs (204) (54)
Recoveries 46 25
Provision for loan losses 80 ---
------------- --------------
Allowance at end of period $ 2,512 1,335
============= ==============
Net charge-offs to average total loans 0.06% 0.02%
Allowance to total loans at end of period 0.84% 0.82%
</TABLE>
10
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NONINTEREST INCOME. Total noninterest income increased by $567,000, or
54%, to $1,626,000 for the six months ended June 30, 1999, from $1,059,000 for
the six months ended June 30, 1998. Total noninterest income increased by
$54,000, or 7%, to $840,000 for the three months ended June 30, 1999, from
$786,000 for the three months ended March 31, 1999 and by $239,000, or 40%, from
$601,000 for the three months ended June 30, 1998. These increases were
primarily attributable to increases in deposit volumes and service charges.
NONINTEREST EXPENSES. Total noninterest expense, before amortization
expense, increased by $3,355,000, or 57%, to $9,258,000 for the six months ended
June 30, 1999, from $5,903,000 for the six months ended June 30, 1998.
Noninterest expense, before amortization expense, increased by $10,000, or 0.2%,
to $4,634,000 for the three months ended June 30, 1999, from $4,624,000 for the
three months ended March 31, 1999 and by $1,518,000, or 49%, from $3,116,000 for
the three months ended June 30, 1998.
The efficiency ratio, before amortization expense, decreased to 71% for the
six months ended June 30, 1999 from 81% for the six months ended June 30, 1998.
The efficiency ratio, before amortization expense, decreased to 66% for quarter
ended June 30, 1999 from 76% for the quarter ended March 31, 1999 and 80% for
the quarter ended June 30, 1998. The efficiency ratio, including amortization
expense, decreased to 75% for the six months ended June 30, 1999 from 82% for
the six months ended June 30, 1998. The efficiency ratio, including amortization
expense, decreased to 70% for quarter ended June 30, 1999 from 80% for the
quarter ended March 31, 1999 and 81% for the quarter ended June 30, 1998.
The increase in noninterest expense is primarily attributed to recurring
personnel, occupancy and other expenses associated with internal growth and
acquisitions made by the Company. Such expenses have been necessary to
accommodate the Company's overall growth.
FEDERAL INCOME TAX. For approximately five years, Vail Banks has utilized a
net operating loss ("NOL") carryforward obtained from a 1993 merger. Under GAAP
requirements, net income includes an equivalent expense that would be paid for
taxation. A federal taxation rate of 34% is used for this purpose.
NONPERFORMING ASSETS. The Company's nonperforming assets consist of
nonaccrual loans, restructured loans, loans past due over 90 days and other real
estate owned. Nonperforming assets were $1,098,000 as of June 30, 1999, (0.25%
of total assets) compared with $1,788,000 as of December 31, 1998, (0.41% of
total assets) and $107,000 as of June 30, 1998 (0.04% of total assets). The
following table presents information regarding nonperforming assets as of the
dates indicated:
<TABLE>
<CAPTION>
NONPERFORMING ASSETS June 30,
--------------------------------
1999 1998
------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Nonaccrual loans $ 202 51
Other loans 90 days past due 467 56
Other real estate 429 0
------------ --------------
Total nonperforming assets $ 1,098 107
============= ==============
Nonaccrual and other loans 90 days past due to total loans 0.22% 0.07%
Nonperforming assets to total loans plus real estate 0.36% 0.07%
Nonperforming assets to total assets 0.25% 0.04%
</TABLE>
11
<PAGE>
CAPITAL RESOURCES
Stockholders' equity as of June 30, 1999 increased $36.8 million, or
191.1%, to $56.0 million from $19.2 million as of June 30, 1998. This increase
was due to the Common Stock issued in connection with the merger with
Independent and Telluride, the retention of current period earnings, a private
offering of $3.0 million in Common Stock, and the stock issued in the IPO.
Stockholders' equity was reduced by $467,000 in December 1998, due to a one-time
early conversion payment upon the required conversion of preferred stock to
common stock in connection with the IPO.
Vail Banks currently maintains risk-weighted capital and leverage (Tier 1
capital to average total assets) ratios in excess of the minimum for a "well
capitalized" designation. The company's Tier 1 leverage ratio increased to 8.0%
as of June 30, 1999, from 7.7% as of December 31, 1998 and 6.2% as of June 30,
1998, while the total risk-based capital ratio decreased to 11.4% as of June 30,
1999 from 12.3% as of December 31, 1998, but was up from 10.4% as of June 30,
1998. The decrease in the total risk-based capital ratio experienced in 1999
was largely attributable to a shift from federal funds to loans, which are
assigned a higher risk weight.
LIQUIDITY
The Company's liquidity management objective is to ensure its ability to
satisfy the cash requirements of depositors and borrowers and allow the Company
to meet its own cash needs. Historically, the Company's primary source of funds
has been customer deposits. Scheduled loan repayments are a relatively stable
source of funds. Deposit inflows and unscheduled loan repayments, which are
influenced by fluctuations in general level of interest rates, returns available
on other investments, competition, economic conditions and other factors, are
relatively unstable. Company borrowing may be used on a short-term basis to
compensate for reductions in other sources of funds (such as deposit inflows at
less than projected levels). Company borrowing may also be used on a longer-term
basis to support expanded lending activities and to match the maturity or
repricing intervals of assets.
DATA PROCESSING AND YEAR 2000 READINESS
IMPACT OF THE YEAR 2000 ISSUE
Generally, the year 2000 risk involves computer programs and computer
hardware that are not able to perform without interruption into the year 2000.
The arrival of the year 2000 poses a unique worldwide challenge to the ability
of all systems to correctly recognize the date change form December 31, 1999 to
January 1, 2000. If Vail Banks' systems did not correctly recognize such a date
change, computer applications that rely on the date field could fail or create
erroneous results. Such erroneous results could affect interest, payment or due
dates or could cause the temporary inability to process transactions, send
invoices or engage in similar normal business activities. If it is not
adequately addressed by Vail Banks or its suppliers and borrowers, the year 2000
issue could result in a material adverse impact on Vail Banks' financial
condition and results of operations.
VAIL BANKS' STATE OF READINESS
Since 1995, Vail Banks has been assessing its year 2000 readiness. It has
formed a committee charged with the task of identifying and remediating date
recognition problems in both information technology ("IT") and non-IT systems
that include microcontrollers and other embedded computer technology. Guided by
requirements of and examination by banking regulators, the committee has
developed a comprehensive plan to assess Vail Banks' year 2000 readiness with
respect the both IT and non-IT systems. Its inventory of such systems is
complete, and Vail Banks believes its IT systems are year 2000 ready. Primarily
for operational reasons, Vail Banks replaced critical mainframe and PC-based
systems in 1996 and 1997, incurring a capital expenditure of approximately $2
million. The systems vendor certified to Vail Banks that the system is year 2000
ready, and Vail Banks is currently in the process of validation. Vail Banks'
inventory of the year 2000 readiness of its non-IT systems is also complete, and
no mission critical systems were found to be deficient.
12
<PAGE>
Vail Banks has completed the remediation or replacement of its systems.
Testing has occurred in 1998 and further testing will occur during the remainder
of 1999. Vail Banks believes that it has identified all major internal business
and operational functions that will be impacted by the year 2000 date change.
COSTS TO ADDRESS YEAR 2000 ISSUES
Vail Banks does not anticipate that the year 2000 related costs (excluding
the $2 million expenditure for the IT system mentioned above) will be material
to its financial condition or results of operations. Excluding the $2 million
expenditure, Vail Banks estimates that its total costs for the evaluation,
remediation and testing of its IT and non-IT systems in connection with the year
2000 issue will be $200,000, all of which as been incurred to date.
RISK OF THIRD PARTY YEAR 2000 ISSUES
The impact of year 2000 non-compliance by outside parties with whom Vail
Banks transacts business cannot be accurately gauged. Vail Banks has surveyed
its major business partners to ascertain their year 2000 readiness. All major
third party providers are year 2000 ready at this time. Vail Banks relies upon
the Federal Reserve for electronic funds transfers and check clearing and
understands that the Federal Reserve has upgraded its systems to be year 2000
ready. 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 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 14 days without
significant losses. The Company believes any mission critical systems could be
recovered and operating within approximately seven days.
In addition, Vail Bank's preliminary contingency plan takes into account
the risk that the Federal Reserve will not make the necessary modifications that
will enable it to handle electronic funds transfers and check clearing by the
year 2000. So long as Vail Banks is able to obtain the necessary information
from the Federal Reserve in some manner, such as by telephone or facsimile
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.
FORWARD LOOKING STATEMENTS
The discussion in this report contains forward-looking statements
including, without limitation, statements relating to the Company's Year 2000
compliance, which are made pursuant to the safe harbor provision of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that the
expectations reflected in the forward-looking statements are reasonable, it can
give no assurance that such expectations will be correct or realized. The
forward-looking statements involve risks and uncertainties that affect the
Company's operations, financial performance and other factors and discussed in
the Company's filings with the Securities and Exchange Commission. These risks
include the impact of economic conditions and interest rates, loan losses, risks
related to the execution of the Company's growth strategy, the possible loss of
key personnel, factors that could affect the Company's ability to complete in
its trade areas, changes in regulations and government policies and other
factors discussed in the Company's filing with the Securities and Exchange
Commission. In particular, risks related to the Company's year 2000 compliance
include those discussed under the heading "Data Processing Systems and Year 2000
compliance" in this report.
13
<PAGE>
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 18, 1999, the Company held its annual meeting of shareholders. At that
meeting, the following items were submitted to a vote of security holders with
the following results:
1. The following directors were elected:
<TABLE>
<CAPTION>
VOTES CAST VOTES CAST VOTES BROKER NON-
NAME TERM FOR ELECTION AGAINST ELECTION WITHHELD ABSTENTIONS VOTES
---- ---- ------------ ---------------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Kay H. Chester 3 years 4,370,061 0 162,278 0 0
James G. Flaum 3 years 4,370,461 0 161,878 0 0
Robert L. Knous 3 years 4,370,311 0 162,028 0 0
Byron A. Rose 3 years 4,369,911 0 162,428 0 0
Donald L. Vanderhoof 3 years 4,370,461 0 161,878 0 0
</TABLE>
ITEM 6. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(A) EXHIBITS
The following exhibits are required to be filed with this Report on
10-QSB by Item 601 of Regulation S-B.
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
27.1 Financial Data Schedule (for SEC use only)
(B) REPORTS ON FORM 8-K.
None
14
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report on Form 10-QSB to be signed on its
behalf by the undersigned, thereunto duly authorized.
VAIL BANKS, INC.
(REGISTRANT)
Date: August 16, 1999 /s/ Lisa M. Dillon
-------------------- -------------------------------------
Lisa M. Dillon,
Title: President and Chief Executive Officer
Date: August 16, 1999 /s/ Kirk S. Colburn
-------------------- -------------------------------------
Kirk S. Colburn,
Title: Secretary
(principal financial officer)
15
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 24,054
<INT-BEARING-DEPOSITS> 38
<FED-FUNDS-SOLD> 13,650
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 38,222
<INVESTMENTS-CARRYING> 5,497
<INVESTMENTS-MARKET> 5,481
<LOANS> 300,443
<ALLOWANCE> 2,512
<TOTAL-ASSETS> 441,827
<DEPOSITS> 382,764
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,443
<LONG-TERM> 0
0
0
<COMMON> 6,041
<OTHER-SE> 49,943
<TOTAL-LIABILITIES-AND-EQUITY> 441,827
<INTEREST-LOAN> 14,755
<INTEREST-INVEST> 1,040
<INTEREST-OTHER> 806
<INTEREST-TOTAL> 16,601
<INTEREST-DEPOSIT> 5,176
<INTEREST-EXPENSE> 5,190
<INTEREST-INCOME-NET> 11,411
<LOAN-LOSSES> 80
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,733
<INCOME-PRETAX> 3,224
<INCOME-PRE-EXTRAORDINARY> 3,224
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,969
<EPS-BASIC> .33
<EPS-DILUTED> .32
<YIELD-ACTUAL> 6.54
<LOANS-NON> 202
<LOANS-PAST> 467
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,280
<ALLOWANCE-OPEN> 2,590
<CHARGE-OFFS> 204
<RECOVERIES> 46
<ALLOWANCE-CLOSE> 2,512
<ALLOWANCE-DOMESTIC> 1,660
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 852
</TABLE>
