PROPOSED MERGER OF ESTES BANK CORPORATION AND VAIL BANKS, INC.
Dear Shareholder:
The Boards of Directors of Estes Bank Corporation and Vail Banks, Inc.
have agreed on a merger transaction that will result in the combination of Estes
Bank and EBC Acquisition Company, a wholly owned subsidiary of Vail Banks. After
the merger, Estes Bank will become a subsidiary of Vail Banks. Estes Bank
shareholders are being asked to approve the merger.
If the merger is approved, Estes Bank shareholders will receive in
total approximately $21,500,000 in cash and shares of Vail Banks common stock in
proportion to their respective holdings of Estes Bank stock. Had the closing of
the merger occurred on May 31, 2000, each share of Estes Bank stock would have
been converted into 6 shares of Vail Banks stock and $332 in cash. The actual
number of shares and amount of cash you receive if the merger is approved will
be subject to the adjustments described in the proxy. Vail Banks common stock is
quoted on the NASDAQ National Market System under the symbol "VAIL."
After careful consideration, the Board of Directors of Estes Bank has
determined that the merger is in the best interests of Estes Bank's
shareholders. The Estes Bank Board unanimously recommends voting FOR approval of
the Agreement and Plan of Reorganization. Your vote is very important because we
cannot complete the merger unless the shareholders of Estes Bank approve the
Agreement and Plan of Reorganization.
Estes Bank has scheduled a Special Meeting of Shareholders to vote on
the merger. Whether or not you plan to attend the shareholder meeting, please
take the time to vote by completing and mailing the enclosed proxy card to us.
If you sign, date, and mail your proxy card without indicating how you want to
vote, your proxy will be counted as a vote in favor of the transaction. If you
do not return your card or do not attend the meeting in person, the effect will
be a vote against the proposed transaction. If your shares are held by a broker
in "street name," you must instruct your broker to be able to vote. The date,
time, and place of the special meeting is as follows:
July 13, 2000, at 10:00 A.M., at the offices of Estes Bank's
subsidiary:
United Valley Bank
363 East Elkhorn Avenue
Estes Park, Colorado 80517
The document accompanying this letter contains additional information
regarding the Agreement and Plan of Reorganization, the proposed merger, and the
two companies. WE ENCOURAGE YOU TO READ THIS ENTIRE DOCUMENT CAREFULLY,
INCLUDING A DISCUSSION OF THE "RISK FACTORS" BEGINNING ON PAGE 7. The Estes Bank
Board of Directors strongly supports this strategic combination between Vail
Banks and Estes Bank and appreciates your prompt attention to this very
important matter.
----------------------------------
JACK G. HASELBUSH
SECRETARY OF THE BOARD OF DIRECTORS
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE. SHARES OF THE COMMON STOCK OF VAIL BANKS,
INC. ARE EQUITY SECURITIES AND ARE NOT SAVINGS ACCOUNTS OR DEPOSITS. INVESTMENT
IN SHARES OF VAIL BANKS COMMON STOCK IS NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
The Date of This Proxy Statement/Prospectus is June 13, 2000, and It is Expected
to be First Mailed to Shareholders on or About June 14, 2000.
<PAGE>
ESTES BANK CORPORATION
P.O. Box 2270
363 E. Elkhorn Avenue
Estes Park, Colorado 80517
_____________________________________________________
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 13, 2000
_____________________________________________________
A Special Meeting of Shareholders of Estes Bank Corporation will be
held on July 13, 2000, at 10:00 a.m., at the offices of United Valley Bank, 363
E. Elkhorn Avenue, Estes Park, Colorado 80517 for the following purposes:
(1) to vote on an Agreement and Plan of Reorganization dated March 21,
2000 pursuant to which EBC Acquisition Company, a subsidiary of Vail
Banks, Inc., will merge with and into Estes Bank Corporation, as
more particularly described in the enclosed proxy statement; and
(2) to transact other business as may properly come before the Special
Meeting or any adjournments of the Special Meeting.
Only shareholders of record of Estes Bank common stock at the close of
business on May 31, 2000, will be entitled to vote at the Special Meeting or any
adjournments thereof.
Estes Bank shareholders are entitled to assert dissenters rights under
Article 113 of the Colorado Business Corporation Act regarding the rights of
dissenting shareholders, as more fully explained under "The Proposed Merger --
Rights of Dissenting Shareholders" (page 32) and in Appendix C to the attached
proxy statement.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND
FINANCIAL INFORMATION THAT IS NOT INCLUDED IN OR DELIVERED WITH THIS DOCUMENT.
THIS INFORMATION IS AVAILABLE WITHOUT CHARGE TO ALL SHAREHOLDERS UPON WRITTEN OR
ORAL REQUEST MADE TO: JACK G. HASELBUSH, CORPORATE SECRETARY, 363 E. ELKHORN
AVENUE, ESTES PARK, COLORADO 80517, (970) 586-4412. TO OBTAIN TIMELY DELIVERY,
YOU MUST REQUEST THE INFORMATION NO LATER THAN JULY 8, 2000.
A form of proxy and a proxy statement are enclosed. The Agreement and
Plan of Reorganization requires the approval of the holders of at least
two-thirds of Estes Bank Stock. To assure representation at the special meeting,
you are requested to sign, date, and return the proxy promptly in the enclosed,
stamped envelope. If you attend the special meeting, you may revoke your proxy
at that time simply by requesting the right to vote in person. You may withdraw
a previously submitted proxy by notifying Jack G. Haselbush, Corporate
Secretary, in writing or by submitting an executed, later-dated proxy prior to
the special meeting to Estes Bank: address. If you properly sign and return the
proxy and do not revoke it, it will be voted at the special meeting in the
manner that you specify in the proxy.
The Estes Bank Board of Directors unanimously recommends that Estes
Bank shareholders vote for the proposal to approve and adopt the Reorganization
Agreement.
By Order of the Board of Directors,
June 14, 2000 ____________________________________
Jack G. Haselbush
Secretary
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Where You Can Find More Information...............................................................................iv
Incorporation of Certain Documents by Reference...................................................................iv
A Warning about Forward-Looking Statements........................................................................iv
Summary...........................................................................................................1
The Companies............................................................................................1
The Terms of the Merger..................................................................................1
The Reasons Management of Both Companies Support the Merger..............................................2
Fairness Opinion to Shareholders of Estes Bank...........................................................2
Conditions, Termination, and Effective Date..............................................................3
Rights of Dissenting Shareholders........................................................................3
Federal Income Tax Consequences..........................................................................3
Accounting Treatment.....................................................................................3
Markets and Description of Capital Stock.................................................................3
Dividends................................................................................................5
There are Some Differences in Shareholders' Rights Between Vail Banks and Estes Bank.....................6
Interests of Directors and Officers of Estes Bank in the Merger..........................................6
Recent Developments of Vail Banks........................................................................6
Risk Factors......................................................................................................6
Comparative Share Data............................................................................................9
Summary Consolidated Financial Information.......................................................................10
Pro Forma Combined Financial Information.........................................................................13
The Proposed Merger..............................................................................................20
Background of and Reasons for the Merger................................................................20
Opinion of Estes Bank's Financial Advisor...............................................................22
The Agreement and Plan of Reorganization................................................................24
Required Shareholder Approval...........................................................................26
Expenses................................................................................................26
Conduct of Business of Estes Bank Pending Closing.......................................................27
Interest of Management in the Transaction; Conduct of Business After the Merger.........................28
Comparison of the Rights of Estes Bank and Vail Banks Shareholders......................................29
Accounting Treatment....................................................................................30
Resales of Vail Banks Stock by Directors and Officers of Estes Bank.....................................30
Regulatory Approvals....................................................................................30
Rights of Dissenting Shareholders.......................................................................31
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<PAGE>
Material Federal Income Tax Consequences of the Merger and Opinion of Tax Counsel........................33
Information about Estes Bank Corporation.........................................................................34
Description of Business.................................................................................34
Management's Discussion and Analysis of Financial Condition and Results of Operations of Estes Bank..............34
Overview................................................................................................34
Results of Operations...................................................................................35
Financial Condition.....................................................................................39
Capital Resources.......................................................................................46
Liquidity...............................................................................................47
Effects of Inflation and Changing Prices................................................................49
Year 2000 Compliance....................................................................................49
Competition.............................................................................................49
Voting Securities and Principal Shareholders............................................................49
Information About Vail Banks, Inc................................................................................51
Description of Business.................................................................................51
Recent Developments.....................................................................................51
Description of Securities...............................................................................51
Legal Opinions...................................................................................................52
Experts..........................................................................................................52
Other Matters....................................................................................................52
Estes Bank Corporation and Subsidiary Index to Financial Statements.............................................F-0
Independent Auditors' Report....................................................................................F-1
Consolidated Balance Sheets.....................................................................................F-2
Consolidated Statements of Income...............................................................................F-3
Consolidated Statement of Shareholders' Equity..................................................................F-4
Consolidated Statements of Cash Flows...........................................................................F-5
Notes to Consolidated Financial Statements......................................................................F-6
</TABLE>
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<TABLE>
<CAPTION>
Appendices
<S> <C>
Agreement and Plan of Reorganization.................................................................Appendix A
Vail Banks, Inc. Form 10-KSB for the year ended December 31, 1999,
Form 10-QSB for the three months ended March 31, 2000, and Form 14A
Proxy Statement dated April 14, 2000...............................................................Appendix B
Colorado Dissenter's Rights Statutes (Section 7-113/101 et seq.).....................................Appendix C
Opinion of The Wallach Company, Inc..................................................................Appendix D
Proxy ..........................................................................................................P-1
</TABLE>
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<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Vail Banks is subject to the information requirements of the Securities
Exchange Act of 1934, which means that it is required to file reports, proxy
statements, and other information at the Public Reference Section of the
Securities and Exchange Commission at Room 1024, 450 Fifth Street, NW,
Washington, D.C. 20549. You may also obtain copies of the reports, proxy
statements, and other information from the Public Reference Section of the SEC,
at prescribed rates, by calling 1-800-SEC-0330 or by visiting the SEC's Website
at http://www.sec.gov.
Vail Banks filed a registration statement on Form S-4 to register with
the SEC the Vail Banks common stock to be issued to the Estes Bank shareholders
in the merger. This proxy statement/prospectus is a part of that registration
statement and constitutes a prospectus of Vail Banks in addition to being a
proxy statement for Estes Banks shareholders for a special meeting to be held on
July 13, 2000, as described herein.
As allowed by the SEC's rules, this proxy statement/prospectus does not
contain all of the information you can find in the registration statement or the
exhibits to the registration statement. This proxy statement/ prospectus
summarizes some of the documents that are exhibits to the registration
statement, and you should refer to the exhibits for a more complete description
of the matters covered by those documents.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This document incorporates important business and financial information
about Vail Banks that is not included in or delivered with this proxy
statement/prospectus. The following documents previously filed by Vail Banks
under the Exchange Act are incorporated by reference into this proxy
statement/prospectus:
(a) Vail Bank's annual report on Form 10-KSB for the fiscal year ended
1999;
(b) Vail Bank's definitive Proxy Statement for its 2000 Annual Meeting;
(c) Vail Bank's quarterly report on Form 10-QSB for the period ended
March 31, 2000; and
(d) All other reports filed by Vail Banks pursuant to sections 13(a) or
15(d) of the Exchange Act since December 31, 1999, and the date the merger is
completed.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
Some of the statements made in this proxy statement/prospectus (and in
other documents to which we refer) are "forward-looking statements." When used
in this document, the words "anticipate," "believe," "estimate," and similar
expressions generally identify forward-looking statements. These statements are
based on the beliefs, assumptions, and expectations of Vail Banks' management,
and on information currently available to those members of management. They are
expressions of historical fact, not guarantees of future performance.
Forward-looking statements include information concerning possible or assumed
future results of operations of Vail Banks after the proposed merger.
Forward-looking statements involve risks, uncertainties, and assumptions, and
certain factors could cause actual results to differ from results expressed or
implied by the forward-looking statements, including:
-iv-
<PAGE>
1. economic conditions (both generally and in the markets where Vail
Banks and Estes Bank operates);
2. competition from other companies that provide financial services
similar to those offered by Vail Banks and Estes Bank;
3. government regulation and legislation;
4. changes in interest rates; and
5. unexpected changes in the financial stability and liquidity of Vail
Banks' and Estes Bank's credit customers.
We believe these forward-looking statements are reasonable. You should
not, however, place undue reliance on these forward-looking statements, because
the future results and shareholder values of Vail Banks following completion of
the merger may differ materially from those expressed or implied by these
forward-looking statements.
-v-
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: The purchase price for the merger is approximately $21,500,000,
subject to adjustments described in "Terms of Merger" at page 1. The purchase
price will be made up of approximately $18,275,000 of cash and $3,225,000 of
Vail Banks common stock. The cash portion of the purchase price will be
increased or decreased on a dollar for dollar basis based on the amount that the
net worth of Estes Bank is more or less than $9,871,000 at month end immediately
prior to closing. In addition, the cash portion of the purchase price will
increase by an amount equal to the net income, if any, of Estes Bank for the
period from the end of the month immediately prior to closing and the closing
date. Estes Bank shareholders will also receive $3,225,000 payable in Vail Banks
common stock. The number of shares will equal $3,225,000 divided by the average
of the closing sales price of Vail Banks stock as reported by the NASDAQ
National Market System on each of the 15 consecutive trading days immediately
prior to the closing. The average share price used to determine the number of
shares will not, however, be less than $9.00 per share nor in excess of $12.00
per share. On May 31, 2000 the average of the 15-day period was $9.70 which
would have resulted in 332,474 shares being issued had the closing been on that
date. Had the closing occurred on May 31, 2000, each share of Estes Bank stock
would have been converted into 6 shares of Vail Banks stock and $332 in cash.
The minimum and maximum number of shares issued in the merger will be 268,750
and 358,333 shares, respectively. The purchase price, including Vail Banks
common stock, will be allocated among Estes Bank shareholders in proportion to
their respective stock holdings. Vail Banks will not issue fractional shares in
the merger. Instead, Estes Bank shareholders will receive a cash payment,
without interest, for the value of any fraction of a share of Vail Banks common
stock that they would otherwise be entitled to receive.
Q: WHAT AM I BEING ASKED TO APPROVE?
A: You are being asked to vote upon the proposed Agreement and Plan of
Reorganization, which contemplates the merger of a subsidiary of Vail Banks with
and into Estes Bank. Approval of the proposal requires the vote of the holders
of at least two-thirds of Estes Bank Stock.
The Estes Bank and Vail Banks Boards of Directors have unanimously
approved and adopted the Agreement and Plan of Reorganization. The Estes Bank
Board is recommending that its shareholders vote FOR approval of the Agreement
and Plan of Reorganization.
Q: WHAT SHOULD I DO NOW?
A: Just indicate on your proxy card how you want to vote, and sign and
mail it in the enclosed envelope as soon as possible, so that your shares will
be represented at the meeting. If you sign and send in your proxy and do not
indicate how you want to vote, your proxy will be voted in favor of the proposal
to approve and adopt the Agreement and Plan of Reorganization. A special
shareholder meeting will be held to vote upon the proposal.
The Estes Bank Special Meeting of Shareholders will take place at the
offices of United Valley Bank, 363 East Elkhorn Avenue, Estes Park, Colorado on
July 13, 2000, at 10:00 a.m.
You may attend that meeting and vote your shares in person, rather than
voting by proxy. In addition, you may withdraw your proxy up to and including
the day of your shareholders meeting by notifying the Secretary prior to the
meeting, in writing, or by submitting an executed later-dated proxy to:
Jack G. Haselbush, Secretary
Estes Bank Corporation
P.O. Box 2270
363 E. Elkhorn Avenue
Estes Park, Colorado 80517
Q: WHAT RISKS SHOULD I CONSIDER?
A: You should carefully consider the "Risk Factors" beginning on page 7.
You should also review the factors considered by each company's Board of
Directors discussed in "The Proposed Merger - Background of and Reasons for the
Merger" beginning on page 20.
Q: WHEN IS THE MERGER EXPECTED TO BE COMPLETED?
A: We plan to complete the merger during the third quarter of 2000.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO ME?
A: The merger will constitute a taxable transaction to the Estes Bank
shareholders. In general, both the cash received and the fair market value of
the Vail Banks stock received by Estes Bank shareholders will be treated as
amounts received from the sale of their shares of Estes Bank stock, and
(provided that such Estes Bank stock is a capital asset in the hands of such
shareholders) each such shareholder will recognize capital gain or loss (short
or long-term as appropriate) measured by the difference between the sale price
of such Estes Bank stock (cash received and the fair market value of the Vail
Banks stock on the closing date) and such shareholders tax basis in such Estes
-vi-
<PAGE>
Bank stock. To review the tax consequences to Estes Bank shareholders in greater
detail, see "Material Federal Income Tax Consequences of the Merger and Opinion
of Tax Counsel" beginning on page 32.
YOUR TAX CONSEQUENCES WILL DEPEND ON YOUR PERSONAL SITUATION. YOU
SHOULD CONSULT YOUR TAX ADVISER FOR A FULL UNDERSTANDING OF THE TAX CONSEQUENCES
OF THE MERGER TO YOU.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER
VOTE MY SHARES FOR ME?
A: Your broker will vote your shares of common stock only if you provide
instructions on how to vote. Following the directions your broker provides, you
should instruct your broker how to vote your shares. If you do not provide
instructions to your broker, your shares will not be voted, and this will have
the effect of a vote against the merger.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the merger is completed, we will send written instructions to
Estes Bank shareholders for exchanging your Estes Bank common stock certificates
for Vail Banks common stock certificates.
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<PAGE>
SUMMARY
This summary highlights information from this document, and it may not
contain all of the information that is important to you as you consider the
proposed merger, the stock issuance, and related matters. For a more complete
description of the terms of the proposed merger, you should carefully read the
entire document and the documents to which we have referred you. The Agreement
and Plan of Reorganization, which is the legal document that governs the
proposed merger, is incorporated into this document and attached as Appendix A.
The Companies
-------------
Vail Banks, Inc.
108 S. Frontage Road West
Suite 101
Vail, Colorado 81657
(970) 476-2002
Vail Banks is a bank holding company headquartered in Vail, Colorado.
Vail Banks' activities are conducted through its wholly-owned subsidiary,
WestStar Bank, a full-service regional commercial bank with its main office
located in Vail, Colorado, and 24 retail offices. Vail Banks provides customary
types of banking services such as checking accounts, savings accounts, and time
deposits. It also engages in commercial and consumer lending, makes secured and
unsecured loans, and provides other financial services. At March 31, 2000, Vail
Banks had total consolidated assets of $474.3 million, total consolidated net
loans of $349.4 million, total consolidated deposits of $380.5 million, and
total consolidated shareholders' equity of $59.8 million. We have attached to
this proxy statement/prospectus as Appendix B the Vail Banks Form 10-KSB for the
year ended December 31, 1999, Form 10-QSB for the three-month period ended March
31, 2000, and the Proxy Statement dated April 14, 2000.
Estes Bank Corporation
P.O. Box 2270
363 E. Elkhorn Avenue
Estes Park, Colorado 80517
(970) 586-4412
Estes Bank Corporation is a bank holding company based in Estes Park,
Colorado. All of Estes Bank's activities are conducted through its wholly-owned
subsidiary, United Valley Bank, a full-service commercial bank with offices in
Estes Park, Granby and Grand Lake, Colorado. At March 31, 2000, Estes Bank had
total consolidated assets of $78.9 million, total consolidated net loans of
$46.5 million, total consolidated deposits of $69.3 million, and total
consolidated shareholders' equity of $9 million. Estes Bank provides customary
types of banking services such as checking accounts, savings accounts, and time
deposits. It also engages in commercial and consumer lending, makes secured and
unsecured loans, and provides other financial services.
THE TERMS OF THE MERGER
If the merger is approved, EBC Acquisition Company, a wholly-owned
subsidiary of Vail Banks, will be merged with and into Estes Bank Corporation.
Estes Bank will be the surviving company and will become a wholly-owned
subsidiary of Vail Banks. As a result of the merger, Estes Bank shareholders
will receive a total purchase price for all outstanding shares of Estes Bank
common stock of approximately $21.5 million adjusted as provided in the
Agreement and Plan of Reorganization. The purchase price will be made up of cash
and Vail Banks common stock.
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<PAGE>
CASH PORTION OF PURCHASE PRICE. The total cash portion of the purchase price
-------------------------------
will be $18.3 million, increased or decreased on a dollar for dollar basis by
the amount that the net worth of Estes Bank is greater or less than $9.9 million
as of the month end immediately preceding closing. The net worth of Estes Bank
will be determined in accordance with generally accepted accounting principles,
PROVIDED, HOWEVER, certain adjustments to the securities held by Estes Bank on
December 31, 1999 will not be made as required by Financial Accounting Standards
Board SFAS No. 115. The cash price will also be increased by the net income, if
any, earned by Estes Bank from the end of the month immediately preceding
closing until the closing. In addition, Estes Bank shareholders will receive an
interest in certain promissory notes with a total outstanding principal amount
of $335,348.05 plus accrued interest, plus related security instruments, if
United Valley Bank's blanket bond carrier declines a claim relating to such
loan. The loan was charged off by United Valley Bank on or about March 31, 2000.
The likelihood of recovery on such loan, or the security instruments is very
remote and in any event might not occur for a number of years. The public
accounting firm of Fortner Bayens Levkulich & Company, P.C. will calculate the
cash portion of the purchase price.
VAIL BANKS COMMON STOCK PORTION OF THE PURCHASE PRICE. Estes Bank shareholders
-----------------------------------------------------
as a group will also receive $3.2 million in Vail Banks common stock. The number
of shares of Vail Banks common stock that Estes Bank shareholders will receive
will equal $3.2 million divided by the average of the closing price of Vail
Banks common stock for the fifteen (15) consecutive trading days immediately
prior to the closing date of the merger, but will not be less than $9.00 per
share nor greater than $12.00 per share. Consequently, a maximum of 358,333
shares of Vail Banks Common stock and minimum of 268,750 shares of Vail Banks
common stock will be issued to Estes Bank shareholders, based on the average
closing price of Vail Banks common stock for the 15 consecutive trading days
immediately preceding closing.
THE REASONS MANAGEMENT OF BOTH COMPANIES SUPPORT THE MERGER
The Boards of Directors of Estes Bank and Vail Banks support the merger
based upon the following reasons. First, the Board of Directors of Estes Bank
believes the merger is in the best interest of Estes Bank's shareholders because
the merger will permit them to exchange their ownership interest in Estes Bank
for cash and an equity interest in Vail Banks, which has greater financial
resources than Estes Bank. Second, both Boards believe the terms of the merger
are fair and equitable. Third, both Boards believe the size of the combined
organization, $547.4 million in consolidated assets as of March 31, 2000, is
sufficiently large to take advantage over time of significant economies of
scale, but is still small enough to maintain the competitive advantages of
community-oriented banks. The Board of Directors of Vail Banks believes that
Estes Bank provides Vail Banks with an expansion opportunity into an attractive
new market area. For a more detailed discussion, see "Background of and Reasons
for the Merger" beginning on page 20.
FAIRNESS OPINION TO SHAREHOLDERS OF ESTES BANK
The Wallach Company, Inc. has rendered an opinion to Estes Bank that,
based upon and subject to the procedures, matters, and limitations described in
its opinion and other matters it considered relevant, as of the date of its
opinion, the consideration (as defined in the fairness opinion) is from a
financial point of view to the shareholders of Estes Bank. The opinion of The
Wallach Company Inc. is attached as Appendix D to this proxy
statement/prospectus. Shareholders of Estes Bank are encouraged to read the
opinion. For a more detailed discussion of the opinion, see "Opinion of Estes
Bank's Financial Advisor" beginning on page 22. The Wallach Company, Inc. will
be paid approximately $562,500 for its advice and for providing its formal
opinion.
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<PAGE>
CONDITIONS, TERMINATION, AND EFFECTIVE DATE
The merger will not occur unless certain conditions are met, and Vail
Banks or Estes Bank can terminate the merger if specified events occur or fail
to occur. The merger must be approved by Estes Bank shareholders, the Federal
Reserve Bank of Kansas City, and the Banking Board of the Division of Banking of
the State of Colorado. The approvals of the Federal Reserve Bank of Kansas City
and the Banking Board of the Division of Banking of the State of Colorado have
been received.
The closing of the merger will occur after the Agreement and Plan of
Reorganization is approved by Estes Bank shareholders, all regulatory approvals
have been received, the parties have complied with relevant provisions of the
Colorado Business Corporation Act, and the parties have complied with any
applicable waiting periods.
RIGHTS OF DISSENTING SHAREHOLDERS
If the merger is completed, Estes Bank shareholders who dissent will be
entitled to be paid the "fair value" of their shares in cash if they follow
certain statutory provisions regarding the rights of dissenting shareholders.
For a more detailed discussion of dissenter's rights, see "Rights of Dissenting
Shareholders" beginning on page 30.
FEDERAL INCOME TAX CONSEQUENCES
The merger will constitute a taxable transaction to the Estes Bank
shareholders. In general, both the cash received and the fair market value of
the Vail Banks stock received by the Estes Bank shareholders will be treated as
amounts received from the sale of their shares of Estes Bank stock, and
(provided that such Estes Bank stock is a capital asset in the hands of such
shareholders) each such shareholder will recognize capital gain or loss (short
or long-term as appropriate) measured by the difference between the sale price
of such Estes Bank stock (cash received and the fair market value of the Vail
Banks stock on the closing date) and such shareholder's tax basis in such Estes
Bank stock.
Shareholders of Estes Bank should consult their tax advisors with
respect to the specific tax treatment to each shareholder.
ACCOUNTING TREATMENT
The merger is expected to be accounted for by Vail Banks as a purchase.
Vail Banks will record, at fair value, the acquired assets and assumed
liabilities of Estes Bank. To the extent the total purchase price exceeds the
fair value of the assets acquired and liabilities assumed, Vail Banks will
record goodwill. Vail Banks will include in its results of operations the
results of Estes Bank's operations after the merger.
The unaudited pro forma data included in this proxy
statement/prospectus for the merger have been prepared using the purchase method
of accounting. For a more detailed discussion of accounting treatment, see
"Summary-Comparative Per Common Share Data."
MARKETS AND DESCRIPTION OF CAPITAL STOCK
VAIL BANKS
----------
Vail Banks common stock began trading on December 10, 1998, on The
NASDAQ National Securities Market under the symbol "VAIL." The following table
sets forth the high and low sale prices per share of Vail Banks common stock as
quoted on the NASDAQ National Market System for the indicated periods.
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<PAGE>
1999 HIGH LOW
---- ---- ---
First Quarter $12.88 $12.06
Second Quarter $12.13 $9.75
Third Quarter $12.25 $8.88
Fourth Quarter $12.88 $8.75
2000
----
First Quarter $10.44 $9.00
Second Quarter $ 9.88 $9.75
(through May 31, 2000)
The authorized capital stock of Vail Banks consists of 20,000,000
shares of common stock, $1.00 par value per share and 2,250,000 shares of
preferred stock, $1.00 par value per share. At March 31, 2000, 6,081,180 shares
of common stock were issued and outstanding, and no shares of preferred stock
were 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 proxy statement/prospectus forms a part, and the
applicable provisions of the Colorado Business Corporation Act.
ESTES BANK
----------
Estes Bank's common stock is not traded on an established public
trading market and, therefore, no specific market sales can be reported.
Management of Estes Bank is not aware of any sales of Estes Bank stock since
April 1999. Management of Estes Bank is aware of one trade totaling 100 shares
of Estes Bank common stock from January 1, 1999, through April 30, 1999, at
$154.85 per share. Management of Estes Bank is aware of two trades of Estes Bank
common stock during 1998, ranging from 100 shares at $117.74 per share and 5,100
shares at $107.37 per share, and one trade of Estes Bank common stock during
1997, of 1,500 shares at $103.79 (and 3,250 currently exercisable options to
purchase Estes Bank common stock) per share. As of March 31, 2000, there were
51,750 shares of Estes Bank common stock outstanding and 12 holders of Estes
Bank common stock. One of the holders of Estes Bank common stock is an ESOP. The
ESOP has 15 beneficial owners. The market value of Vail Banks common stock as of
March 22, 2000, the date of the announcement of the merger, was $9.50 per share.
The majority of Estes Bank shareholders are subject to a shareholders agreement
that requires shareholders who want to sell their Estes Bank stock to offer it
to Estes Bank at the book value of Estes Bank. The book value of Estes Bank
stock ranged between $151.00 and $173.00 per share during 1999, and was $174.05
per share at March 31, 2000. Based on the price range at the time of the
announcement and the effect of the exchange ratio, the resulting equivalent pro
forma price per share of Estes Bank common stock was approximately $390.00, on a
fully diluted basis. The equivalent per share price of a share of Estes Bank
common stock at each specified date represents the last reported sale price of a
share of Vail Banks common stock on such date multiplied by the base period
trading price. We can give you no assurance that the price ranges represent the
actual market value for Estes Bank common stock.
-4-
<PAGE>
DIVIDENDS
On April 24, 2000 the Board of Directors of Vail Banks declared a
dividend of $0.04 per share. The dividend was paid on May 18, 2000.
Holders of common stock will be entitled to receive future dividends
when, as and if declared by Vail Banks' Board of Directors out of funds legally
available therefor. 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. Vail Banks is a legal entity separate and distinct from its
banking subsidiary. In connection with receiving approval for the merger, Vail
Banks has committed to the Federal Reserve Bank of Kansas City to cause WestStar
Bank obtain "well capitalized" status prior to June 30, 2001. If WestStar Bank
is not "well capitalized" by that date, it may be required to suspend its
acquisition activity or consider only those transactions that will result in
WestStar Bank becoming "well capitalized." Most of the revenues of Vail Banks
result from dividends paid to it by its banking subsidiary. There are statutory
and regulatory requirements applicable to the payment of dividends by Vail
Bank's banking subsidiary, as well as by Vail Banks to its shareholders.
WestStar is a state chartered bank regulated by the Colorado Division
of Banking ("CDB") and the Federal Reserve. 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 WestStar may also be
affected or limited by other factors, such as the requirement to maintain
adequate capital above regulatory guidelines. In addition, if, in the opinion of
the applicable regulatory authority, a bank under its jurisdiction is engaged in
or is about to engage in an unsafe or unsound practice (which, depending upon
the financial condition of the bank, could include the payment of dividends),
such authority may require, after notice and hearing, that such bank cease and
desist from such practice. In addition to the formal statutes and regulations,
regulatory authorities consider the adequacy of a bank's total capital in
relation to its assets. Capital adequacy considerations could further limit the
availability of dividends. At December 31, 1999, net assets available from
WestStar to pay dividends without prior approval from regulatory authorities
totaled $5.6 million. 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.
Estes Bank paid a cash dividend of $540,000 or $12.00 per share to its
shareholders in 1999, $260,000 or $5.00 per share to its shareholders in 1998,
and $240,000 or $4.80 per share to its shareholders in 1997. Estes Bank is
permitted under the Agreement and Plan of Reorganization to pay ordinary
dividends prior to the closing of the transaction without the prior written
consent of Vail Banks.
-5-
<PAGE>
Whether the Vail Banks and Estes Bank shareholders approve the
Agreement and Plan of Reorganization and regardless of whether the merger is
completed, the future dividend policy of Vail Banks and Estes Bank will depend
upon each company's respective earnings, financial condition, appropriate legal
restrictions, and other factors relevant at the time the respective Boards of
Directors consider whether to declare dividends.
THERE ARE SOME DIFFERENCES IN SHAREHOLDERS' RIGHTS BETWEEN VAIL BANKS AND ESTES
BANK
If the merger occurs, Estes Bank shareholders, whose rights are
governed by Estes Bank's Articles of Incorporation and Bylaws, will
automatically become Vail Banks shareholders, and their rights as Vail Banks
shareholders will be governed by Vail Banks' Articles of Incorporation and
Bylaws. The rights of Estes Bank shareholders and Vail Banks shareholders are
different in certain ways. See "Comparison of the Rights of Estes Bank and Vail
Banks Shareholders" (page 28).
INTERESTS OF DIRECTORS AND OFFICERS OF ESTES BANK IN THE MERGER
There are no directors or executive officers of Estes Bank who have
interests in the merger as directors or employees that are different from, or in
addition to, those of Estes Bank shareholders, except that if the merger takes
place, it is anticipated that Jack G. Haselbush, a director and executive
officer of Estes Bank, will be elected to serve on Vail Banks' Board of
Directors.
There are 2,206,468 shares, or 35%, of Vail Banks common stock held by
its directors and executive officers. There are 39,270 shares, or 71.4%
(assuming 55,000 shares outstanding) of Estes Bank common stock held by its
directors, executive officers, and their affiliates, all of which are entitled
to vote on the merger. Jack G. Haselbush, Secretary and Treasurer and a director
of Estes Bank, and Bradley D. Sishc, Vice President and a director of Estes
Bank, have agreed to vote their shares (approximately 66.27% of the Estes Bank
shares outstanding) in favor of the merger.
RECENT DEVELOPMENTS OF VAIL BANKS
On May 21, 1999, Vail Banks acquired $36.8 million of deposits and the
real estate of the Glenwood Springs, Colorado branch of World Savings of
Oakland, California. World Savings retained the mortgage loans it owned in
Glenwood Springs. The acquisition makes WestStar one of the largest depository
institutions in the Glenwood Springs market. Additionally, on November 8, 1999,
WestStar entered into an agreement to acquire First Western Services, Inc., for
consideration that included cash and installment notes. The acquisition closed
on January 1, 2000, adding mortgage brokerage to WestStar's lending services.
RISK FACTORS
You should carefully consider the risks described below before voting
on the Agreement and Plan of Reorganization.
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
merged with Telluride Bancorp Ltd. in December 1998. It merged with Independent
Bankshares, Inc. in July 1998. Mergers and acquisitions involve risk of (1)
changes in results of operations, (2) unforeseen liabilities relating to the
merged institutions, (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.
-6-
<PAGE>
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.
In addition, as a result of the growth from mergers, Vail Banks'
management must successfully integrate the operations of merged institutions.
Vail Banks must (1) consolidate data processing operations, (2) combine employee
benefit plans, (3) integrate 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, which could negatively impact Vail Banks' net income.
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' customers. The
seasonality of Vail Banks' business in those areas results in fluctuations in
deposit and credit needs. Deposits tend to peak during the ski season. 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.
DEPENDENCE UPON KEY PERSONNEL
The continued success of Vail Banks substantially depends upon the
efforts of the directors and executive officers of Vail Banks. The success of
Vail Banks depends in large part on the retention of present key management
personnel, particularly, E.B. Chester, Jr. and Lisa M. Dillon. 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>
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 20.5% of the
outstanding common stock. Accordingly, these persons will have substantial
influence over the business, policies, and affairs of Vail Banks, including the
ability to potentially control the election of directors and other matters
requiring shareholder approval by simple majority vote.
NEED FOR ADDITIONAL FINANCING AND CAPITAL
The acquisition of Estes Bank will reduce WestStar Bank's capital below
"well capitalized" to "adequately capitalized." As a condition of approval of
the acquisition of Estes Bank by Vail Banks by the Federal Reserve, Vail Banks
committed that WestStar Bank's capital would exceed the minimum requirements for
"well-capitalized" banks at June 30, 2001. If WestStar Bank is not "well
capitalized" by that date, it may be required to suspend its acquisition
activity or consider only those transactions that will result in WestStar Bank
becoming "well capitalized."
Vail Banks' ability to cause WestStar Bank to exceed "well capitalized"
status and consequently to receive approval to merge with and acquire financial
institutions may depend on its ability to obtain additional debt or equity
funding. Vail Banks cannot assure that it will be successful in consummating any
future financing transactions. Factors which could affect Vail Banks' access to
the capital markets, or the costs of such capital, include (1) changes in
interest rates, (2) general economic conditions and the perception in the
capital markets of Vail Banks' business, (3) results of operations, (4)
leverage, (5) financial condition, and (6) business prospects. Each of these
factors is to a large extent subject to economic, financial, competitive, and
other factors beyond Vail Banks' control. Borrowing restrictions contained in
certain regulations that apply to Vail Banks and its subsidiary may also have
an affect on 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.
-8-
<PAGE>
COMPARATIVE SHARE DATA
The following table shows selected comparative unaudited per share data
for Vail Banks on a historical basis, for Estes Bank on a historical basis, for
Vail Banks and Estes Bank on a pro forma basis assuming the merger had been
effective for the periods indicated, and for Estes Bank on a pro forma
equivalent basis. The merger will be accounted for as a purchase transaction in
accordance with generally accepted accounting principles.
Equivalent earnings per share amounts for Estes Bank have been
calculated by multiplying the pro forma combined earnings per share by the
exchange ratio (for purposes of this calculation, we assumed 43.7325 shares of
Vail Banks common stock for each share of Estes Bank common stock based on an
average base period trading price of $9.50 per share of Vail Banks common
stock). The Estes Bank pro forma equivalent cash dividends per common share
represent historical dividends declared by Vail Banks multiplied by the
applicable exchange ratio. The purpose of the pro forma equivalent per-share
amounts is for informational purposes only to show the pro forma net earnings
that would have been earned for each share of Estes Bank had the merger been
completed for the periods indicated. This data should be read together with the
historical financial statements of Vail Banks, including the respective notes
thereto included in Appendix B attached hereto.
<TABLE>
<CAPTION>
As of and for the As of the Year Ended
Three Months Ended December 31,
March 31, 2000 1999
-------------- ----
<S> <C> <C>
NET INCOME PER COMMON SHARE (BASIC)
Vail Banks Historical $ 0.20 $ 0.80
Estes Bank Historical 4.70 38.80
Vail Banks and Estes Bank Pro Forma Combined (a) 0.19 0.93
Estes Bank Pro Forma Equivalent (b) 8.31 40.67
NET INCOME PER COMMON SHARE (DILUTED)
Vail Banks Historical $ 0.19 $ 0.80
Estes Bank Historical 3.99 32.36
Vail Banks and Estes Bank Pro Forma Combined (a) 0.19 0.92
Estes Bank Pro Forma Equivalent (b) 8.31 40.23
CASH DIVIDENDS PER COMMON SHARE
Vail Banks Historical $ 0.00 $ 0.00
Estes Bank Historical 3.00 12.00
Vail Banks and Estes Bank Pro Forma Combined (a) (c) 0.02 0.08
Estes Bank Pro Forma Equivalent (d) 0.88 3.50
BOOK VALUE PER COMMON SHARE (PERIOD END)
Vail Banks Historical $ 9.84 $ 9.68
Estes Bank Historical 174.05 173.02
Vail Banks and Estes Bank Pro Forma Combined (a) 9.82 9.67
Estes Bank Pro Forma Equivalent (b) 429.45 422.89
(a) Computed giving effect to the merger.
(b) Computed based on the Estes Bank per share exchange ratio of
43.7325 shares of Vail Banks common stock for each share of Estes
Bank common stock designated for purposes of this computation.
(c) Represents historical dividends paid by Vail Banks, and assumes
Vail Banks will not change its dividend policy as a result of the
merger.
(d) Represents historical dividends paid per share by Vail Banks
multiplied by the exchange ratio of 43.7325 shares of Vail Banks
common stock for each share of Estes Bank common stock designated
for purposes of this computation.
</TABLE>
-9-
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following tables present certain selected historical financial
information for Vail Banks and Estes Bank. The data should be read in
conjunction with the historical consolidated financial statements, including the
notes thereto, and other financial information concerning Vail Banks
incorporated by reference in this proxy statement/prospectus in Appendix B.
Interim unaudited data for the three months ended March 31, 2000 and 1999, of
Vail Banks and Estes Bank reflect, in the opinion of the respective management
of Vail Banks and Estes Bank, all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of that data. Results
for the three months ended March 31, 2000, are not necessarily indicative of
results which may be expected for any other interim period or for the year as a
whole.
-10-
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
----------------------------------------------------
VAIL BANKS, INC. | AS OF AND FOR THE AS OF THE YEAR ENDED
| THREE MONTHS ENDED MARCH 31 DECEMBER 31
----------------------------------------------------
Operating Data: 2000 1999 1999
-------------- ------ ---- ----
<S> <C>> <C> <C>
Interest income $ 9,540 $ 7,914 $ 35,082
Interest expense $ 3,198 $ 2,636 $ 10,868
--------- --------- ---------
Net interest income $ 6,342 $ 5,278 $ 24,214
Provision for loan losses $ 300 0 $ 455
--------- --------- ---------
Net interest income after provision
for loan losses $ 6,042 $ 5,278 $ 23,759
Noninterest income $ 1,731 $ 927 $ 3,970
Noninterest expense $ 5,788 $ 4,999 $ 19,832
Income tax expense $ 803 $ 490 $ 3,041
--------- --------- ---------
Net income $ 1,182 $ 716 $ 4,856
Common Share Data:
-----------------
Earnings per common share (basic) $ 0.20 $ 0.12 $ 0.80
Earnings per common share (dilutive) $ 0.19 $ 0.12 $ 0.80
Book value per common share (basic) $ 9.84 $ 9.12 $ 9.68
Tangible book value per common share $ 5.67 $ 5.35 $ 5.69
Cash dividends per common share 0 0 0
Weighted average common shares outstanding (basic) 6,041,806 6,040,608 6,040,618
Weighted average common shares outstanding 6,107,869 6,129,502 6,091,635
End of period common shares outstanding 6,081,180 6,040,608 6,069,370
Balance Sheet Data (end of period):
----------------------------------
Total Assets $ 474,308 $ 436,611 $ 464,962
Investment securities $ 34,968 $ 36,037 $ 36,791
Total loans $ 352,390 $ 265,903 $ 336,735
Allowance for loan losses $ 2,984 $ 2,444 $ 2,739
Earning assets $ 387,358 $ 356,800 $ 373,526
Deposits $ 380,477 $ 377,500 $ 372,742
Shareholders' equity $ 59,821 $ 55,096 $ 58,727
Tangible shareholders' equity $ 34,481 $ 32,324 $ 34,550
Performance Ratios:
------------------
Return on average assets 1.01% .67% 1.10%
Return on average shareholders' equity 7.98% 5.30% 8.62%
Net interest margin (FTE) 6.70% 6.13% 6.78%
Operating efficiency ratio 68.31% 76.79% 66.87%
Shareholders' equity to total assets 12.61% 12.62% 12.63%
Loan to deposit ratio 92.6% 70.4% 90.3%
Average total loans $ 346,992 $ 268,010 $ 301,052
Average earning assets $ 383,216 $ 351,924 $ 359,552
Average total assets $ 472,530 $ 433,405 $ 443,014
Average equity $ 59,589 $ 54,798 $ 56,318
Average equity to average assets 12.6% 12.6% 12.7%
Average loans to average deposits 92.1% 71.7% 80.3%
</TABLE>
-11-
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
----------------------------------------------------
ESTES BANK CORPORATION | AS OF AND FOR THE AS OF AND FOR THE
| THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------------------------------------------
Operating Data: 2000 1999 1999
-------------- ---- ---- ----
<S> <C> <C> <C>
Interest income $ 1,432 $ 1,433 $ 6,067
Interest expense $ 473 $ 473 $ 1,974
--- --- -----
Net interest income $ 959 $ 960 $ 4,093
Provision for loan losses $ 275 $ 8 $ 0
--- ---- -----
Net interest income after provision for loan losses $ 684 $ 952 $ 4,093
Noninterest income $ 202 $ 231 $ 861
Noninterest expense $ 606 $ 758 $ 2,614
Income tax expense $ 64 $ 87 $ 594
--- ---- -----
Net income $ 216 $ 338 $ 1,746
Common Share Data:
-----------------
Earnings per common share (basic) $ 4.70 $ 7.52 $ 38.80
Earnings per common share (dilutive) $ 3.99 $ 6.27 $ 32.36
Book value per common share $ 174.05 $ 154.84 $ 173.02
Tangible book value per common share $ 129.66 $ 99.53 $ 120.91
Cash dividends per common share $ 3.00 $ 2.00 $ 12.00
Weighted average common shares outstanding (basic) 45,895 45,000 45,000
Weighted average common shares outstanding 54,094 53,949 53,961
(diluted)
End of period common shares outstanding 51,750 45,000 45,000
Balance Sheet Data (end of period):
-----------------------------------
Total Assets $ 78,920 $ 79,071 $ 82,898
Investment securities $ 22,429 $ 23,803 $ 26,444
Total loans $ 46,888 $ 44,558 $ 46,349
Allowance for loan losses $ 345 $ 412 $ 405
Earnings assets $ 70,192 $ 70,051 $ 72,793
Deposits $ 69,329 $ 70,948 $ 73,132
Shareholders' equity $ 9,007 $ 6,968 $ 7,786
Tangible shareholders' equity $ 6,710 $ 4,479 $ 5,441
Performance Ratios:
------------------
Return on average assets 1.08% 1.70% 2.07%
Return on average shareholders' equity 10.29% 19.65% 23.95%
Net interest margin (FTE) 5.40% 5.47% 5.51%
Operating efficiency ratio 48.06% 59.61% 48.91%
Shareholders' equity to total assets 11.41% 8.81% 9.39%
Loan to deposit ratio 67.13% 62.22% 62.82%
Average total loans $ 46,442 $ 43,287 $ 45,763
Average earning assets $ 71,107 $ 70,274 $ 74,535
Average total assets $ 79,731 $ 79,484 $ 84,343
Average equity $ 8,397 $ 6,882 $ 7,291
Average equity to average assets 10.53% 8.66% 8.64%
Average loans to average deposits 66.05% 60.60% 60.33%
</TABLE>
-12-
<PAGE>
PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined balance sheet as of March
31, 2000, and the unaudited pro forma combined statements of income for the
three months ended March 31, 2000 and 1999, and for the year ended December 31,
1999, combine the historical financial statements of Vail Banks with Estes Bank
after giving effect to the merger using the purchase method of accounting. Pro
forma adjustments to the balance sheet are computed as if the transaction
occurred at March 31, 2000, while the pro forma adjustments to the statements of
earnings are computed as if the transaction occurred on January 1, 1999, the
earliest period presented. In addition, the following financial statements do
not reflect any anticipated cost savings, which may be realized by Vail Banks
after completion of the merger.
The unaudited pro forma information is not intended to represent what
Vail Banks' and Estes Bank's combined results of operations actually would have
been if the merger had occurred on January 1, 1999. The information has been
prepared assuming that the merger will be accounted for under the purchase
method of accounting such that the assets acquired and liabilities assumed will
be recorded at their estimated fair values, with the excess of the purchase
price over the net fair values recorded as an intangible asset. These pro forma
financial statements should be read in conjunction with the consolidated
financial statements of Vail Banks, Inc. incorporated by reference in this proxy
statement/prospectus and the consolidated financial statements of Estes Bank
Corporation included herein. The unaudited pro forma combined balance sheet and
statements of income are not necessarily indicative of the combined financial
position at consummation of the merger or the results of operations following
consummation of the merger.
-13-
<PAGE>
Vail Banks, Inc. and Estes Bank Corporation
Pro Forma Combined Balance Sheet
March 31, 2000
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Historical
--------------------------
Pro Forma
Vail Banks, Estes Bank Adjustments Pro Forma
Inc. Corporation Debit (Credit) Combined
----------- ----------- -------------- ---------
Assets
------
<S> <C> <C> <C> <C>
Cash and due from banks $24,320 3,276 (18,525)(B) 9,071
Federal funds sold -- 875 -- 875
Investment securities available-for-sale 29,639 7,252 -- 36,891
Investment securities held to maturity 5,329 15,177 (278)(B) 20,228
Loans 352,390 46,888 -- 399,278
Less allowance for loan losses (2,984) (345) -- (3,329)
--------- ------ --------- -------
Net loans 349,406 46,543 -- 395,949
--------- ------ --------- -------
Premises and equipment 35,015 2,588 -- 37,603
Interest receivable 2,881 606 -- 3,487
Intangible assets 25,340 2,297 13,021(B) 40,658
Other assets 2,378 306 -- 2,684
--------- ------ -------- -------
Total assets 474,308 78,920 (5,782) 547,446
========= ====== ======== =======
Deposits:
Noninterest-bearing 78,402 14,472 -- 92,874
Interest-bearing 302,075 54,857 -- 356,932
--------- ------ --------- -------
Total deposits 380,477 69,329 -- 449,806
Federal Home Loan Bank advances 21,000 -- -- 21,000
Federal funds purchased 8,410 -- -- 8,410
Interest payable and other liabilities 3,933 584 -- 4,517
--------- ------ --------- -------
Total liabilities 413,820 69,913 -- 483,733
--------- ------ --------- -------
Minority interest 667 -- -- 667
Common stock 6,081 52 52 (B) 6,421
(340)(B)
Additional paid-in capital 46,744 1,667 1,667 (B) 49,629
(2,885)(B)
Retained earnings 7,560 7,335 7,335 (B) 7,560
Accumulated other comprehensive income (loss) (564) (47) (47)(B) (564)
--------- ------ --------- -------
59,821 9,007 5,782 63,046
--------- ------ --------- -------
Total liabilities and stockholders' equity $474,308 78,920 5,782 547,446
========= ====== ======== =======
See Notes to Unaudited Pro Forma Combined Financial Statements.
</TABLE>
-14-
<PAGE>
Vail Banks, Inc. and Estes Bank Corporation
Pro Forma Combined Statements of Income
For the Three Months Ended March 31, 2000
(Dollars in Thousands, Except Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma
----------------------------- Adjustments
Vail Banks, Estes Bank Debit Pro Forma
Inc. Corporation (Credit) Combined
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Interest income $9,540 1,432 -- 10,972
Interest expense 3,198 473 -- 3,671
-------------- ------------- ------------- --------------
Net interest income 6,342 959 -- 7,301
Provision for loan losses 300 275 -- 575
-------------- ------------- ------------- --------------
Net interest income after provision for loan losses 6,042 684 -- 6,726
-------------- ------------- ------------- --------------
Non-interest income 1,731 202 -- 1,933
-------------- ------------- ------------- --------------
Non-interest expense 150(C)
5,788 606 30(D) 6,574
-------------- ------------- ------------- --------------
Income before income taxes 1,985 280 180 2,085
Income tax expense 803 64 (11)(F) 856
-------------- ------------- ------------- --------------
Net income $1,182 216 169 1,229
============== ============= ============= ==============
Net income per common share (basic) $0.20 4.70 0.19
============== ============= ==============
Net income per common share (diluted) $0.19 3.99 0.19
============== ============= ==============
Weighted average shares (basic) 6,041,806 45,895 6,381,280
============== ============= ==============
Weighted average shares (diluted) 6,107,869 54,094 6,447,343
============== ============= ==============
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
-15-
<PAGE>
Vail Banks, Inc. and Estes Bank Corporation
Pro Forma Combined Statements of Income
For the Three Months Ended March 31, 1999
(Dollars in Thousands, Except Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma
----------------------------- Adjustments
Vail Banks, Estes Bank Debit Pro Forma
Inc. Corporation Credit) Combined
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Interest income $7,914 1,433 -- 9,347
Interest expense 2,636 473 -- 3,109
-------------- ------------- ------------- --------------
Net interest income 5,278 960 -- 6,238
Provision for loan losses -- 8 -- 8
-------------- ------------- ------------- --------------
Net interest income after provision for loan losses 5,278 952 -- 6,230
-------------- ------------- ------------- --------------
Non-interest income 927 231 -- 1,158
-------------- ------------- ------------- --------------
Non-interest expense 4,999 758 150(C) 5,937
-------------- ------------- ------------- --------------
Income before income taxes 1,206 425 180 1,451
Income tax expense 490 87 (11)(F) 566
-------------- ------------- ------------- --------------
Net income $716 338 169 885
============== ============= ============= ==============
Net income per common share (basic) $0.12 7.52 0.14
============== ============= ==============
Net income per common share (diluted) $0.12 6.27 0.14
============== ============= ==============
Weighted average shares (basic) 6,040,608 45,000 6,380,082
============== ============= ==============
Weighted average shares (diluted) 6,129,502 53,949 6,468,976
============== ============= ==============
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
-16-
<PAGE>
Vail Banks, Inc. and Estes Bank Corporation
Pro Forma Combined Statement of Income
For the Year Ended December 31, 1999
(Dollars in Thousands, Except Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma
---------------------------- Adjustments
Vail Banks, Estes Bank Debit Pro Forma
Inc. Corporation (Credit) Combined
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Interest income $35,082 6,067 -- 41,149
Interest expense 10,868 1,974 -- 12,842
---------- ------ ----- ---------
Net interest income 24,214 4,093 -- 28,307
Provision for loan losses 455 -- -- 455
---------- ------ ----- ---------
Net interest income after provision for loan losses 23,759 4,093 -- 27,852
---------- ------ ----- ---------
Non-interest income 3,970 861 -- 4,831
Non-interest expense 19,832 2,614 120(D) 23,166
---------- ------ ----- ---------
Income before income taxes 7,897 2,340 720 9,517
Income tax expense 3,041 594 (46)(F) 3,589
---------- ------ ----- ---------
Net income $4,856 1,746 674 5,928
========== ====== ==== =========
Net income per common share (basic) $0.80 38.80 0.93
========== ====== =========
Net income per common share (diluted) $0.80 32.36 0.92
========== ====== =========
Weighted average shares (basic) 6,040,618 45,000 6,380,092
========== ====== =========
Weighted average shares (diluted) 6,091,635 53,961 6,431,109
========== ====== =========
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
-17-
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(A) The Agreement and Plan of Reorganization provides for the cash portion
of the purchase price to be adjusted (increased or decreased) by the
amount in which the net worth of Estes Bank is more or less than
$9,871,000 million as of the month end immediately preceding the
closing. In addition, the cash portion of the purchase price will be
increased to the extent of Estes Bank's net income from the end of the
month preceding closing until the closing. The pro forma combined
condensed financial statements assume that the net worth of Estes Bank
will be $9,871,000 million at the date of closing.
(B) The merger transaction with Estes Bank has been reflected in the pro
forma combined condensed balance sheet at March 31, 2000 as follows (in
thousands):
Consideration paid:
Cash
Paid to sellers $ 18,275
Estimated direct merger costs 250
----------
18,525
Common stock issued (339,474 shares valued at $9.50
per share) 3,225
----------
21,750
Total cost of merger 21,750
Less: Estes Bank equity at March 31, 2000 9,007
----------
Excess cost $ 12,743
==========
Allocation of excess cost:
Investment securities held to maturity $ (278)
Intangible assets 13,021
----------
$ 12,743
==========
The computations reflected above are preliminary. The actual amounts at
which the transaction will be recorded are dependent on the equity of
Estes Bank at the date of closing and an allocation of the purchase
price to the fair values of the net assets acquired.
(C) Estimated amortization of intangible assets acquired in merger (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, 2000 March 31, 1999 December 31, 1999
-------------- -------------- -----------------
<S> <C> <C> <C>
Amortization for period based on a 25
year life 150 150 600
=== === ===
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<PAGE>
(D) Estimated non-direct expenses relating to the merger (in thousands):
Three Months Ended Year Ended
March 31, 2000 March 31, 1999 December 31, 1999
-------------- -------------- -----------------
Non-direct expenses $30 30 120
=== == ===
</TABLE>
(E) Pro forma shares outstanding (basic and diluted) used in the
determination of net income per share for Vail Banks are as follows:
<TABLE>
<CAPTION>
March 31,
2000 1999 December 31, 1999
------------- ------------- -----------------
<S> <C> <C> <C>
Basic Shares
------------
Average basic shares - end of period 6,040,608 6,041,806 6,040,618
Common stock issued to Estes Bank
shareholders (1) 339,474 339,474 339,474
------- ------- -------
Average shares - basic 6,381,280 6,380,082 6,380,092
========= ========= =========
Diluted Shares
--------------
Average diluted shares - end of period
6,107,869 6,129,502 6,091,635
Common stock issued to Estes Bank
shareholders (1) 339,474 339,474 339,474
------- ------- -------
Average shares - diluted 6,447,343 6,468,976 6,431,109
========= ========= =========
</TABLE>
(1) For pro forma calculations, shares valued at $9.50 per share and are
assumed to be outstanding during the entire period.
(F) Pro forma adjustments to income tax expense, based on an effective tax
rate of 38%, relate to pro forma adjustments reflected above excluding
the amortization of intangible assets.
-19-
<PAGE>
THE PROPOSED MERGER
BACKGROUND OF AND REASONS FOR THE MERGER
BACKGROUND
Over the last few years Estes Bank received occasional inquiries from
other financial institutions about the possibility of being acquired. Estes Bank
engaged The Wallach Company, an investment banking company, to approach a
selected group of prospective purchasers, assist in structuring and negotiating
a possible business combination, and render its opinion regarding the fairness,
from a financial point of view, of the consideration proposed to be paid to
Estes Bank shareholders in such transaction. In October 1999, Wesley A. Brown of
The Wallach Company, representing Estes Bank, contacted E. B. Chester, Chairman
of Vail Banks to explore the possibility of combining Estes Bank and Vail Banks.
Wallach contacted a total of 20 potential merger candidates to determine their
interest in Estes Bank and based on discussions with Wallach, eight parties
elected to receive additional information about Estes Bank. Of those eight
parties, three attended Estes Bank's management presentation and of those three,
two parties submitted preliminary indications of interest. On November 5, 1999,
after Vail Banks had signed a confidentiality agreement, The Wallach Company
delivered to Vail Banks a detailed Offering Memorandum, which described the
operations and financial performance of Estes Bank. On November 29, 1999, Mr.
Chester and Lisa M. Dillon, President and Chief Executive Officer of Vail Banks
met with Mr. Jack G. Haselbush, Chairman of Estes Bank and Bradley D. Sishc,
along with Mr. Brown of The Wallach Company to discuss the proposal in greater
detail. Again on December 14, 1999, Messrs. Chester, Haselbush, Sishc and Brown
and Ms. Dillon met to further discuss the proposal. On December 22, 1999, Mr.
Chester and Mr. Haselbush executed a letter that set forth certain
understandings between Vail Banks and Estes Bank with respect to the possible
acquisition of Estes Bank by Vail Banks.
Mr. Chester and Ms. Dillon presented a financial analysis of the
proposed transaction to members of Vail Banks' Board of Directors on January 24,
2000. At that same meeting, the Board of Directors of Vail Banks considered the
business, operations, and asset quality of Estes Bank as well as the
attractiveness of the Estes Bank franchise, its management team, and the
compatibility of that franchise with the operations of Vail Banks. This analysis
included the pro forma financial impact of the merger at a range of prices.
After that consideration, Vail Banks' Board of Directors directed Mr. Chester
and Ms. Dillon to proceed to a commitment stage, subject to satisfactory
completion of a due diligence investigation of Estes Bank.
After negotiating the terms of a definitive merger agreement, the Board
of Estes Bank met on March 21, 2000, to review the merger agreement and consider
the transaction with Vail Banks. At that meeting, the Board, Wallach and Estes
Bank's legal counsel engaged in a discussion and analysis of a number of factors
in determining with which merger candidate to proceed, including: (a) the
Board's obligation to maximize the benefit to Estes Bank's shareholders; (b) the
ability of Vail Banks to complete the transaction; (c) the tax consequences of
the transaction to Estes Bank's shareholders; (d) the proposed term of a
definitive agreement; and (e) the effect of the proposed transaction on
employees, customers, and the community.
The Board determined that Vail Banks' offer would produce the maximum
benefit to Estes Bank's shareholders since it was the highest price offered by
those entities submitting indications of interest and Vail Banks had a good
history of completing acquisitions. Further, the Board believes that the
proposed transaction with Vail Banks offered a greater likelihood of stability
in the operations of the Bank, thereby benefiting customers and the community.
As a result, the Board authorized signing the definitive Agreement and Plan of
Reorganization.
-20-
<PAGE>
On January 24, 2000, representatives of Vail Banks conducted on-site
due diligence. Subsequently, both companies undertook additional due diligence
and discussions with legal counsel and financial advisors. At a WestStar Bank
Board of Directors meeting held February 22, 2000, Mr. Chester distributed and
discussed additional pro forma financial information and Ms. Dillon reviewed the
due diligence findings. At that time the members of the board authorized Mr.
Chester and Ms. Dillon to execute documents in final form.
The Agreement and Plan of Reorganization by and between Estes Bank,
Jack G. Haselbush, Bradley D. Sishc, and Vail Banks was executed on March 21,
2000 and on March 22, 2000, Vail Banks issued a press release describing the
transaction.
ESTES BOARD'S REASONS FOR THE MERGER
Estes Bank's Board believes that the merger is fair to, and in the best
interest of, Estes Bank and its shareholders. Accordingly, the Board has
unanimously approved the Agreement and Plan of Reorganization and recommends
that Estes Bank shareholders vote FOR the approval and adoption of the Agreement
and Plan of Reorganization.
In reaching its determination that the merger is fair to, and in the
best interests of, Estes Bank and its shareholders, the Board considered a
number of factors including, without limitation, the following:
o the current condition and growth prospects of Estes Bank, Estes Bank's
historical results of operations and its prospective results of operations
were Estes Bank to remain independent;
o the economic, business and competitive climate for banking and financial
institutions in Colorado;
o the monetary value offered to Estes Bank shareholders by Vail Banks (i) in
absolute terms, and (ii) as compared to the value of the other offer
received by Estes Bank by a qualified and informed potential acquirer,
whose offer was less than Vail Banks' offer;
o the potential market value, liquidity and dividend yield of Estes Bank's
common stock if Estes Bank were to remain independent;
o the greater financial and management resources and customer product
offerings of Vail Banks which could increase the competitiveness of the
combined institution in Estes Bank's market area and its ability to serve
the depositors, customers and communities currently served by Estes Bank;
o the historical results of operations and financial condition of Vail Banks
and the future prospects for Vail Banks, including anticipated benefits of
the Reorganization; and
o the future growth prospects of Vail Banks following the Reorganization.
ESTES BANK'S BOARD UNANIMOUSLY RECOMMENDS THAT ESTES BANK SHAREHOLDERS
VOTE FOR APPROVAL OF THE AGREEMENT AND PLAN OF REORGANIZATION.
---
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<PAGE>
ADDITIONAL REASONS FOR THE MERGER
The Boards of Directors of Estes Bank and Vail Banks believe that the
size of the combined organization, $547.4 million in total consolidated assets
as of March 31, 2000, is sufficiently large to take advantage over time of
significant economies of scale, but is still small enough to maintain the
competitive advantages management believes are afforded community-oriented banks
over the larger regional and super-regional banks. It has become increasingly
apparent to the management of Estes Bank and Vail Banks that in the current
regulatory and competitive environment, larger organizations with greater
economies of scale, including the ability to spread largely fixed regulatory
compliance costs over a larger gross income base and the ability to attract
management talent able to compete in a more sophisticated financial-services
environment, will be more successful than smaller organizations, such as Estes
Bank or Vail Banks, will be separately. Management of Vail Banks and Estes Bank
believe that there is a future for community banks in the banking industry, but
that community banks will be required to achieve a critical size to maintain
above-average economic performance. The Board of Directors of Vail Banks also
viewed Estes Bank as offering a solid franchise in an attractive market giving
Vail Banks an opportunity to diversify geographically.
OPINION OF ESTES BANK'S FINANCIAL ADVISOR REORGANIZATION
Estes Bank has received an opinion from The Wallach Company, Inc. that,
as of the date of this Proxy Statement, the merger consideration to be received
from Vail Banks was fair to Estes Bank's shareholders from a financial point of
view. The full text of Wallach's opinion dated as of the date of this Proxy
Statement, which sets forth matters considered in connection with such opinion,
is attached hereto as Appendix D and should be read in its entirety by Estes
Bank's shareholders. This summary of the opinion is qualified in its entirety by
reference to the full text of the opinion.
Estes Bank's Board retained Wallach as its financial advisor on the
basis of the firm's experience and expertise with the financial services and
banking industry and with transactions similar to the merger.
In arriving at an opinion, Wallach has, among other things:
o reviewed certain financial statements and other financial
information of Estes Bank;
o reviewed the current condition and growth prospects for Estes
Bank and its subsidiary bank, including financial projections
prepared by Estes Bank's management;
o discussed the past and current operations and financial
conditions and the prospects of Estes Bank with Estes Bank's
management;
o evaluated the economic, banking and competitive climate for
banking institutions in Colorado;
o reviewed the process used leading to the Vail Banks offer,
including a review of the potential acquirors contacted and
their responses relative to a potential acquisition of Estes
Bank;
o compared the various offers received from interested parties;
o compared the Vail Banks offer to recent transactions involving
other institutions of similar size, to the extent publicly
available; and
-22-
<PAGE>
o reviewed the Agreement and Plan of Reorganization.
Neither Vail Banks nor Estes Bank imposed any limitations upon the
scope of the investigation performed by Wallach in formulating its opinion. In
rendering its opinion, Wallach did not independently verify the asset quality
and financial condition of Vail Banks or Estes Bank, but instead relied upon the
data provided by or on behalf of Vail Banks and Estes Bank to be true and
accurate in all material respects. Wallach relied without independent
verification upon the accuracy and completeness of all the financial and other
information reviewed by it for purposes of the fairness opinion. The fairness
opinion is necessarily based on information as of the date thereof. The fairness
opinion is directed only to the consideration to be received by Estes Bank's
shareholders for their shares if the merger is consummated and does not
constitute a recommendation to any Estes Bank shareholder as to how such
shareholder should vote at the special meeting.
Following is a brief summary of the material analyses utilized by
Wallach in arriving at its fairness opinion. This summary does not purport to be
a complete description of the analyses performed by Wallach.
Implied Vail Banks Offer Price. The total offer price is equal to $21.5
------------------------------
million subject to adjustments as described in Article I of the Agreement and
Plan of Reorganization. Of the total offer price of $21.5 million, $18.3 million
is cash consideration and $3.2 million is consideration in the form of Vail
Banks' common stock. The implied multiple of trailing 12-month earnings of the
Company for the year ended December 31, 1999, was 12.35. The implied multiples
of book value and tangible book value at December 31, 1999, were 276.1% and
395.1%, respectively.
Comparison With the Other Offers. Wallach compared the Vail Banks offer
--------------------------------
to the other offers received. The other offers involved cash-for-stock and
stock-for-stock mergers, pursuant to which Estes Bank's shareholders would
receive compensation less than Vail Banks' offer.
Analysis of Selected Bank Mergers. Wallach reviewed publicly available
---------------------------------
information on the two bank merger and acquisition transactions known by Wallach
to have occurred since January 1, 1999, for which Wallach believed the sellers
were similar to Estes Bank in size, market and financial performance. At
December 31, 1999, Estes Bank had assets of $82.9 million, equity to assets of
9.4%, and a return on assets of 2.11%. The average asset size of the banks
acquired in the two comparable transactions was $79.9 million, the average
equity to assets was 9.1%, and the average return on assets was 1.99%. Wallach
compared certain percentages and multiples implied by the Vail Banks offer with
comparable percentages and multiples for the two comparable transactions. The
average price offered in the two transactions as a multiple of twelve months
trailing earnings was 12.9 as compared to 12.35 associated with the Vail Banks
offer. The average multiples of book value and tangible book value in these
transactions were [266.5% and 266.5%], respectively, as compared to the
multiples of book value and tangible book value of 276.1% and 395.1%,
respectively, associated with the Vail Banks offer at the time of the signing of
the definitive purchase agreement. Wallach is not aware of any other merger or
acquisition transactions involving the sale of commercial banks that it believes
are comparable to Estes Bank and for which information is publicly available.
At May 31, 2000, Wallach was of the opinion that the merger
consideration is fair to Estes Bank's shareholders from a financial point of
view.
Wallach believes that its analyses and the summary set forth above must
be considered as a whole and that selecting portions of its analyses and the
factors considered by them could create an incomplete view of the process
underlying the preparation of its fairness opinion. No company or transaction
used in the company comparable transaction analysis is identical to Estes Bank,
Vail Banks or the merger. Accordingly, in its analysis Wallach used complex
-23-
<PAGE>
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading value or the acquisition value of the companies to which they are being
compared.
The Wallach Company, from time to time, has provided strategic and
advisory services to Vail Banks in relation to financial planning and
acquisition analysis. The Wallach Company is not engaged by Vail Banks with
respect to the merger and will not receive any fee from Vail Banks.
For Wallach's services in connection with preparing a plan for
obtaining acquisition offers for Estes Bank, soliciting and negotiating such
acquisition offers, rendering its opinion as to the fairness of the merger
consideration to Estes Bank's shareholders from a financial point of view and
for certain other advisory services in connection therewith, Estes Bank has
agreed to pay Wallach certain fees. Wallach will receive a cash fee upon the
effectiveness of the merger equal to 2.25% of the first $18.0 million and 4.5%
of the amount in excess of $18.0 million received by Estes Bank's shareholders
in the transaction. From June 10, 1999 to the effective date of the merger,
Wallach has or will receive a monthly retainer of $7,500, which amounts will be
credited against the transaction fee due at the effectiveness of the merger.
Wallach has also received reimbursement of its actual out-of-pocket expenses and
Estes Bank has agreed to indemnify Wallach against certain liabilities,
including liabilities under securities laws.
THE AGREEMENT AND PLAN OF REORGANIZATION
The material features of the Agreement and Plan of Reorganization are
summarized below. Estes Bank Corporation and its wholly-owned subsidiary are
referred to collectively as "Estes Bank."
CLOSING DATE. The Agreement and Plan of Reorganization provides that
the merger will be consummated on the first business day following the receipt
of approvals from any governmental authorities having jurisdiction over the
merger, compliance with the Colorado Business Corporation Act, and compliance
with any applicable waiting periods. Vail Banks and Estes Bank management
anticipate that the merger will be consummated during the third quarter of 2000.
TERMS OF THE MERGER. The purchase price for the merger is approximately
$21.5 million with $3.2 million payable in Vail Banks common stock and the
remainder in cash. The purchase price will be allocated among Estes Bank
shareholders in proportion to their respective stock holdings. The number of
shares of Vail Banks common stock Estes Bank shareholders will receive will
equal $3.2 million divided by the average of the closing sales price of Vail
common stock as reported by the NASDAQ market system on each of the 15
consecutive trading days immediately prior to the closing. The share price will
not be less than $9.00 per share nor in excess of $12.00 per share. Had the
closing occurred on May 31, 2000, each share of Estes Bank stock would have been
converted into 6 shares of Vail Banks stock and $332 in cash. Vail Banks
shareholders will continue to hold their existing shares of Vail Banks common
stock. If, prior to the closing, there is any change in the outstanding shares
of Vail common stock or it is effected by reason of any reclassification,
recapitalization, stock split or combination, exchange or readjustment of
shares, or any stock dividend thereon with a record date during such period, the
number of shares of Vail common stock shall be adjusted on a pro rata basis.
Vail Banks will not issue a fractional share certificate of Vail Banks
common stock in connection with the merger, and an outstanding fractional share
interest will not entitle the owner thereof to vote, to receive dividends, or to
any rights of a shareholder of Vail Banks with respect to that fractional
interest. Instead of received fractional shares of Vail Banks common stock,
Estes Bank shareholders will receive a cash payment, without interest, for the
value of any fraction of a share of Vail Banks common stock that they would
otherwise be entitled to receive.
-24-
<PAGE>
If the merger is completed, shareholders of Estes Bank will become
shareholders of Vail Banks, and EBC Acquisition Company, a wholly-owned
subsidiary of Vail Banks, will be merged with and into Estes Bank. Following the
merger, the Articles of Incorporation, Bylaws, corporate identity, and existence
of Vail Banks will not be changed, EBC Acquisition Company will cease to exist
as a separate entity, and Estes Bank will become a subsidiary of Vail Banks.
TERMINATION AND CONDITIONS OF CLOSING. The Agreement and Plan of
Reorganization may be terminated only for the following reasons:
o By either party, if there is a material adverse change in the
financial condition or business of the Estes Bank or Vail Banks
o By Vail Banks, if the terms, covenants or conditions of the
Agreement to be complied with or performed by the Estes Bank at
or before the Closing shall not have been complied with or
performed or waived by Vail Banks.
o By the Estes Bank, if the terms, covenants or conditions of this
Agreement to be complied with or performed by Vail Banks at or
before the Closing shall not have been complied with or performed
or waived by the Estes Bank.
o By either party, if any action, suit or proceeding shall have
been instituted or threatened which makes consummation of the
transactions herein contemplated inadvisable.
o By either party, if the receipt of regulatory approvals has not
occurred on or before October 1, 2000.
The following are some of the required conditions of closing:
o the accuracy of the representations and warranties of all parties
contained in the Agreement and Plan of Reorganization and related
documents as of the date when made and the effective date;
o the performance of all agreements and conditions required by the
Agreement and Plan of Reorganization;
o the delivery of officers' certificates, resolutions, and legal
opinions to Estes Bank and Vail Banks;
o approval of the Agreement and Plan of Reorganization by the vote
of the holders of at least two-thirds of Estes Bank stock;
o receipt of all necessary authorizations of governmental
authorities, and the expiration of any regulatory waiting
periods;
-25-
<PAGE>
o the receipt by Vail Banks of an opinion from counsel for Estes
Bank covering customary corporate matters;
o the receipt by Vail Banks of an accountants' letter from Fortner
Bayens Levkulich & Co., P.C.;
o the issuance of certificates of merger executed by the Secretary
of State of the State of Colorado;
o delivery of the purchase price by Vail Banks;
o effectiveness of the registration statement on Form S-4
registering under the Securities Act, the Vail Banks common stock
to be issued to Estes Bank shareholders in connection with the
merger;
o the tendering of the resignations of the Boards of Directors and
Executive Officers of Estes Bank and United Valley Bank; and
o the termination of all written employment, termination
consultancy or similar agreements entered into by Estes Bank or
United Valley Bank.
SURRENDER OF CERTIFICATES. Shortly before the consummation of the
merger, Vail Banks will make available to American Securities Transfer & Trust,
Denver, Colorado, the number of shares of Vail Banks common stock that will be
issuable to the shareholders of Estes Bank stock. After the closing date, Vail
Banks or American Securities shall mail to each holder of record of Estes Bank
stock a letter with instructions for the issuance of Vail common stock
certificates. Upon receipt by American Securities of a completed, signed
transmittal letter, American Securities will issue Vail Banks common stock
certificates representing the holder's share of the Vail Banks common stock
portion of the purchase price and a check for an amount in lieu of any
fractional shares.
REQUIRED SHAREHOLDER APPROVAL
The holders of at least two-thirds of Estes Bank stock entitled to vote
at the special meeting must approve the Agreement and Plan of Reorganization for
the merger to be completed.
On March 21, 2000, the outstanding voting securities of Estes Bank
consisted of 51,750 shares of Estes Bank common stock, with registered holders
thereof being entitled to one vote per share. Certain executive officers and
members of Estes Bank's Board of Directors, who have entered into agreements
with Vail Banks to vote their shares of Estes Bank common stock in favor of the
merger, own or control 34,295 shares, approximately 66.27% of outstanding shares
of Estes Bank common stock, which is slightly less than the two-thirds majority
required to approve the merger (if all outstanding options were exercised,
approximately 67.67% of the then outstanding shares of Estes Bank common stock
would be voted in favor of the merger, in excess of the two-thirds majority
required to approve the merger).
EXPENSES
Vail Banks will pay all of the expenses it incurs in connection with
the authorization, preparation, execution and performance of the Agreement and
Plan of Reorganization including, without limitation, all fees and expenses of
its agents, representatives, counsel and accountants and the fees and expenses
-26-
<PAGE>
related to filing of required registration statements, and all other regulatory
applications with state and federal authorities in connection with the merger.
Vail Bank will also pay all of the expenses of Fortner Bayens Levkulich &
Company, P.C. in connection with its audit and preparation of Estes Banks
management's discussion and analysis. All expenses incurred by Estes Bank in
connection with the authorization, preparation, execution, and performance of
the Agreement and Plan of Reorganization, including, without limitation, all
fees and expenses of its agents, representatives, counsel and accountants
(except as noted above) for Estes Bank, shall be paid by Estes Bank. The cost of
preparing and mailing this proxy statement/prospectus will be paid by Vail
Banks, PROVIDED, HOWEVER, that in the event that the Estes Bank does not secure
the shareholder vote necessary to authorize and approve the Agreement and Plan
of Reorganization, Estes Bank shall reimburse Vail Banks for the reasonable
costs and expenses it incurred in connection with the preparation and filing of
this proxy statement/prospectus.
CONDUCT OF BUSINESS OF ESTES BANK PENDING CLOSING
The Agreement and Plan of Reorganization provides that, pending
consummation of the merger, Estes Bank will:
o carry on its businesses in the usual, regular, and ordinary course;
o shall not propose to declare or pay any dividends on, or make other
distributions in respect of, any of its capital stock except that it may
declare its regular quarterly dividends or other distributions on its
common stock; split, combine or reclassify any of their capital stock or
issue, authorize or propose the issuance of any other securities; or
repurchase or otherwise acquire any shares of their capital stock (except
for the 3,250 options outstanding as of the date of the Agreement and Plan
of Reorganization);
o not sell, issue, authorize or propose the sale or issuance of, or purchase
or propose the purchase of, any shares of their capital stock or any class
of securities convertible into, or rights, warrants or options to acquire
(except for the 3,250 options outstanding as of the date of the Agreement
and Plan of Reorganization), any such shares, or other convertible
securities or enter into any agreement with respect to the foregoing;
o not amend its articles of incorporation, charter, or bylaws;
o maintain its corporate existence and powers and fully comply with all
federal, state and local laws with respect to its operations and the
conduct of its businesses;
o not acquire a substantial portion of the assets of any business or any
corporation, partnership, association or other entity or division thereof;
o not sell, lease or otherwise dispose of any of its assets except for sales,
leases and other dispositions in the ordinary course of business consistent
with prior practice;
o maintain its properties and assets in satisfactory condition and repair for
the purposes intended, ordinary wear and tear and damage by fire or other
casualty excepted;
o not enter into or amend any bonus, incentive compensation, deferred
compensation, profit sharing, retirement, pension, group insurance, stock
option, stock purchase or other benefit plan or any union, employment or
consulting agreement except as required by law or regulations and shall not
accelerate the exercisability of any options (except the 3,250 options
outstanding as of the date of the Agreement and Plan of Reorganization),
warrants, or rights to purchase securities of Estes Bank pursuant to any
benefit plan;
-27-
<PAGE>
o maintain the books and records in the usual, regular, and ordinary course
on a basis consistent with prior years;
o not grant to any officer, employee or agent any increase in compensation or
in severance or termination pay, or enter into any employment agreement;
o not pay any claim or discharge or satisfy any lien or encumbrance or pay
any obligation or liability other than in the ordinary course of business
or as required by the terms of any written instrument evidencing or
governing the same;
o not take any action that would or could reasonably be expected to result in
any of their representations and warranties becoming untrue at any time on
or prior to the Closing Date;
o maintain and keep or cause to be maintained and kept in full force and
effect all of its insurance;
o only invest funds in securities of the government of the United States,
Repurchase Agreements secured by securities of the government of the United
States, federal funds, or deposits insured by the FDIC; provided, however,
that no such investment shall have a stated maturity of greater than five
(5) years and the various stated maturities of the investments shall be
consistent with the stated maturities of the investments held in the
ordinary course of their businesses;
o not change the banking and safe deposit arrangements, except for changes in
the ordinary course of business; and
o advise Vail Banks orally and in writing of any change or event having, or
which Estes Bank Management believes could have, a material adverse effect
on the assets, liabilities, business, operations or financial condition.
INTEREST OF MANAGEMENT IN THE TRANSACTION; CONDUCT OF BUSINESS AFTER THE MERGER
Except as set forth below, no director or officer of Estes Bank, or any
of its associates, has any direct or indirect material interest in the merger,
except that those persons may own shares of Estes Bank common stock which will
be converted in the merger into Vail Banks common stock. The directors of Vail
Banks currently anticipate that after the merger, Jack G. Haselbush, a director
and executive officer of Estes Bank will be elected to serve on Vail Banks'
Board of Directors. Vail Banks and Estes Bank do not anticipate that the merger
will result in any material change in compensation to employees of Estes Bank.
There are 39,270 shares of Estes Bank common stock held by its
directors, executive officers, and their affiliates, all of which are entitled
to vote on this merger.
Vail Banks has agreed in the Agreement and Plan of Reorganization to
provide employee benefits to Estes Bank employees that are substantially similar
to those Vail Banks currently provides to its employees and to indemnify each
person entitled to indemnification by Estes Bank for liabilities arising from
acts or omissions arising prior to the effective date.
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COMPARISON OF THE RIGHTS OF ESTES BANK AND VAIL BANKS SHAREHOLDERS
Upon completion of the merger, holders of Estes Bank common stock
(other than dissenting shareholders) will become shareholders of Vail Banks. The
following is a summary of material differences between the rights of holders of
Vail Banks common stock and holders of Estes Bank common stock. Since Vail Banks
and Estes Bank are both organized under the laws of Colorado, any differences
arise from differing provisions of the corporations' respective articles of
incorporation and bylaws.
ELIMINATION OF LIABILITY.
VAIL BANKS: 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
of 1933 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.
ESTES BANK: The Estes Bank Articles of Incorporation provide that a
Estes Bank director shall not be personally liable to Estes Bank or its
shareholders for monetary damages for breach of fiduciary duty as a director,
except in certain circumstances. In addition, Estes Bank's Articles of
Incorporation provide for indemnification of directors to the full extent
permitted by applicable law.
STAGGERED BOARD OF DIRECTORS; REMOVAL; FILLING VACANCIES.
VAIL BANKS: The Articles of Incorporation provide that the Board of
Directors will consist of between 10 and 18 directors. The Board currently
consists of 14 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
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<PAGE>
the case. 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.
ESTES BANK: The Articles of Incorporation provide that the number of
Directors will be fixed by resolution of the board of directors from time to
time and may be increased or decreased. Directors must be at least 18 years old
but need not be shareholders or residents of Colorado. Directors are elected at
the annual meeting or a special meeting called for that purpose. Each director
holds office until the next annual meeting or until the director successor is
elected and qualified. Vacancies may be filled by shareholders, the board or by
an affirmative vote of a majority of the remaining directors, even if less than
a quorum.
ACCOUNTING TREATMENT
The merger is expected to be accounted for by Vail Banks as a purchase.
Vail Banks will record, at fair value, the acquired assets and assumed
liabilities of Estes Bank. To the extent the total purchase price exceeds the
fair value of the assets acquired and liabilities assumed, Vail Banks will
record goodwill. Vail Banks will include in its results of operations the
results of Estes Bank's operations after the merger.
The unaudited pro forma data included in this proxy
statement/prospectus for the merger have been prepared using the purchase method
of accounting. For a more detailed discussion of accounting treatment, see
"Summary-Comparative Per Common Share Data."
RESALES OF VAIL BANKS STOCK BY DIRECTORS AND OFFICERS OF ESTES BANK
Although Vail Banks has registered the Vail Banks common stock to be
issued in the merger under the Securities Act of 1933, the directors, officers,
and shareholders of Estes Bank who are deemed to be affiliates of Estes Bank may
not resell the Vail Banks common stock received by them unless those sales are
made pursuant to an effective registration statement under the Securities Act,
or under Rules 144 and 145 of the Securities Act, or another exemption from
registration under the Securities Act. Rules 144 and 145 limit the amount of
Vail Banks common stock or other equity securities of Vail Banks that those
persons may sell during any three month period, and they require that certain
current public information with respect to Vail Banks be available and that the
Vail Banks common stock be sold in a broker's transaction or directly to a
market maker in the Vail Banks common stock.
REGULATORY APPROVALS
The Federal Reserve Bank of Kansas City pursuant to delegated authority
from the Board of Governors of the Federal Reserve System and the Banking Board
of Division of Banking of the State of Colorado have approved the merger. In
determining whether to grant that approval, the Federal Reserve and the Division
of Banking considered the effect of the merger on the financial and managerial
resources and future prospects of the companies and banks concerned and the
convenience and needs of the communities served.
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The acquisition of Estes Bank will reduce WestStar Bank's capital below
"well capitalized" to "adequately capitalized." As a condition of approval of
the acquisition of Estes Bank by Vail Banks by the Federal Reserve, Vail Banks
committed that WestStar Bank's capital would exceed the minimum requirements for
"well-capitalized" banks at June 30, 2001. If WestStar Bank is not "well
capitalized" by that date, it may be required to suspend its acquisition
activity or consider only those transactions that will result in WestStar Bank
becoming "well capitalized."
RIGHTS OF DISSENTING SHAREHOLDERS
Sections 7-113-101 through 7-113-302 of the Colorado Business
Corporation Act provide that the holders of Estes Bank stock have the right to
dissent from consummation of the merger and obtain the "fair value" of their
shares if the merger is effectuated. Copies of these sections are set out in
Appendix C.
To preserve the right to exercise dissenter's rights, an Estes Bank
shareholder must: (i) deliver to Jack G. Haselbush, Secretary of Estes Bank,
Estes Bank Corporation, P.O. Box 2270, 363 E. Elkhorn Avenue, Estes Park,
Colorado 80517, prior to the vote of the Estes Bank shareholders to approve the
Agreement and Plan of Reorganization, written notice that the shareholder
intends to demand payment for his or her shares if the merger is consummated,
and (ii) not vote his or her shares in favor of approval of the Agreement and
Plan of Reorganization. The failure by a shareholder to vote his or her shares
at the Estes Bank meeting or to return a proxy in respect of the Estes Bank
meeting will not be deemed to be a vote in favor of approval of the Agreement
and Plan of Reorganization. Return of a blank proxy or a proxy directing a vote
in favor of the merger will be deemed to be a vote in favor of the Agreement and
Plan of Reorganization and will constitute a waiver of the shareholder's right
to dissent from the approval of the Agreement and Plan of Reorganization.
After the Agreement and Plan of Reorganization is approved by the Estes
Bank shareholders but in no event later than ten days after the consummation
date of the merger, Estes Bank will deliver a written notice (a "Dissenter's
Notice") to all of its shareholders who both notified Estes Bank of their
intention to dissent and did not vote in favor of the Agreement and Plan of
Reorganization, (i) stating that the merger was authorized and the consummation
date of the merger (or if the merger is not yet effective, the proposed
consummation date); (ii) providing the address to which payment demands must be
sent and the address at which the certificates representing the shares of Estes
Bank stock with respect to which dissenter's rights are being exercised must be
deposited; (iii) stating that if a record shareholder is exercising dissenter's
rights for a beneficial owner, that any demand for payment in respect of such
shares must be accompanied by a certificate from the beneficial owner certifying
that dissenter's rights have been or will be timely asserted with respect to all
shares of Estes Bank stock owned beneficially by such beneficial shareholder and
as to which there is no limitation on such shareholder's ability to exercise
dissenters' rights; (iv) inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment demand is received,
and (v) stating the date by which Estes Bank must receive the payment demand and
the certificates representing the shares of Estes Bank stock for which
dissenter's rights are being exercised, which date shall not be less than 30
days after the Dissenter's Notice is given. The Dissenter's Notice shall be
accompanied by a form which may be used to demand payment and by a copy of the
provisions of the Colorado Business Corporation Act governing dissenter's
rights.
A shareholder who wishes to assert dissenter's rights after receiving a
Dissenter's Notice must, by the date stated in the Dissenter's Notice, (i) make
a written demand for payment for such Estes Bank Dissenting Shareholder's shares
of Estes Bank stock, and (ii) deposit the certificates representing such shares
as directed in the Dissenter's Notice. A Estes Bank dissenting Shareholder
retains all rights of a shareholder, except the right to transfer his or her
shares, until the consummation date of the merger. After the consummation date
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of the Estes Bank merger, the Estes Bank Dissenting Shareholder has only the
right to receive payment for such shares. A shareholder who does not demand
payment and deposit his or her shares by the date stated in the Dissenter's
Notice is not entitled to payment for his or her shares.
Upon the later of the consummation date of the merger or the date of
receipt of demand for payment from a Estes Bank Dissenting Shareholder, Estes
Bank shall pay to each Estes Bank Dissenting Shareholder who has complied with
the dissenter's rights provisions of the Colorado Business Corporation Act the
amount that Estes Bank estimates to be the "fair value" of such Estes Bank
Dissenting Shareholder's shares, plus accrued interest from the consummation
date of the merger until the date of payment at an annual rate equal to the
interest rate currently paid by Estes Bank on its principal bank loans, if any,
or if none, at the legal rate specified in Section 5-12-10 of the Colorado
Revised Statutes which is currently eight percent per annum. Payment will be
made to the address stated in the Estes Bank Dissenting Shareholder's payment
demand or, if none, at the address shown in Estes Bank's current record of
shareholders. The payment will be accompanied by (i) Estes Bank's financial
statements for its most recent fiscal year for which financial statements have
been prepared; (ii) a statement of Estes Banks estimate of the "fair value" of
the Estes Bank Dissenting Shareholder's shares; (iii) an explanation of how the
amount of interest included in the payment was calculated; (iv) a statement of
the Estes Bank Dissenting Shareholder's rights if the Estes Bank Dissenting
Shareholder is dissatisfied with the payment, and (v) a copy of the provisions
of the Colorado Business Corporation Act governing dissenter's rights.
If a Estes Bank Dissenting Shareholder believes that the amount paid by
Estes Bank as the "fair value" of his or her shares is inadequate or that the
interest due to the Estes Bank Dissenting Shareholder has been incorrectly
calculated, the Estes Bank Dissenting Shareholder may notify Estes Bank in
writing within 30 days of receipt of payment by Estes Bank of the Estes Bank
Dissenting Shareholder's own estimate of the "fair value" of his or her shares
and/or the amount of interest that the Estes Bank Dissenting Shareholder
believes to be due and may demand payment of such amount less any payments
already received by the Estes Bank Dissenting Shareholder. If a Estes Bank
Dissenting Shareholder makes such a payment demand within the 30-day period,
Estes Bank is obligated to pay the amount demanded unless, within 60 days of
receipt of such demand, Estes Bank and the Estes Bank Dissenting Shareholder
agree on the amount payable by Estes Bank to the Estes Bank Dissenting
Shareholder or Estes Bank commences a proceeding in Colorado District Court for
Larimer County, Colorado petitioning the court to determine the "fair value" of
such Estes Bank Dissenting Shareholder's shares and/or the amount of the
interest due to the Estes Bank Dissenting Shareholder.
The costs of any court proceeding to determine the amount due to a
Estes Bank Dissenting Shareholder, including reasonable compensation and
expenses of appraisers appointed by the court, will generally be assessed
against Estes Bank. The court may, however, assess such costs against the Estes
Bank Dissenting Shareholder if the court finds that the Estes Bank Dissenting
Shareholder acted arbitrarily, vexatiously, or not in good faith. The court may
also assess fees and expenses of counsel and experts against Estes Bank if Estes
Bank did not substantially comply with the dissenter's rights provisions of the
Colorado Business Corporation Act or against any party who the court finds acted
arbitrarily, vexatiously or not in good faith.
Once a Estes Bank Dissenting Shareholder demands payment for his or her
shares, the demand is irrevocable unless the merger is not consummated within 60
days after the date stated in the Dissenter's Notice by which a Estes Bank
Dissenting Shareholder must provide Estes Bank with a demand for payment and
must deposit his or her shares with Estes Bank. If the merger is not consummated
by the end of the 60-day period, Estes Bank must return any deposited shares to
the Estes Bank Dissenting Shareholder and deliver a new Dissenter's Notice to
the Estes Bank Dissenting Shareholder.
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If shareholders elect to exercise these dissenter's rights, the receipt
of cash for shares of Estes Bank stock will be a taxable transaction to Estes
Bank shareholders receiving such cash, as described under "Material Federal
Income Tax Consequences of the Merger."
ESTES BANK SHAREHOLDERS CONSIDERING EXERCISING STATUTORY DISSENTER'S RIGHTS
SHOULD CONSULT WITH THEIR OWN TAX ADVISORS WITH REGARD TO THE TAX CONSEQUENCES
OF SUCH ACTIONS.
To the extent there are any inconsistencies between the foregoing summary and
the Colorado Business Corporation Act, the Colorado Business Corporation Act
shall control.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER AND OPINION OF TAX
COUNSEL
The merger will constitute a taxable transaction to the Estes Bank
shareholders. In general, both the cash received and the fair market value of
the Vail Banks stock received by the Estes Bank shareholders will be treated as
amounts received from the sale of their shares of Estes Bank stock, and
(provided that such Estes Bank stock is a capital asset in the hands of such
shareholders) each such shareholder will recognize capital gain or loss (short
or long-term as appropriate) measured by the difference between the sale price
of such Estes Bank stock and such shareholders tax basis in such Estes Bank
stock.
Each shareholder of Estes Bank should consult their tax advisors with
respect to the specific tax treatment to each such shareholder.
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INFORMATION ABOUT ESTES BANK CORPORATION
DESCRIPTION OF BUSINESS
Estes Bank Corporation is a bank holding company based in Estes Park,
Colorado. All of Estes Bank's activities are conducted through its wholly-owned
subsidiary, United Valley Bank, a full-service commercial bank with offices in
Estes Park, Granby and Grand Lake, Colorado. At March 31, 2000, Estes Bank had
total consolidated assets of $78.9 million, total consolidated loans of $46.5
million, total consolidated deposits of $69.3 million, and total consolidated
shareholders' equity of $9 million. Estes Bank provides customary types of
banking services such as checking accounts, savings accounts, and time deposits.
It also engages in commercial and consumer lending, makes secured and unsecured
loans, and provides other financial services. Estes Bank was incorporated on
October 5, 1972, as a Colorado business corporation. In December 1972, Estes
Bank acquired all of the shares of common stock of United Valley Bank, formerly
known as Estes Park Bank, which was organized as a Colorado banking corporation
on April 10, 1908. As of March 31, 2000, United Valley Bank had 27 full-time
employees and 2 part-time employees. Estes Bank has no employees. United Valley
Bank is not a party to any collective bargaining agreement, and, in the opinion
of management, it believes that it enjoys satisfactory relations with its
employees.
Estes Bank's corporate office and main office is located at P.O. Box
2270, 363 E. Elkhorn Avenue, Estes Park, Colorado 80517. The main office is in
an office building owned by United Valley Bank and contains approximately 20,000
square feet of finished space. The Granby, Colorado Branch Office of United
Valley Bank contains approximately 4,500 square feet. The Grand Lake Branch
Office of United Valley Bank is leased.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ESTES BANK
The following discussion provides certain information regarding the
financial condition and results of operations of Estes Bank. This discussion
should be read in conjunction with Estes Bank's Consolidated Financial
Statements and Notes to Consolidated Financial Statements presented elsewhere in
this proxy statement/prospectus. See "Index to Estes Bank Consolidated Financial
Statements."
OVERVIEW
Estes Bank's net income for the three months ended March 31, 2000
decreased $122,000, or 36.1%, to $216,000 from $338,000 for the three months
ended March 31, 1999. Net income for the year ended December 31, 1999 increased
$367,000 or 26.6% to $1,746,000 from $1,379,000 in 1998.
Total assets at March 31, 2000 decreased $151,000, or .2%, to
$78,920,000 from $79,071,000 at March 31, 1999. Total assets at December 31,
1999 increased $3,212,000 or 4.0%, to $82,898,000 from $79,686,000 at December
31, 1998.
The annualized return on average assets was 1.08% for the three months
ended March 31, 2000, compared to 1.70% for the three months ended March 31,
1999. The return on average assets was 2.07% for the year ended December 31,
1999 compared to 1.75% for the year ended December 31, 1998.
The annualized return on average equity was 10.29% for the three months
ended March 31, 2000, compared to 19.65% for the three months ended March 31,
1999. The return on average equity was 23.95% for the year ended December 31,
1999, compared to 22.33% for the year ended December 31, 1998.
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<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME. Estes Bank's net income is derived primarily from
net interest income. Net interest income is the difference between interest
income, principally from loans, investment securities and funds sold, and
interest expense, principally on customer deposits. Changes in net interest
income result from changes in volume, net interest spread and net interest
margin. Volume refers to the average dollar levels of interest-earning assets
and interest-bearing liabilities. Net interest spread refers to the difference
between the average yield on interest-earning assets and the average cost of
interest-bearing liabilities. Net interest margin refers to net interest-income
divided by average interest-earning assets and is influenced by the level and
relative mix of interest-earning assets and interest-bearing liabilities.
The following tables set forth the average balances, net interest
income and expense and average yields and rates for Estes Bank's earning assets
and interest-bearing liabilities for the indicated periods on a tax-equivalent
basis assuming a 34% tax rate.
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<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------------------------- YEAR ENDED DECEMBER 31,
2000 1999 1999
---------------------------- ----------------------------- --------------------------
Interest Average Interest Average Interest Average
Average Earned Yield Average Earned Yield Average Earned Yield
Balance or Paid or Cost Balance or Paid or Cost Balance or Paid or Cost
-------- ------- ------- -------- ------- ------- -------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets
Federal funds sold $ 827 $ 11 5.47% $ 3,536 $ 40 4.56% $ 3,044 $ 147 4.83%
Investment securities
Taxable 23,685 336 5.67 23,429 361 6.17 25,674 1,582 6.16
Tax exempt (tax equivalent) 555 11 7.93 428 8 7.91 461 36 7.81
Loans (1) 46,442 1,078 9.29 43,287 1,026 9.48 45,763 4,314 9.43
Allowance for loan losses (402) - (406) - (407) -
------ ------ ------- ----- ------ ----
Total interest-earning assets 71,107 1,436 8.06 70,274 1,435 8.16 74,535 6,079 8.16
Noninterest-earning assets 8,624 9,210 9,808
------ ------- ------
Total assets $79,731 $79,484 $84,343
====== ======= ======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing deposits
Demand, interest-bearing $27,852 $ 163 2.34% $27,635 $ 147 2.12% $30,260 $ 694 2.29%
Savings 8,000 56 2.80 8,595 61 2.84 8,706 247 2.84
Time deposits 18,940 246 5.20 20,398 265 5.21 19,855 1,026 5.17
------ ----- ------ ----- ------ -----
Total interest-bearing
deposits 54,792 465 3.39 56,628 473 3.34 58,821 1,967 3.34
Federal funds purchased 518 8 5.94 9 - .59 109 7 6.42
------ ----- ------ ----- ------ -----
Total interest-bearing
liabilities 55,310 473 3.42 56,637 473 3.34 58,930 1,974 3.35
----- ----- -----
Noninterest-bearing liabilities 16,024 15,965 18,122
------ ------ ------
Total liabilities 71,334 72,602 77,052
Shareholders' equity 8,397 6,882 7,291
------ ------ -------
Total liabilities and
shareholders' equity $79,731 $79,484 $84,343
====== ====== ======
Net interest income $ 963 $ 962 $4,105
===== ===== =====
Net interest margin (2) 5.40% 5.47% 5.51%
Net interest spread 4.64 4.82 4.81
Ratio of average interest-
bearing assets to average
interest-earning liabilities 128.56% 124.08% 126.48%
---------
(1) Loans are net of unearned discount. Nonaccrual loans are included in average loans outstanding.
Loan fees are included in interest income as follows:
March 31, 2000 $ 56
March 31, 1999 67
December 31, 1999 244
(2) Net interest margin is net interest income divided by average total earning assets.
</TABLE>
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<PAGE>
Net interest income on a tax equivalent basis was $963,000 for the
three months ended March 31, 2000, an increase of $1,000 from $962,000 for the
same period in 1999. Interest income for the three months ended March 31, 2000
and 1999 was $1,436,000 and $1,435,000, respectively. This minimal change was
due to relatively consistent balances in total interest-earning assets.
Net interest income, on a tax-equivalent basis, was $4,105,000 for the
year ended December 31, 1999, an increase of $153,000 from $3,893,000 in 1998.
Interest income increased $153,000 to $6,079,000 in 1999 from $5,926,000 in
1998. This increase resulted primarily from an increase of $5,976,000 in average
interest-earning assets to $74,535,000 in 1999 from $69,559,000 in 1998. The
majority of the asset growth was due to growth in the investment portfolio.
Average investments increased $4,938,000 or 23.3% to $26,135,000 for the year
ended December 31, 1999 from $21,197,000 at December 31, 1998. The average yield
on interest-earning assets decreased to 8.06% for the three months ended March
31, 2000 from 8.16% for the three months ended March 31, 1999 and for the year
ended December 31, 1999, on a tax equivalent basis.
Interest expense for the three months ended March 31, 2000 was $465,000
compared to $473,000 for the same period in 1999. This minimal change was
reflective of the relatively stable balances in interest-bearing liabilities and
the minimal change in the cost of interest-bearing liabilities. Interest expense
decreased $59,000 to $1,974,000 in 1999 from $2,033,000 in 1998. A $2,956,000
increase in interest-bearing demand deposits in 1999 accounted for an increase
in interest expense of $64,000. This was offset principally by a decrease in the
cost of deposit liabilities to 3.34% in 1999 from 3.60% in 1998. The net
interest margin, on a tax-equivalent basis, decreased to 5.40% for the three
months ended March 31, 2000 from 5.47% for the same period in 1999. The net
interest margin decreased to 5.51% in 1999 from 5.60% in 1998, primarily as a
result of lower interest-earning asset yields.
The following table illustrates, for the periods indicated, the changes
in Estes Bank's net interest income (on a tax-equivalent basis) due to changes
in volume and changes in interest rates. Changes in net interest income due to
both volume and rate have been allocated to volume and rate in proportion to the
relationship of the absolute dollar amounts of the change in each.
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
2000 Compared to 1999 1999 Compared to 1998
--------------------------- ------------------------
Change Due to Change Due to
--------------------------- ------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Federal funds sold $(31) $ 2 $(29) $ (82) $ (14) $ (96)
Investment securities
Taxable 4 (29) (25) 304 - 304
Tax exempt (tax equivalent) 2 1 3 1 - 1
Loans 75 (23) 52 160 (216) (56)
-- -- -- --- ------ ------
Total interest income 50 (49) 1 383 (230) 153
Interest-bearing liabilities
Interest-bearing deposits
Demand, interest-bearing 1 15 16 78 (46) 32
Savings (4) (1) (5) - 13 13
Time deposits (19) - (19) (14) (77) (91)
Federal funds purchased - 8 8 7 - 7
Note payable - - - (20) - (20)
---- ---- ---- ---- ------ -----
Total interest expense (22) 22 - 51 (110) (59)
--- -- ----- ---- ------ ------
Net change in interest income $72 $(71) $ 1 $332 $ (120) $ 212
== == === === ====== =====
</TABLE>
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OTHER INCOME. The following table sets forth Estes Bank's other income for the
indicated periods.
Three Months Ended Year Ended
March 31, December 31,
2000 1999 1999
---- ---- ------------
(In Thousands)
Service charges on deposit accounts $107 $132 $496
Other customer service fees 66 68 228
Rental income 35 29 122
Gain (loss) of investment securities (8) - (2)
Other income 2 2 17
---- ---- ----
Total other income $202 $231 $861
=== === ===
Other income generated for the three months ended March 31, 2000
decreased to $202,000 as compared to $231,000 for the same period in 1999. Most
of the decrease was attributed to a reduction on service charge income as a
result of the loss of several customer deposit accounts that historically
reflected overdraft balances on which service charges were collected.
Other income for the year ended December 31, 1999 decreased $21,000 to
$861,000 as compared to $882,000 in 1998.
OTHER EXPENSES. The following table sets forth Estes Bank's operating expenses
for the indicated periods.
Three Months Ended Year Ended
March 31, December 31,
-------------------- -------------
2000 1999 1999
---- ---- --------
(In Thousands)
Salaries and employee benefits $272 $309 $1,242
Occupancy expense of premises 57 59 226
Furniture and equipment expense 41 38 158
Data processing 36 41 158
Goodwill amortization 48 48 191
Other operating expenses 152 263 639
--- --- ---
Total other expenses $606 $758 $2,614
=== === =====
During the three months ended March 31, 2000 total operating expenses
were $606,000 compared to $758,000 for the same period in 1999. The decrease in
salaries and employee benefits was primarily due to a reduction in compensation
accrued under the stock option plan of $37,000. Other operating expenses
decreased $112,000, primarily due to a non-recurring operational loss in March
1999 of $130,000.
During the year ended December 31, 1999 total operating expenses
decreased $22,000 to $2,614,000 from $2,636,000 in 1998. Salaries and employee
benefits increased from $1,237,000 in 1998 to $1,242,000 in 1999. Compensation
accrued under the stock option plan decreased by $92,000 in 1999 over 1998. This
was offset by a reduction in compensation expense in 1998 principally
attributable to the reversal of previously accrued compensation of $86,000 under
a deferred compensation plan that was terminated.
FEDERAL INCOME TAX. Estes Bank's consolidated income tax rate varies
from statutory rates principally due to deductible dividends paid to its ESOP.
Estes Bank recorded income tax expense totaling $64,000 for the three months
ended March 31, 2000 and $594,000 for the year ended December 31, 1999.
-38-
<PAGE>
FINANCIAL CONDITION
LOAN PORTFOLIO COMPOSITION. The following table sets forth the
composition of Estes Bank's loan portfolio by type of loan at the dates
indicated. Management believes that the balance sheet information as of the
dates indicated should be read in conjunction with the average balance
information in the tables above under "Net Interest Income." Estes Bank focuses
its lending activities in the local communities in which it operates, Larimer
and Grand Counties. The principal industry of these counties is tourism. Due to
the seasonal nature of the tourist related economies in these areas, loans may
fluctuate significantly. Commercial loan customers typically increase their
borrowings from the first of the year through late spring. By late fall, a
portion of the borrowings are repaid with cash flow generated during the tourist
season. Residential real estate construction loan customers typically originate
borrowings starting in late spring, reaching a peak by mid-summer. These loans
are typically repaid by late fall as construction is completed prior to the
winter months. Commercial real estate construction loans are typically for the
construction of motels and other tourist-related facilities. These borrowings
typically reach a peak by mid-spring, in anticipation of the tourist season, and
a low point by mid-fall when this type of construction is minimal.
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
Amount % Amount %
------ - ------ -
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Commercial and real estate construction $34,128 72.8% $33,206 71.6%
Real estate mortgage 11,402 24.3 11,864 25.6
Installment 1,180 2.5 1,116 2.4
Other 178 .4 163 .4
------ ----- ------- -----
Total loans $46,888 100.0% $46,349 100.0%
====== ===== ====== =====
</TABLE>
Loans as of March 31, 2000 increased $539,000 compared to December 31,
1999, and loans as of December 31, 1999, increased $2,953,000 compared to
December 31, 1998. The weighted average interest rate of the loan portfolio at
March 31, 2000 was 9.29%.
Estes Bank's primary category of loans, commercial and real estate
construction loans, trended upward as indicated. These loans increased $922,000
during the three months ended March 31, 2000 due principally to the seasonal
factors discussed above. These loans increased by $3,347,000 during the year
ended December 31, 1999. These increases are attributable to the general
economic growth in the markets that Estes Bank serves.
Real estate mortgage loans decreased slightly with a balance of
$11,402,000 at March 31, 2000 compared to $11,864,000 as of December 31, 1999
and compared to $12,384,000 as of December 31, 1998, due to the decline in new
loan originations and repayments on existing loans.
Installment loans have historically comprised less than 5% of Estes
Bank's loan portfolio.
Although the risk of non-payment exists for a variety of reasons with
respect to all loans, certain other more specific risks are associated with each
type of loan. Several risks are present in construction loans, including
economic conditions in the home building industry, fluctuating land values, the
failure of the contractor to complete the work and the borrower's inability to
repay. Risks associated with commercial loans are quality of the borrower's
management and the impact of local economic factors. Installment loans also have
risks associated in a single type of loan. Installment loans additionally face
the risk of a borrower's unemployment as a result of deteriorating economic
conditions as well as the personal circumstances of the borrower.
-39-
<PAGE>
Estes Bank believes that its philosophy in extending credit is
relatively conservative in nature, with a presumption that most credit should
have both a primary and a secondary source of repayment, and that the primary
source should generally be operating cash flows, while the secondary source
should generally be disposition of collateral. Estes Bank engages in limited
unsecured lending, and requires personal guarantees of principals for business
obligations. Lending officers are assigned various levels of loan approval
authority based upon their respective levels of experience and expertise. Loans
exceeding the approving officer's lending limit must be approved by the
Directors' Loan Committee, which consists of at least four members of United
Valley Bank's Board of Directors.
At March 31, 2000, net loans totaled 67.1% of total deposits and 59.0%
of total assets.
LOAN MATURITIES. The following tables present, at March 31, 2000 and
December 31, 1999, loans by maturity in each major category of Estes Bank's
portfolio based on contractual repricing schedules. Actual maturities may differ
from the contractual repricing maturities shown below as a result of renewals
and prepayments. Loan renewals are evaluated in the same manner as new credit
applications.
<TABLE>
<CAPTION>
March 31, 2000
------------------------------------------------------------------------------------
Over One Year
Through Five Years Over Five Years
One Year ---------------------------- -------------------------
or Less Fixed Rate Floating Rate Fixed Rate Floating Rate Total
------- ---------- ------------- ---------- ------------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial and real estate
construction $12,879 $11,444 $2,021 $2,151 $5,633 $34,128
Real estate mortgage 1,504 2,574 89 3,414 3,821 11,402
Installment 229 939 - 12 - 1,180
Other 178 - - - - 178
-------- -------- ----- ------ ------ -------
Total loans $14,790 $14,957 $2,110 $5,577 $9,454 $46,888
====== ====== ===== ===== ===== ======
December 31, 1999
------------------------------------------------------------------------------------
Over One Year
Through Five Years Over Five Years
One Year ---------------------------- -------------------------
or Less Fixed Rate Floating Rate Fixed Rate Floating Rate Total
------- ---------- ------------- ---------- ------------- -------
(In Thousands)
Commercial and real estate
construction $12,906 $10,941 $1,908 $1,733 $ 5,718 $33,206
Real estate mortgage 1,910 2,116 113 3,196 4,529 11,864
Installment 198 918 - - - 1,116
Other 163 - - - - 163
------ ------ ----- ----- ----- -------
Total loans $15,177 $13,975 $2,021 $4,929 $10,247 $46,349
====== ====== ===== ===== ====== ======
</TABLE>
NONPERFORMING LOANS. Nonperforming loans consist of loans 90 days or
more delinquent and still accruing interest, nonaccrual loans and restructured
loans. When, in the opinion of management, a reasonable doubt exists as to the
collectibility of interest, regardless of the delinquency status of a loan, the
accrual of interest income is discontinued and interest accrued during the
current year is reversed through a charge to current year's earnings. While the
loan is on nonaccrual status, interest income is recognized only upon receipt
and then only if, in the judgment of management, there is no reasonable doubt as
to the collectibility of the principal balance. Loans 90 days or more delinquent
generally are changed to nonaccrual status unless the loan is in the process of
collection and management determines that full collection of principal and
accrued interest is probable.
Restructured loans are those for which concessions, including the
reduction of interest rates below a rate otherwise available to the borrower or
the deferral of interest or principal, have been granted due to the borrower's
weakened financial condition. Interest on restructured loans is accrued at the
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<PAGE>
restructured rates when it is anticipated that no loss of original principal
will occur. Estes Bank did not have any restructured loans as of March 31, 2000
or December 31, 1999.
The following table sets forth information concerning the nonperforming
assets of Estes Bank at the dates indicated:
March 31, December 31,
2000 1999
-------------- ------------
(Dollars in Thousands)
Nonaccrual loans $ - $ -
Other loans 90 days past due - -
Other real estate - -
---- ---
Total nonperforming assets $ - $ -
===== ===
Nonaccrual and other loans 90 days
past due to total loans .00% .00%
Nonperforming assets to total loans
plus other real estate .00 .00
Nonperforming assets to total assets .00 .00
Management is not aware of any significant adverse trends relating to
Estes Bank's loan portfolio.
As of March 31, 2000, there was no significant balance of loans
excluded from nonperforming loans set forth above, where known information about
possible credit problems of borrowers causes management to have serious doubts
as to the ability of such borrowers to comply with the present loan repayment
terms and which may result in such loans becoming nonperforming.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses
represents management's recognition of the risks of extending credit and its
evaluation of the quality of the loan portfolio. The allowance is maintained at
a level considered adequate to provide for anticipated loan losses based on
management's assessment of various factors affecting the loan portfolio,
including a review of problem loans, business conditions, historical loss
experience, evaluation of the quality of the underlying collateral and holding
and disposal costs. The allowance is increased by additional charges to
operating income and reduced by loans charged off, net of recoveries.
-41-
<PAGE>
The following table sets forth information regarding changes in the
allowance for loan losses of Estes Bank for the periods indicated.
Three Months Ended Year Ended
March 31, 2000 December 31, 1999
-------------- -----------------
(Dollars in Thousands)
Average total loans $46,442 $45,763
====== ======
Total loans at end of period $46,888 $46,349
====== ======
Allowance at beginning of year $ 405 $ 401
Chargeoffs
Commercial and real estate construction 335 1
Real estate mortgage - -
Installment - -
Other - -
------- ------
Total chargeoffs 335 1
Recoveries
Commercial and real estate construction - 3
Real estate mortgage - -
Installment - 2
Other - -
------- ------
Total recoveries - 5
------- ------
Net chargeoffs (recoveries) 335 (4)
Provision for loan losses 275 -
------- ------
Allowance at end of period $ 345 405
======= $======
Net chargeoffs (recoveries)
to average total loans .72% (.01)%
Allowance to total loans at end of period .74 .87
Allowance to nonperforming loans NM* NM*
* "NM" represents a number that is not calculable because there were no
nonperforming loans.
Net charge offs during the three months ended March 31, 2000 totaled
$335,000 or .72% of average loans. Net recoveries during 1999 totaled $4,000 or
approximately .01% of average loans.
The loan charge offs of $335,000 during the three months ended March
31, 2000 relate to loans to a single borrower. This borrower owned an automobile
dealership. In late 1999, management discovered that numerous titles which
represented collateral on one of the loans were fraudulent. As of December 31,
1999, management designated $85,000 as a component of the allowance for loan
losses for the unsecured portion of the loans. In January 2000 Estes Bank filed
a bonding claim with its insurance carrier, requesting reimbursement of the loan
balances, and charged off $85,000 relating to the unsecured balances of these
loans. In April 2000 Estes Bank was notified that the insurance carrier did not
intend to honor this claim. Management recorded an additional charge off of
$250,000, representing the remaining balance of these loans, and an additional
provision for loan losses of $200,000, effective March 31, 2000. Management
intends to pursue litigation against the insurance carrier to collect the
charged off balances. In addition, Estes Bank is in a secondary collateral
position with respect to two commercial properties owned by the borrower. Estes
Bank intends to pursue collection under its rights as a lien holder. However,
there is no assurance that Estes Bank will prevail in these actions. During the
three months ended March 31, 2000, Estes Bank recorded a provision for loan
losses of $275,000 related principally to the problem loans of this borrower.
Estes Bank's lending personnel are responsible for regular monitoring
of the quality of loan portfolios. 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
-42-
<PAGE>
management's estimates of possible loan losses from the foregoing processes and
historical experience. These estimates involve ongoing judgments and may be
adjusted over time depending on economic conditions and changing historical
experience.
State and federal regulatory agencies, as an integral part of their
examination process, review Estes Bank's loans and its allowance for loan
losses. Management believes that Estes Bank's allowance for loan losses is
adequate to cover anticipated losses. There can be no assurance, however, that
management will not determine a need to increase the allowance for loan losses
or that regulators, when reviewing Estes Bank's loan portfolios in the future,
will not require Estes Bank to increase such allowance, either of which could
adversely affect Estes Bank's earnings. Further, there can be no assurance that
Estes Bank's actual loan losses will not exceed its allowance for loan losses.
The following tables set 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 categories based on analysis of the status of particular
loans; however, the majority of the allowance is utilized as a single
unallocated allowance available for all loans. The allocation table should not
be interpreted as an indication of the specific amounts, by loan classification,
to be charged to the allowance. Management believes that the table may be a
useful device for assessing the adequacy of the allowance as a whole. The table
has been derived in part by applying historical loan loss ratios to both
internally classified loans and the portfolio as a whole in determining the
allocation of the loan losses attributable to each category of loans.
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
------------------------ --------------------------
Loans in Loans in
category as category as
a percentage a percentage
Amount of of total Amount of of total
allowance gross loans allowance gross loans
--------- ------------ --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Allocated
Commercial and real estate
construction $ 59 72.8% $97 71.6%
Real estate mortgage -- 24.3 -- 25.6
Installment 4 2.5 4 2.4
Other -- .4 -- .4
Unallocated 282 304
--- ----- --- -----
Total allowance for loan losses $345 100.0% 405 100.0%
==== ===== === =====
</TABLE>
As of March 31, 2000, Estes Bank had decreased its allowance for loan
losses by $60,000 compared to December 31, 1999. This decrease is a result of
the charge offs, net of the provision for loan losses, relative to the problem
loan situation discussed above. The total allowance for loan losses at March 31,
2000 was $345,000 or .74% of total loans and 3,136.36% of nonperforming assets.
As of December 31, 1999, Estes Bank increased its allowance for loan
losses by $4,000 compared to December 31, 1998. This increase represented net
recoveries for the year.
The allocation for loan losses takes into account many factors such as
Estes Bank's prior experience with loan losses and an evaluation of the risks in
the loan portfolio at any given time, including changes in economic, operating
and other conditions of borrowers, the Larimer and Grand County economies and
the national economy. As indicated in the table above, a majority of the loan
loss allowance was not allocated to a single category. Estes Bank's loan
portfolio contains a significant amount of loans that are dependent upon the
tourist economy. Management assesses general risks to the portfolio that are
common to this type of lending. These risks include national and regional
-43-
<PAGE>
economic conditions that will directly impact the level of tourism and also the
level of migration into and out of the communities. Also, local economic
conditions will directly impact valuations on real estate.
INVESTMENTS. Estes Bank's investment policy is designed to ensure
liquidity for cash flow requirements; to help manage interest rate risk; to
ensure collateral is available for public deposits, and to manage asset quality
diversification. Investments are managed centrally to maximize compliance and
effectiveness of overall investing activities. Ongoing review of the performance
of the investment portfolio, market values, market conditions, current economic
conditions, profitability, capital ratios, liquidity needs, and other matters
related to investing activities is made.
Estes Bank's investment portfolio at March 31, 2000 was comprised of
U.S. Treasury and U.S. government agency bonds and bills, corporate debt
securities, and general obligation and revenue municipal bonds. Although the
municipal securities are non-rated and were privately placed, none of these
investments are derivatives, structured notes or similar instruments that are
classified as "High-Risk Securities" as defined by the Federal Financial
Institutions Examinations Counsel. In accordance with the principles of the
Financial Accounting Standards Board in its Statement of Financial Accounting
Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENT IN DEBT AND EQUITY
SECURITIES, all investments are accounted for as "Available for Sale" or "Held
to Maturity."
The following table sets forth the estimated market value of the
available for sale securities and the amortized cost basis of held to maturity
securities in Estes Bank's investment portfolio by type at the dates indicated,
with the exception of the trading account.
March 31, 2000 December 31, 1999
------------------ -------------------
Amount Percentage Amount Percentage
------ ---------- ------ ----------
(Dollars in Thousands)
Available for sale securities
Estimated market value
U.S. Treasury $ 4,937 68.1% $ 5,259 67.9%
U.S. government agencies 2,235 30.8 2,415 31.1
State and municipal 80 1.1 80 1.0
------- ----- ------- -----
Total available for sale $ 7,252 100.0% $ 7,754 100.0%
======= ===== ======= =====
Held to maturity securities
Amortized cost
U.S. Treasury $ 1,638 10.8% $ 1,647 8.8%
U.S. government agencies 10,862 71.6 14,365 76.9
State and municipal 475 3.1 475 2.5
Corporate obligations 2,202 14.5 2,203 11.8
------- ------ ------- ------
Total held to maturity $15,177 100.0% $18,690 100.0%
====== ===== ====== =====
-44-
<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 March 31, 2000.
<TABLE>
<CAPTION>
After one but within After five but within Total
Within one year five years ten years After ten years
----------------------- ------------------------ ----------------------- ------------------
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 $1,137 6.01% $3,800 5.96% $ - $ - $4,937 5.97%
U.S. government agencies 885 6.31 1,350 6.62 - - 2,235 6.50
State and municipal - - 80 6.00% - 80 6.00
----- ----- ----- ---- -----
Total available for sale $2,022 $5,150 $ 80 $ - $7,252
===== ===== ===== ==== =====
Weighted average yield 6.14% 6.13% 6.00% 6.13%
</TABLE>
<TABLE>
<CAPTION>
After one but within After five but within Total
Within one year five years ten years After ten years
----------------------- ------------------------ ----------------------- ------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity securities
U.S. Treasury $ - $1,638 5.92% $ - $ - $ 1,638 5.92%
U.S. government agencies 2,100 5.74% 8,762 6.19 - - 10,862 6.10
State and municipal 35 4.30 340 4.65 100 4.70% - 475 4.63
Corporate obligations 450 6.16 1,160 6.35 592 6.44 - 2,202 6.34
----- ----- ---- --- -----
Total held to maturity $2,585 $11,900 $ 692 $ - $15,177
===== ====== ==== ==== ======
Weighted average yield 5.79% 6.12% 6.19% 6.07%
</TABLE>
DEPOSITS. Estes Bank's primary source of funds has historically been
customer deposits. The level of deposits during the year is directly impacted by
local economic factors. The level of deposits is significantly related to
tourism. A majority of the deposit customers of Estes Bank are directly effected
by the tourism cycle. The height of the tourist season runs from early June
through mid-September, at which time deposits are at their highest level.
Deposit levels then decline until they reach their lowest point during late
spring. A smaller component of the customer base in the communities that Estes
Bank serves are resident retirees whose level of deposits do not vary
significantly during the year.
The following table sets forth the distribution of Estes Bank's
deposits by type as of the date indicated.
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------ ---------- ------ ----------
(DOLLARS IN THOUSANDS)
Demand, noninterest-bearing $14,472 20.9% $17,081 23.4%
Demand, interest-bearing 28,425 41.0 28,101 38.4
Savings 7,784 11.2 8,581 11.7
Time, $100,000 and over 3,234 4.7 2,839 3.9
Other time 15,414 22.2 16,530 22.6
------ ------ ------ ------
$69,329 100.0% $73,132 100.0%
====== ===== ====== =====
Deposits decreased $3,803,000 to $69,329,000 for the three months ended
March 31, 2000 and decreased $924,000 to $70,947,000 for the three months ended
March 31, 1999. These decreases in deposits for the three months ended March 31,
2000 and 1999, are primarily a result of seasonal factors discussed above.
Deposits increased $1,260,000 to $73,132,000 for the year ended December 31,
1999, from $71,872,000 as of December 31, 1998. The 1999 increase is primarily a
result of general economic growth in the communities that Estes Bank serves. At
March 31, 2000, noninterest-bearing deposits comprised 20.9% of total deposits
compared to 23.4% as of December 31, 1999. This percentage decrease is
attributable to the seasonal business cycle discussed above.
-45-
<PAGE>
The following table sets forth the amount of time deposits at their
stated rates as of March 31, 2000:
(In thousands)
3.99% or less $ -
4.00% to 4.99% 4,618
5.00% to 5.99% 12,189
6.00% and above 1,841
-------
Total $18,648
Weighted average interest rate 5.20%
At March 31, 2000, the scheduled maturities of time deposits were are
follows:
Maturing by
March 31,
-----------
(In thousands)
2001 $13,353
2002 4,145
2003 1,077
2004 68
2005 5
------
Total $18,648
======
The following table sets forth the amount and maturity of time deposit that had
balances of $100,000 and over at March 31, 2000.
Remaining Maturity
------------------
(In thousands)
Less than three months $1,601
Three months up to six months 810
Six months up to one year 216
One year and over 607
Total $3,234
=====
CAPITAL RESOURCES
Estes Bank monitors compliance with federal regulatory capital
requirements, focusing primarily on risk-based capital guidelines. Under the
risk-based capital method of capital measurement, the ratio computed is
dependent upon the amount and composition of assets recorded on the balance
sheet, and the amount and composition of off-balance sheet items, in addition to
the level of capital.
-46-
<PAGE>
The following tables set forth the capital ratios of United Valley Bank
as of the indicated dates.
<TABLE>
<CAPTION>
CAPITAL RATIOS
March 31, 2000 December 31, 1999
------------------------- ---------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Tier 1 capital $ 5,911 7.6% $ 5,790 7.4%
Minimum requirement 3,106 4.0 3,120 4.0
------ --- ------ ---
Excess $ 2,805 3.6% $ 2,670 3.4%
====== ==== ====== ====
Average total assets $77,660 $77,997
====== ======
RISK-BASED CAPITAL RATIOS
March 31, 2000 December 31, 1999
------------------------ ----------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
(Dollars in thousands)
Tier 1 capital $ 5,911 11.3% $ 5,790 11.6%
Tier 1 capital minimum
requirement 2,089 4.0 1,994 4.0
----- --- ------ ---
Excess $ 3,822 7.3% $ 3,796 7.6%
===== ==== ====== ===
Total capital $ 6,256 12.0% $ 6,195 12.4%
Total capital minimum
requirement 4,178 8.0 3,988 8.0
----- --- ------ ---
Excess $ 2,078 4.0% $ 2,207 4.4%
====== ==== ====== ====
Total risk adjusted assets $52,219 $49,849
====== ======
</TABLE>
LIQUIDITY
SOURCES OF LIQUIDITY. As discussed in the sections "Loan Portfolio
Composition" and "Deposits", during the annual business cycle, loan levels tend
to peak during the period from late spring through mid-summer. Meanwhile,
deposits reach their lowest level in late spring. Conversely, deposits reach
their highest levels in late summer, a time at which loans are reaching their
lowest levels.
Estes Bank manages its liquidity in order to satisfy cash flow
requirements of depositors and borrowers and allow Estes Bank to meet its own
cash flow needs. Estes Bank has two basic sources of liquidity. The first is its
commercial and retail deposit market served by its banking offices. Estes Bank
maintains its core deposits by offering competitive rates and products. The
second source of Estes Bank's liquidity is federal funds. During periods in the
annual business cycle when loans are peaking and deposits are at lower levels,
federal fund borrowings have adequately met liquidity needs. Estes Bank
anticipates that it will continue to rely primarily upon customer deposits,
federal fund borrowings and retained earnings to provide liquidity, and will use
funds so provided primarily to make loans and to purchase investment securities.
ASSET/LIABILITY MANAGEMENT. A principal function of asset/liability
management is to coordinate the levels of interest-sensitive assets and
liabilities to minimize net interest income fluctuations in times of fluctuating
-47-
<PAGE>
market interest rates. Interest-sensitive assets and liabilities are those that
are subject to repricing in the near term, including both variable rate
instruments and those fixed-rate instruments which are approaching maturity.
Changes in net yield on interest-sensitive assets arise when interest rates on
those assets (e.g. loans and investment securities) change in a different time
period from that of interest rates on liabilities (principally deposits).
Changes in net yield on interest-sensitive assets also arise from changes in the
mix and volumes of earning assets and interest-bearing liabilities. 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 Estes
Bank's assets and liabilities as of March 31, 2000, and sets forth the repricing
dates of Estes Bank's interest-earning assets and interest-bearing liabilities
as of that date, as well as Estes Bank's interest rate sensitivity gap
percentages for the periods presented. The table is based upon assumptions as to
when assets and liabilities will reprice in a changing interest rate
environment, and since such assumptions can be no more than estimates, certain
assets and liabilities indicated as maturing or otherwise repricing within a
stated period may, in fact, mature or reprice at different times and at
different volumes than those estimated. Also, the renewal or repricing of
certain assets and liabilities can be discretionary and subject to competitive
and other pressures. Therefore, the following table does not and cannot
necessarily indicate the actual future impact of general interest rate movements
on Estes Bank's net interest income.
<TABLE>
<CAPTION>
Estimated Maturity or Repricing At March 31, 2000
-------------------------------------------------
Over Three Over One
Three 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 $ 875 $ - $ - $ - $ 875
Investment securities 2,098 2,651 17,680 - 22,429
Loans 10,291 9,713 21,307 5,577 46,888
------ ------- ------ ----- ------
Total interest-earning assets 13,264 12,364 38,987 5,577 70,192
Interest-bearing liabilities
Deposits
Demand, interest-bearing* 1,073 6,705 16,357 4,290 28,425
Savings* - - 6,227 1,557 7,784
Time deposits 6,327 7,903 4,418 18,648
------- ------- ------- -------- ------
-
Total interest-bearing liabilities 7,400 14,608 27,002 5,847 54,857
------- ------ ------ -------- ------
Interest rate gap $ 5,864 $ (2,244) $11,985 $ (270) $15,335
====== ======= ====== ======== ======
Cumulative interest rate gap at
March 31, 2000 $ 5,864 $ 3,620 $15,605 $15,335
====== ======= ====== ======
Cumulative interest rate gap
to total assets 7.43% 4.59% 19.77% 19.43%
====== ======= ====== ======
</TABLE>
* Estes Bank's experience with interest-bearing demand deposits and savings
deposits has been that, although these deposits are subject to immediate
withdrawal or repricing, a portion of the balances have remained relatively
-48-
<PAGE>
constant in periods of both rising and falling rates. Therefore, these deposits
are included in the above periods based on estimated maturity data.
EFFECTS OF INFLATION AND CHANGING PRICES
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than inflation. Although interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services, increases in inflation generally have resulted in increased
interest rates. Over short periods of time interest rates may not move in the
same direction or magnitude as inflation.
YEAR 2000 COMPLIANCE
Estes Bank did not experience any problems with the date change to year
2000 or the date value for the year 2000. Expenses incurred during 1999
associated with year 2000 compliance totaled approximately $50,000.
COMPETITION
United Valley Bank has competition within its market from both
locally-owned financial institutions and major regional banks. Additionally,
there is competition from savings and loan companies, large credit unions,
investment companies and other types of financial services companies. Many of
United Valley Bank's competitors are larger and have substantially more capital
and financial resources than United Valley Bank and therefore have more
resources than United Valley Bank for lending and to pay for mass advertising,
technology and physical facilities. The primary factors affecting competition
for deposits are interest rates, cost of services, the quality and range of
financial products offered and the convenience of locations and office hours.
The primary factors in competing for loans are interest rates, loan origination
fees and quality and range of lending product offered. Other factors which
affect competition include the general availability and reliability of lendable
funds/credit, general and local economic conditions and the quality of service
and loan approval turn-around provided to the customers.
United Valley Bank believes that it has been successful in developing a
niche of catering to the banking needs of its community, especially the seasonal
needs of its commercial customers in Estes Park, Colorado, by providing a
comprehensive banking relationship. It further believes that this success is
attributable in part to personal service and by striving to meet all of the
customers' essential banking needs.
VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS
The following sets forth as of March 31, 2000 each shareholder of
record that directly or indirectly owned, controlled, or held with power to vote
5% or more of the 51,750 outstanding shares of Estes Bank common stock, and the
amount of Estes Bank common stock held by each executive officer and director of
Estes Bank. There were 51,750 shares outstanding at March 31, 2000 (and 3,250
currently exercisable options to purchase Estes Bank common stock). Unless
otherwise indicated, each person has sole voting and investment powers over the
indicated shares. Information relating to beneficial ownership of the Estes Bank
common stock is based upon "beneficial ownership" concepts set forth in rules
issued under the Exchange Act. Under those rules, a person is deemed to be a
"beneficial owner" of a security if that person has or shares "voting power,"
which includes the power to vote or to direct the voting of that security, or
"investment power," which includes the power to dispose or to direct the
-49-
<PAGE>
disposition of that security. Under the rules, more than one person may be
deemed to be a beneficial owner of the same securities.
<TABLE>
<CAPTION>
NAME AND ADDRESS <F1> NUMBER OF SHARES BENEFICIALLY PERCENT OF CLASS (%)<F3>
---------------- ------------------------------ -----------------------
OWNED
-----
<S> <C> <C>
Jack G. Haselbush*<F1> 24,595 44.72
1363 E. Elkhorn Avenue
Estes Park, Colorado 80517
Bradley D. Sishc*<F2> 12,625 22.95
363 E. Elkhorn Avenue
Estes Park, Colorado 80517
George J. Hix* 500 0.91
P.O. Box 2270
Estes Park, Colorado 80517
James F. Banker* 1250 2.27
P.O. Box 2344
Estes Park, Colorado 80517
Jeffrey P. Hancock* 300 0.55
501 S. St. Vrain Ln., #203
Estes Park, Colorado 80517
United Valley Bank Restated Employee Stock 36,890 67.07
Ownership 401(K) Plan and Retirement Trust
("ESOP Plan")
363 E. Elkhorn Avenue
Estes Park, Colorado 80517
All executive officers and directors as a 39,270 71.4
group (five persons)
<FN>
* Director of Estes Bank.
<F1> Mr. Haselbush serves as Secretary and Treasurer of Estes Bank. Includes
3,300 shares owned by Haselbush Enterprises, LLP and 14,570 shares in the ESOP
Plan over which Mr. Haselbush has voting power, Mr. Haselbush is Plan
Administrator of the ESOP Plan with voting power over certain forfeited or
unallocated shares held in the name of the ESOP Plan. Mr. Haselbush disclaims a
beneficial interest in shares he may vote in his capacity as Plan Administrator
of the ESOP Plan.
<F2> Mr. Sishc serves as Vice President of Estes Bank. Includes 2,925 shares of
Estes Bank common stock issuable upon exercise of options that are fully vested
and exercisable as of the date of this proxy statement/prospectus and 8,890
shares in the ESOP Plan over which Mr. Sishc has voting power.
<F3> All percentages are based on 55,000 shares of Estes Bank common stock
issued and outstanding assuming the exercise of all outstanding options.
</FN>
</TABLE>
-50-
<PAGE>
INFORMATION ABOUT VAIL BANKS, INC.
DESCRIPTION OF BUSINESS
Vail Banks is a bank holding company headquartered in Vail, Colorado.
Vail Banks' activities are conducted through its wholly-owned subsidiary,
WestStar Bank, a full-service regional commercial bank with its main office
located in Vail, Colorado, and 24 retail offices. Vail Banks provides customary
types of banking services such as checking accounts, savings accounts, and time
deposits. It also engages in commercial and consumer lending, makes secured and
unsecured loans, and provides other financial services. At December 31, 1999,
Vail Banks had total consolidated assets of $464.9 million, total consolidated
loans of $336.7 million, total consolidated deposits of $372.7 million, and
total consolidated shareholders' equity of $58.7 million. We have attached to
this proxy statement/prospectus as Appendix B the Vail Banks Form 10-KSB for the
year ended December 31, 1999, the Form 10-QSB for the three-month period ended
March 31, 2000, and the Proxy Statement Dated April 14, 2000.
RECENT DEVELOPMENTS
On May 21, 1999, Vail Banks acquired $36.8 million of deposits and the
real estate of the Glenwood Springs, Colorado branch of World Savings of
Oakland, California. World Savings retained the mortgage loans it owned in
Glenwood Springs. The acquisition makes WestStar one of the largest depository
institutions in the Glenwood Springs market. Additionally, on November 8, 1999,
WestStar entered into an agreement to acquire First Western Services, Inc., for
consideration that included cash and installment notes. The acquisition closed
on January 1, 2000, adding mortgage brokerage to WestStar's lending services.
DESCRIPTION OF SECURITIES
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 proxy statement/prospectus forms a part, and the applicable provisions of
the Colorado Business Corporation Act:
GENERAL. 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. 6,081,180 shares of common stock were issued
and outstanding as of March 31, 2000, and no shares of preferred stock are
issued and outstanding. Additionally, there are presently exercisable options to
acquire 138,440 shares of Vail Banks' common stock issued and outstanding.
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. 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 proxy
statement/prospectus) will be, fully paid and nonassessable.
-51-
<PAGE>
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 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.
EXCHANGE AGENT. The Exchange Agent for Vail Banks' common stock is
American Securities Transfer and Trust, Denver, located in Denver, Colorado.
LEGAL OPINIONS
Kilpatrick Stockton LLP, counsel to Vail Banks, will provide an opinion
as to the legality of the Vail Banks common stock to be issued in connection
with the merger.
EXPERTS
The audited consolidated financial statements of Vail Banks, Inc. as of
December 31, 1999 and 1998 and for each of the years in the two-year period
ended December 31, 1999, have incorporated by reference in this proxy
statement/prospectus and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing.
The audited consolidated financial statements of Estes Bank as of and
for the year ended December 31, 1999, included in this proxy
statement/prospectus and elsewhere in the registration statement have been
audited by Fortner, Bayens, Levkulich and Co., P.C., independent certified
public accountants, as indicated in their related audit reports, and are
included on the authority of that firm as experts in giving those reports.
OTHER MATTERS
Management of Estes Bank and Vail Banks know of no other matters which
may be brought before the special shareholders' meeting. If any matter other
than the proposed merger or related matters should properly come before the
special meeting, however, the persons named in the enclosed proxies will vote
proxies in accordance with their judgment on those matters.
By Order of the Boards of Directors,
-52-
<PAGE>
ESTES BANK CORPORATION AND SUBSIDIARY
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
<S> <C>
Independent Auditors' Report on the Consolidated Financial Statements as of and for
the Year Ended December 31, 1999 ..........................................................................F-1
Consolidated Balance Sheets as of March 31, 2000 (Unaudited) and December 31, 1999 ........................F-2
Consolidated Statements of Income for the Three Months Ended March 31, 2000 and 1999
(Unaudited) and the Year Ended December 31, 1999...........................................................F-3
Consolidated Statement of Shareholders' Equity for the Year Ended December 31, 1999
and the Three Months Ended March 31, 2000 (Unaudited)......................................................F-4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and
1999 (Unaudited) and the Year Ended December 31, 1999......................................................F-5
Notes to Consolidated Financial Statements ................................................................F-6
</TABLE>
-52-
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Estes Bank Corporation
Estes Park, Colorado
We have audited the accompanying consolidated balance sheet of Estes
Bank Corporation and Subsidiary as of December 31, 1999 and the related
consolidated statements of income, shareholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of Company's
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 Estes Bank
Corporation and Subsidiary at December 31, 1999 and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ Fortner, Bayens, Levkulich and Co., P.C.
Denver, Colorado
March 1, 2000
F-1
<PAGE>
Estes Bank Corporation and Subsidiary
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------------- ------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ $ 4,481
3,276
Federal funds sold 875 -
Investment securities available for sale 7,252 7,754
Investment securities held to maturity 15,177 18,690
Loans 46,888 46,349
Less allowance for loan losses (345) (405)
-------------- ----------------
46,543 45,944
Bank premises and equipment, net 2,588 2,645
Accrued interest receivable 606 662
Goodwill 2,297 2,345
Other assets 306 377
-------------- ----------------
$ 78,920 $ 82,898
============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Demand, non-interest bearing $ 14,472 $ 17,081
Demand, interest bearing 28,425 28,101
Savings 7,784 8,581
Time, $100,000 and over 3,234 2,839
Other time 15,414 16,530
-------------- ----------------
Total deposits 69,329 73,132
Federal funds purchased - 955
Accrued interest payable and other liabilities 584 1,025
-------------- ----------------
Total liabilities 69,913 75,112
Commitments (notes 6 and 13)
Shareholders' equity
Common stock, $1 par value; 100,000 shares authorized;
issued and outstanding, 51,750 and 45,000 shares at
March 31, 2000 and December 31, 1999, respectively 52 45
Capital in excess of par value 1,667 510
Retained earnings 7,335 7,255
Accumulated other comprehensive income (loss) (47) (24)
-------------- ----------------
9,007 7,786
-------------- ----------------
$ 78,920 $ 82,898
============== ================
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-2
<PAGE>
Estes Bank Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Year ended
March 31, December 31,
---------------------------------- ----------------
2000 1999 1999
---------------- ----------------- ---------------
(Unaudited)
<S> <C> <C> <C>
Interest income
Interest and fees on loans $ 1,078 $ 1,026 $ 4,314
Investment securities
Taxable interest 336 361 1,582
Exempt from federal taxes 7 6 24
Federal funds sold 11 40 147
---------------- ----------------- ---------------
Total interest income 1,432 1,433 6,067
Interest expense
Deposits 465 473 1,967
Federal funds purchased 8 -- 7
---------------- ----------------- ----------------
Total interest expense 473 473 1,974
Net interest income 959 960 4,093
---------------- ---------------- ----------------
Provision for loan losses 275 8 --
---------------- ----------------- ----------------
Net interest income after provision for
loan losses 684 952 4,093
Other income
Service charges on deposit accounts 107 132 496
Other customer service fees 66 68 228
Rental income 35 29 122
Gain (loss) on sale of investment securities (8) -- (2)
Other income 2 2 17
---------------- ----------------- ----------------
Total other income 202 231 861
Other expenses
Salaries and employee benefits 272 309 1,242
Occupancy 57 59 226
Equipment 41 38 158
Data processing 36 41 158
Goodwill amortization 48 48 191
Other 152 263 639
---------------- ----------------- ----------------
Total other expenses 606 758 2,614
---------------- ---------------- ----------------
Net income before income taxes 280 425 2,340
Income tax expense 64 87 594
---------------- ----------------- ----------------
NET INCOME $ 216 $ 338 $ 1,746
================ ================= ================
Earnings per share
Basic $ 4.70 $ 7.52 $ 38.80
================ ================= ================
Diluted $ 3.99 $ 6.27 $ 32.36
================ ================= ================
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-3
<PAGE>
Estes Bank Corporation and Subsidiary
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Year ended December 31, 1999
and three months ended March 31, 2000 (Unaudited)
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
COMMON STOCK Accumulated
------------ Capital in other
Number excess of Retained comprehensive
of shares Amount par value earnings income (loss) Total
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999 45,000 $ 45 $ 496 $ 6,063 $ 191 $ 6,795
Sale of common stock at $154.85 per share 100 -- 15 -- -- 15
Reacquisition of common stock at $154.85
per share (100) -- (1) (14) -- (15)
Cash dividends paid -- -- -- (540) -- (540)
Comprehensive income
Net income for the year -- -- -- 1,746 -- 1,746
Change in net unrealized gain (loss) on
securities available for sale, net of -- -- -- -- (215) (215)
tax effects ---------
Total comprehensive income 1,531
--------------------------------------------------------------------------------
Balance at December 31, 1999 45,000 45 510 7,255 (24) 7,786
Issuance of common stock under stock
option plan 6,750 7 1,157 -- -- 1,164
Cash dividends paid -- -- -- (136) (136)
Net income for the period -- -- -- 216 -- 216
Change in net unrealized gain (loss) on
securities available for sale, net of -- -- -- -- (23) (23)
tax effects ----------
Total comprehensive income 193
---------------------------------------------------------------------------------
Balance at March 31, 2000 (unaudited) 51,750 $ 52 $ 1,667 $ 7,335 $ (47) $ 9,007
=================================================================================
The accompanying notes are an integral part of this financial statement.
</TABLE>
F-4
<PAGE>
Estes Bank Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Three months ended Year ended
March 31, December 31,
----------------------------- ---------------
2000 1999 1999
------------- -------------- ---------------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 216 $ 338 $ 1,746
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 44 39 171
Amortization of goodwill 48 48 191
Deferred income taxes 163 (64) (159)
Provision for loan losses 275 8 0
Net amortization (accretion) on investment securities (3) (1) 5
Loss on sale of investment securities 8 0 2
Compensation accrued under stock option plan 6 43 205
Changes in deferrals and accruals
Accrued interest receivable 56 (25) (141)
Other assets, net (95) 14 1
Accrued interest payable and other liabilities 76 194 (55)
------------- -------------- ---------------
Net cash provided by operating activities 794 594 1,966
Cash flows from investing activities
Decrease (increase) in federal funds sold (875) 2,160 3,850
Purchase of securities held to maturity (3,463) (6,988) (32,918)
Purchase of securities available for sale -- (1,996) (1,899)
Proceeds from maturities of securities held to maturity 4,745 7,187 25,626
Proceeds from maturities of securities available for sale -- 1,050 5,075
Proceeds from sale of securities available for sale 2,691 -- 499
Net increase in loans (874) (1,158) (2,949)
Purchases of property and equipment -- (103) (141)
------------- -------------- ---------------
Net cash provided by (used in) investing activities 2,224 152 (2,857)
Cash flows from financing activities
Net increase (decrease) in deposits (3,803) (924) 1,259
Increase (decrease) in federal funds purchased (955) -- 955
Reacquisition of common stock -- -- (15)
Sale of common stock 671 -- 15
Cash dividends paid (136) (90) (540)
------------- -------------- ----------------
Net cash provided by (used in) financing (4,223) (1,014) 1,674
activities
------------- -------------- ----------------
Net increase (decrease) in cash and due from banks (1,205) (268) 783
Cash and due from banks at beginning of period 4,481 3,698 3,698
------------- -------------- ----------------
Cash and due from banks at end of period $ 3,276 $ 3,430 $ 4,481
============= ============== =================
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest expense $ 447 $ 479 $ 1,973
Income taxes -- 7 826
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-5
<PAGE>
Estes Bank Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the three months ended March 31, 2000 is unaudited)
(Amounts in thousands of dollars)
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION
----------------------------------------------------
The accompanying consolidated financial statements include the accounts
of Estes Bank Corporation and its wholly owned subsidiary United Valley
Bank (the Bank). The entities are collectively referred to as the
Company. All significant intercompany accounts and transactions have
been eliminated in consolidation.
The Company provides a full range of banking and mortgage services to
individual and corporate customers principally in the Larimer and Grand
County areas. A majority of the Company's loans are tourism related.
Borrowers' abilities to honor their loans are dependent upon the
continued economic viability of the area. The Company is subject to
competition from other financial institutions for loans and deposit
accounts. The Company is also subject to regulation by certain
governmental agencies and undergoes periodic examinations by those
regulatory agencies.
As of March 31, 2000 and December 31, 1999, 71% and 82%, respectively,
of the Company's common stock was owned by United Valley Bank Restated
Employee Stock Ownership 401(k) Plan.
BASIS OF FINANCIAL STATEMENT PRESENTATION
-----------------------------------------
The financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period.
Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance
for loan losses. In connection with the determination of the allowance
for loan losses, management obtains independent appraisals for
significant properties and assesses estimated future cash flows from
borrowers' operations and the liquidation of loan collateral.
Management believes that the allowance for loan losses is adequate.
While management uses available information to recognize loan losses,
changes in economic conditions may necessitate revisions in future
years. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance
for loan losses. Such agencies may require the Company to recognize
additional losses based on their judgments about information available
to them at the time of their examination.
F-6
<PAGE>
Estes Bank Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information as of and for the three months ended March 31, 2000 is unaudited)
(Amounts in thousands of dollars)
INTERIM FINANCIAL INFORMATION (UNAUDITED)
-----------------------------------------
The unaudited interim financial statements 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
periods presented. Results of operations for the three months ended
March 31, 2000 are not necessarily indicative of the results to be
expected for the full year.
INVESTMENT SECURITIES
---------------------
The Company revalues investment securities designated as available for
sale at each reporting period. 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
excluded from earnings and reported in other comprehensive income.
Gains or losses on sales of securities are recognized by the specific
identification method.
LOANS AND ALLOWANCE FOR LOAN LOSSES
-----------------------------------
Loans are reported at the principal amount outstanding, net of the
allowance for loan losses. Interest on loans is calculated by using the
simple interest method on the daily balance of the principal amount
outstanding.
The accrual of interest on loans is discontinued when management
believes that interest or principal may not be collectible or
recoverable. 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 loan losses. All other interest
reversed on nonaccrual loans is charged against current year interest
income.
Loan origination and commitment fees are recognized as income when
received, since a major portion of these represent recovery of direct
origination costs. These fees are not deemed to be material to the
consolidated financial statements.
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings.
Loan losses are charged against the allowance when management believes
the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
F-7
<PAGE>
Estes Bank Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information as of and for the three months ended March 31, 2000 is unaudited)
(Amounts in thousands of dollars)
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available.
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and
interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior
payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan
basis for commercial and construction loans by either the present value
of expected future cash flows discounted at the loan's effective
interest rate, the loan's obtainable market price, or the fair value of
the collateral if the loan is collateral dependent.
BANK PREMISES AND EQUIPMENT
---------------------------
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed generally on the straight-line
method over the estimated useful lives of the assets.
GOODWILL
--------
The excess of the purchase price over the net assets of branch
facilities acquired is reflected as goodwill. Goodwill is amortized on
the straight-line method over fifteen years. Accumulated amortization
of goodwill as of March 31, 2000 and December 31, 1999 was $574 and
$526, respectively.
INCOME TAXES
------------
Provisions for income taxes are based on taxes payable or refundable
for the current year (after exclusion of non-taxable income such as
interest on state and municipal securities) and deferred taxes on
temporary differences between the amount of taxable income and pretax
financial income and between the tax bases of assets and liabilities
and their reported amounts in the financial statements. Deferred tax
assets and liabilities are included in the financial statements at
currently enacted income tax rates applicable to the period in which
the deferred tax assets and liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income
taxes.
F-8
<PAGE>
Estes Bank Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information as of and for the three months ended March 31, 2000 is unaudited)
(Amounts in thousands of dollars)
STOCK-BASED COMPENSATION
------------------------
Stock options granted under the Company's stock option and stock
appreciation rights plan are accounted for under the provisions of the
Financial Accounting Standards Board Interpretation No. 28, ACCOUNTING
FOR STOCK APPRECIATION RIGHTS AND OTHER VARIABLE STOCK OPTIONS OF AWARD
PLANS. Under this Interpretation, compensation is charged to operations
based on the difference between the defined value of the common stock
and the option price. Upon the exercise of stock options, accrued
compensation is recognized as consideration for the stock issued.
EARNINGS PER SHARE
------------------
The Company computes earnings per share in accordance with Financial
Accounting Standard No. 128, EARNINGS PER SHARE. Basic earnings per
share is based on the weighted average number of common shares
outstanding during each period. Diluted earnings per share is computed
by dividing net income by the weighted average number of common shares
outstanding during the period plus dilutive securities. Common shares
used in the determination of basic and diluted earnings per share
follow:
<TABLE>
<CAPTION>
Three months ended
March 31, Year ended
------------------------- December 31,
2000 1999 1999
---- ---- --------------
(Unaudited)
Basic
<S> <C> <C> <C>
Weighted average common shares outstanding 45,895 45,000 45,000
Effect of dilutive securities
Stock options 8,199 8,949 8,961
------ ------ ------
Diluted 54,094 53,949 53,961
====== ====== ======
</TABLE>
COMPREHENSIVE INCOME
--------------------
The Company has adopted Financial Accounting Standard No. 130,
REPORTING COMPREHENSIVE INCOME, (SFAS No. 130). SFAS No. 130
establishes standards for reporting comprehensive income and its
components (revenues, expenses, gains and losses). Components of
comprehensive income are net income and all other non-owner changes in
equity. The statement requires an enterprise to classify items of other
comprehensive income by their nature in the financial statements and to
display the accumulated balance of other comprehensive income
separately from other components of equity in the balance sheet. The
only component of comprehensive income consists of net unrealized
holding gains and losses on available for sale securities, less the
related tax effects. The Company discloses comprehensive income in the
Statement of Shareholders' Equity.
F-9
<PAGE>
Estes Bank Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information as of and for the three months ended March 31, 2000 is unaudited)
(Amounts in thousands of dollars)
The components of other comprehensive income and related tax effects
are as follows:
<TABLE>
<CAPTION>
Three months ended Year ended
March 31, December 31,
2000 1999
------------------- -------------
<S> <C> <C>
Change in unrealized holding gains (losses)
on available-for sale securities $ (37) $ (37)
Tax effect 14 127
---- ---
Net-of-tax amount $ (23) $ (215)
==== =====
</TABLE>
STATEMENT OF CASH FLOWS
-----------------------
The Company has defined cash and cash equivalents for purposes of the
Statement of Cash Flows as those amounts included in the balance sheet
caption "Cash and Due from Banks".
NOTE 2 - INVESTMENT SECURITIES
The amortized costs and fair market values of investment securities at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Securities Available for Sale
U.S. Treasury securities $ 5,296 $13 $ (50) $ 5,259
Obligations of other U.S.
government agencies 2,416 5 (6) 2,415
State and municipal 80 - - 80
-------- ---- ----- ------
$ 7,792 $18 $ (56) $ 7,754
======= == ==== ======
</TABLE>
F-10
<PAGE>
Estes Bank Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information as of and for the three months ended March 31, 2000 is unaudited)
(Amounts in thousands of dollars)
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY
U.S. Treasury securities $ 1,647 $ 1 $ (22) $ 1,626
Obligations of other U.S.
government agencies 14,365 4 (116) 14,253
State and municipal 475 1 (4) 472
Corporate obligations 2,203 7 (80) 2,130
------ --- ---- -------
$18,690 $13 $(222) $18,481
====== == === ======
The amortized cost and estimated fair value of debt securities at December
31, 1999 by contractual maturity are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations without call or prepayment penalties.
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 $ 2,266 $ 2,267 $ 6,748 $ 6,668
Due after one year through
five years 5,446 5,407 11,038 10,874
Due after five years through
ten years 80 80 904 939
------- ------- ------- -------
$ 7,792 $ 7,754 $ 18,690 $ 18,481
======= ====== ======= =======
</TABLE>
Investment securities with a carrying value of $5,764 are pledged at
December 31, 1999 as collateral for public deposits and for other purposes
as required or permitted by law.
The Company received proceeds of $499 from sales of investment securities in
1999, realizing a loss of $2.
F-11
<PAGE>
Estes Bank Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information as of and for the three months ended March 31, 2000 is unaudited)
(Amounts in thousands of dollars)
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
<S> <C> <C>
Commercial and real estate construction $34,128 $33,206
Real estate mortgage 11,402 11,864
Installment 1,180 1,116
Other 178 163
--------- ---------
$46,888 $46,349
====== ======
</TABLE>
Transactions in the allowance for possible loan losses are as follows:
<TABLE>
<CAPTION>
Three months ended Year ended
March 31, December 31,
2000 1999
-------------------- -----------------
<S> <C> <C>
Balance at beginning of period $405 $401
Provision for loan losses 275 -
Recoveries on loans previously charged off - 5
Loans charged off (335) (1)
--- ----
Balance at end of period $345 $405
=== ===
</TABLE>
The loan charge offs of $335 during the three months ended March 31, 2000
relate to loans to a single borrower. This borrower owned an automobile
dealership. In late 1999, management discovered that numerous titles which
represented collateral on one of the loans were fraudulent. As of December
31, 1999, management designated $85 as a component of the allowance for loan
losses for the unsecured portion of the loans. In January 2000 the Company
filed a bonding claim with its insurance carrier, requesting reimbursement
of the loan balances, and charged off $85 relating to the unsecured balances
of these loans. In April 2000 the Company was notified that the insurance
carrier did not intend to honor this claim. Management recorded an
additional charge off of $250, representing the remaining balance of these
loans, and an additional provision for loan losses of $200, effective March
31, 2000. Management intends to pursue litigation against the insurance
carrier to collect the charged off balances. In addition, the Company is in
a secondary collateral position with respect to two commercial properties
owned by the borrower. The Company intends to pursue collection under its
rights as a lien holder. However, there is no assurance that the Company
will prevail in these actions. During the three months ended March 31, 2000,
the Company recorded a provision for loan losses of $275 related principally
to the problem loans of this borrower.
F-12
<PAGE>
Estes Bank Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information as of and for the three months ended March 31, 2000 is unaudited)
(Amounts in thousands of dollars)
There were no outstanding principal balances of loans having payments
delinquent more than ninety days at December 31, 1999. At December 31, 1999,
the accrual of interest had not been discontinued on any loans.
At December 31, 1999, approximately 85% of the Company's loan portfolio was
collateralized by real estate.
NOTE 4 - BANK PREMISES AND EQUIPMENT
At December 31, 1999 bank premises and equipment, less accumulated
depreciation, consisted of the following:
Buildings and improvements $2,411
Furniture, fixtures and equipment 666
Land 388
------
3,465
Less accumulated depreciation (820)
------
$2,645
======
NOTE 5 - DEPOSITS
At December 31, 1999, the scheduled maturities of time deposits are as
follows:
2000 $13,465
2001 4,458
2002 1,266
2003 172
2004 8
------
$19,369
======
NOTE 6 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
and stand-by letters of credit.
Those instruments involve, to a varying degree, elements of credit risk in
excess of the amount recognized in the statement of financial position. The
contract amounts of those instruments reflect the extent of involvement the
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
stand-by letters of credit is represented by the contractual notional amount
F-13
<PAGE>
Estes Bank Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information as of and for the three months ended March 31, 2000 is unaudited)
(Amounts in thousands of dollars)
of those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
A summary of the Company's commitments follows:
March 31, December 31,
2000 1999
------------- --------
Commitments to extend credit $6,935 $5,962
Stand-by letters of credit 169 33
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Company evaluates
each customer's credit-worthiness on a case-by-case basis. The amount of
collateral obtained if deemed necessary by the Company upon extension of
credit is based on management's credit evaluation. Collateral held varies,
but may include accounts receivable, inventory, property, plant and
equipment and income-producing commercial properties.
Stand-by letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
F-14
<PAGE>
Estes Bank Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information as of and for the three months ended March 31, 2000 is unaudited)
(Amounts in thousands of dollars)
NOTE 7 - INCOME TAXES
Allocation of federal and state income taxes between current and deferred
portions is as follows:
<TABLE>
<CAPTION>
Three months ended Year ended
March 31, December 31,
2000 1999
---------------------- -----------------
<S> <C> <C>
Current tax expense (benefit)
Federal $(99) $720
State - 33
----- ----
(99) 753
Deferred tax expense (benefit)
Federal 142 (139)
State 21 (20)
---- ---
163 (159)
--- ---
$ 64 $594
==== ===
</TABLE>
The reasons for the differences between the statutory federal income tax
rates are summarized as follows:
<TABLE>
<CAPTION>
Three months ended Year ended
March 31, December 31,
2000 1999
------------------------ -----------------------
AMOUNT PERCENT AMOUNT PERCENT
<S> <C> <C> <C> <C>
Tax expense at statutory rate $95 34.0% $796 34.0%
Increase (decrease) in taxes due to
Tax-exempt interest (7) (2.5) (27) (1.2)
Deductible dividends paid to the
Company's ESOP (34) (12.2) (136) (5.8)
Other items (net) 10 3.6 (39) (1.6)
-- ----- ---- -----
$64 22.9% $594 25.4%
== ==== === ====
</TABLE>
F-15
<PAGE>
Estes Bank Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information as of and for the three months ended March 31, 2000 is unaudited)
(Amounts in thousands of dollars)
Deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------- -----------
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 63 $ 74
Deferred compensation 74 240
Unrealized loss on available for sale investments 28 14
---- ----
Total deferred tax assets 165 328
Deferred tax liabilities
Adjustment from accrual to cash basis (52) (72)
Bases of bank premises and equipment (104) (97)
--- ---
Total deferred tax liabilities (156) (169)
--- ---
Net deferred tax asset $ 9 $159
==== ===
</TABLE>
NOTE 8 - RELATED PARTY TRANSACTIONS
At December 31, 1999, the Company had loans receivable from directors,
officers and principal shareholders (more than ten percent ownership) of the
Company and their related business interest which totaled approximately
$1,342.
NOTE 9 - EMPLOYEE BENEFIT PLANS
RETIREMENT PLAN
---------------
The Company provides retirement benefits to its employees under United
Valley Bank Restated Employee Stock Ownership 401(k) Plan. To become
eligible for the plan, an employee is required to complete one-half year
of service and be eighteen years of age. Any employee who has qualified
to become a participant under this plan may elect not to become a
participant.
In 1999 and 1998, the Company matched employees' 401(k) contributions up
to three percent of eligible compensation. The Company's 401(k)
contributions totaled $17 in 1999.
For each plan year, the Company's board of directors shall determine the
amount, if any, of ESOP contributions, limited to no greater than
twenty-five percent of each employee's compensation covered under the
plan. The Company did not contribute to the ESOP in 1999.
F-16
<PAGE>
Estes Bank Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information as of and for the three months ended March 31, 2000 is unaudited)
(Amounts in thousands of dollars)
STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN
The Company has a non-qualified stock option plan for its key executives
that provides for the granting of incentive stock options as defined
under the Internal Revenue Code. Under the plan, a maximum of 10,000
options may be granted at a price not less than 100% of the book value at
the date of the option grant. Recipients of stock options are fully
vested as of the date that the options are granted. The options have a
term of ten years.
The plan provides for the granting of Stock Appreciation Rights ("SARs")
subject to certain conditions and limitations to holders of options under
the plan. SARs permit the optionee to surrender an exercisable option for
an amount equal to the excess of the current book value of the common
stock over the option price. The Company accrues compensation expense
based on the difference between these prices. Compensation charged to
operations amounted to $6 and $206 for the three months ended March 31,
2000 and the year ended December 31, 1999, respectively.
A summary of activity in this plan follows:
Average option
Shares price per share
------ ---------------
Outstanding at January 1, 1999 7,500 $ 84.25
Granted 1,500 145.54
Exercised (35) 145.54
Expired or terminated - -
------
Outstanding at December 31, 1999 8,965 94.27
Granted 1,035 166.48
Exercised (6,750) 99.42
Expired or terminated - -
------
Outstanding at March 31, 2000 3,250 $ 84.28
=====
During the three months ended March 31, 2000, employees exercised options to
acquire 6,750 shares of common stock. The Company received $671 in proceeds
from the exercise of these options. This amount plus the amount previously
accrued as compensation relative to the options, $493, was credited to
shareholders' equity.
F-17
<PAGE>
Estes Bank Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information as of and for the three months ended March 31, 2000 is unaudited)
(Amounts in thousands of dollars)
NOTE 10 - DIVIDENDS
Various restrictions limit the extent to which dividends may be paid by the
Bank. Regulatory approval 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.
NOTE 11 - REGULATORY MATTERS
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 Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative measures
of the bank's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1999,
that the Bank meets all capital adequacy requirements to which it is subject.
The most recent notification from the Federal Deposit Insurance Corporation
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 1 risk-based, and Tier 1 leverage
ratios as set forth in the table. There are no conditions or events since
that notification that management believes have changed the institution's
category.
F-18
<PAGE>
Estes Bank Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information as of and for the three months ended March 31, 2000 is unaudited)
(Amounts in thousands of dollars)
Capital ratios for the Bank as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------ -------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
Total capital
<S> <C> <C> <C> <C> <C> <C>
(to risk weighted assets) $6,195 12.4% $3,988 >8.0% $4,985 >10.0%
- -
Tier 1 capital
(to risk weighted assets) 5,790 11.6 1,994 >4.0 2,991 >6.0
- -
Tier 1 capital
(to average assets) 5,790 7.4 3,120 >4.0 3,900 >5.0
- -
</TABLE>
Capital ratios for the Bank as of March 31, 2000 are as follows:
Total capital to risk weighted assets 12.0%
Tier 1 capital to risk weighted assets 11.3
Tier 1 capital to average assets 7.6
F-19
<PAGE>
Estes Bank Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information as of and for the three months ended March 31, 2000 is unaudited)
(Amounts in thousands of dollars)
NOTE 12 - PARENT COMPANY ONLY FINANCIAL INFORMATION
BALANCE SHEETS
March 31, December 31,
2000 1999
------------ -----------
(unaudited)
ASSETS
Cash $ 716 $ 24
Investment in unconsolidated subsidiary 8,161 8,111
Deferred income taxes 75 240
Other 283 118
------ ------
$9,235 $8,493
===== =====
LIABILITIES AND
STOCKHOLDER'S EQUITY
Liabilities
Compensation accrued under stock option plan $ 219 $ 706
Other 19 -
------- -------
228 706
Shareholders' equity 9,007 7,787
----- -----
$9,235 $8,493
===== =====
F-20
<PAGE>
Estes Bank Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information as of and for the three months ended March 31, 2000 is unaudited)
(Amounts in thousands of dollars)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three months ended
March 31, Year ended
------------------------ December 31,
2000 1999 1999
---- ---- -----------
(unaudited)
Income
<S> <C> <C> <C>
Dividends from subsidiary $125 $125 $ 475
Other 1 - 1
---- ----- --------
126 125 476
Expenses
Compensation accrued under stock option plan 6 43 206
Other 16 - 13
---- ----- -------
22 43 219
---- ---- ------
Income before income taxes and equity
in undistributed net income of subsidiary 104 82 257
Income tax benefit 39 25 223
---- ---- ------
Income before equity in undistributed net
income of subsidiary 143 107 480
Equity in undistributed net income of subsidiary 73 231 1,266
---- --- -----
Net income $216 $338 $1,746
=== === =====
</TABLE>
F-21
<PAGE>
Estes Bank Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information as of and for the three months ended March 31, 2000 is unaudited)
(Amounts in thousands of dollars)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended
March 31, Year ended
------------------------ December 31,
2000 1999 1999
---- ---- ------------
(unaudited)
<S> <C> <C> <C>
Cash flows from operating activities
Net income $216 $338 $1,746
Adjustments to reconcile net income to
net cash provided by operating activities
Equity in undistributed net income of subsidiary (73) (231) (1,266)
Compensation accrued under stock option plan 6 43 206
Deferred income taxes 166 (15) (70)
Changes in other assets and liabilities (net) (158) 23 (73)
----- ---- ------
Net cash provided by operating activities 157 158 543
Cash flows from financing activities
Sale of common stock 671 - 15
Reacquisition of common stock - - (15)
Cash dividends paid (136) (90) (540)
----- ---- -----
Net cash provided by (used in) financing
activities 535 (90) (540)
--- ---- -----
Net increase in cash 692 68 3
Cash at beginning of period 24 21 21
---- ---- ----
Cash at end of period $716 $ 89 $ 24
==== ===== ========
</TABLE>
NOTE 13 - PROPOSED MERGER
On March 21, 2000, Estes Bank entered into an Agreement and Plan of
Reorganization with Vail Banks, Inc. (Vail Banks). Under this agreement Estes
Bank will be merged into Vail Banks. The aggregate purchase price is $21,500.
Shareholders of Estes Bank will receive common stock of Vail Banks valued at
$3,225 and cash, subject to adjustment, of $18,275. The cash portion of the
sales price will be adjusted based on the difference between $9,871 and the
equity of Estes Bank (as defined in the agreement) as of the end of the month
immediately preceding the closing plus net income from the end of that month
through the closing date.
The merger is subject to shareholder and regulatory approval. The Company
estimates that the transaction will close early in the third quarter of 2000.
F-22
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of this 21st day of March, 2000, by and between ESTES BANK
CORPORATION, a Colorado corporation (hereinafter "Company," and unless the
context otherwise requires, the term "Company" shall include both Estes Bank
Corporation and its wholly-owned subsidiary, United Valley Bank, a Colorado bank
("United Valley Bank")), Jack G. Haselbush ("Haselbush"), Bradley D. SISHC
("Sishc") and VAIL BANKS, INC., a Colorado corporation (hereinafter "Vail
Banks," and unless the context otherwise requires, the term "Vail Banks" shall
include both Vail Banks, Inc. and its wholly-owned subsidiary, WestStar Bank, a
Colorado bank ("WestStar"). Haselbush and Sishc are signatories hereof solely to
be bound by Section 4.11 of this Agreement. They assume no other obligations
hereunder.
R E C I T A L S:
WHEREAS, the respective boards of directors of Company and Vail Banks
deem it advisable and in the best interests of each such entity and their
respective shareholders that Company be acquired by Vail Banks and that such
acquisition be accomplished by a merger of Company and Newco, a wholly-owned
subsidiary of Vail Banks to be formed ("Newco"), pursuant to which Newco will
merge with and into Company with each of the issued and outstanding shares of
common stock, $1 par value per share, of Company ("Company Stock") being
converted into the right to receive common stock of Vail Banks (the "Vail Common
Stock") and cash in accordance with Article I herein and all upon the terms and
conditions hereinafter set forth and as set forth in the Agreement and Plan of
Merger attached hereto as Exhibit A and incorporated herein by reference (the
"Merger Agreement");
WHEREAS, Haselbush and Sishc have agreed to vote all shares owned
directly or indirectly by them in favor of the transactions contemplated by this
Agreement.
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants and agreements herein contained, and other good and valuable
consideration, the receipt and adequacy of which as legally sufficient
consideration are hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
---------
PURCHASE PRICE
--------------
The aggregate Purchase Price (the "Purchase Price"), subject to the
adjustments described herein, shall be Twenty One Million Five Hundred Thousand
Dollars ($21,500,000) payable as follows:
Three Million Two Hundred Twenty Five Thousand Dollars ($3,225,000) in
Vail Common Stock and the remainder in cash.
<PAGE>
The cash portion of the Purchase Price will be adjusted, increased or
reduced as applicable, by an amount equal to the difference between $9,871,000
and the Net Worth of the Company as of the end of the month immediately
preceding the Closing plus the Net Income of the Company as of the end of such
month until the Closing Date. The Net Worth of the Company shall be determined
in accordance with generally accepted accounting principles, provided, however,
(a) that the value of trading securities, held to maturity securities,
and available-for-sale securities (held on December 31, 1999 and held at the
Closing) shall be determined as of December 31, 1999, and changes thereafter in
such accounts required by Financial Accounting Standards Board SFSA No. 115
shall be disregarded, and
(b) The Net Income of the Company from the end of the month immediately
preceding Closing to the Closing Date shall be paid as a post closing adjustment
within 30 days after the Closing Date (the "Post Closing Adjustment").
(c) The principal balance of the Rains Estes Park Ford, Inc. Loan (the
"Rains Loan") will be charged off prior to Closing and will be deemed to be zero
for purposes of calculating the Net Worth of the Company. If United Valley
Bank's blanket bond carrier has declined or has not paid in full United Valley
Bank's claims on the Rains Loan, then the Rains Loan promissory note(s), all
collateral security instruments of any nature and related collection files and
records shall be transferred and assigned immediately prior to Closing to a
fiduciary for the benefit of the shareholders of the Company. The fiduciary
shall be selected by the management of the Company. The shareholders of the
Company shall bear all costs of the fiduciary and costs of collection after the
Date of Closing.
The Vail Common Stock portion of the Purchase Price shall be issued by
Vail Banks and shall be registered for resale by Vail Banks pursuant to a Form
S-4 registration statement.
To compute the aggregate number of Vail Common Stock shares to be
issued pursuant to this Agreement, a share price shall be utilized that is in no
instance less than nine dollars ($9.00) per share and in no instance in excess
of twelve dollars ($12.00) per share. Within these parameters, the price per
share of Vail Common Stock will be determined by the average of the closing
sales price of Vail Common Stock as reported by the NASDAQ National Market
System on each of the fifteen (15) consecutive trading days immediately prior to
the Closing Date (the "Average Vail Common Stock Price"). The Average Vail
Common Stock Price shall be divided into $3,225,000 to determine the aggregate
number of shares of Vail Common Stock that will be issued to the holders of
Company Stock pursuant to this Agreement.
The Purchase Price will be allocated among the shareholders of Company
in proportion to their respective holdings of Company Stock as of the Closing.
If at any time during the period between the date of this Agreement and
the Closing Date, any change in the outstanding shares of Vail Common Stock
occurs or is effected by reason of any reclassification, recapitalization, stock
split or combination, exchange or readjustment of shares, or any stock dividend
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thereon with a record date during such period, the number of shares of Vail
Common Stock shall be adjusted on a pro rata basis.
ARTICLE II
----------
CLOSING
-------
The transactions contemplated herein shall be consummated (the
"Closing") at the offices of Company, or some other mutually agreeable location,
on the first business day following the later to occur of (i) the receipt of all
approvals from any governmental authorities having jurisdiction over the
transactions contemplated by this Agreement and the Merger Agreement, and the
expiration of any waiting or similar period required by applicable law (ii)
compliance with the Colorado Business Corporation Act and (iii) the satisfaction
of all other conditions to consummation of the Merger (the "Closing Date"), or
at such other time and place as may be mutually satisfactory to the parties
hereto. Notwithstanding the foregoing, the transactions contemplated herein
shall be consummated on or prior to October 1, 2000.
ARTICLE III
-----------
MERGER
------
3.1 MERGER. Pursuant to the terms and conditions provided herein, on
the Closing Date, Company and Newco shall be merged in accordance with and in
the manner set forth in the Merger Agreement. The surviving corporation
following the Merger will operate under the Articles of Incorporation of Company
and will be a wholly-owned subsidiary of Vail Banks.
At the Closing, (a) Vail Banks shall furnish to each shareholder of
Company Stock such shareholder's pro rata share of the cash portion of the
Purchase Price by cashier's check and (b) Company will cause each shareholder of
Company Stock to surrender the certificate(s) which represented such holder's
Company Stock in exchange for the cash portion of the Purchase Price to which
such holder is entitled.
Upon the terms and conditions of this Agreement and the Merger
Agreement, Vail Banks shall make available on or before the Closing Date to
American Securities Transfer & Trust, Denver, Colorado, who is designated as
exchange agent (the "Exchange Agent"), such number of shares of Vail Common
Stock as shall be issuable to the shareholders of Company Stock in accordance
with this Agreement. As soon as practicable after the Closing Date, Vail Banks
or the Exchange Agent shall mail to each holder of record of Company Stock a
form letter of transmittal and instructions for the issuance of Vail Common
Stock certificates pursuant to this Agreement. Upon receipt by the Exchange
Agent of a properly completed and signed transmittal letter, the Exchange Agent
shall promptly issue to such holder of Company Stock, Vail Common Stock
certificates representing such holder's share of the Vail Common Stock portion
of the Purchase Price and a check for an amount in lieu of any fractional
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shares. No fractional shares will be issued. As of and after the Closing Date,
the holders of Company Stock shall be entitled to all of the rights and benefits
of a holder of Vail Common Stock.
Vail Banks shall furnish to each holder of Company Stock such holder's
pro rata share of the Post Closing Adjustment by cashier's check mailed to their
address of record.
The transactions contemplated by this Agreement and the Merger
Agreement are not intended to qualify as a tax free reorganization under Section
368 of the Internal Revenue Code.
3.2 REGISTRATION STATEMENT. (a) The parties agree jointly to prepare a
registration statement on Form S-4 (the "Registration Statement") to be filed by
Vail Banks with the SEC in connection with the issuance of Vail Banks Common
Stock pursuant to the Merger Agreement. The parties agree to cooperate with the
other party, its counsel and its accountants, in the preparation of the
Registration Statement; and provided that both parties have cooperated as
provided above, Vail Banks agrees to file the Registration Statement with the
SEC as soon as reasonably practicable after the execution of this Agreement.
Each of the Company and Vail Banks agrees to use all reasonable efforts to cause
the Registration Statement to be declared effective under the Securities Act of
1933 as promptly as reasonably practicable after any SEC comments are resolved.
Vail Banks also agrees to use all reasonable efforts to obtain all necessary
state securities law or "Blue Sky" permits and approvals required to carry out
the transactions contemplated by this Agreement. Company agrees to furnish to
Vail Banks all information concerning Company and United Valley Bank, their
subsidiaries, officers, directors and stockholders as may be reasonably
requested in connection with the foregoing.
(b) Each of Company and Vail Banks agrees that none of the information
supplied or to be supplied by it for inclusion or incorporation by reference in
the Registration Statement will, at the time the Registration Statement and each
amendment or supplement thereto, if any, becomes effective under the Securities
Act of 1933, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances under which such
statements were made. Each of the Company and Vail Banks further agrees that if
it shall become aware prior to the Closing Date of any information furnished by
it that would cause any of the statements in the Registration Statement to be
false or misleading with respect to any material fact, or to omit to state any
material fact necessary to make the statements therein not false or misleading,
to promptly inform the other party thereof and to take the necessary steps to
the Registration Statement.
(c) Vail Banks agrees to advise Company, promptly after Vail Banks
receives notice thereof, of the time when the Registration Statement has become
effective or any supplement or amendment has been filed, of the issuance of any
stop order or the suspension of the qualification of Vail Banks Common Stock for
offering or sale in any jurisdiction, of the initiation or threat of any
proceeding for any such purpose, or of any request by the SEC for the amendment
or supplement of the Registration Statement or for additional information.
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ARTICLE IV
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OTHER AGREEMENTS
----------------
4.1 MEETING OF SHAREHOLDERS OF COMPANY. Company shall take all actions
in accordance with the laws of Colorado and its Articles of Incorporation and
Bylaws to call a special meeting of its shareholders (the "Special Meeting") for
the purpose of submitting the Merger Agreement to such shareholders for their
approval.
4.2 ABSENCE OF BROKERS. Each party hereto represents and warrants to
the other that no broker, finder or other finder has acted on its behalf in
connection with this Agreement or the transactions contemplated hereby.
Notwithstanding the preceding sentence, the Company has entered into an
agreement with The Wallach Company, Inc. pursuant to which the Company will pay
a fee to The Wallach Company, Inc. Each party agrees to indemnify the other and
hold and save it harmless from any claim or demand for commissions or other
compensation by any broker, finder, financial consultant or similar agent (other
than The Wallach Company, Inc.) claiming to have been employed by or on behalf
of such party.
4.3 ACCESS, INFORMATION AND DOCUMENTS. Company shall allow Vail Banks
and its authorized representatives reasonable access during normal business
hours from and after the date hereof and prior to the Closing Date to all of the
respective properties, books, contracts, commitments and records of Company and
its subsidiary and shall furnish Vail Banks and its authorized representatives
such information concerning its affairs and the affairs of its subsidiary as
Vail Banks may reasonably request provided that such request shall be reasonably
related to the transactions contemplated by this Agreement and shall not
interfere unreasonably with normal operations. Company shall require its
personnel to assist Vail Banks in making any such investigation and shall cause
the counsel (subject to attorney-client privilege), accountants, employees and
other representatives of Company to be available to Vail Banks for such
purposes. Such investigation will be conducted in a manner designed to be the
least disruptive of the affairs of Company as possible. During such
investigation, Vail Banks and its authorized representatives shall have the
right, subject to the confidentiality provisions of this Agreement, to make
copies of such records, files, tax returns and other materials as it may deem
advisable and shall advise Company of those items of which copies are made. No
investigation made heretofore or hereafter by either party and its authorized
representatives shall affect the representations and warranties of either such
party hereunder.
4.4 CONFIDENTIALITY. Prior to consummation of the transactions
contemplated by this Agreement and the Merger Agreement, the parties will
provide each other with information which may be deemed by the party providing
the information to be confidential or proprietary. Each party agrees that it
will hold confidential and protect all information provided to it by the other
party to this Agreement and use such information only in connection with the
consummation of the transactions contemplated in this Agreement and the Merger
Agreement, except that the obligations contained in this Section 4.4 shall not
in any way restrict the rights of any party or person to use information that
(i) was known to such party prior to disclosure by the other party; (ii) is or
becomes generally available to the public other than by breach of this
Agreement; or (iii) otherwise becomes lawfully available to a party to this
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Agreement on a non-confidential basis from a third party who is not under an
obligation of confidence to the other party to this Agreement. If this Agreement
is terminated prior to consummation of the transactions contemplated hereby,
each party agrees to return all documents and other material, and any copies
thereof, whether or not confidential, provided to it by or on behalf of the
other party to this Agreement. Each party shall insure that its officers,
directors, investment advisors, attorneys and other representatives who are
given access to such information are bound by and will use the information only
in accordance with the foregoing restrictions. The provisions of this Section
4.4 shall survive any termination of this Agreement.
4.5 FULL COOPERATION. The parties shall cooperate fully with each other
in connection with any acts or actions required to be taken as part of their
respective obligations under this Agreement, including cooperation in the filing
of all applications and other requests for consents and approvals with respect
to the transactions contemplated hereby.
4.6 EXPENSES. All of the expenses incurred by Vail Banks in connection
with the authorization, preparation, execution and performance of this Agreement
and the Merger Agreement including, without limitation, all fees and expenses of
its agents, representatives, counsel and accountants and the fees and expenses
related to filing of required registration statements, and all other regulatory
applications with state and federal authorities in connection with the
transactions contemplated hereby and thereby, shall be paid by Vail Banks. All
expenses incurred by Company in connection with the authorization, preparation,
execution and performance of this Agreement and the Merger Agreement, including,
without limitation, all fees and expenses of its agents, representatives,
counsel and accountants for Company, shall be paid by Company. The cost of
preparing and mailing any Registration Statement hereunder with the Securities
and Exchange Commission will be paid by Vail Banks, provided, however, that in
the event that the Company does not secure the shareholder vote necessary to
authorize and approve the Merger Agreement, the Company shall reimburse Vail
Banks for the reasonable costs and expenses it incurred in connection with the
preparation and filing of the Registration Statement.
4.7 PRESERVATION OF GOODWILL. Company shall use reasonable efforts to
preserve its business organization and the business organization of its
subsidiary consistent with past practices, to keep available the services of its
present employees and of the present employees of its subsidiary, and to
preserve the goodwill of customers and others having business relations with
Company or its subsidiary.
4.8 APPROVALS AND CONSENTS. Each party hereto represents and warrants
to and covenants with the other that it will use its best efforts, and will
cause its officers, directors, employees and agents and its subsidiary and
subsidiary's officers, directors, employees and agents to use their best
efforts, to obtain as soon as is reasonably practicable all approvals and
consents of state and federal departments or agencies required or deemed
necessary for consummation of the transactions contemplated by this Agreement
and the Merger Agreement. In particular, within 45 days of the date of this
Agreement, Vail Banks shall file all applications required to obtain all
consents and approvals of bank regulatory authorities for the transactions
contemplated by this Agreement. Vail Banks shall provide drafts of the public
sections of applications to Company prior to filing the same, and shall promptly
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provide Company with copies of all correspondence to and from regulatory
authorities with respect to the transactions contemplated by this Agreement.
4.9 PRESS RELEASES. Prior to the Closing Date, Company and Vail Banks
shall agree with each other as to the form and substance of any press release or
other public disclosure materially related to this Agreement or any other
transaction contemplated hereby; provided, however, that nothing in this Section
4.9 shall be deemed to prohibit any Party from making any disclosure which its
counsel deems necessary or advisable in order to satisfy such Party's disclosure
obligations imposed by law.
4.10 EMPLOYEES OF UNITED VALLEY BANK. For purposes of any length of
service requirements, waiting periods, vesting periods or benefits based on
length of service in any benefit plan of United Valley Bank for which an
employee may be eligible after the Closing, Vail Banks shall ensure that service
by such employee with United Valley Bank shall be deemed to have been service
with Vail Banks.
(a) From and after the Closing employees of the Company and United
Valley Bank shall be eligible to participate in all Vail Banks employee plans in
accordance with their terms and in the same manner as similarly situated Vail
Banks employees. Service of such employees with the Company and United Valley
Bank shall be counted as service with Vail Banks for purposes of determining
eligibility, vesting and levels of benefits.
(b) Vail Banks will (i) waive any pre-existing conditions or
limitations and eligibility waiting periods under any group health plans of Vail
Banks with respect to Company and United Valley Bank employees and their
eligible dependents, provided that there is no material adverse change in the
Company's claims history prior to Closing (from that previously disclosed to
Vail Banks by the Company) and (ii) give each Company and United Valley Bank
employee credit for the plan year in which the Closing occurs towards applicable
deductibles and out-of-pocket limits for expense incurred prior to Closing.
(c) Vail Banks agrees to honor in accordance with their terms all
benefits vested as of the date of this Agreement under the Company and United
Valley Bank Benefit Plans.
4.11 VOTING AND NON-COMPETE AGREEMENTS OF HASELBUSH AND SISHC.
(a) Haselbush and Sishc agree to vote all shares of Company Stock owned
by them, directly or indirectly, and those shares allocated to them pursuant to
the Employee Stock Ownership Plan (the "ESOP") in favor of the transactions
contemplated by this Agreement. Haselbush shall not be obligated to vote
unallocated shares held by the ESOP in favor of the transactions contemplated by
this Agreement in his capacity as Plan fiduciary.
(b) For a period commencing on the Closing Date and continuing in
effect for two (2) years, each of Haselbush and Sishc will not, directly or
indirectly, on his own behalf or on behalf of any other person or entity:
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Provide banking products and services in the geographic area
encompassed by the following in the State of Colorado: Grand County, Census
Tract # 136.02 of Boulder County and Census Tracts # 28 and #19.03 of Larimer
County (the "Territory");
(i) Solicit any Company, United Valley Bank, Vail Banks or
WestStar Bank (collectively, "Employer") customer with whom he has worked during
the one (1) year period prior to the Closing Date or about whom he possesses
confidential information for the purposes of terminating the customer's
relationship with the Employer or of providing products or services reasonably
substitutable for the Employer's products and services to the customer in the
Territory; or
(ii) Solicit or induce , or in any manner attempt to solicit or
induce, any person or entity (including without limitation consultants and
independent contractors) employed by the Employer to leave such employment.
(c) Haselbush, Sishc and the Employer acknowledge that a breach or
threatened breach of the terms of this Agreement by Haselbush and Sishc would
result in material and irreparable damage and injury to the Employer, and that
it would be difficult or impossible to establish the full monetary value of such
damages. Therefore, the Employer shall be entitled to injunctive relief by a
court of appropriate jurisdiction in the event of Haselbush's or Sishc's breach
or threatened breach of any of the provisions of this Agreement. Furthermore, in
addition to all other remedies provided by law, each of Haselbush and Sishc
agrees that he will indemnify and hold the Employer harmless from any loss,
cost, damage or expense (including attorney's fees) incurred by the Employer
arising out of his breach of any portion of this Agreement.
4.12 "RUN-OFF" LIABILITY INSURANCE COVERAGE. Company shall acquire for
the benefit of its officers and directors "run-off" liability insurance coverage
to survive the Closing Date, which coverage shall be satisfactory to Company.
Alternatively, Vail Banks shall obtain coverage for the officers and directors
of Company under its officer and director liability policy satisfactory to
Company. The cost of such insurance shall be paid by Company.
4.13 DIVIDENDS. The Company may declare its regular quarterly dividends
or other distributions on its Common Stock. United Valley Bank may declare its
ordinary quarterly dividends. Except with prior written consent of Vail Banks,
neither the Company nor United Valley Bank may issue, sell, repurchase, acquire
or redeem any of its Common Stock.
4.14 VAIL BANKS BOARD OF DIRECTORS POSITION. Immediately following the
Closing, Vail Banks shall use its best efforts to provide for the nomination and
election of Haselbush to the Board of Directors of Vail Banks for a three (3)
year term.
4.15 EMPLOYMENT OF HASELBUSH AND SISHC. Vail Banks (or WestStar)
anticipates employing Haselbush and Sishc from and after the Closing on terms
mutually acceptable to the parties.
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4.16 TERMINATION OF ESOP. The parties will reasonably cooperate with
respect to terminating the ESOP.
4.17 EXERCISE OF OPTIONS. The Company shall use its best efforts to
cause the holders of the 9,700 options outstanding as of the date of this
Agreement to exercise such options prior to the Closing.
ARTICLE V
---------
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY
--------------------------------------------------------
To induce Vail Banks to enter into and perform this Agreement, Company
represents, warrants, covenants and agrees as follows, which representations,
warranties, covenants and agreements are being made as of the date hereof and
shall be deemed to be made again as of the Closing:
5.1 COMPANY DISCLOSURE MEMORANDUM. Company shall deliver to Vail Banks
on or before the fifth (5th) day following the date of this Agreement a
memorandum (the "Company Disclosure Memorandum") containing certain information
regarding the Company and United Valley Bank as indicated at various places in
this Agreement. All information set forth in the Company Disclosure Memorandum
or in documents incorporated by reference in the Company Disclosure Memorandum
is true, correct and complete, does not omit to state any fact necessary in
order to make the statements therein not misleading in any material respect, and
shall be deemed for all purposes of this Agreement to constitute part of the
representations and warranties of the Company under this Article V. The
information contained in the Company Disclosure Memorandum shall be deemed to be
part of and qualify only those representations and warranties contained in this
Article V which make specific reference to the Company Disclosure Memorandum.
All information in each of the documents and other writings furnished to Vail
Banks pursuant to this Agreement or the Company Disclosure Memorandum is or will
be true, correct and complete in all material respects and does not and will not
omit to state any fact necessary in order to make the statements therein not
misleading. Company shall promptly provide Vail Banks with written notification
of any material event, occurrence or other information necessary to maintain the
Company Disclosure Memorandum and all other documents and writings furnished to
Vail Banks pursuant to this Agreement as true, correct and complete in all
material respects at all times prior to and including the Closing.
5.2 CORPORATE AND FINANCIAL.
5.2.1 AUTHORITY. (a) Subject to the approval of various state and
federal regulatory authorities and Company shareholder approval, the Company has
full power and authority to make, execute and perform this Agreement and to
consummate the transactions contemplated hereby and thereby, and no further
action is necessary on the part of the Company to authorize its consummation of
the transactions contemplated hereby and thereby. Other than such regulatory
approvals and Company shareholder approval, no further corporate action is
necessary on the part of the Company to consummate the transactions contemplated
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hereby. This Agreement constitutes the valid and binding obligation of the
Company and is enforceable in accordance with its terms, except as limited by
the laws affecting creditors' rights generally and by the discretion of courts
to compel specific performance.
(b) Subject to the approval of various state and federal
regulators, the execution, delivery and performance of this Agreement and the
other transactions contemplated or required in connection herewith will not,
with or without the giving of notice or the passage of time, or both, (i)
violate any provision of federal or state law applicable to the Company or
United Valley Bank, the violation of which could be expected to have a material
adverse effect on the business, operations, properties, assets, financial
condition or prospects of the Company or United Valley Bank; (ii) violate any
provision of the articles of incorporation or charter, as the case may be, or
bylaws of the Company or United Valley Bank; (iii) conflict with or result in a
breach of any provision of, or termination of, or constitute a default under any
instrument, license, agreement or commitment to which the Company or either of
United Valley Bank is a party, which, singly or in the aggregate, could be
expected to have a material adverse effect on the business, operations,
properties, assets, financial condition or prospects of the Company or United
Valley Bank; or (iv) constitute a violation of any order, judgment or decree to
which the Company or United Valley Bank is a party, or by which the Company or
United Valley Bank or any of their respective assets or properties are bound.
5.2.2 CORPORATE STATUS.
(a) THE COMPANY. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Colorado
and has no direct or indirect subsidiaries other than United Valley Bank. The
Company has all requisite corporate power and authority and is entitled to own
or lease its properties and assets and to carry on its business as and in the
places where such properties or assets are now owned, leased or operated and
such business is conducted. The Company is duly licensed, qualified or
domesticated as a foreign corporation in the jurisdictions listed in Section
5.2.2(a) of the Company Disclosure Memorandum, which are all jurisdictions where
the character of the property owned by it or the nature of the business
transacted by it make such license, qualification or domestication necessary.
(b) UNITED VALLEY BANK. United Valley Bank is a bank duly
organized, validly existing and in good standing under the laws of the State of
Colorado. United Valley Bank has all requisite corporate power and authority and
is entitled to own and lease its properties and assets and to carry on its
business as and in the places where such properties or assets are now owned,
leased or operated and such business is conducted.
5.2.3 CAPITAL STRUCTURE.
(a) THE COMPANY. (i) The Company has an authorized capital stock
consisting solely of 100,000 shares, $1.00 par value, common stock, of which
45,300 (subject to the exercise of 9,700 options) shares of common stock are
issued and outstanding as of the date hereof (a list of the Company Shareholders
and the number of shares of Company Stock owned by each is attached hereto as
Exhibit B). All of the outstanding capital stock of the Company is duly and
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validly issued, fully paid and non-assessable and was offered, issued and sold
in compliance with all applicable federal and state securities laws. No person
has any right of rescission or claim for damages under federal or state
securities laws with respect to the issuance of any shares of capital stock of
the Company previously issued. None of the capital stock of the Company has been
issued in violation of any preemptive or other rights of its shareholders.
(ii) Except as set forth in Section 5.2.3(a)(ii) of the
Company Disclosure Memorandum, the Company does not have outstanding any
securities which are either by their terms or by contract convertible or
exchangeable into capital stock of the Company, or any other securities or debt
of the Company, or any preemptive or similar rights to subscribe for or to
purchase, or any options or warrants or agreements or understandings for the
purchase or the issuance (contingent or otherwise) of, or any calls, commitments
or claims of any character relating to, its capital stock or securities
convertible into its capital stock. The Company is not subject to any obligation
(contingent or otherwise) to repurchase or otherwise acquire or retire, or to
register, any shares of its capital stock.
(iii) Except as set forth in Section 5.2.3(a)(iii) of the
Company Disclosure Memorandum, there is no agreement, arrangement or
understanding to which the Company is a party restricting or otherwise relating
to the transfer of any shares of capital stock of the Company.
(iv) All shares of Company Stock or other capital stock, or
any other securities or debt, of the Company, which have been purchased or
redeemed by the Company have been purchased or redeemed in accordance with all
applicable federal, state and local laws, rules, and regulations, including,
without limitation, all federal and state securities laws and rules and
regulations of any securities exchange or system on which such stock, securities
or debt are, or at such time were, traded, and no such purchase or redemption
has resulted or will with the giving of notice or lapse of time, or both, result
in a default or acceleration of the maturity of, or otherwise modify, any
agreement, note, mortgage, bond, security agreement, loan agreement or other
contract or commitment of the Company.
(b) UNITED VALLEY BANK. (i) United Valley Bank has an authorized
capital stock consisting solely of 4,000 shares, $100.00 par value, common
stock, of which 4,000 shares of common stock are issued and outstanding as of
the date hereof and of which the Company owns 4,000 shares, or 100 % of the
issued and outstanding common stock. All of the outstanding capital stock of
United Valley Bank is duly and validly issued, fully paid and non-assessable and
was offered, issued and sold in compliance with all applicable federal and state
securities laws. No person has any right of rescission or claim for damages
under federal or state securities laws with respect to the issuance of any
shares of capital stock of United Valley Bank previously issued. None of the
capital stock of United Valley Bank has been issued in violation of any
preemptive or other rights of its shareholders.
(ii) United Valley Bank does not have outstanding any
securities which are either by their terms or by contract convertible or
exchangeable into capital stock of United Valley Bank, or any other securities
or debt of United Valley Bank, or any preemptive or similar rights to subscribe
for or to purchase, or any options or warrants or agreements or understandings
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for the purchase or the issuance (contingent or otherwise) of, or any calls,
commitments or claims of any character relating to, its capital stock or
securities convertible into its capital stock. United Valley Bank is not subject
to any obligation (contingent or otherwise) to repurchase or otherwise acquire
or retire, or to register, any shares of its capital stock.
(iii) There is no agreement, arrangement or understanding to
which either United Valley Bank or the Company is a party restricting or
otherwise relating to the transfer of any shares of capital stock of United
Valley Bank.
(iv) All shares of United Valley Bank Common Stock or other
capital stock, or any other securities or debt, of United Valley Bank, which
have been purchased or redeemed by United Valley Bank have been purchased or
redeemed in accordance with all applicable federal, state and local laws, rules,
and regulations, including, without limitation, all federal and state securities
laws and rules and regulations of any securities exchange or system on which
such stock, securities or debt are, or at such time were, traded, and no such
purchase or redemption has resulted or will, with the giving of notice or lapse
of time, or both, result in a default or acceleration of the maturity of, or
otherwise modify, any agreement, note, mortgage, bond, security agreement, loan
agreement or other contract or commitment of United Valley Bank.
5.2.4 CORPORATE RECORDS. The stock records and minute books of the
Company and United Valley Bank, as applicable, whether previously or in the
future furnished or made available to Vail Banks by the Company and United
Valley Bank, fully and accurately reflect all issuances, transfers and
redemptions of the common stock of the Company or United Valley Bank, as
applicable, correctly show the record addresses and the number of shares of such
stock issued and outstanding on the date hereof held by the shareholders of the
Company or United Valley Bank, correctly show all corporate action taken by the
directors and shareholders of the Company or United Valley Bank (including
actions taken by consent without a meeting), and contain true and correct copies
or originals of their respective articles of incorporation or charter, as the
case may be, and all amendments thereto, bylaws, as amended and currently in
force, and the minutes of all meetings or consent actions of their respective
directors and shareholders. No resolutions, regulations or bylaws have been
passed, enacted, consented to or adopted by the respective directors or
shareholders of the Company or United Valley Bank except those contained in the
minute books. All corporate records of the Company and United Valley Bank have
been maintained in accordance with all applicable statutory requirements and are
complete and accurate.
5.2.5 TAX RETURNS, TAXES. (a) The Company and United Valley Bank have
duly filed or will file when due (i) all required federal and state tax returns
and reports, and (ii) all required returns and reports of other governmental
units having jurisdiction with respect to taxes imposed upon their respective
incomes, properties, revenues, franchises, operations or other assets or taxes
imposed which might create a lien or encumbrance on any of such assets or affect
adversely their respective businesses or operations. Such returns or reports
are, and when filed will be, true, complete and correct, and the Company and
United Valley Bank have paid, or will pay with respect to returns or reports
related to their respective businesses not yet filed because not yet due, to the
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extent such taxes or other governmental charges have become due, all taxes and
other governmental charges including all applicable interest and penalties, set
forth in such returns or reports related to their respective businesses. All
federal, state and local taxes and other governmental charges paid or payable by
the Company or United Valley Bank have been paid, or have been accrued or
reserved on their respective books in accordance with generally accepted
accounting principles applied on a basis consistent with prior periods. Adequate
reserves for the payment of taxes have been established on the books of the
Company and United Valley Bank for all periods through the date hereof, whether
or not due and payable and whether or not disputed. Until the Closing Date, the
Company and United Valley Bank shall continue to reserve sufficient funds for
the payment of expected tax liabilities in accordance with generally accepted
accounting principles applied on a basis consistent with prior periods. Neither
the Company nor United Valley Bank has received any notice of a tax deficiency
or assessment of additional taxes of any kind and, to the knowledge of officers
of the Company or United Valley Bank (collectively "Management"), there is no
threatened claim against either the Company or United Valley Bank, or any basis
for any such claim, for payment of any additional federal, state, local or
foreign taxes for any period prior to the date of this Agreement in excess of
the accruals or reserves with respect to any such claim shown in the 1999
Financial Statements (as defined below) or disclosed in the notes with respect
thereto. There are no waivers or agreements by either the Company or either of
the Banks for the extension of time for the assessment of any taxes. The federal
income tax returns of the Company or either of the Banks have not been examined
by the Internal Revenue Service for any period since calendar year 1997.
(b) Except as set forth in Section 5.2.5(b) of the Company
Disclosure Memorandum, proper and accurate amounts have been withheld by the
Company and United Valley Bank from their employees for all periods in full and
complete compliance with the tax withholding provisions of applicable federal,
state and local tax laws, and proper and accurate federal, state and local tax
returns have been filed by the Company and United Valley Bank for all periods
for which returns were due with respect to withholding, social security and
unemployment taxes, and the amounts shown thereon to be due and payable have
been paid in full.
5.2.6 FINANCIAL STATEMENTS. The Company will deliver to Vail Banks
contemporaneously with the delivery of the Company Disclosure Memorandum true,
correct and complete copies of (i) the unaudited financial statements of the
Company for the years ended December 31, 1997, 1998 and 1999, including balance
sheets, statements of income, statements of shareholders' equity, statement of
cash flows and related notes, (ii) the audited financial statements of United
Valley Bank for the years ended December 31, 1997, 1998 and 1999, including
balance sheets, statements of income, statements of shareholders' equity,
statement of cash flows and related notes (the unaudited financial statements of
the Company and the audited financial statements of United Valley Bank for the
year ended December 31, 1999 shall be collectively referred to as the "1999
Financial Statements"), (iii) unaudited financial statements of the Company and
United Valley Bank for the period ended March 31, 2000, including a balance
sheet, statement of income and related notes and (iv) monthly interim unaudited
financial statements of each of the Company and United Valley Bank ending at the
end of each month prior to Closing and after March 31, 2000. All of such
financial statements, except for the interim statements which have been prepared
consistently with the audited financial statements of the Company but without
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footnotes, etc., have been prepared in accordance with generally accepted
accounting principles consistently applied and truthfully reflect, in all
material aspects, the assets, liabilities and financial condition of the Company
and United Valley Bank as of the dates indicated therein and the results of its
operations for the respective periods then ended.
5.2.7 REGULATORY REPORTS. Company will deliver to Vail Banks
contemporaneously with the delivery of the Company Disclosure Memorandum for
review and inspection all Forms FRY6 filed by the Company with the Board of
Governors of the Federal Reserve System (the "Federal Reserve") for the three
years ended December 31, 1999 and through the date of this Agreement, together
with all other reports filed by the Company or United Valley Bank for the same
period with the Division of Banking of the Department of Regulatory Agencies of
the State of Colorado (the "Division of Banking"), and other applicable
regulatory agencies (collectively, the "Reports"). All of such Reports, as
amended, have been prepared in accordance with applicable rules and regulations
applied on a basis consistent with prior periods and contain in all material
respects all information required to be presented therein in accordance with
such rules and regulations.
5.2.8 ACCOUNTS. Section 5.2.8 of the Company Disclosure Memorandum
contains a list of each and every bank and other institution in which the
Company or United Valley Bank maintains an account or safety deposit box, the
account numbers and the names of all persons who are presently authorized to
draw thereon, have access thereto or give instructions regarding distribution of
funds or assets therein.
5.2.9 NOTES AND OBLIGATIONS. (a) Except as set forth in Section
5.2.9(a) of the Company Disclosure Memorandum or as provided for in the loss
reserve described in subsection (b) below, all notes receivable or other
obligations owned by the Company or United Valley Bank or due to any one of them
shown in the 1999 Financial Statements and any such notes receivable and
obligations on the date hereof and on the Closing Date are, and will be,
genuine, legal, valid and collectible obligations of the respective makers
thereof and are not and will not be subject to any offset or counterclaim.
Except as set forth in Section 5.2.9(a) of the Company Disclosure Memorandum or
in subsection (b) below, all such notes and obligations are evidenced by written
agreements, true and correct copies of which will be made available to Vail
Banks for examination prior to the Closing Date. All such notes and obligations
were entered into by either the Company or United Valley Bank, as the case may
be, in the ordinary course of business and in compliance with all applicable
laws and regulations.
(b) United Valley Bank has established a loss reserve in its 1999
Financial Statements and as of the date of this Agreement and will establish a
loan loss reserve as of the Closing Date in accordance with formulas and
procedures consistent with past practice which is or will be adequate to cover
anticipated losses which might result from such items as the insolvency or
default of borrowers or obligors on such loans or obligations, defects in the
notes or evidences of obligation (including losses of original notes or
instruments), offsets or counterclaims properly chargeable to such reserve, or
the availability of legal or equitable defenses which might preclude or limit
the ability of the Company or United Valley Bank, as the case may be, to enforce
the note or obligation, and the representations set forth in subsection (a)
above are qualified in their entirety by the aggregate of such loss reserve.
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5.2.10 LIABILITIES. Neither the Company nor United Valley Bank has any
debt, liability or obligation of any kind required to be shown pursuant to
generally accepted accounting principles on the consolidated balance sheet of
the Company, whether accrued, absolute, known or unknown, contingent or
otherwise, including, but not limited to, (a) liability or obligation on account
of any federal, state or local taxes or penalty, or interest or fines with
respect to such taxes, (b) liability arising from or by virtue of the
distribution, delivery or other transfer or disposition of goods, personal
property or services of any type, kind or variety, (c) unfunded liabilities with
respect to any pension, profit sharing or employee stock ownership plan, whether
operated by the Company or United Valley Bank or any other entity covering
employees of the Company or United Valley Bank, or (d) environmental liability,
except (i) those reflected in the 1999 Financial Statements, or (ii) as
disclosed in Section 5.2.10 of the Company Disclosure Memorandum. Except as set
forth in Section 5.2.10 of the Company Disclosure Memorandum, on the Closing
Date, the Company shall have no indebtedness for borrowed money of any nature
whatsoever, and United Valley Bank shall have no indebtedness resulting from the
borrowing of any funds, property or services; provided, however, that this
section 5.2.10 shall not apply to the purchase of Federal Funds in the ordinary
course of business.
5.2.11 ABSENCE OF CHANGES. Except as specifically provided for in this
Agreement or specifically set forth in Section 5.2.11 of the Company Disclosure
Memorandum, since December 31, 1999:
(a) there have been no changes in the business, assets,
properties, liabilities, results of operations or financial condition of the
Company or United Valley Bank, or in any of their respective relationships with
customers, employees, lessors or others, other than changes in the ordinary
course of business, none of which individually or in the aggregate has had or
which Management believes will have a material adverse effect on such
businesses, assets, liabilities, results of operations, financial conditions or
properties;
(b) there has been no material damage, destruction or loss to the
assets, properties or business of the Company or United Valley Bank, whether or
not covered by insurance, which has had or which Management believes may have an
adverse effect thereon;
(c) the businesses of the Company and United Valley Bank have been
operated in the ordinary course;
(d) the properties and assets of the Company and United Valley
Bank used in their respective businesses have been maintained in good order,
repair and condition, ordinary wear and tear excepted;
(e) the respective books, accounts and records of the Company and
United Valley Bank have been maintained in the usual, regular and ordinary
manner;
(f) except as set forth in the Company Disclosure Memorandum,
there has been no increase in the compensation payable or to become payable to
any director, executive officer or employee of the Company or United Valley
Bank;
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(g) there have been no changes in the articles of incorporation or
charter, as the case may be, or bylaws of the Company or either of United Valley
Bank;
(h) there has been no labor dispute, unfair labor practice charge
or employment discrimination charge, nor, to the knowledge of Management, any
organizational effort by any union, or institution or threatened institution of
any effort, complaint or other proceeding in connection therewith, involving the
Company or United Valley Bank, or affecting their respective operations;
(i) there has been no issuance, sale, repurchase, acquisition or
redemption by the Company or United Valley Bank of any of their respective
capital stock, bonds, notes, debt or other securities or any modification or
amendment of the rights of the holders of any outstanding capital stock, bonds,
notes, debt or other securities thereof;
(j) except as set forth in Section 5.2.11(j) of the Company
Disclosure Memorandum, there has been no mortgage, lien or other encumbrance or
security interest (other than liens for current taxes not yet due or purchase
money security interests or pledges to secure public deposits or federal funds
purchased arising in the ordinary course of business) created on or in
(including without limitation, any deposit for security consisting of) any asset
or assets of the Company or United Valley Bank or assumed by any one of them
with respect to any of their assets;
(k) except as disclosed in the 1999 Financial Statements, any
interim financial statements or Section 5.2.11(k) of the Company Disclosure
Memorandum, there has been no material indebtedness or other liability or
obligation (whether absolute, accrued, contingent or otherwise) incurred by the
Company or United Valley Bank which would be required to be reflected on a
balance sheet of the Company or United Valley Bank prepared as of the date
hereof in accordance with generally accepted accounting principles applied on a
consistent basis, except as incurred in the ordinary course of business;
(l) no material obligation or liability of either the Company or
United Valley Bank has been discharged or satisfied, other than in the ordinary
course of business;
(m) there have been no material sales, transfers or other
dispositions of any asset or assets of either the Company or United Valley Bank,
other than sales in the ordinary course of business; and
(n) there has been no amendment, termination or waiver of any
right of either the Company or United Valley Bank under any governmental
license, permit or permission which has had or may have an adverse effect on
either of their businesses or properties.
5.2.12 LITIGATION AND PROCEEDINGS. Except as set forth in Section
5.2.12 of the Company Disclosure Memorandum, there are no actions, decrees,
suits, counterclaims, claims, proceedings or governmental actions or
investigations pending or, to the knowledge of Management, threatened against,
by or affecting either the Company or United Valley Bank, or any officer,
director, employee or agent in such person's capacity as an officer, director,
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employee or agent of either the Company or United Valley Bank or relating to the
business or affairs of either the Company or United Valley Bank, in any court or
before any arbitrator or governmental agency, and no judgment, award, order or
decree of any nature has been rendered against or with respect thereto by any
agency, arbitrator, court, commission or other authority, nor does either the
Company or United Valley Bank have any unasserted contingent liabilities which
might have an adverse effect on either of their assets or on the operation of
their respective businesses or which might prevent or impede the consummation of
the transactions contemplated by this Agreement.
5.3 BUSINESS OPERATIONS.
5.3.1 CUSTOMERS. Management has no knowledge of any presently existing
facts which could reasonably be expected to result in the loss of any material
borrower or depositor of United Valley Bank or in the inability of United Valley
Bank to collect amounts due therefrom or to return funds deposited thereby,
except as set forth in Section 5.3.1 of the Company Disclosure Memorandum.
5.3.2 PERMITS; COMPLIANCE WITH LAW. (a) The Company and United Valley
Bank have all permits, licenses, approvals, authorizations and registrations
under all federal, state, local and foreign laws required for them to carry on
their respective businesses as presently conducted, and all of such permits,
licenses, approvals, authorizations and registrations are in full force and
effect, and no suspension or cancellation of any of them is pending or, to the
knowledge of Management, threatened.
(b) The Company and United Valley Bank have complied with all
laws, regulations, and orders applicable to them or their businesses. Section
5.3.2(b) of the Company Disclosure Memorandum contains a list of any known
violations of such laws, regulations, ordinances or rules by any present
officer, director, or employee of the Company or United Valley Bank which
occurred since December 31, 1995, and which resulted in any order, proceeding,
judgment or decree which would be required to be disclosed pursuant to Item
401(f) of Regulation S-K promulgated by the Securities and Exchange Commission
if the Company or United Valley Bank had been subject to the reporting
requirements under the Securities Act or the Exchange Act. No past violation of
any such law, regulation, ordinance or rule has occurred which could impair the
right or ability of the Company or United Valley Bank to conduct their
businesses.
(c) Except as set forth in Section 5.3.2(c) of the Company
Disclosure Memorandum, no notice or warning from any governmental authority with
respect to any failure or alleged failure of the Company or United Valley Bank
to comply in any respect with any law, regulation or order has been received,
nor is any such notice or warning proposed or, to the knowledge of Management,
threatened.
5.3.3 ENVIRONMENTAL. (a) Except as set forth in Section 5.3.3(a) of the
Company Disclosure Memorandum, the Company and United Valley Bank:
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(i) have not caused or permitted, and have no knowledge of,
the generation, manufacture, use, or handling or the release or presence of any
hazardous substances on, in, under or from any properties or facilities
currently owned or leased by the Company or United Valley Bank or adjacent to
any properties so owned or leased; and
(ii) have complied with, and have kept all records and made
all filings required by, applicable federal, state and local laws, regulations,
orders, permits and licenses relating to the generation, manufacture, use,
handling, release or presence of any hazardous substance on, in, under or from
any properties or facilities currently owned or leased by the Company or United
Valley Bank.
(b) Except as set forth in Section 5.3.3(b) of the Company
Disclosure Memorandum, neither the Company nor United Valley Bank nor any of
their officers, directors, employees or agents, in the course of their
employment by the Company or United Valley Bank, has directly or indirectly
given advice with respect to, or participated in any respect, directly or
indirectly, in, the management or operation of any entity or concern whose
business relates in any way to the generation, storage, handling, disposal,
transfer, production or processing of hazardous substances, nor has the Company
or United Valley Bank foreclosed on any property on which there is a threatened
release of any hazardous substances or on which there has been such a release
and full remediation has not been completed, or any property on which contained
(non-released) hazardous substances or solid wastes are located.
(c) Except as set forth in Section 5.3.3(c) of the Company
Disclosure Memorandum, neither the Company nor United Valley Bank, nor any of
their officers, directors, employees, and agents, are aware of, have been told
of, or have observed, the presence of any hazardous substance or solid waste on,
in, under, or around property on which the Company or United Valley Bank holds a
legal or security interest, in violation of, or creating liability under,
federal, state or local environmental statutes, regulations, or ordinances.
5.3.4 INSURANCE. Section 5.3.4 of the Company Disclosure Memorandum
contains a complete list and description (including the expiration date, premium
amount and coverage thereunder) of all policies of insurance and bonds presently
maintained by, or providing coverage for, the Company and United Valley Bank or
any of their officers, directors and employees, all of which are, and will be
maintained through the Closing Date, in full force and effect, together with a
complete list of all pending claims under any of such policies or bonds. All
terms, obligations and provisions of each of such policies and bonds have been
complied with, all premiums due thereon have been paid, and no notice of
cancellation with respect thereto has been received. Except as set forth in
Section 5.3.4 of the Company Disclosure Memorandum, Management believes that
such policies and bonds provide adequate coverage to insure the properties and
businesses of the Company and United Valley Bank and the activities of their
officers, directors and employees against such risks and in such amounts as are
prudent and customary. Neither the Company nor United Valley Bank will as of the
Closing Date have any liability for premiums or for retrospective premium
adjustments for any period prior to the Closing Date. The Company and United
Valley Bank have previously made available to Vail Banks a true, correct and
complete copy of each insurance policy and bond in effect since January 1, 1997
with respect to the business and affairs of the Company and United Valley Bank.
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5.4 PROPERTIES AND ASSETS.
5.4.1 CONTRACTS AND COMMITMENTS. Section 5.4.1 of the Company
Disclosure Memorandum contains a list identifying and briefly describing all
written contracts, purchase orders, agreements, security deeds, guaranties or
commitments to which the Company or United Valley Bank is a party, or by which
they may be bound, involving the payment or receipt, actual or contingent, of
more than $25,000 or having a term or requiring performance over a period of
more than ninety (90) days, other than agreements, contracts, security deeds,
guaranties or commitments made in the ordinary course of the Company's business
and other agreements pursuant to which the Company has received a security
interest. Except as set forth in Section 5.4.1 of the Company Disclosure
Memorandum, each such contract, agreement, guaranty and commitment of the
Company and United Valley Bank is in full force and effect and is valid and
enforceable in accordance with its terms (subject to any applicable bankruptcy
or creditor laws) and constitutes a legal and binding obligation of the
respective parties thereto and is not the subject of any notice of default,
termination, partial termination or of any ongoing, pending, completed or
threatened investigation, inquiry or other proceeding or action that will give
rise to any notice of default, termination or partial termination. The Company
and United Valley Bank have complied with the provisions of such contracts,
agreements, guaranties and commitments. A true and complete copy of each such
document has been made available to Vail Banks for examination.
5.4.2 LICENSES; INTELLECTUAL PROPERTY. The Company and United Valley
Bank have all patents, trademarks, trade names, service marks, copyrights, trade
secrets and know-how reasonably necessary to conduct their businesses as
presently conducted and, except as described in Section 5.4.2 of the Company
Disclosure Memorandum, neither the Company nor United Valley Bank is a party,
either as licensor or licensee, to any agreement for any patent, process,
trademark, service mark, trade name, copyright, trade secret or other
confidential information, and there are no rights of third parties with respect
to any trademark, service mark, trade secrets, confidential information, trade
name, patent, patent application, copyright, invention, device or process owned
or used by the Company or United Valley Bank or presently expected to be used by
either of them in the future. All patents, copyrights, trademarks, service
marks, trade names, and applications therefor or registrations thereof, owned or
used by the Company or United Valley Bank, are listed in Section 5.4.2 of the
Company Disclosure Memorandum. The Company and United Valley Bank have complied
with all applicable Colorado laws relating to the filing or registration of
"fictitious names" or trade names.
5.4.3 PERSONAL PROPERTY. The Company and United Valley Bank each have
good and marketable title to all of their respective personalty, tangible and
intangible, reflected in the 1999 Financial Statements (except as since sold or
otherwise disposed of by either of them in the ordinary course of business),
free and clear of all encumbrances, liens or charges of any kind or character
except (i) those referred to in the notes to the 1999 Financial Statements as
securing specified liabilities (with respect to which no default exists or, to
the knowledge of Management, is claimed to exist), (ii) those described in
Section 5.4.3 of the Company Disclosure Memorandum and (iii) liens for taxes not
due and payable.
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5.4.4 LEASES. (a) All leases pursuant to which either the Company or
United Valley Bank is lessor or lessee (the "Leases") of any real or personal
property are valid and enforceable in accordance with their terms; there is not,
under any of such Leases any default or, to the knowledge of Management, any
claimed default by the Company or United Valley Bank, as the case may be, or
event of default or event which with notice or lapse of time, or both would
constitute a default by the Company or United Valley Bank, as the case may be,
and in respect of which adequate steps have not been taken to prevent a default
on either of their parts from occurring.
(b) Except as set forth in Section 5.4.4(b) of the Company
Disclosure Memorandum, there are no contractual obligations, agreements in
principle or present plans for either the Company or United Valley Bank to enter
into new leases of real property or to renew or amend existing Leases prior to
the Closing Date.
(c) The copies of the Leases heretofore furnished or made
available by the Company and United Valley Bank to Vail Banks are true, correct
and complete, and the Leases have not been modified in any respect other than
pursuant to amendments, copies of which have been concurrently delivered or made
available to Vail Banks, and are in full force and effect in accordance with
their terms.
(d) Except as set forth in Section 5.4.4(d) of the Company
Disclosure Memorandum, no rent has been paid in advance and no security deposit
has been paid, nor is any brokerage commission payable, by or to the Company or
United Valley Bank with respect to any Lease.
5.4.5 REAL PROPERTY. (a) The Company shall furnish to Vail Banks a
title insurance binder on each parcel of real property owned by the
Company or United Valley Bank on or prior to April 15, 2000. Vail Banks shall
have the right to obtain, at its expense, a Phase One environmental assessment
of each parcel of real estate owned by the Company or United Valley Bank. Except
as disclosed in Section 5.4.5(a) of the Company Disclosure Memorandum, the
Company and United Valley Bank have good and marketable title to the real
property reflected in the 1999 Financial Statements (the "Realty"), and the
titles to the Realty are covered by title insurance policies providing coverage
in the amount of the original purchase price.
(b) Except as set forth in Section 5.4.5(b) of the Company
Disclosure Memorandum, the interests of the Company or United Valley Bank in the
Realty and in and under each of the Leases are free and clear of any and all
liens and encumbrances except for liens for current taxes not yet due, and are
subject to no present claim, contest, dispute, action or, to the knowledge of
Management, threatened action at law or in equity.
(c) The present and (and to the knowledge of the Company) past use
and operations of, and improvements upon, the Realty and all real properties
leased by the Company and United Valley Bank (the "Leased Properties") are in
compliance with all applicable building, fire, zoning and other applicable laws,
ordinances and regulations, including the Americans with Disabilities Act, and
with all deed restrictions of record, no notice of any violation or alleged
violation thereof has been received, and to the knowledge of Management, there
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are no proposed changes therein that would affect the Realty, the Leased
Properties or their uses.
(d) To the knowledge of Company, Company is not aware of any
proposed or pending change in the zoning of, or of any proposed or pending
condemnation proceeding with respect to, any of the Realty or the Leased
Properties which may adversely affect the Realty or the Leased Properties or the
current or currently contemplated use thereof.
(e) The buildings and structures owned, leased or used by the
Company and United Valley Bank are, taken as a whole, in good operating order
(except for ordinary wear and tear), usable in the ordinary course of business,
and are sufficient and adequate to carry on the businesses and affairs of the
Company and United Valley Bank as presently conducted.
5.5 EMPLOYEES AND BENEFITS.
5.5.1 COMPENSATION STRUCTURE. Section 5.5.1 of the Company Disclosure
Memorandum contains a true and complete list of the names, titles,
responsibilities and compensation arrangements of each person whose earned
compensation (including without limitation all salary, wages, bonuses and fringe
benefits, other than those fringe benefits made available to all employees on a
non-discriminatory basis), regardless of whether actually payable in such year,
from the Company and United Valley Bank for the current fiscal year will equal
or exceed $25,000. Section 5.5.1 of the Company Disclosure Memorandum contains
copies of all material written agreements, correspondence (other than
outstanding offers of employment to prospective employees whose compensation
levels will not exceed $25,000 in cash), memoranda and other written materials
currently in effect which have been provided to such employees relating to their
compensation.
5.5.2 DIRECTORS OR OFFICERS OF OTHER CORPORATIONS. Except as set forth
in Section 5.5.2 of the Company Disclosure Memorandum, no director, officer, or
employee of the Company or United Valley Bank serves, or in the past five years
has served, as a director or officer of any other corporation (other than the
Company or United Valley Bank) on behalf of or as a designee of the Company or
any of its subsidiaries.
5.5.3 EMPLOYEE BENEFITS. (a) Except as set forth in Section 5.5.3(a) of
the Company Disclosure Memorandum, neither the Company nor United Valley Bank
has or maintains a pension plan, profit sharing plan, group insurance plan,
employee welfare benefit plan (as such term is defined in Section 3(l) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")),
severance plan, bonus plan, stock option plan or deferred compensation plan for
any of its current or former employees.
(b) Each "employee benefit plan" as defined in Section 3(3) of
ERISA, maintained by or on behalf of the Company or United Valley Bank
(including any plans which are "multiemployer plans" under Section 3(37)(A) of
ERISA ("Multiemployer Plans") and any defined benefit plan (as defined in
Section 3(35) of ERISA) terminated by the Company or United Valley Bank within
the five plan-years ending immediately before the Closing Date), which covers or
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covered any employees of the Company, United Valley Bank, or any subsidiary or
of any predecessors thereof (each a "Plan"), is listed in Section 5.5.3(b) of
the Company Disclosure Memorandum, and copies of all the Plans and Plan trusts
(if applicable), Summary Plan Descriptions, Actuarial Reports and valuations (if
any), and Annual Reports (and attachments thereto) on Form 5500, 5500-C or
5500-R, as the case may be (if required pursuant to ERISA), for the most recent
three years with respect to the Plans, Internal Revenue Service determination
letters and any other related documents requested by Vail Banks or its counsel
have been, or prior to the Closing Date will be, provided to Vail Banks.
(c) Except as set forth in Section 5.5.3(c) of the Company
Disclosure Memorandum, with respect to each Plan: no litigation or
administrative or other proceeding is pending or, to the knowledge of
Management, threatened; each Plan has been restated or amended so as to comply
with all applicable requirements of law, including all applicable requirements
of ERISA, the Internal Revenue Code of 1986, as amended (the "Code"), and the
regulations promulgated thereunder by the Internal Revenue Service and the
United States Department of Labor. Neither the Plan nor any trustee,
administrator or fiduciary thereof has at any time been involved in any
transaction relating to the Plan which would constitute a breach of fiduciary
duty under ERISA or a "prohibited transaction" within the meaning of Section 406
of ERISA or Section 4975 of the Code, unless such transaction is specifically
permitted under Sections 407 or 408 of ERISA, Section 4975 of the Code or a
class or administrative exemption issued by the Department of Labor.
(d) Except as set forth in Section 5.5.3(d) of the Company
Disclosure Memorandum, each Plan has been administered in compliance in all
material respects with applicable law and the terms of the Plan.
(e) Except as disclosed in Section 5.5.3(e) of the Company
Disclosure Memorandum and except for obligations under the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended ("COBRA"), neither the Company nor
United Valley Bank has any obligation to provide, or material liability for,
health care, life insurance or other benefits after termination of active
employment. As of the Closing Date, the Company and United Valley Bank will have
provided adequate reserves, or insurance or qualified trust funds, for all
claims incurred through the Closing Date, including adequate reserves to provide
for any post-retirement health care, life insurance or other benefits with
respect to periods of employment prior to the Closing Date, based on an
actuarial valuation satisfactory to the actuaries of the Company and United
Valley Bank representing a projection of claims expected to be incurred for such
retirees during their period of coverage under such Plan.
(f) To the knowledge of Management, no fact or circumstance exists
which could constitute grounds in the future for the Pension Benefit Guaranty
Corporation ("PBGC") (or any successor to the PBGC) to take any action
whatsoever under Section 4042 of ERISA in connection with any plan which an
Affiliate (as defined below) of the Company maintains within the meaning of
Section 4062 or 4064 of ERISA, and, in either case, PBGC has not previously
taken any such action which has, or reasonably might, result in any liability of
an Affiliate or the Company to the PBGC, which would have an adverse effect on
the business of the Company. The term "Affiliate" for purposes of this Section
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means any trade or business (whether incorporated or unincorporated) which is a
member of a group described in Sections 414(b) or 414(c) of the Code of which
the Company is also a member.
(g) Except as specifically identified in the Company Disclosure
Memorandum, the execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby will not result in any payment or series of
payments by the Company or United Valley Bank to any person which is an "excess
parachute payment" (as defined in Section 280G of the Code), increase or secure
(by way of a trust or other vehicle) any benefits payable under any Employee
Benefit Plan of Company or United Valley Bank, or accelerate the time of payment
or vesting of any such benefit.
(h) The Company and United Valley Bank shall take such actions
with respect to any Plans, and refrain from such actions, as are necessary to
maintain the qualifications of each such Plan under Section 401(a) of the Code,
and the exemption of the trust maintained for each such Plan under Section
401(a) of the Code. Company and United Valley Bank shall timely make all
contributions and other payments to the Plans which they are obligated to make
as of the date hereof. Other than contributions or payments declared, required
or obligated to be paid to the Plans as of the date hereof, no contribution
shall be declared for or paid to any such Plan. Except as required by Applicable
Law and contractual commitment existing as of the date hereof and disclosed in
Section 5.5.3(h) of the Company Disclosure Memorandum, no amendment or change to
the provisions of any Plan shall be made or adopted prior to Closing, and each
of such Plans shall be continued in accordance with its terms.
(i) Except as disclosed in Section 5.5.3(i) of the Company
Disclosure Memorandum, Company or United Valley Bank does not provide and has no
obligation to provide benefits, including, without limitation, death, health or
medical benefits (whether or not insured) with respect to current or former
employees of Company or United Valley Bank beyond their retirement or other
termination of service with Company or United Valley Bank other than (i)
coverage mandated by Applicable Law, (ii) benefits under any Plan, or (iii)
benefits the full cost of which is borne by the current or former employee or
beneficiary.
5.5.4 LABOR-RELATED MATTERS. Neither the Company nor United Valley Bank
is, and neither the Company nor United Valley Bank has been, a party to any
collective bargaining agreement or agreement of any kind with any union or labor
organization or to any agreement with any of its employees which is not
terminable at will or upon ninety (90) days notice at the election of, and
without cost or penalty to, the Company or United Valley Bank. Except as set
forth in Section 5.5.4 of the Company Disclosure Memorandum, neither the Company
nor United Valley Bank has received at any time in the past five (5) years, any
demand for recognition from any union, and no attempt has been made, or will
have been made as of the Closing Date, to organize any of their employees. The
Company has complied with all obligations under the National Labor Relations
Act, as amended, the Age Discrimination in Employment Act, as amended, and all
other federal, state and local labor laws and regulations applicable to
employees. To the knowledge of Management, there are no unfair labor practice
charges pending or threatened against the Company or United Valley Bank, and
there are, and in the past three (3) years there have been, no charges,
complaints, claims or proceedings, or slowdowns or strikes pending or threatened
against, or involving, as the case may be, the Company or United Valley Bank
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with respect to any alleged violation of any legal duty (including but not
limited to any wage and hour claims, employment discrimination claims or claims
arising out of any employment relationship) by the Company or United Valley Bank
as to any of their employees or as to any person seeking employment therefrom,
and no such violations exist.
5.5.5 RELATED-PARTY TRANSACTIONS. Except for (a) loans and extensions
of credit made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions by the
Company or United Valley Bank with other persons who are not affiliated with the
Company or United Valley Bank, and which do not involve more than the normal
risk of repayment or present other unfavorable features, (b) deposits, all of
which are on terms and conditions identical to those made available to all
customers of United Valley Bank at the time such deposits were entered into, and
(c) transactions specifically described in Section 5.5.5 of the Company
Disclosure Memorandum, there are no contracts with or commitments to present or
former 5% or greater shareholders, directors, officers, or employees of the
Company or United Valley Bank involving the expenditure after December 31, 1997
of more than $60,000 as to any one individual, including with respect to any
business directly or indirectly controlled by any such person, or $100,000 for
all such contracts or commitments in the aggregate for all such individuals
(other than contracts or commitments relating to services to be performed by any
officer, director or employee as a currently-employed employee of the Company or
United Valley Bank).
5.6 OTHER MATTERS.
5.6.1 APPROVALS, CONSENTS AND FILINGS. Except for the approval of the
Federal Reserve, the Federal Deposit Insurance Corporation (the "FDIC"), the
Division of Banking, Company shareholder approval or as set forth in Section
5.6.1 of the Company Disclosure Memorandum, neither the execution and delivery
of this Agreement by the Company nor the consummation of the transactions
contemplated hereby or thereby, will (a) require any consent, approval,
authorization or permit of, or filing with or notification to, any governmental
or regulatory authority, or (b) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to the Company or United Valley Bank, or
any of their respective assets.
5.6.2 DEFAULT. (a) Except for those consents described in or set forth
pursuant to Section 5.6.1 above or as set forth in Section 5.6.2(a) of the
Company Disclosure Memorandum, neither the execution of this Agreement nor the
consummation of the transactions contemplated herein or therein (i) constitutes
a breach of or default under any contract or commitment to which the Company or
United Valley Bank is a party or by which the Company or United Valley Bank or
their properties or assets are bound, (ii) does or will result in the creation
or imposition of any security interest, lien, encumbrance, charge, equity or
restriction of any nature whatsoever in favor of any third party upon any assets
of the Company or United Valley Bank, or (iii) constitutes an event permitting
termination of any agreement or the acceleration of any indebtedness of the
Company or United Valley Bank.
(b) Except as set forth in Section 5.6.2(b) of the Company
Disclosure Memorandum, neither the Company nor United Valley Bank is in default
under its articles of incorporation or charter, as the case may be, or bylaws or
under any term or provision of any security deed, mortgage, indenture or
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security agreement or of any other material contract or instrument to which the
Company or United Valley Bank is a party or by which either of them or any of
their property is bound.
5.6.3 UNITED VALLEY BANK. The Company owns 100% of the equity interests
of United Valley Bank, and pursuant to this Agreement, Vail Banks will acquire
all of the Company's rights, title and interest in and to such equity interests.
5.6.4 REPRESENTATIONS AND WARRANTIES. No material representation or
warranty contained in this Article V or in any written statement delivered by or
at the direction of the Company or United Valley Bank pursuant hereto or in
connection with the transactions contemplated hereby contains or shall contain
any untrue statement, nor shall such representations and warranties taken as a
whole omit any statement necessary in order to make any statement not
misleading. Copies of all documents furnished to Vail Banks in connection with
this Agreement or pursuant hereto are true, correct and complete as of the date
given. If Vail Banks has relied on the Banker's Book supplied by The Wallach
Company, Inc., its contents are accurate as of the date of the book.
ARTICLE VI
----------
CONDUCT OF BUSINESS OF THE COMPANY
----------------------------------
OR UNITED VALLEY BANK PENDING CLOSING
-------------------------------------
During the period from the date of this Agreement and continuing until
the Closing Date, or the earlier termination of this Agreement pursuant to
Article X hereof, the Company agrees (except as expressly contemplated by this
Agreement or to the extent that Vail Banks shall otherwise consent in advance in
writing) that:
(a) ORDINARY COURSE. Except in specific contemplation of the
transactions contemplated by this Agreement, the Company and United Valley Bank
shall carry on their businesses in the usual, regular and ordinary course in the
same manner as heretofore conducted, without the creation of any indebtedness
for borrowed money (other than deposit and similar accounts and customary credit
arrangements between banks in the ordinary course of business), and, to the
extent consistent with such businesses, use their best efforts to preserve
intact their present business organizations, keep available the services of
their present officers and employees and preserve their relationships with
representatives, customers, suppliers, personnel and others having business
dealings with the Company and United Valley Bank.
(b) DIVIDENDS; CHANGES IN STOCK. Except as provided in Section
4.13, the Company shall not and or shall not propose to declare or pay any
dividends on, or make other distributions in respect of, any of its capital
stock, and neither the Company nor United Valley Bank shall or shall propose to
(i) split, combine or reclassify any of their capital stock or issue, authorize
or propose the issuance of any other securities in respect of, in lieu of or in
substitution for shares of capital stock of the Company or United Valley Bank,
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or (ii) repurchase or otherwise acquire any shares of their capital stock
(except for the 9,700 options outstanding as of the date of this Agreement).
(c) ISSUANCE OF SECURITIES. The Company and United Valley Bank
shall not sell, issue, authorize or propose the sale or issuance of, or purchase
or propose the purchase of, any shares of their capital stock or any class of
securities convertible into, or rights, warrants or options to acquire (except
for the 9,700 options outstanding as of the date of this Agreement), any such
shares, or other convertible securities or enter into any agreement with respect
to the foregoing.
(d) GOVERNING DOCUMENTS; COMPLIANCE WITH LAW. The Company and
United Valley Bank shall not amend their articles of incorporation or charter,
as the case may be, or bylaws. The Company and United Valley Bank shall each
maintain their corporate existence and powers and fully comply with all federal,
state and local laws with respect to their operations and the conduct of their
businesses.
(e) NO ACQUISITIONS. The Company and United Valley Bank shall not
acquire by merging or consolidating with, or by purchasing a substantial portion
of the assets of, or by any other manner, any business or any corporation,
partnership, association or other entity or division thereof or otherwise
acquire or agree to acquire any assets which are material, individually or in
the aggregate, to them.
(f) NO DISPOSITIONS. The Company and United Valley Bank shall not
sell, lease or otherwise dispose of any of their assets except for sales, leases
and other dispositions in the ordinary course of business consistent with prior
practice.
(g) MAINTENANCE OF PROPERTIES. The Company and United Valley Bank
shall maintain their properties and assets in satisfactory condition and repair
for the purposes intended, ordinary wear and tear and damage by fire or other
casualty excepted.
(h) BENEFIT PLANS, ETC. The Company and United Valley Bank shall
not enter into or amend any bonus, incentive compensation, deferred
compensation, profit sharing, retirement, pension, group insurance, stock
option, stock purchase or other benefit plan or any union, employment or
consulting agreement except as required by law or regulations and shall not
accelerate the exercisability of any options (except the 9,700 options
outstanding as of the date of this Agreement), warrants or rights to purchase
securities of the Company or United Valley Bank pursuant to any benefit plan.
(i) BOOKS AND RECORDS. The books and records of the Company and
United Valley Bank shall be maintained in the usual, regular and ordinary course
on a basis consistent with prior years.
(j) INCREASE IN COMPENSATION. The Company and United Valley Bank
shall not grant to any officer, employee or agent any increase in compensation
(other than any increase referred to in Section 5.2.11(f) hereof) or in
severance or termination pay, or enter into any employment agreement, except as
may be required under employment, termination or other agreements in effect on
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the date of this Agreement and which are described in the Company Disclosure
Memorandum.
(k) PAYMENT OF DEBT. The Company and United Valley Bank shall not
pay any claim or discharge or satisfy any lien or encumbrance or pay any
obligation or liability other than in the ordinary course of business or as
required by the terms of any written instrument evidencing or governing the
same, a copy of which has been heretofore made available to Vail Banks.
(l) OTHER ACTIONS. The Company and United Valley Bank shall not
take any action that would or could reasonably be expected to result in any of
the representations and warranties of the Company and United Valley Bank set
forth in this Agreement becoming untrue at any time on or prior to the Closing
Date.
(m) MAINTENANCE OF INSURANCE. The Company and United Valley Bank
shall maintain and keep or cause to be maintained and kept in full force and
effect all of the insurance referred to in Section 5.3.4 hereof or other
insurance equivalent thereto.
(n) INVESTMENT PORTFOLIO. The Company and United Valley Bank shall
only invest funds of the Company or United Valley Bank in securities of the
government of the United States, Repurchase Agreements secured by securities of
the government of the United States, federal funds, or deposits insured by the
FDIC; provided, however, that no such investment by the Company or United Valley
Bank shall have a stated maturity of greater than five (5) years and the various
stated maturities of the Company's and United Valley Banks' investments shall be
consistent with the stated maturities of the investments held in the ordinary
course of the Company's and United Valley Banks' businesses.
(o) BANKING RELATIONSHIPS. Except for changes in the ordinary
course of business, no change will be made in the banking and safe deposit
arrangements referred to in Section 5.2.8 hereof.
(p) NOTICE OF CHANGES. The Company and United Valley Bank shall
promptly advise Vail Banks orally and in writing of any change or event having,
or which Management of the Company and United Valley Bank believes could have, a
material adverse effect on the assets, liabilities, business, operations or
financial condition of the Company or United Valley Bank.
ARTICLE VII
-----------
REPRESENTATIONS AND WARRANTIES OF VAIL BANKS
--------------------------------------------
To induce the Company to enter into and perform this Agreement, Vail
Banks represents, warrants, covenants and agrees as follows, which
representations, warranties, covenants and agreements are being made as of the
date hereof and shall be deemed to be made again as of the Closing:
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7.1 CORPORATE AND FINANCIAL.
7.1.1 AUTHORITY. (a) Subject to the approval of various state and
federal regulatory authorities, Vail Banks has full power and authority to make,
execute and perform this Agreement and to consummate the transaction
contemplated hereby and thereby, and no further action is necessary on the part
of Vail Banks to authorize its consummation of the transaction contemplated
hereby and thereby. Other than such regulatory approvals, no further corporate
action is necessary on the part of Vail Banks to consummate the transaction
contemplated hereby. This Agreement constitutes the valid and binding obligation
of Vail Banks and is enforceable in accordance with its terms, except as limited
by the laws affecting creditors' rights generally and by the discretion of
courts to compel specific performance.
(b) Subject to the approval of the various state and federal
regulators, the execution, delivery and performance of this Agreement and the
transaction contemplated or required in connection herewith will not, with or
without the giving of notice or the passage of time, or both, (i) violate any
provision of federal or state law applicable to Vail Banks or WestStar, the
violation of which could be expected to have an adverse effect on the business,
operations, properties, assets, financial condition or prospects of Vail Banks
or WestStar; (ii) violate any provision of the articles of incorporation or
charter, as the case may be, or bylaws of Vail Banks or WestStar; (iii) conflict
with or result in a breach of any provision of, or termination of, or constitute
a default under any instrument, license, agreement or commitment to which Vail
Banks or WestStar is a party, which, singly or in the aggregate, could be
expected to have an adverse effect on the business, operations, properties,
assets, financial condition or prospects of Vail Banks or WestStar; or (iv)
constitute a violation of any order, judgment or decree to which Vail Banks or
WestStar is a party, or by which Vail Banks or WestStar or any of their
respective assets or properties are bound.
7.1.2 CORPORATE STATUS.
(a) VAIL BANKS. Vail Banks is a corporation duly organized,
validly existing and in good standing under the laws of the state of Colorado
and has no direct or indirect subsidiaries other than WestStar and Mortgage
Associates Vail, Inc. Vail Banks has all requisite corporate power and authority
and is entitled to own or lease its properties and assets and to carry on its
business as and in the places where such properties or assets are now owned,
leased or operated and such business is conducted.
(b) WESTSTAR. WestStar is a bank duly organized, validly existing
and in good standing under the laws of the State of Colorado. WestStar has all
requisite corporate power and authority and is entitled to own and lease its
properties and assets and to carry on its business as and in the places where
such properties or assets are now owned, leased or operated and such business is
conducted.
7.1.3 CAPITAL STRUCTURE.
(a) VAIL BANKS. Vail Banks has an authorized capital stock
consisting of 20,000,000 shares, $1.00 par value, common stock, of which
6,040,608 shares of common stock are issued and outstanding as of the date
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hereof. Although there are no shares of preferred stock issued and outstanding,
the Board of Directors of Vail Banks is authorized to issue preferred stock in
one or more series. All of the outstanding capital stock of Vail Banks is duly
and validly issued, fully paid and non-assessable and was offered, issued and
sold in compliance with all applicable federal and state securities laws. No
person has any right of rescission or claim for damages under federal or state
securities laws with respect to the issuance of any shares of capital stock of
Vail Banks previously issued. None of the capital stock of Vail Banks has been
issued in violation of any preemptive or other rights of its shareholders.
(b) WESTSTAR. WestStar has an authorized capital stock consisting
solely of 130,693 shares, $6.00 par value, common stock, of which 130,693 shares
of common stock are issued and outstanding as of the date hereof and of which
Vail Banks owns 130,693 shares, or 100% of the issued and outstanding common
stock. All of the outstanding capital stock of WestStar is duly and validly
issued, fully paid and non-assessable and was offered, issued and sold in
compliance with all applicable federal and state securities laws. No person has
any right of rescission or claim for damages under federal or state securities
laws with respect to the issuance of any shares of capital stock of WestStar
previously issued. None of the capital stock of WestStar has been issued in
violation of any preemptive or other rights of its shareholders.
7.1.4 FINANCIAL STATEMENTS. Vail Banks has delivered to the Company
true, correct and complete copies of (i) the audited, consolidated financial
statements of Vail Banks and WestStar for the years ended December 31, 1997,
1998 and 1999, including balance sheets, statements of income, statements of
shareholders' equity, statements of cash flows and related notes (the audited,
consolidated financial statements for the year ended December 31, 1999 being
referred to as the "Vail Banks 1999 Financial Statements") and (ii) unaudited,
consolidated financial statements of Vail Banks and WestStar for the period
ended March 31, 2000, including a balance sheet, statement of income and related
notes. In addition, Vail Banks will provide to the Company monthly interim
unaudited, consolidated financial statements of Vail Banks and WestStar ending
at the end of each month prior to Closing and after March 31, 2000. All of such
financial statements, except for the interim statements which have been prepared
consistently with the audited financial statements of the Company but without
footnotes, etc., have been prepared in accordance with generally accepted
accounting principles consistently applied and truthfully reflect the assets,
liabilities and financial condition of Vail Banks and WestStar as of the dates
indicated therein and the results of its operations for the respective periods
then ended.
7.2 OTHER MATTERS.
7.2.1 APPROVALS, CONSENTS AND FILINGS. Except for the approval of the
Federal Reserve, the Federal Deposit Insurance Corporation (the "FDIC") or the
Division of Banking, neither the execution and delivery of this Agreement by
Vail Banks nor the consummation of the transactions contemplated hereby or
thereby, will (a) require any consent, approval, authorization or permit of, or
filing with or notification to, any governmental or regulatory authority, or (b)
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to Vail Banks or WestStar, or any of their respective assets.
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<PAGE>
7.2.2 DEFAULT. (a) Except for those consents described in or set forth
pursuant to Section 7.2.1 above, neither the execution of this Agreement nor the
consummation of the transactions contemplated herein (i) constitutes a breach of
or default under any contract or commitment to which Vail Banks or WestStar is a
party or by which Vail Banks or WestStar or their properties or assets are
bound, (ii) does or will result in the creation or imposition of any security
interest, lien, encumbrance, charge, equity or restriction of any nature
whatsoever in favor of any third party upon any assets of Vail Banks or
WestStar, or (iii) constitutes an event permitting termination of any agreement
or the acceleration of any indebtedness of Vail Banks or WestStar.
(b) Neither Vail Banks nor WestStar is in default under its
articles of incorporation or charter, as the case may be, or bylaws or under any
term or provision of any security deed, mortgage, indenture or security
agreement or of any other contract or instrument to which Vail Banks or WestStar
is a party or by which either of them or any of their property is bound.
7.2.3 WESTSTAR. Vail Banks owns 100% of the equity interests of
WestStar.
7.2.4 STATUS OF VAIL COMMON STOCK TO BE ISSUED. The shares of Vail
Common Stock into which the shares of Company Stock are to be exchanged pursuant
to this Agreement will be, when delivered as specified in this Agreement,
validly authorized and issued, fully paid and nonassessable, and registered
pursuant to an effective registration statement under the Securities Act of
1933.
7.2.5 REPRESENTATIONS AND WARRANTIES. No material representation or
warranty contained in this Article VII or in any written statement delivered by
or at the direction of Vail Banks or WestStar pursuant hereto or in connection
with the transactions contemplated hereby contains or shall contain any untrue
statement, nor shall such representations and warranties taken as a whole omit
any statement necessary in order to make any statement not misleading. Copies of
all documents furnished to the Company in connection with this Agreement or
pursuant hereto are true, correct and complete.
ARTICLE VIII
------------
CONDUCT OF THE BUSINESS OF VAIL BANKS
-------------------------------------
OR WESTSTAR PENDING CLOSING
---------------------------
During the period from the date of this Agreement and continuing until
the Closing Date, or the earlier termination of this Agreement pursuant to
Article IX hereof, Vail Banks agrees (except as expressly contemplated by this
Agreement or to the extent that the Company shall otherwise consent in advance
in writing) that:
8.1 ORDINARY COURSE. Except in specific contemplation of the
transactions contemplated by this Agreement, Vail Banks and WestStar shall carry
on their businesses in the usual, regular and ordinary course in the same manner
as heretofore conducted.
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8.2 OTHER ACTIONS. Vail Banks and WestStar shall not take any action
that would or could reasonably be expected to result in any of the
representations and warranties of Vail Banks and WestStar set forth in this
Agreement becoming untrue at any time on or prior to the Closing Date.
8.3 INDEMNIFICATION
(a) Following the Closing Date, Vail Banks shall indemnify, defend
and hold harmless the present and former directors and officers of the Company
and United Valley Bank (each, an "Indemnified Party") against all costs or
expenses (including reasonable attorneys fees), judgments, fines, losses,
claims, damages or liabilities (collectively, "Costs") as incurred in connection
with any claim, action, suit, proceeding or investigation, whether civil,
criminal, administrative or investigative, arising out of actions or omissions
occurring at or prior to the Closing Date (including without limitation, the
transaction contemplated by this Agreement), to the extent that the Company and
United Valley bank are currently obligated to indemnify (and advance expenses
to) their respective directors and officers under the laws of the State of
Colorado, their respective articles of incorporation and by-laws.
(b) Vail Banks shall indemnify, defend and hold harmless the
Company and its stockholders, directors, officers and employees from all Costs,
whether arising under the federal or state securities laws or otherwise, which
may be asserted against any of them which arise as a result of any alleged act
or failure to act, or any alleged statement or omission, of Vail Banks done or
made in connection with any registration statement, proxy statement, or any
other statement or form filed or required to be filed with the Securities and
Exchange Commission or state securities departments, or delivered or required to
be delivered to the holders of Company Stock.
(c) The Company shall indemnify, defend and hold harmless Vail
Banks and its stockholders, directors, officers and employees from all Costs,
whether arising under the federal or state securities laws or otherwise, which
may be asserted against any of them which arise as a result of information
provided by the Company to Vail Banks for inclusion in the Registration
Statement that contains any untrue statement.
(d) Any Indemnified Party wishing to claim indemnification under
this Section, upon learning of any claim, action, suit, proceeding or
investigation described above, shall promptly notify Vail Banks thereof.
(e) If Vail Banks or any of its successors or assigns shall
consolidate with or merge into any other entity and shall not be the continuing
or surviving entity of such consolidation or merger or shall transfer all or
substantially all of its assets to any other entity, then in each such case,
Vail Banks shall cause proper provision to be made so that the successors and
assigns of Vail Banks shall assume the obligations set forth in this Section.
(f) The provisions of this Section are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party and his or her
heirs and representatives.
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8.4 ARTICLES OF MERGER. On the Closing Date, Vail Banks shall file with
the Secretary of State of the State of Colorado, Articles of Merger in
accordance with the provisions of the Colorado Business Corporations Act to
effect the transactions contemplated by this Agreement.
ARTICLE IX
----------
CONDITIONS TO OBLIGATIONS OF VAIL BANKS
---------------------------------------
All of the obligations of Vail Banks under this Agreement are subject
to the fulfillment prior to or at the Closing Date of each of the following
conditions, any one or more of which may be waived by Vail Banks:
9.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
of the Company contained herein or in any certificate, schedule or other
document delivered pursuant to the provisions hereof, or in connection herewith,
shall be true in all material respects as of the date when made and, except
where otherwise expressly provided herein, shall be deemed to be made again at
and as of the Closing Date and shall be true in all material respects at and as
of such time, except (i) for those representations and warranties confined to a
specific date, which shall be true and correct as of such date, or (ii) as a
result of changes or events expressly permitted or contemplated herein.
9.2 PERFORMANCE OF CONDITIONS AND AGREEMENTS. The Company shall have
performed and complied in all material respects with all agreements and
conditions required by this Agreement to be performed or complied with by it
prior to or on the Closing Date.
9.3 CERTIFICATES, RESOLUTIONS, OPINION. The Company shall have
delivered, or cause the Company and United Valley Bank to deliver, to Vail
Banks:
(a) a certificate executed by the President or Chairman of the
Company, dated as of the Closing Date, and certifying in such detail as
Vail Banks may reasonably request to the fulfillment of the conditions
specified in Sections 9.1 and 9.2 hereof;
(b) certificates executed by the Secretary of State of the
State of Colorado dated not more than thirty (30) business days prior
to the Closing Date, of the valid existence of the Company and United
Valley Bank, respectively, under the laws of Colorado; and
(c) an opinion from counsel of the Company in form and
substance reasonably acceptable to Vail Banks and its counsel, dated
the Closing Date, covering customary corporate matters.
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9.4 ACCOUNTANTS' LETTER. Vail Banks shall have received a letter from
Fortner Baynes Levkulich & Company, P.C., dated the Closing Date, to the effect
that: At the request of the Company they have carried out procedures to a
specified date not more than five business days prior to the Closing Date, which
procedures did not constitute an examination in accordance with generally
accepted auditing standards, of the financial statements of the Company, as
follows: (a) read the unaudited balance sheets and statements of income of the
Company and United Valley Bank from December 31, 1999 through the date of the
most recent monthly financial statements available in the ordinary course of
business; (b) read the minutes of the meetings of shareholders and Board of
Directors of the Company and United Valley Bank from December 31, 1999 to said
date not more than five business days prior to the Closing Date; and (c)
consulted with certain officers and employees of the Company and United Valley
Bank responsible for financial and accounting matters and, based on such
procedures, nothing has come to their attention which would cause them to
believe that (i) such unaudited interim balance sheets and statements of income
are not fairly presented in conformity with generally accepted accounting
principles applied on a basis consistent with that of the 1999 Financial
Statements, (ii) as of said date not more than five business days prior to the
Closing Date the shareholders' equity, long-term debt, reserve for possible loan
losses and total assets of the Company, in each case as compared with the
amounts shown in the 1999 Financial Statements, are not different except as set
forth in such letter, or (iii) for the period from December 31, 1999 to said
date not more than five business days prior to the Closing Date, the net
interest income, total and per share amounts of consolidated income (before
extraordinary items) and net income of the Company, as compared with the
corresponding portion of the preceding 12-month period, are not different except
as set forth in such letter. The Company's accountants shall provide the Net
Worth determination of the Company for the Purchase Price determination and will
calculate the Purchase Price as of Closing and for the post-Closing adjustment
within twenty (20) days after the Closing.
9.5 REGULATORY APPROVALS. Vail Banks shall have received from any and
all governmental authorities, bodies or agencies having jurisdiction over the
transaction contemplated by this Agreement, including, but not limited to, the
Federal Reserve, FDIC and the Division of Banking, all such consents,
authorizations and approvals as are necessary for the consummation thereof and
all applicable waiting or similar periods required by law shall have expired.
9.6 EMPLOYMENT. All written employment, termination, consulting or
similar agreements entered into by the Company or United Valley Bank shall have
been effectively terminated with no remaining liabilities, duties or obligations
on the part of the Company or United Valley Bank under said agreements.
9.7 RESIGNATION OF EXECUTIVE OFFICERS AND BOARD OF DIRECTORS. The
Boards of Directors and Executive Officers of the Company and United Valley Bank
shall have tendered their resignations immediately prior to the Closing.
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9.8 EXERCISE OF OPTIONS. The Company shall have caused the holders of
the 9,700 outstanding options as of the date of this Agreement to have exercised
such options so that no options remain outstanding as of the Closing Date.
ARTICLE X
---------
CONDITIONS TO OBLIGATIONS OF THE COMPANY
----------------------------------------
All of the obligations of the Company under this Agreement are subject
to the fulfillment prior to or at the Closing Date of each of the following
conditions, any one or more of which may be waived by the Company:
10.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Vail Banks contained herein or in any certificate, schedule or other document
delivered pursuant to the provisions hereof, or in connection herewith, shall be
true in all material respects as of the date when made and shall be deemed to be
made again at and as of the Closing Date and shall be true in all material
respects at and as of such time.
10.2 PERFORMANCE OF AGREEMENTS. Vail Banks shall have performed and
complied in all material respects with all agreements and conditions required by
this Agreement to be performed or complied with by it prior to or at the Closing
Date.
10.3 CERTIFICATES, RESOLUTIONS, OPINIONS. Vail Banks shall have
delivered to the Company:
(a) a certificate executed by the President of Vail Banks,
dated the Closing Date, certifying in such detail as the Company may
reasonably request to the fulfillment of the conditions specified in
Sections 10.1 and 10.2 hereof;
(b) duly adopted resolutions of the Board of Directors of Vail
Banks, certified by the Secretary or an Assistant Secretary thereof,
dated the Closing Date, authorizing and approving (i) the execution of
this Agreement and the consummation of the transactions contemplated
herein and therein in accordance with their respective terms, and (ii)
all other necessary and proper corporate action to enable Vail Banks to
comply with the terms hereof;
(c) an opinion of Kilpatrick Stockton LLP, counsel for Vail
Banks in form and substance reasonably acceptable to Company and its
counsel, dated the Closing Date.
(d) certificates executed by the Secretary of State of the
State of Colorado, dated not more than thirty (30) business days prior
to the Closing Date, of the valid existence of Vail Banks under the
laws of Colorado.
10.4 REGULATORY APPROVALS. Any and all governmental authorities, bodies
or agencies having jurisdiction over the transactions contemplated by this
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Agreement, including, but not limited to, the Federal Reserve, the FDIC and the
Division of Banking, shall have granted all such consents, authorizations and
approvals as are necessary for the consummation thereof, and all applicable
waiting or similar periods required by law shall have expired.
10.5 DELIVERY OF CONSIDERATION BY VAIL BANKS. Vail Banks shall have
delivered the Purchase Price pursuant to Article I hereof.
10.6 SHAREHOLDER APPROVAL. The Merger Agreement shall have been
approved by the vote of the holders of at least two-thirds of Company Stock.
ARTICLE XI
----------
WARRANTIES, NOTICES, ETC.
-------------------------
11.1 WARRANTIES. All statements contained in any certificate or other
instrument delivered by or on behalf of the Company pursuant to Article V or
Vail Banks pursuant to Article VII hereto or in connection with the transactions
contemplated hereby shall be deemed representations and warranties hereunder by
the delivering party.
11.2 SURVIVAL OF REPRESENTATIONS. All representations, warranties,
covenants, and agreements made by either party hereto, except as set forth
hereafter or specifically stated in this Agreement, shall expire and be of no
further force and effect upon the consummation of the transactions contemplated
by this Agreement; provided, however, that the covenant with respect to the
confidentiality of certain information contained in Section 4.4, the obligations
of Haselbush and Sishc in Section 4.11 of this Agreement and the obligations of
Vail Banks with regard to the Purchase Price and registration of Vail Common
Stock shall survive consummation of this Agreement and the transactions
contemplated hereby.
11.3 NOTICE. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if delivered or mailed, first class, certified mail, postage
prepaid to each of the parties hereto at the respective addresses set forth
below (or at such other address either party may have theretofore notified the
other party in writing):
(a) To the Company: Estes Bank Corporation
P.O. Box 2270
363 E. Elkhorn Avenue
Estes Park, Colorado 80517
Attn.: Jack G. Haselbush
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With copies to: Ted R. Sikora II, Esq.
Davis, Graham & Stubbs LLP
Suite 4700
370 Seventeenth Street
Denver, Colorado 80202
Facsimile: (303) 893-1379
(b) To Vail Banks: Vail Banks, Inc.
108 S. Frontage Road, West
Suite 101
Vail, Colorado 81657
Attn.: E. B. Chester, Jr.
With copies to: Kilpatrick Stockton LLP
Suite 2800
1100 Peachtree Street
Atlanta, Georgia 30309-4530
Attn.: R. Alexander Bransford, Jr.
11.4 ENTIRE AGREEMENT. This Agreement supersedes all prior discussions
and agreements by and between Vail Banks and the Company with respect to the
Merger and the other matters with respect thereto, and this Agreement contains
sole and entire agreement between the parties hereto with respect to the
transactions contemplated herein.
11.5 WAIVER; AMENDMENT. Prior to or on the Closing Date, Vail Banks,
acting through its Board of Directors, Chairman or President, shall have the
right to waive any default in the performance of any term of this Agreement by
the Company, to waive or extend the time for the fulfillment by the Company of
any and all of their obligations under this Agreement, and to waive any or all
of the conditions precedent to the obligations of Vail Banks under this
Agreement, except any condition which, if not satisfied, would result in the
violation of any law or applicable governmental regulation. Prior to or on the
Closing Date, the Company, acting individually or through the Company's Board of
Directors or Chairman, shall have the right to waive any default in the
performance of any term of this Agreement by Vail Banks, to waive or extend the
time for the fulfillment by Vail Banks of any and all of its obligations under
this Agreement, and to waive any or all of the conditions precedent to the
obligations of the Company under this Agreement, except any condition which, if
not satisfied, would result in the violation of any law or applicable
governmental regulation. This Agreement may be amended by a subsequent writing
signed by the parties hereto; provided, however, that the provisions of Sections
9.5 and 10.4 requiring regulatory approval shall not be amended by the parties
hereto without such approval.
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<PAGE>
ARTICLE XII
-----------
TERMINATION
-----------
12.1 TERMINATION OF AGREEMENT. This Agreement may be terminated only
for the following reasons:
(a) MATERIAL ADVERSE CHANGE OF THE COMPANY OR UNITED VALLEY BANK. By
either party, if, after the date hereof, a material adverse change in the
financial condition or business of the Company, United Valley Bank, Vail Banks
or WestStar, as the case may be, shall have occurred or if the Company, United
Valley Bank, Vail Banks or WestStar, as the case may be, shall have suffered a
material loss or damage to any of its properties or assets, which change, loss
or damage materially affects or impairs the ability of any of the Company,
United Valley Bank, Vail Banks or WestStar, as the case may be, to conduct its
business.
(b) COMPANY DISCLOSURE MEMORANDUM. By Vail Banks within ten (10) days
after receipt of the Company Disclosure Memorandum.
(c) NONCOMPLIANCE OF THE COMPANY. By Vail Banks, if the terms,
covenants or conditions of this Agreement to be complied with or performed by
the Company at or before the Closing shall not have been complied with or
performed in all material respects and such noncompliance or non-performance
shall not have been waived by Vail Banks.
(d) NONCOMPLIANCE OF VAIL BANKS. By the Company, if the terms,
covenants or conditions of this Agreement to be complied with or performed by
Vail Banks at or before the Closing shall not have been complied with or
performed in all material respects and such noncompliance or non-performance
shall not have been waived by the Company.
(e) ADVERSE PROCEEDINGS. By either party, if any action, suit or
proceeding shall have been instituted or threatened against either party to this
Agreement to restrain or prohibit, or to obtain substantial damages in respect
of, this Agreement or the consummation of the transactions contemplated herein,
which, in the good faith opinion of such party, makes consummation of the
transactions herein contemplated inadvisable.
(f) TERMINATION DATE. By either party, if the receipt of Regulatory
Approvals has not occurred on or before October 1, 2000.
ARTICLE XIII
------------
COUNTERPARTS, HEADINGS, ETC.
----------------------------
This Agreement may be executed simultaneously in any number of
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument. The headings herein set out are for
convenience of reference only and shall not be deemed a part of this Agreement.
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<PAGE>
ARTICLE XIV
-----------
BINDING EFFECT
--------------
This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and assigns; provided,
however, that this Agreement may not be assigned by any party without the prior
written consent of the others.
ARTICLE XV
----------
GOVERNING LAW
-------------
The validity and effect of this Agreement and the rights and
obligations of the parties hereto shall be governed by and construed and
enforced in accordance with the laws of the State of Colorado.
ARTICLE XVI
-----------
THIRD PARTIES NOT BENEFITED
---------------------------
Except as provided herein, nothing contained in this Agreement is
intended or shall be deemed to benefit any third party, and no third party shall
be entitled to require either party to enforce any right which the party may
have under this Agreement or otherwise.
[Signatures follow on next page]
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<PAGE>
IN WITNESS WHEREOF, Company and Vail Banks have caused this Agreement
to be executed by their respective duly authorized corporate officers and their
respective corporate seals to be affixed hereto as of the day and year first
above written and Haselbush and Sishc have executed this Agreement individually.
ESTES BANK CORPORATION
(CORPORATE SEAL) By: /s/ Jack G. Haselbush
------------------------------------
Jack G. Haselbush
Secretary and Treasurer
Attest:
/s/ Bradley D. Sishc
----------------------------
Bradley D. Sishc
Vice President
VAIL BANKS, INC.
(CORPORATE SEAL) By: /s/ E.B. Chester, Jr.
------------------------------------
E. B. Chester, Jr.
Chairman
Attest:
/s/ Kirk S. Colburn
----------------------------
Secretary
/s/ Jack G. Haselbush
---------------------------------------
Jack G. Haselbush, individually
/s/ Bradley D. Sishc
---------------------------------------
Bradley D. Sishc, individually
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<PAGE>
APPENDIX B
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Commission File Number: 000-25081
Vail Banks, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 84-1250561
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
108 South Frontage Road West, Vail, Colorado 81657
--------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (970) 476-2002
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Name of exchange on which registered:
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00
par value per share.
Check whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
State issuer's revenues for its most recent fiscal year. $28,184,000
-----------
Transitional Small Business Disclosure format. Yes [ ] No [X]
State the aggregate market value of the voting stock held by non-affiliates
(which for purposes hereof are all holders other than executive officers and
directors): As of March 8, 2000: 6,081,180 shares of common stock $1.00 par
value (the "Common Stock"), were issued and outstanding with an aggregate value
of $37,242,041 held by non-affiliates (based on market value of $9.28/share)
(computed by reference to the average bid and asked price of the Common Stock on
March 8, 2000)
State the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest practicable date: As of March 8, 2000, there were
issued and outstanding 6,081,186 shares of Common Stock.
That portions of the Registrant's definitive Proxy Statement for the 2000
Annual Meeting of Stockholders, to be filed with the Commission, are
incorporated by reference into Part III.
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
Vail Banks, Inc. ("Vail Banks") is a bank holding company headquartered in
Vail, Colorado with consolidated assets of $465 million at December 31, 1999.
Vail Banks' wholly owned subsidiary, WestStar Bank ("WestStar"), is a Colorado
state bank with 25 retail offices located primarily in the western slope region
of Colorado. On July 31, 1998, Vail Banks merged with Independent Bankshares,
Inc. ("Independent") and WestStar merged with Glenwood Independent Bank
("Glenwood"), expanding its presence into Garfield County, Colorado. In
connection with the merger, Vail Banks issued 318,770 shares of its Common Stock
and paid $3.8 million in cash to holders of Independent common stock. On
December 15, 1998, Vail Banks merged with Telluride Bancorp, Ltd. ("Telluride")
and WestStar acquired the capital stock of Telluride's former subsidiaries, Bank
of Telluride and Western Colorado Bank (both recently merged into WestStar),
expanding its presence into Ouray, San Miguel and Montrose Counties, Colorado.
Vail Banks issued 908,913 shares of Common Stock and paid $13.3 million in cash
to the holders of Telluride common stock.
In July 1999, the Division of Banking of the State of Colorado ("CDB") and
the Federal Reserve Bank of Kansas City approved the application for the mergers
of WestStar and Vail Banks' other subsidiary banks, Western Colorado Bank and
Bank of Telluride. The mergers closed August 6, 1999, with WestStar as the
surviving entity. The mergers were accounted for under the purchase method of
accounting.
In May 1999, Vail Banks acquired $36.8 million of deposits and the branch
office of the Glenwood Springs, Colorado branch of World Savings of Oakland,
California. World Savings retained its mortgage loans. The acquisition makes
WestStar one of the largest depository institutions in the Glenwood Springs
market. Additionally, on November 8, 1999, WestStar entered into an agreement to
acquire First Western Mortgage Services, Inc., a Colorado corporation ("First
Western"), for consideration that included cash, Vail Banks Common Stock, and
installment notes. The acquisition closed on January 1, 2000, and added mortgage
brokerage to WestStar's lending services. First Western continues to operate as
a wholly-owned subsidiary of WestStar.
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 relatively broad range of convenient banking services, delivered with
personalized customer service. 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, San Miguel County (which includes the town and ski resort of Telluride),
Routt County (which includes the town and ski resort of Steamboat Springs) and
offices in Denver. These areas of Colorado are home to a variety of commercial,
recreational, entertainment, and cultural 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 was located in a more rural area and
thus less dependent on customers involved in the tourism industry than WestStar,
has diversified the economic base in which Vail Banks operates. To meet the
growing needs of its customers and to prepare for future growth
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throughout the Western Slope, Vail Banks has developed a stronger infrastructure
by (1) expanding its computer technology, (2) entering emerging growth markets
by building and staffing new facilities, and (3) centralizing certain
administrative, processing, accounting and other operations functions. 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 that some
of these capital and one-time 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) expanded Vail Banks' presence in Western
Slope markets, as these were well-established community banks that had
significant local sponsorship. Several directors of WestStar, as well as its
chief executive officer, have been associated with WestStar for more than ten
years. The director of Independent and one of the two directors of Telluride who
joined the Board of Vail Banks have also been associated with those banks for
more than ten years. James Brenner, who has been with First Western for over 25
years, is continuing to manage the mortgage business as a part of WestStar.
In this Form 10-KSB, most percentage and dollar amounts have been rounded to
aid presentation; as a result, all such figures are approximations. References
to such approximations have generally been omitted.
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 share, de novo establishment of retail offices, and mergers and
acquisitions. Vail Banks' loan portfolio increased from $78.7 million to $336.7
million from December 31, 1995 to December 31, 1999, for a compound annual
growth rate of 44%. During the same period, Vail Banks opened six de novo
branches. Additionally, the First Western acquisition represents the sixth
acquisition completed by Vail Banks since January 1, 1997.
EXPANSION OF 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 associates, (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 by opening new retail offices. 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 market share in its existing markets and to enter attractive new
markets by merging with well established community banks. In assessing potential
mergers, Vail Banks focuses on credit quality, financial performance, market
share,
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management, location, community demographics, strength of the local economy,
potential merger synergies 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 merging their banks with a community-based
organization like Vail Banks. Additionally, management believes that merging
with established banks and then methodically integrating their operations into
Vail Banks allows Vail Banks to offer its relatively broad range of products and
services while maintaining the merged bank's reputation and community ties. Vail
Banks' strategy is to streamline operations judiciously, in order to optimize
the balance between cost savings and not interrupting the community-based
services of the acquired bank.
COMMUNITY BANKING PHILOSOPHY
WestStar is a community bank that provides a relatively broad range of banking
products and services to consumers and businesses in all of its retail offices.
Retail offices are operated with the goal of offering individualized customer
service and providing superior financial services. Many administrative
operations, such as data processing, loan administration, account reconciliation
and maintenance, accounting, compliance and broad policy decisions are
centralized in order to ensure consistency, accuracy and efficiency and to allow
retail office personnel to concentrate on providing superior customer service.
The managers and associates of each retail office focus on day-to-day customer
service, business development and selling. Management of Vail Banks believes
that this organizational structure allows retail offices to offer the
individualized customer service of a community bank while maximizing the
benefits of technological expertise, operating synergies and other cost saving
administrative efficiencies.
Management is committed to investing in its communities. Executive officers
and market managers live in the communities served by their retail offices, and
Vail Banks encourages board members and bank associates to be actively involved
in civic and public service activities in their communities. Additionally, most
charitable contribution decisions are made by WestStar's market managers.
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, de novo
establishment of retail offices 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. In 1996, taking advantage of changes to Colorado bank
branching laws that permitted subsidiary banks of Colorado bank holding
companies to branch into additional locations, WestStar opened retail offices in
Frisco and Edwards. In 1997, Vail Banks merged with Cedaredge Financial
Services, Inc. ("Cedaredge"), a bank holding company with 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 retail offices in
Telluride, Norwood and Montrose. The acquisition of World Savings added another
office in Glenwood Springs, and the acquisition of First Western in early 2000
added offices in Eagle-Vail and Steamboat Springs.
SERVICES AND PRODUCTS
Vail Banks serves the banking needs of its business and consumer customers
by providing a relatively broad range of commercial and consumer banking
products and services in all of its communities. These products and services
include short-term and medium-term loans, revolving credit facilities, inventory
and accounts receivable financing, equipment financing, short-term commercial
mortgage lending and mortgage brokerage, installment
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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, depository services, and corporate cash management services.
LENDING. Vail Banks offers loans for business and consumer purposes and focuses
its lending activities on individuals and small-to-medium size businesses.
Lending activities are funded primarily from core deposits gathered in the local
communities. Loan products are concentrated in relatively short-term, variable
rate loans, with a majority of the loans at December 31, 1999 having remaining
terms of less than two years. Collateral for loans is concentrated in real
estate and operating business assets. The mergers with Independent and Telluride
brought an expanded focus on consumer lending. The acquisition of First Western
added an expanded array of residential mortgage products through its mortgage
operations. Vail Banks also participates in many Small Business Administration
("SBA") programs. It has experienced significant growth in its SBA lending
division since 1995, and in January 1999 the SBA designated WestStar as one of
the top 25 SBA lenders in Colorado during 1998. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Financial Condition"
in Item 6.
DEPOSITS. Vail Banks offers a relatively broad range of depository products
including checking, savings and money market accounts, and certificates of
deposit. Deposits are insured by the Federal Deposit Insurance Corporation
("FDIC") up to statutory limits. 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. Additionally, because some of Vail
Banks' markets are located in resort areas, deposits tend to peak during the ski
season. However, increases in deposits in non-resort markets have reduced the
overall impact of such seasonality.
OTHER SERVICES. WestStar offers its customers the flexibility of monitoring
their loan and deposit account activity and conducting some banking transactions
24 hours a day through personal computers from their home or business.
Additionally, telephone access allows customers to receive current account
balances, deposit status, checks paid, withdrawals made, loan status, loan
amounts due and other specifics relating to services provided by WestStar.
WestStar has 21 automated teller machines, 15 of which are located at retail
offices and six of which are located at remote locations.
ADMINISTRATION OF WESTSTAR
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, make lending decisions, sell products and present a
favorable impression of WestStar to the community in order to attract new
customers. Administrative functions that can be centralized have been placed in
an operations center in Gypsum.
At the operation center, Vail Banks provides administrative services,
oversight and support to the retail offices, including data processing,
accounting services, investments, credit policy formulation, loan
administration, a customer service center, PC banking support and other customer
service assistance.
Management believes that by standardizing products, services and systems, and
providing appropriate holding company support, retail office personnel can
concentrate on 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, streamlining credit administration and supervision, and 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
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the retail office level allows its banking subsidiary to better serve customers
in their respective communities, and thus enhances business opportunities and
operations. This structure also has served in the past to ease the integration
of banks acquired by Vail Banks because it allows Vail Banks to maintain
customer familiarity (by maintaining existing management and retail office
culture), while at the same time transitioning new retail offices to Vail Banks'
policies and procedures.
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 access to information concerning all customer
account data. Additionally, advanced hardware and software has been installed
that allows images (or photographs) to be taken of all items (checks, deposit
tickets and payments). Once processed, the images of checks and deposit tickets
are simultaneously associated with the appropriate customer's account, where
they are stored and retrieved to be printed with customer statements. The
imaging system also will allow, via a data network, instant access at all retail
offices to loan files, customer signature cards and other data that is available
currently only at the originating retail office. Vail Banks believes that its
technology platform is 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 customers. Vail Banks believes 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 its markets.
The financial services industry is currently highly fragmented, but
consolidation in the industry continues to reduce the number of independent
banks. Vail Banks competes with other commercial banks, savings institutions,
credit unions, finance companies, brokerage and investment banking firms,
insurance companies, asset-based lenders and certain other nonfinancial
institutions, including retail stores that offer credit programs and
governmental organizations which offer financing programs. 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.
Congress has enacted legislation allowing full nationwide interstate banking and
branching. Additionally, Colorado law permits interstate branching (the
acquisition of a bank in Colorado by an out-of-state bank without the
requirement of maintaining a Colorado banking charter). These laws may lead to
increased competition from out-of-state banks in Vail Banks' markets. See
"Supervision and Regulation" in this Item 1.
Management believes that WestStar will continue to compete successfully in
its 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, resourceful
personnel. Management believes that large, institutional banks cannot or are
unwilling to offer a high level of individualized customer service, and that
Vail Banks' customers and potential customers choose to bank with Vail Banks to
take advantage of this attention while also receiving products and 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 financial services are factors that should allow it to continue to
maintain and improve its competitive position.
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<PAGE>
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.
ASSOCIATES
As of March 1, 2000 Vail Banks, WestStar and First Western employed
approximately 227 persons, 224 on a full-time basis and 3 on a part-time basis.
Neither Vail Banks nor WestStar is a party to any collective bargaining
agreement, and Vail Banks believes that its employee relations are good.
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<PAGE>
SELECTED FINANCIAL DATA
The selected historical data set forth below should be read in conjunction with
"General," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," the consolidated financial statements and notes thereto
and other financial data contained elsewhere in this Annual Report on Form
10-KSB.
(Dollars in thousands, except for share data)
<TABLE>
<CAPTION>
EARNINGS 1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net interest income $ 24,214 13,574 9,508
Provision for loan losses 455 -- 232
Non-interest income 3,970 2,388 1,273
Non-interest expense 19,832 13,048 9,787
Net income 4,856 1,959 474
Cash earnings (1) 5,840 2,256 607
---------- ---------- ----------
PER SHARE DATA
Basic earnings 0.80 0.47 0.23
Basic cash earnings (1) $ 0.97 0.58 0.29
Diluted earnings 0.80 0.47 0.23
Diluted cash earnings (1) 0.96 0.58 0.29
Book value per common share at year end 9.68 9.00 5.91
Tangible book value per common share at year end 5.69 5.20 4.07
Closing market price 9.88 12.19 N/A
---------- ---------- ----------
AT YEAR END
Total assets $ 464,962 439,123 231,191
Earning assets 373,526 353,031 191,708
Loans 336,735 269,191 154,913
Allowance for loan losses 2,739 2,590 1,364
Non-interest bearing deposits 86,991 91,510 56,929
Total deposits 372,742 377,572 206,215
Shareholders' equity 58,727 54,377 17,868
Shares outstanding 6,069,370 6,040,608 2,250,980
---------- ---------- ----------
AVERAGE BALANCES
Total assets $ 443,014 261,604 162,028
Earning assets 359,552 218,687 140,837
Loans 301,052 170,667 115,179
Non-interest bearing deposits 86,377 56,392 40,955
Total deposits 374,825 235,201 145,480
Shareholders' equity 56,318 22,301 12,783
Shares outstanding:
Basic 6,040,618 2,691,987 2,100,423
Diluted 6,091,635 3,361,560 2,153,653
---------- ---------- ----------
PERFORMANCE
Return on assets 1.10% 0.75% 0.29%
Return on equity 8.62 8.78 3.71
Net interest margin (2),(3) 6.78 6.31 6.77
Efficiency ratio (1) 67 80 90
Loan to deposit ratio (at year end) 90 71 75
---------- ---------- ----------
ASSET QUALITY (at year end)
Net charge-offs to average loans 0.10% 0.07% 0.03%
Allowance for loan losses to loans 0.81 0.96 0.88
Allowance for loan losses to non-performing loans (4) 148.62 804.35 1002.94
Non-performing assets to loan-related assets (5),(6) 0.63 0.27 0.09
Risk assets to loan-related assets (6),(7) 0.64 0.67 0.14
---------- ---------- ----------
CAPITAL (at year end)
Equity to assets 12.63% 12.38% 7.73%
Tangible equity to assets 7.43 7.15 5.93
Leverage ratio 8.14 7.69 7.33
Risk-based capital ratios:
Tier 1 10.76 11.42 8.26
Total 11.59 12.34 10.15
---------- ---------- ----------
(1) Cash earnings and selected financial ratios are based on income that
excludes amortization of intangible assets.
(2) Expenses associated with the mandatorily convertible debentures of $141 and
$13 in 1998 and 1997, respectively, are not reflected in interest expense in
calculating the margin as the debentures were converted to
common stock in connection with the December 1998 Initial Public Offering.
(3) Net interest margin is reported on a fully taxable equivalent basis.
(4) Non-performing loans consist of nonaccrual and restructured loans that are
in noncompliance with their revised terms.
(5) Non-performing assets consist of non-performing loans and foreclosed
properties.
(6) Loan related assets consist of total loans and foreclosed properties.
(7) Risk assets consist of non-performing assets and loans 90 days or more past
due but continuing to accrue interest.
</TABLE>
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<PAGE>
CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
This Annual Report on form 10-KSB contains certain forward-looking statements
(as such term is defined in the Securities Act of 1933, as amended (the
"Securities Act")) concerning Vail Banks' mergers, operations, performance and
financial condition, including, in particular, the likelihood of Vail Banks'
success in developing and expanding its business. These statements are based
upon a number of assumptions and estimates which are inherently subject to
significant uncertainties, many of which are beyond the control of Vail Banks.
Consequently, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, those set forth
below.
RISKS INVOLVED IN MERGER AND ACQUISITION STRATEGY
Vail Banks believes that a portion of its growth will come from mergers with and
acquisitions of banks and other financial institutions. Vail Banks merged with
Telluride (the "Telluride merger") in December 1998. It merged with Independent
(the "Independent merger") in July 1998. Mergers and acquisitions involve risk
of (1) changes in results of operations, (2) unforeseen liabilities relating to
the merged institutions, (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.
In addition, as a result of the growth from mergers, Vail Banks' management must
successfully integrate the operations of merged institutions. Vail Banks must
(1) consolidate data processing operations, (2) combine employee benefit plans,
(3) integrate 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, which
could negatively impact Vail Banks' net income.
NEED FOR ADDITIONAL FINANCING
Vail Banks' ability to merge with and acquire financial institutions may depend
on its ability to obtain additional debt or equity funding. Vail Banks cannot
assure that it will be successful in consummating any future financing
transactions. Factors which could affect Vail Banks' access to the capital
markets, or the costs of such capital, include (1) changes in interest rates,
(2) general economic conditions and the perception in the capital markets of
Vail Banks' business, (3) results of operations, (4) leverage, (5) financial
condition and (6) business prospects. Each of these factors is to a large extent
subject to economic, financial, competitive and other factors beyond Vail Banks'
control. Borrowing restrictions contained in certain regulations which apply to
Vail Banks and its subsidiary may also have an effect on Vail Banks' ability to
obtain additional financing. Vail Banks' future credit facilities may
significantly restrict its 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
B-9
<PAGE>
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.
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' customers. The seasonality
of Vail Banks' business in those areas results in fluctuations in deposit and
credit needs. Deposits tend to peak during the ski season. In addition, a
decline in the economy of these areas could have a material adverse effect on
Vail Banks' business. A decline could affect (1) the demand for new loans, (2)
refinancing activity, (3) the ability of borrowers to repay outstanding loans
and (4) the value of loan collateral. A decline could also adversely affect
asset quality and net income. See "Business--General" in this Item 1.
DEPENDENCE UPON KEY PERSONNEL
The continued success of Vail Banks substantially depends upon the efforts of
the directors and executive officers of Vail Banks. Vail Banks particularly
depends on E.B. Chester, Jr. and Lisa M. Dillon. The success of Vail Banks
depends in large part on the retention of present key management personnel. It
also depends on Vail Banks' ability to hire and retain additional qualified
personnel in the future. Neither Mr. Chester nor Ms. Dillon has entered into
employment agreements with Vail Banks. Vail Banks does not maintain key-person
life insurance coverage on either of them.
CERTAIN ANTI-TAKEOVER PROVISIONS
Vail Banks' Articles of Incorporation and Bylaws contain certain provisions
that may delay, discourage or prevent an attempted acquisition or change in
control of Vail Banks. These provisions include (1) a Board of Directors
classified into three classes of directors with the directors of each class
having staggered, three-year terms and providing for the removal of directors
only for cause, and (2) noncumulative voting for directors. Vail Banks' Articles
of Incorporation authorize the Board of Directors of Vail Banks to issue shares
of preferred stock of Vail Banks without shareholder approval. The preferred
stock may be issued upon any terms that the Board of Directors may determine.
The issuance of preferred stock may provide desirable flexibility in connection
with possible mergers, acquisitions, financings and be used for other corporate
purposes. However, the preferred stock makes it more difficult for a third party
to acquire, or discourage a third party from acquiring, a controlling interest
in Vail Banks.
GOVERNMENT REGULATION
The banking industry is regulated by federal and state regulatory authorities.
The Federal Reserve and the CDB supervise and regularly examine Vail Banks and
WestStar. 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.
Regulations substantially affect the business and financial results of all
financial institutions and holding companies, including Vail Banks and WestStar.
Vail Banks cannot predict the impact of changes in such regulations on Vail
Banks' business and profitability. Changes in regulation could adversely affect
Vail Banks' financial condition and results of operations. See "Supervision and
Regulation" in this Item 1.
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<PAGE>
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 institutions, credit unions,
finance companies, brokerage and investment banking firms, insurance companies,
asset-based lenders and certain other nonfinancial institutions, including
retail stores which offer credit programs and governmental organizations that
offer financing programs. Many competitors may have greater financial and other
resources than Vail Banks. Vail Banks has been able to compete effectively with
other financial institutions by (1) emphasizing customer service, technology and
local office decision-making, (2) establishing long-term customer relationships
and building customer loyalty, and (3) providing products and services designed
to address the specific needs of its customers. Vail Banks may not be able to
continue to compete effectively in the future. Further, changes in government
regulation of banking, particularly recent legislation which removes
restrictions on interstate banking and permits interstate branching, are likely
to increase competition by out-of-state banking organizations or by other
financial institutions in Vail Banks' market areas. See "Business--Competition"
in this Item 1.
CONTROL BY MANAGEMENT
The directors and executive officers of Vail Banks beneficially own
approximately 35% of the outstanding Common Stock. Furthermore, E. B. Chester,
Jr., Chairman of Vail Banks, beneficially owns approximately 20% of the
outstanding Common Stock. Accordingly, these persons will have substantial
influence over the business, policies and affairs of Vail Banks, including the
ability to potentially control the election of directors and other matters
requiring shareholder approval by simple majority vote.
INTEREST RATE RISK
Vail Banks' earnings depend to a great extent on its net interest income. Net
interest income is the difference between interest income earned on loans and
investments and the interest expense paid on deposits and other borrowings. The
net interest margin is highly sensitive to many factors that are beyond Vail
Banks' control. These factors include general economic conditions and the
policies of various governmental and regulatory authorities. Changes in the
discount rate or targeted federal funds rate by the Federal Reserve usually lead
to general changes in 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, the interest rate structures of earning assets and liabilities may
not be 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
Vail Banks did not experience any material disruptions in its or its
subsidiary's operations or activities as a result of the so-called "Year 2000"
problem. In addition, Vail Banks or its subsidiary did not incur material
expenses in correcting perceived or suspected Year 2000 problems. Furthermore,
Vail Banks is not aware that any of its suppliers or customers have experienced
any material disruptions in their operations or activities due to Year 2000
problems. Vail Banks does not expect to encounter any such problems in the
foreseeable future, although it continues to monitor its computer operations for
signs or indications of such problems.
It is possible, however, that Year 2000 problems could still disrupt Vail Banks'
or its subsidiary's operations and the systems of other companies upon which
their systems rely. If Vail Banks' or its subsidiary's systems or the systems of
their customers, product vendors, utility vendors, and suppliers experience
unforeseen Year 2000 problems in the future, such problems may negatively impact
Vail Banks' systems, operations and financial performance.
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<PAGE>
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 bank holding company subject to regulation
by the Board of Governors of the Federal Reserve System (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 Federal Reserve's
prior approval before (1) 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; (2) it or any of its non-bank subsidiaries may acquire all or
substantially all of the assets of a bank; and (3) 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 listed in the Act or found by the
Federal Reserve, by order or regulation, to be 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 include:
o making or servicing loans and certain types of leases;
o performing certain data processing services;
o acting as fiduciary or investment or financial advisor;
o providing brokerage services;
o underwriting bank eligible securities;
o underwriting debt and equity securities on a limited basis through
separately capitalized subsidiaries; and
o making investments in corporations or projects designed primarily to
promote community welfare.
Although, the activities of bank holding companies have traditionally been
limited to the business of banking and activities closely related or incidental
to banking, as discussed above, on November 12, 1999 the Gramm-Leach-Bliley Act
was signed into law which will, effective March 11, 2000, relax the previous
limitations and permit bank holding companies to engage in a broader range of
financial activities. Specifically, bank holding companies may elect to become
financial holding companies which may affiliate with securities firms and
insurance companies and engage in other activities that are financial in nature.
Among the activities that will be deemed "financial in nature" include:
o lending, exchanging, transferring, investing for others or
safeguarding money or securities;
o insuring, guaranteeing, or indemnifying against loss, harm, damage,
illness, disability, or death, or providing and issuing annuities, and
acting as principal, agent, or broker with respect thereto;
o providing financial, investment, or economic advisory services,
including advising an investment company;
o issuing or selling instruments representing interests in pools of
assets permissible for a bank to hold directly; and
o underwriting, dealing in or making a market in securities.
A bank holding company may become a financial holding company under the new
statute only if each of its subsidiary banks is well capitalized, is well
managed and has at least a satisfactory rating under the Community Reinvestment
Act. A bank holding company that falls out of compliance with such requirement
may be required to cease engaging in certain activities. Any bank holding
company which does not elect to become a financial holding company remains
subject to the current restrictions of the Bank Holding Company Act.
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<PAGE>
Under the new legislation, the Federal Reserve Board serves as the primary
"umbrella" regulator of financial holding companies with supervisory authority
over each parent company and limited authority over its subsidiaries. The
primary regulator of each subsidiary of a financial holding company will depend
on the type of activity conducted by the subsidiary. For example, broker-dealer
subsidiaries will be regulated largely by securities regulators and insurance
subsidiaries will be regulated largely by insurance authorities.
Implementing regulations under the Gramm-Leach-Bliley Act have not yet been
promulgated and Vail Banks cannot predict the full impact of the new legislation
and has not yet determined whether it will ever elect to become a financial
holding company.
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 subsidiary. 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 subsidiary under the Federal Reserve
Act, which imposes certain restrictions on (1) loans by WestStar to Vail Banks,
(2) investments in the stock or securities of Vail Banks by its banking
subsidiary, (3) its banking subsidiary's taking the stock or securities of an
"affiliate" as collateral for loans by it to a borrower and (4) the purchase of
assets from Vail Banks by its banking subsidiary. 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. 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 subsidiary. Most of the revenues of Vail Banks result from dividends
paid to it by its banking subsidiary. There are statutory and regulatory
requirements applicable to the payment of dividends by Vail Bank's banking
subsidiary, as well as by Vail Banks to its shareholders.
WestStar is a state chartered bank regulated by the CDB and the Federal Reserve.
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 WestStar may also be affected or
limited by other factors, such as the requirement to maintain adequate capital
above regulatory guidelines. In addition, if, in the opinion of the applicable
regulatory authority, a bank under its jurisdiction is engaged in or is about to
engage in an unsafe or unsound practice (which, depending upon the financial
condition of the bank, could include the payment of dividends), such authority
may require, after notice and hearing, that such bank cease and desist from such
practice. In addition to the formal statutes and regulations, regulatory
authorities consider the adequacy of a bank's total capital in relation to its
assets. Capital adequacy considerations could further limit the availability of
dividends. At December 31, 1999, net assets available from WestStar to pay
dividends without prior approval from regulatory authorities totaled $5.6
million.
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<PAGE>
MONETARY POLICY. The results of operations of WestStar 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 subsidiary.
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. To be considered "adequately capitalized," 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 (Tier 1 capital to average 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 of the Federal Deposit Insurance Act implemented the
prompt corrective action provisions that Congress enacted as a part of the
Federal Deposit Insurance Corporation Improvement Act of 1991 (the "1991 Act").
The "prompt corrective action" provisions set forth five regulatory zones in
which all banks are placed largely based on their capital positions. Regulators
are permitted to take increasingly harsh action as a bank's financial condition
declines. Regulators are also empowered to place in receivership or require the
sale of a bank to another depository institution when a bank's capital leverage
ratio reaches 2%. Better capitalized institutions are generally subject to less
onerous regulation and supervision than banks with lesser capital ratios.
The FDIC and the Federal Reserve have adopted regulations implementing the
prompt corrective action provisions of the 1991 Act, which place financial
institutions in the following five categories based upon capitalization ratios
(i) a "well capitalized" institution has a total risk-based capital ratio of at
least 10%, a Tier 1 risk-based capital 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 capital 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 capital
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, Vail Banks exceeded "well capitalized"
minimum requirements at December 31, 1999, with Tier 1 and total risk-based
capital ratios of 10.8% and 11.6%, respectively, and a leverage ratio of 8.1%.
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<PAGE>
RECENT DEVELOPMENTS.
On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley Act, a
very significant piece of legislation intended to modernize the financial
services industry. The bill repeals the anti-affiliation provisions of the 1933
Glass-Steagall Act to allow for the merger of banking and securities
organizations and permits banking organizations to engage in insurance
activities including insurance underwriting. The bill also allows bank holding
companies to engage in financial activities that are "financial in nature or
complementary to a financial activity." The act lists the expanded areas that
are financial in nature and includes insurance and securities underwriting and
merchant banking among others. The bill also:
o prohibits non-financial entities from acquiring or establishing a
thrift while grandfathering existing thrifts owned by non-financial
entities.
o establishes state regulators as the appropriate functional regulators
for insurance activities but provides that state regulators cannot
"prevent or significantly interfere" with affiliations between banks
and insurance firms.
o contains provisions designed to protect consumer privacy. The bill
requires financial institutions to disclose their policy for
collecting and protecting confidential information and allows
consumers to "opt out" of information sharing except with unaffiliated
third parties who market the institutions' own products and services
or pursuant to joint agreements between two or more financial
institutions.
o provides for functional regulation of a bank's securities activities
by the Securities and Exchange Commission.
Various portions of the bill have different effective dates, ranging from
immediately to more than a year for implementation.
EXECUTIVE OFFICERS OF VAIL BANKS
Certain information regarding the executive officers of the Company is set forth
in the following table and paragraphs.
NAME AGE POSITION
---- --- --------
E.B. Chester, Jr. 57 Chairman of the Board
Lisa M. Dillon 46 President and Chief Executive Officer
Mr. Chester, who formed Vail Banks through a series of acquisitions, has
served as Chairman of the Board of Directors of Vail Banks since 1993 and the
Chairman of the Board of Directors of WestStar since 1989. Mr. Chester is also
currently 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.
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<PAGE>
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 of WestStar from 1989 to 1999 and
Chief Executive Officer of WestStar since 1989.
ITEM 2. DESCRIPTION OF PROPERTIES.
As of March 1, 2000, Vail Banks had 26 offices, 15 of which are leased and 11 of
which are owned. The properties range in size from 1,400 square feet to 34,000
square feet. None of the properties owned by Vail Banks secures the outstanding
balance of the purchase prices for the properties. The aggregate annual lease
payments for properties in 1999 were $590,000. Leases for the facilities expire
at various periods between 2000 and 2011. Vail Banks considers its properties
adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS.
Vail Banks and its banking subsidiary periodically are parties to or otherwise
involved in legal proceedings arising in the normal course of business, such as
claims to enforce liens, claims involving the making and servicing of real
property loans and other issues incident to their business. Management does not
believe that there is any pending or threatened proceeding against Vail Banks or
its banking subsidiary which, if determined adversely, would have a material
effect on the business, results of operations, or financial position of Vail
Banks or its banking subsidiary.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to security holders during the fourth quarter of the
1999 fiscal year.
B-16
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKETS FOR CAPITAL STOCK
Vail Banks' Common Stock began trading on The Nasdaq Stock Market under the
symbol "VAIL" on December 10, 1998. Prior to that time, there was no formal
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................................................... $12.88 $12.06
Second Quarter.................................................. 12.13 9.50
Third Quarter................................................... 12.25 8.88
Fourth Quarter.................................................. 10.88 8.75
</TABLE>
HOLDERS
As of March 1, 2000, there were 145 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. Vail Banks
believes that there are approximately 2,436 beneficial holders of the Common
Stock.
DIVIDENDS
Holders of Common Stock will be entitled to receive dividends when, as and if
declared by Vail Banks' Board of Directors out of funds legally available
therefor. Vail Banks 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
subsidiary. The payment of dividends by WestStar is subject to certain
restrictions imposed by the federal and state banking laws and regulations. See
"Supervision and Regulation" in Item 1.
Vail Banks' ability to pay cash dividends on the Common Stock is also subject to
statutory restrictions, including banking regulations, and restrictions arising
under the terms of securities or indebtedness which may be issued or incurred in
the future. The terms of such securities or indebtedness may restrict payment of
dividends on Common Stock until required payments and distributions are made on
such securities or indebtedness. Under regulations of the CDB and the Federal
Reserve, approval of the regulators will be required if the total of all
dividends declared by any banking subsidiary in any year exceeds the total of
its net profits of that year combined with its retained net profits of the
preceding two years.
B-17
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATION FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
INTRODUCTION
The following discussion and analysis presents management's review of the
operating results and financial condition of Vail Banks, Inc. ("Vail Banks"). It
provides information that is not otherwise apparent from the Consolidated
Financial Statements and related footnotes and is intended to assist readers in
evaluating Vail Banks' performance. The following analysis should be read in
conjunction with the Consolidated Financial Statements and accompanying notes as
well as the selected financial information presented in other sections of the
report.
CORPORATE PROFILE
Vail Banks is a bank holding company headquartered in Vail, Colorado with assets
of $465.0 million at December 31, 1999. Vail Banks' wholly owned subsidiary,
WestStar Bank ("WestStar"), is a Colorado state bank with 25 retail offices
located primarily in the western slope region of Colorado.
MERGERS
Mergers and acquisitions continue to be part of Vail Banks' overall growth
strategy, providing over half of Vail Banks' growth since 1996. All mergers
listed below have been accounted for under the purchase method of accounting,
and accordingly, the purchase price of each transaction 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 Financial Statements include
the operations of each of the acquired entities since the dates of the
respective transactions. The excess of purchase price over net assets has been
recorded as goodwill, which is amortized over 25 years. Although the
amortization of goodwill does not result in a cash expense, it has a substantial
effect on reported earnings. See "Cash Operating Results" below for further
discussion on the effects of goodwill amortization on reported earnings.
Telluride Bancorp, Ltd. ("Telluride"). On December 15, 1998, Vail Banks
consummated the Telluride merger by paying cash of $13.3 million and issuing
908,913 shares of Vail Banks Common Stock. As of the merger date, Telluride had
assets of $132.9 million, net loans of $80.6 million, deposits of $119.9 million
and equity capital of $10.8 million. The Telluride merger had only minimal
effect on income and average balances for the year 1998, as the transaction
closed with only 16 days remaining in the year. 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.
Independent Bankshares, Inc. ("Independent"). On 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 assets of $30.3 million, net loans of $17.0 million, deposits of $27.4
million and equity capital of $2.6 million. 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.
Cedaredge Financial Services, Inc. ("Cedaredge"). On December 1, 1997, Vail
Banks consummated the Cedaredge merger by paying cash of $3.3 million, and
assuming certain obligations of $458,000 and the Series I and Series II
Convertible Notes (the "Mandatorily Convertible Debentures") totaling $1.6
million. As of the date of the merger, Cedaredge had assets of $45.5 million,
net loans of $33.9 million, deposits of $42.0 million and equity capital of $3.0
million. The Mandatorily Convertible Debentures were converted to Vail Banks
Common Stock subsequent to Vail Banks' initial public offering in December 1998
(the "Offering"). The 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.
B-18
<PAGE>
Other Transactions. On May 21, 1999, Vail Banks acquired $36.8 million of
deposits and the real estate of the Glenwood Springs, Colorado branch of World
Savings of Oakland, California ("World Savings"). World Savings retained the
mortgage loans it owned in Glenwood Springs. The acquisition makes WestStar one
of the largest depository institutions in the Glenwood Springs market.
Additionally, on November 8, 1999, WestStar entered into an agreement to acquire
First Western Services, Inc. ("First Western"), for consideration that included
cash, Vail Banks Common Stock, and installment notes. The acquisition closed on
January 1, 2000, adding mortgage brokerage to WestStar's lending services. See
Item 1. "Business-- Recent Mergers" for further information on these
transactions and the mergers described above.
FINANCIAL OVERVIEW
Net income for 1999 increased $2.9 million, or 147.9%, to $4.9 million from $2.0
million in 1998. This increase is largely the result of the Telluride and
Independent mergers, as discussed above, quality loan growth, and improvements
in operating efficiency, coupled with a strong net interest margin. Net income
for 1998 increased $1.5 million, or 313.3%, from $474,000 in 1997.
The return on average assets was 1.10% for the year ended December 31, 1999
compared to 0.75% for year ended December 31, 1998. The return on average assets
was 0.29% for the year ended December 31, 1997.
The return on average equity was 8.62% for the year ended December 31, 1999
compared to 8.78% for the year ended December 31, 1998. The return on average
equity was 3.71% for the year ended December 31, 1997.
Year-end assets increased by $25.8 million, or 5.9%, to $465.0 million in 1999.
This growth was a result of internally generated loan growth, spurred by a
strong local economy, and the May 1999 World Savings acquisition. In 1998,
assets grew by 89.9%, to $439.1 million from $231.2 million in 1997. Growth in
1998 was primarily achieved through the acquisitions of Independent and
Telluride, as discussed above, and, to a lesser extent, through internal growth.
The increase in net interest income on a fully taxable equivalent basis ("FTE")
of 76.7% to $24.4 million in 1999 from $13.8 million in 1998 was primarily from
the growth in average loans. Average loans rose to $301.1 million in 1999 from
$170.7 million in 1998, an increase of 76.4%. Similarly, average earning assets
were $359.6 million in 1999, up 64.4% from $218.7 million in 1998. The full-year
impact of the loans obtained in the 1998 Telluride and Independent mergers
significantly contributed to higher average loan and earning asset balances in
1999. The 48.2% increase in average loans in 1998, including the impact of the
$33.9 million in loans obtained from the Cedaredge acquisition, was the most
significant factor for the increase in that year's FTE net interest income.
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
that 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.
B-19
<PAGE>
CASH OPERATING RESULTS
As a result of the acquisitions of Telluride, Independent, Cedaredge, World
Savings and an acquisition occurring in 1995, Vail Banks had goodwill of $24.2
million and $23.0 million at December 31, 1999 and 1998, respectively. Since the
amortization of goodwill does not result in a cash expense, Vail Banks believes
that supplemental reporting of its operating results on a "cash" (or "tangible")
basis (which excludes the after-tax effect of amortization of goodwill and the
related asset balance) represents a relevant measure of financial performance.
The supplemental cash basis data presented herein does not exclude the effect of
other non-cash operating expenses such as depreciation, provision for loan
losses, or deferred income taxes associated with the results of operations.
Cash earnings rose 158.9% to $5.8 million in 1999 from $2.3 million in 1998.
Diluted cash earnings per share in 1999 were up 65.5% to $0.96, from $0.58 in
1998. In 1997, cash earnings were $607,000 while diluted cash earnings per share
were $0.29.
Based on cash earnings, return on average tangible assets was 1.39% in 1999,
compared with 0.88% in 1998, and return on average tangible common equity was
17.89% in 1999, compared with 13.72% in 1998.
RESULTS OF OPERATIONS
Net Interest Income. Net interest income continues to be Vail Banks' principal
source of income, representing the difference between interest and fees earned
on loans and investments, and interest paid on interest bearing liabilities. In
this discussion, FTE net interest income is presented whereby tax exempt income,
such as interest on securities of state and municipalities, has been increased
to an amount that would have been earned had such income been taxable. This
adjustment places taxable and nontaxable income on a common basis and permits
comparisons of rates and yields. Additionally, expenses associated with the
Mandatorily Convertible Debentures are not reflected in interest expense as the
debentures were converted to common shares in connection with the Offering.
In 1999, FTE net interest income rose $10.6 million, or 76.7%, to $24.4 million
from $13.8 million in 1998, largely the result of growth in average earning
assets, which increased $140.9 million, or 64.4%, to $359.6 million in 1999 from
$218.7 million in 1998. FTE net interest income and average earning assets in
1997 were $9.5 million and $140.8 million, respectively.
The following table sets forth the average balances, net interest income and
expense and average yields and rates for Vail Banks' earnings assets and
interest bearing liabilities for the periods indicated on a taxable equivalent
basis.
B-20
<PAGE>
NET INTEREST INCOME ANALYSIS
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- -------------------------- -------------------------
(in thousands on a fully taxable Average Avg. Average Avg. Average Avg.
equivalent basis) Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------------------------------- -------- -------- ----- ------- -------- ----- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold and other
short-term investments $ 18,262 854 4.68% 27,779 1,459 5.25% 9,396 496 5.28%
Investment securities:
Taxable 32,719 1,848 5.65 16,845 981 5.82 15,780 934 5.92
Tax exempt (1) 7,519 462 6.14 3,396 236 6.95 482 33 6.85
Loans (2) 301,052 32,076 10.65 170,667 18,787 11.01 115,179 12,570 10.91
-------- -------- ----- ------- ------ ----- ------- ------ -----
TOTAL EARNING ASSETS 359,552 35,240 9.80 218,687 21,463 9.81 140,837 14,033 9.96
Non-earning assets 83,462 42,917 21,191
-------- ------- -------
TOTAL ASSETS $443,014 261,604 162,028
======== ======= =======
LIABILITIES
Interest bearing deposits:
Interest being transaction accounts $202,887 6,219 3.07% 122,052 4,298 3.52% 81,750 2,971 3.63%
Certificates of deposit 85,561 4,159 4.86 56,757 3,228 5.69 22,775 1,280 5.62
-------- -------- ----- ------- ------ ----- ------- ------ -----
TOTAL INTEREST BEING DEPOSITS 288,448 10,378 3.60 178,809 7,526 4.21 104,525 4,251 4.07
Short-term borrowings 8,033 476 5.93 734 31 4.22 2,057 127 6.17
Notes payable 170 14 8.24 1,105 111 10.05 1,275 123 9.65
-------- -------- ----- ------- ------ ----- ------- ------ -----
TOTAL INTEREST BEARING
LIABILITIES (3) 296,651 10,868 3.66 180,648 7,668 4.24 107,857 4,501 4.17
Non-interest bearing demand deposits 86,377 56,392 40,955
Other liabilities 3,668 2,263 433
-------- ------- -------
TOTAL LIABILITIES 386,696 239,303 149,245
SHAREHOLDERS' EQUITY (3) 56,318 22,301 12,783
-------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $443,014 261,604 162,028
======== ======= =======
TOTAL DEPOSITS $374,825 10,378 2.77% 235,201 7,526 3.20% 145,480 4,251 2.92%
======== ======== ===== ======= ====== ===== ======= ====== =====
RECAP: (4)
Interest income $ 35,240 9.80% 21,463 9.82% 14,033 9.97%
Interest expense (3) 10,868 3.02 7,668 3.51 4,501 3.20
-------- ----- ------ ----- ------ -----
NET INTEREST INCOME/MARGIN $ 24,372 6.78% 13,795 6.31% 9,532 6.77%
======== ===== ====== ===== ====== =====
</TABLE>
(1) Tax exempt securities have been adjusted to a fully taxable equivalent basis
using a marginal tax rate of 34%.
(2) Loans are presented net of unearned income and include nonaccrual
loans.
(3) Mandatorily convertible debentures are included in the "Shareholders'
equity" account, and expenses associated with the debentures are not reflected
in interest expense in this table as they were converted in connection with the
Initial Public Offering in December 1998.
(4) Average rates have been computed by dividing by total earning assets.
B-21
<PAGE>
The amount of net interest income is affected by changes in the volume and mix
of earning assets and interest bearing liabilities, and the interest rates on
these assets and liabilities. An analysis of how changes in volumes and rates
affected net interest income for the years ended December 31, 1999 and 1998 is
presented below.
ANALYSIS OF CHANGES IN NET INTEREST INCOME*
<TABLE>
<CAPTION>
1999 over 1998 1998 over 1997
(in thousands) VOLUME RATE TOTAL Volume Rate Total
-------- ------ ------ ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Federal funds sold and other
short-term investments $ (500) (105) (605) 970 (7) 963
Investment securities
Taxable 924 (57) 867 63 (16) 47
Tax exempt 287 (61) 226 200 3 203
Loans 14,353 (1,064) 13,289 6,056 161 6,217
-------- ------ ------ ----- ---- -----
Total interest income 15,064 (1,287) 13,777 7,289 141 7,430
-------- ------ ------ ----- ---- -----
Interest Expense:
Interest bearing transaction accounts 2,847 (926) 1,921 1,465 (138) 1,327
Certificates of deposit 1,638 (707) 931 1,910 38 1,948
Short-term borrowings 308 137 445 (82) (14) (96)
Notes payable (94) (3) (97) (16) 4 (12)
-------- ------ ------ ----- ---- -----
Total interest expense 4,699 (1,499) 3,200 3,277 (110) 3,167
-------- ------ ------ ----- ---- -----
Change in net interest income $ 10,365 212 10,577 4,012 251 4,263
======== ====== ====== ===== ==== =====
</TABLE>
*Fully taxable equivalent.
Notes:
The change in interest that cannot be attributed to only a change in rate or a
change in volume, but instead represents a combination of the two factors, has
been allocated to the rate variance. Expenses associated with convertible
debentures are not included in interest expense.
The growth in average earning assets in 1999 and 1998 was largely attributable
to higher average loans outstanding. Average loans were $301.1 million in 1999,
up 76.4% from $170.7 million in 1998 and 161.4% greater than $115.2 million in
1997. The full-year impact of the loans obtained in the December 1998 Telluride
merger and the July 1998 Independent merger significantly contributed to higher
average loan balances in 1999 compared with 1998. Additionally, growth generated
internally also contributed to higher loan levels, with total loans increasing
by $67.5 million, or 25.1%, to $336.7 million at year-end 1999 from $269.2
million in 1998.
Improvement in 1999's net interest income resulting from loan growth contributed
significantly to the increase in net interest margin, or taxable-equivalent net
interest income expressed as a percentage of average earning assets. Vail Banks'
net interest margin in 1999 was 6.78%, compared with 6.31% in 1998 and 6.77% in
1997, remaining well above industry averages. Net interest margin is influenced
by the level and relative mix of earning assets, interest bearing liabilities
and non-interest bearing liabilities.
Interest income increased to $35.2 million in 1999 from $21.5 million in 1998
almost entirely as a result of the increase in loans as discussed above.
Commercial and Industrial loans increased by $34.7 million, while Real
Estate--Construction loans increased by $25.3 million, combining for 88.9% of
the increase. Somewhat offsetting the positive effect of the increased loan
volume, however, was a decrease in the average yield on the loan portfolio,
which is consistent with the overall decrease in the average prime rate in 1999
to 8.00% from 8.35% in 1998.
B-22
<PAGE>
Interest expense increased to $10.9 million in 1999 from $7.7 million in 1998.
The full-year impact of the interest bearing liabilities obtained in the
December 1998 Telluride merger and the July 1998 Independent merger
significantly contributed to higher average interest bearing deposit balances in
1999 compared with 1998. Interest bearing deposits acquired in the Telluride
acquisition were approximately $91.6 million, significantly contributing to the
$109.6 million increase in average interest bearing deposits experienced in
1999. The decrease in the cost of interest bearing liabilities to 3.66% in 1999
from 4.24% in 1998 was largely due to management's efforts to reduce high cost
certificates of deposit, specifically those from public entities. Similarly, the
$3.2 million increase in interest expense in 1998 resulted primarily from the
increases in interest bearing deposits obtained in the Cedaredge merger. The
cost of interest bearing deposits increased to 4.21% for 1998, from 4.07% in
1997.
Provision for Loan Losses. The amount of the provision for loan losses is based
on continual evaluations of the loan portfolio, with particular attention
directed toward non-performing, delinquent, 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
delinquent and non-performing loans, historical loan loss experience, results of
examinations by regulatory agencies, external and internal asset review
processes, the market value of collateral, the strength and availability of
guarantees, concentrations of credit and other judgmental factors.
The provision for loan losses was $455,000 in 1999. In comparison, Vail Banks
recorded no provision for loan losses in 1998 and $232,000 in 1997. Net
charge-offs during 1999 equaled $306,000, resulting in a net increase in the
allowance for loan losses of $149,000 compared to a net decrease of $120,000,
excluding the effects of acquisitions, in 1998. At December 31, 1999, the
allowance to total loans was .81% and 149% of non-performing loans.
Non-Interest Income. The following table sets forth Vail Banks' non-interest
income for the periods indicated.
NON-INTEREST INCOME
(in thousands) 1999 1998 1997
------ ----- -----
Service charges on deposit accounts $ 912 489 335
NSF and return check charges 1,502 915 581
Other fee income 738 420 220
Rental income 565 489 12
Other 253 75 125
------ ----- -----
Total non-interest income $3,970 2,388 1,273
====== ===== =====
Non-interest income rose $1.6 million, or 66.2%, to $4.0 million in 1999 from
$2.4 million in 1998. Growth in service charges and other fees on deposit
accounts obtained in the Telluride and Independent acquisitions contributed
substantially to the increase. Approximately 56% of the increase in non-interest
income in 1999 was attributable to the former Telluride locations.
During 1998, total non-interest income increased $1.1 million, or 87.6%, to $2.4
million from $1.3 million for the comparable period in 1997 due to increases in
service charges and fees on deposit accounts in approximate proportion to growth
in those deposit levels achieved through both internal growth and the Cedaredge
acquisition. Also contributing to the increase was rental income from third
parties associated with the acquisition of Vail Banks' main Vail location and a
54% interest in its Avon retail office building.
B-23
<PAGE>
Non-Interest Expense. The following table sets forth Vail Banks' non-interest
expense for the periods indicated.
NON-INTEREST EXPENSE
(in thousands) 1999 1998 1997
------- ------ -----
Salaries and employee benefits $ 9,929 6,954 5,086
Occupancy 2,174 1,626 1,325
Furniture and equipment 1,696 1,151 852
Amortization of intangible assets 984 297 133
Service fees 894 660 366
Professional fees 773 293 238
Telephone and data communications 708 359 209
Supplies and printing 463 425 342
Marketing and promotions 317 204 399
Postage and freight 312 195 137
Other 1,582 884 700
------- ------ -----
Total non-interest expense $19,832 13,048 9,787
======= ====== =====
In 1999 non-interest expense was $19.8 million, an increase of $6.8 million, or
52.0%, from $13.0 million in 1998, which had increased from $9.8 million in
1997. The increase in non-interest expense during 1999 was primarily due to the
incremental increase in expenses associated with the Telluride merger and, to a
lesser extent, the Independent merger, including the amortization of intangible
assets associated with those purchase accounting transactions. The increase in
1998 was largely the result of the addition of eight retail offices; one through
expansion, four from the Cedaredge merger, and three from the Independent
merger, which occurred mid-year 1998 and, thus, materially affected both 1999
and 1998 operating results.
Salaries and employee benefits expense for 1999 were $9.9 million, an increase
of $3.0 million from $6.9 million in 1998. Although this represents an increase
of 42.8% in 1999, salaries and employee benefits as a percentage of average
assets declined to 2.2% from 2.7% in 1998, which was primarily the result of
efficiencies realized in the last half of 1999 largely due to the Telluride
merger. Salaries and employee benefits increased by $1.9 million from $5.1
million in 1997. This increase was due to expansion through de novo branches and
the Independent and Cedaredge mergers. The number of full-time equivalent
associates at December 31, 1999, 1998, and 1997 were 227, 263, and 187,
respectively.
Expenses associated with fixed assets, including occupancy and furniture and
equipment, rose $1.1 million and $600,000 in 1999 and 1998, respectively.
Increases in 1999 were the result of aforementioned mergers and the opening of
Vail Banks' new operations facility in Gypsum in March 1999. All of these
capital outlays have resulted, or are expected to result, in operating synergies
and cost savings. Similarly, increases is 1998 are attributable to expansion of
operations due to the Independent and Cedaredge mergers, as well as the purchase
of imaging equipment for check processing and distribution in June 1998.
Other expenses associated with the recent mergers have also increased in both
1999 and 1998. Specifically, the amortization of intangibles increased 231.3% in
1999 to $984,000 from $297,000 in 1998, which had increased from $133,000 in
1997. Additionally, normal operating expenses have increased in categories such
as telephone and communications, postage, courier, travel, training, insurance,
and deposit insurance, largely resulting from expansion.
The efficiency ratio represents non-interest expense (excluding the amortization
of intangible assets) as a percentage of the sum of FTE net interest income and
non-interest income; and is a measure of cost to generate a dollar of revenue.
The efficiency ratio improved in 1999 to 67% from 80% in 1998 and also in 1998
from 90%
B-24
<PAGE>
in 1997. This steady improvement has been achieved through top line earnings
growth and cost efficiencies realized from mergers.
Income Taxes. For six 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 approximately 34% is used for this purpose. The taxes saved by
use of the NOL carryforward before 1999 have been recorded directly to
additional paid-in capital, resulting in a reduction in reported earnings which
is offset by an increase to additional paid-in capital. In 1999, the benefit of
the NOL carryforward was realized through a reduction in taxable earnings offset
by an adjustment to the deferred tax asset account.
Income tax expense as a percentage of pre-tax income was 38.5% for 1999 compared
with 32.8% and 37.8% in 1998 and 1997, respectively. Certain of the acquisition
related charges recorded in all three years were not deductible for income tax
purposes, affecting the effective tax rates. Factoring out this amortization for
1999, 1998, and 1997, the effective tax in each period would have been 34.2%,
29.7%, and 32.2%, respectively. The variation in effective tax rates during
these periods was largely precipitated by the mergers closed since 1996. A
reconciliation of income tax expense to the amount computed by applying the
statutory federal income tax rate to pre-tax income is provided in note 10 of
Notes to Consolidated Financial Statements.
FINANCIAL CONDITION
Loan Portfolio Composition. The following table sets forth the composition of
Vail Banks' loan portfolio by type of loan at the dates indicated. Management
believes that the balance sheet information as of the dates indicated should be
read in conjunction with the average balance information in the tables above
under "Net Interest Income." Vail Banks has followed a policy to manage the loan
portfolio composition to hedge risks in specific markets by diversifying the
loan portfolio. However, Vail Banks does have a concentration of loans in the
Commercial and Industrial and Real Estate--Construction categories. As a result
of seasonal trends in the retail, service and real estate markets, balances of
commercial loans may fluctuate significantly. The Independent merger initially
increased the mix of loans in the Consumer category. This initial change in loan
type mix, however, was only temporary as increased lending capacity was utilized
across all markets and loan types. The Telluride merger shifted the mix back
toward Commercial and Industrial and Real Estate- Construction. Therefore, the
data below is not necessarily indicative of longer-term trends within a
particular category.
LOANS OUTSTANDING AT DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
(dollars in thousands) AMOUNT % Amount % Amount % Amount % Amount %
-------- --- ------- --- ------- --- ------- --- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial $165,373 49% 130,677 48% 77,801 50% 46,850 44% 33,995 43%
Real estate-construction 80,959 24 55,642 21 25,163 16 23,852 22 19,524 25
Real estate-mortgage 59,898 18 51,000 19 31,618 21 31,815 30 21,479 27
Consumer 30,505 9 31,872 12 20,331 13 4,269 4 3,689 5
-------- --- ------- --- ------- --- ------- --- ------ ---
Total $336,735 100% 269,191 100% 154,913 100% 106,786 100% 78,687 100%
======== === ======= === ======= === ======= === ====== ===
</TABLE>
At December 31, 1999, loans were $336.7 million, which was an increase of $67.5
million, or 25.1%, over $269.2 million at December 31, 1998. All categories of
loans except for Consumer increased over this period, primarily due to internal
loan growth precipitated by a healthy local economy and active and successful
solicitation by banking officers. Loans increased in 1998 by $114.3 million, or
73.8%, over $154.9 million in
B-25
<PAGE>
1997. This growth was the result of the Independent merger ($17.2 million in
loans), the Telluride merger ($81.8 million in loans), as well as core business
growth.
Commercial and Industrial loans principally include loans to service, real
estate and retail businesses and farmers. These loans are primarily secured by
real estate and operating business assets and are made on the basis of the
financial strength and repayment ability of the borrowers as well as the
collateral securing the loans.
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.
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 five years. These loans are secured by the subject real
estate, typically well margined with a first lien position.
Consumer 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 typically secured, at minimum, by the value of the items being
financed.
Banking officers are assigned various levels of loan approval authority based
upon their respective levels of experience and expertise. Loan relationships
exceeding $1.0 million are evaluated and acted upon by the Directors' Loan
Committee, which meets weekly, and are reported to the Board of Directors. Vail
Banks' strategy for approving or disapproving loans is to follow a conservative
loan policy and underwriting practices which include: (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 in the loan portfolio as a whole and of the
loans within each loan category; and (vi) ensuring that each loan is properly
documented and, if appropriate, insurance coverage is adequate. Vail Banks' loan
review and compliance personnel interact daily with commercial and consumer
lenders to identify potential underwriting or technical exception variances. In
addition, Vail Banks has placed increased emphasis on early identification of
problem loans in an effort to aggressively seek resolution of the situations.
Management believes that adherence to conservative loan policy guidelines has
contributed to Vail Banks' below average level of loan losses compared to its
industry peer group.
Loan Maturities. The following table presents loans by maturity in each major
category at December 31, 1999. 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 AT DECEMBER 31, 1999
Within 1-5 Over 5
(in thousands) 1 Year Years Years Total
-------- ------- ------ -------
Commercial and industrial $ 58,184 72,854 34,335 165,373
Real estate-construction 53,472 26,848 639 80,959
Real estate-mortgage 11,411 34,426 14,061 59,898
Consumer 7,974 19,833 2,698 30,505
-------- ------- ------ -------
Total $131,041 153,961 51,733 336,735
======== ======= ====== =======
Of the loans with maturities over one year, $89.8 million had floating interest
rates and the remainder had fixed interest rates.
B-26
<PAGE>
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.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(dollars in thousands) 1999 1998 1997 1996 1995
------ ----- ----- ----- -----
Allowance at beginning of the year $2,590 1,364 823 620 361
Charge-offs
Commercial and industrial 86 23 6 83 31
Real estate-construction -- -- -- -- --
Real estate-mortgage 50 2 -- -- --
Consumer 245 143 52 39 7
------ ----- ----- ----- -----
Total charge-offs 381 168 58 122 38
Recoveries
Commercial and industrial 58 22 17 167 54
Real estate-construction -- -- -- -- --
Real estate-mortgage -- -- -- -- 20
Consumer 17 26 7 4 3
------ ----- ----- ----- -----
Total recoveries 75 48 24 171 77
------ ----- ----- ----- -----
Net charge-offs (recoveries) 306 120 34 (49) (39)
Provision for loan losses 455 -- 232 154 40
Allowance acquired through acquisitions -- 1,346 343 -- 180
------ ----- ----- ----- -----
Allowance at the end of the year $2,739 2,590 1,364 823 620
====== ===== ===== ===== =====
Net charge-offs (recoveries) to
average loans 0.10% 0.07% 0.03% (0.05%) (0.07%)
====== ===== ===== ===== =====
Provision for loan losses to
average loans 0.15 0.00 0.20 0.17 0.08
====== ===== ===== ===== =====
Allowance for loan losses to
total loans at year-end 0.81 0.96 0.88 0.77 0.79
====== ===== ===== ===== =====
Net charge-offs during 1999 totaled $306,000, or 0.10% of average loans,
compared to $120,000 or 0.07% of average loans in 1998. Net charge-offs during
1997 totaled $34,000, or 0.03% of average loans, compared to net 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. Additionally, Vail Banks has engaged an external bank
auditing firm to conduct loan reviews on a periodic basis. A list containing any
potential problem loans is updated 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 an appropriate 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
B-27
<PAGE>
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.
In order to comply with certain regulatory requirements, management has prepared
the following allocation of Vail Banks' allowance for loan losses among various
categories of the loan portfolio for each of the years in the five-year period
ended December 31, 1999. In management's opinion, such allocation has, at best,
a limited utility. It is based on management's assessment as of a given point in
time of the risk characteristics for each of the component parts of the total
loan portfolio and is subject to changes as and when the risk factors of each
such component part change. Such allocation is not indicative of either the
specific amounts or the loan categories in which future charge-offs may be
taken, nor should it be taken as an indicator of future loss trends. In
addition, by presenting such allocation, management does not mean to imply that
the allocation is exact or that the allowance has been precisely determined from
such allocation.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Amount Loans by Type to Total Loans
(dollars in thousands) 1999 1998 1997 1996 1995 1999 1998 1997 1996 1995
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial $ 784 992 110 41 -- 49% 48% 50% 44% 43%
Real estate-construction 513 411 334 675 351 24 21 16 22 25
Real estate-mortgage 642 584 55 68 84 18 19 21 30 27
Consumer 380 292 141 32 154 9 12 13 4 5
Unallocated 420 311 724 7 31
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $2,739 2,590 1,364 823 620 100% 100% 100% 100% 100%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Non-performing Assets. Non-performing assets consist of nonaccrual loans,
restructured loans and foreclosed properties. 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.
B-28
<PAGE>
The following table sets forth information concerning the non-performing and
risk assets of Vail Banks as of the dates indicated.
ASSET QUALITY AT DECEMBER 31,
(dollars in thousands) 1999 1998 1997 1996 1995
------ ----- ---- ---- ----
Nonaccrual loans $1,843 322 136 -- 353
Restructured loans -- -- -- -- --
------ ----- ---- ---- ----
Total non-performing loans 1,843 322 136 -- 353
Foreclosed properties 287 412 -- -- 128
------ ----- ---- ---- ----
Total non-performing assets 2,130 734 136 -- 481
Loans 90 days or more past due and accruing 11 1,061 78 65 3
------ ----- ---- ---- ----
Total risk assets $2,141 1,795 214 65 484
====== ===== ==== ==== ====
Non-performing loans to total loans 0.55% 0.12% 0.09% 0.00% 0.45%
====== ===== ==== ==== ====
Non-performing assets to total loans
plus foreclosed properties 0.63 0.27 0.09 0.00 0.61
====== ===== ==== ==== ====
Non-performing assets to total assets 0.46 0.17 0.06 0.00 0.35
====== ===== ==== ==== ====
Risk assets to total loans plus
foreclosed properties 0.64 0.67 0.14 0.06 0.61
====== ===== ==== ==== ====
Non-performing assets as a percentage of total loans plus foreclosed properties
at December 31, 1999 was 0.63% compared to 0.27%, and 0.09%, at December 31,
1998, and 1997, respectively. The $1.8 million in nonaccrual loans at December
31, 1999, is comprised primarily of two loans, both of which were in Telluride's
loan portfolio at the time of acquisition. Management believes Vail Banks is
adequately collateralized to recover the majority of the balance of these
nonaccrual loans. Vail Banks has reviewed and analyzed each of these loans and
has implemented strategies to resolve the issues with the few loans that caused
these measures to rise. Management generally obtains and maintains appraisals on
real estate collateral. Management is not aware of any adverse trends relating
to Vail Banks' loan portfolio.
At December 31, 1999, there were no loans excluded from non-performing 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 non-performing.
Investments. Vail Banks' investment policy is designed primarily to ensure
liquidity and to meet pledging requirements and secondarily to provide
acceptable investment income. Management's focus is on maintaining a
high-quality investment portfolio oriented toward U.S. Treasury and U.S.
Government agency securities. None of the securities in the investment portfolio
is classified as "high-risk" as defined by the Federal Financial Institutions
Examinations Council. The determination of the amount and maturity of securities
purchased is a function of liquidity and income projections based on the
existing, and expected, balance sheet and interest rate forecasts.
Vail Banks accounts for investment securities according to Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities. At the date of purchase, Vail Banks
B-29
<PAGE>
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. Since its inception, Vail Banks has not had any
trading account activities. Investments not classified as either held to
maturity or trading are classified as available for sale and measured at fair
value in the financial statements with unrealized gains and losses reported, net
of tax, in a separate component of other comprehensive income until realized.
The following tables set forth information regarding the investment composition
of Vail Banks as of the dates indicated.
INVESTMENT SECURITIES AVAILABLE FOR SALE AT DECEMBER 31,
1999 1998 1997
(dollars in thousands) Amount % Amount % Amount %
------- --- ------ --- ------ ---
U.S. Treasury $ 1,804 6% 8,491 26% 1,865 19%
Government agencies 13,418 43 13,729 42 3,843 40
State and municipal 6,055 19 7,952 24 2,978 31
Mortgage-backed securities 7,806 25 812 2 -- 0
Federal Home Loan Bank stock 1,387 4 1,090 3 500 5
Federal Reserve stock 793 2 764 2 371 4
Other equity securities 183 1 184 1 50 1
------- --- ------ --- ----- ---
Total available for sale $31,446 100% 33,022 100% 9,607 100%
======= === ====== === ===== ===
INVESTMENT SECURITIES HELD TO MATURITY AT DECEMBER 31,
1999 1998 1997
(dollars in thousands) Amount % Amount % Amount %
------ --- ------ --- ------ ---
U.S. Treasury $3,994 75% 5,986 77% 7,960 79%
State and municipal -- 0 50 1 85 1
Mortgage-backed securities 1,351 25 1,677 22 2,080 20
------ --- ----- --- ------ ---
Total held to maturity $5,345 100% 7,713 100% 10,125 100%
====== === ===== === ====== ===
B-30
<PAGE>
Investment Maturities and Yield. The following tables set forth the estimated
market value and approximate yield of the securities in the investment portfolio
by type and maturity at December 31, 1999.
MATURITIES FOR AVAILABLE FOR SALE INVESTMENTS AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
Within 1-5 5-10 Over 10
(dollars in thousands) 1 Year Years Years Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 1,503 4.77% 301 5.89% -- 0.00% -- 0.00% 1,804 4.96%
Government agencies 3,455 5.10 7,497 5.36 1,911 6.19 555 5.40 13,418 5.41
State and municipal 2,086 4.04 2,937 4.07 746 5.34 286 4.61 6,055 4.25
Mortgage-backed securities 17 6.61 217 6.76 55 6.69 7,517 6.12 7,806 6.14
Equity securities (1) -- -- -- 2,363 2,363
-------- ---- ------ ---- ----- ---- ------ ---- ------ -----
Total and weighted average yield $ 7,061 4.72% 10,952 5.06% 2,712 5.97% 10,721 6.02% 31,446 5.35%
======== ==== ====== ==== ===== ==== ====== ==== ====== =====
</TABLE>
(1) Equity securities do not have stated maturity dates.
MATURITIES FOR HELD TO MATURITY INVESTMENTS AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
Within 1-5 5-10 Over 10
(dollars in thousands) 1 Year Years Years Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ -- 0.00% 3,994 5.40% -- 0.00% -- 0.00% 3,994 5.40%
Mortgage-backed securities -- 0.00 -- 0.00 381 6.75 970 7.23 1,351 7.10
-------- ---- ------ ---- ----- ---- ------ ---- ------ -----
Total and weighted average yield $ -- 0.00% 3,994 5.40% 381 6.75% 970 7.23% 5,345 5.83%
======== ==== ====== ==== ===== ==== ====== ==== ====== =====
</TABLE>
Deposits. Vail Banks' primary source of funds has historically been in-market
customer deposits. Deposit products are concentrated in business and personal
checking accounts, including interest bearing and non-interest bearing accounts.
Generally, deposits are short-term in nature with approximately 79% of deposits
having a committed term less than three months and approximately 96% having a
committed term of less than one year. Vail Banks' resort locations experience a
seasonality of deposits; however, increases in deposits in non-resort-oriented
markets due to recent mergers have somewhat mitigated such seasonality.
Total deposits were $372.7 million at December 31, 1999, a decrease of $4.8
million, or 1.3%, from $377.5 million at December 31, 1998. Management
attributes this decline in deposits to several factors, including: the
intentional reduction of high-cost public certificates of deposit, cash
withdrawals at year-end related to the public's Year 2000 liquidity concerns,
and the general movement from bank deposits to stock market investments by the
consumer. In 1998 deposits increased by $171.4 million, or 83.1% from $206.2
million, at December 31, 1997. The increase in 1998 was primarily attributable
to the Telluride merger in which deposits of $119.9 million were obtained.
Deposits are relatively concentrated in lower cost transaction accounts with 23%
in non-interest bearing checking and 17% in interest bearing checking at
December 31, 1999. Savings deposits made up 8% and money market deposits made up
28% of deposits at year-end.
B-31
<PAGE>
The following table sets forth the composition of Vail Banks' deposits by type
at December 31, 1999 and 1998.
DEPOSIT COMPOSITION AT DECEMBER 31,
1999 1998 1997
(dollars in thousands) AMOUNT % Amount % Amount %
-------- --- ------- --- ------- ---
Non-interest bearing checking $ 86,991 23% 91,510 24% 56,929 28%
Interest bearing checking 64,753 17 61,050 16 64,592 31
Money market 102,784 28 90,839 24 30,187 15
Savings 31,451 9 42,165 11 13,537 6
Certificates of deposit 86,763 23 92,008 25 40,970 20
-------- --- ------- --- ------- ---
Total $372,742 100% 377,572 100% 206,215 100%
======== === ======= === ======= ===
The following table sets forth the amount and maturity of certificates of
deposit that had balances equal to or greater than $100,000 at December 31, 1999
and 1998.
MATURITIES OF CERTIFICATES OF DEPOSIT EQUAL TO OR GREATER THAN $100,000 AT
DECEMBER 31,
(in thousands) 1999 1998
------- ------
3 months or less $ 9,290 22,907
3 - 6 months 6,825 9,036
6 - 12 months 10,424 7,888
Over 12 months 1,978 4,641
------- ------
Total $28,517 44,472
======= ======
Vail Banks' secondary sources of funding include federal funds purchased lines
and Federal Home Loan Bank ("FHLB") borrowings. At December 31, 1999 federal
funds purchased totaled $11.1 million and FHLB borrowings totaled $19.0 million.
While the federal funds purchased were overnight borrowings, the FHLB borrowings
had maturities between one and five months.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Sources of Liquidity. Liquidity is a measure of Vail Banks' ability to meet its
customers' present and future deposit withdrawals and/or increased loan demand
without unduly penalizing earnings. Interest rate sensitivity involves the
relationship between rate sensitive assets and liabilities and is an indication
of the probable effects of interest rate movements on Vail Banks' net interest
income. Vail Banks manages both its liquidity and interest sensitivity by
projecting credit demand and other financial needs and then maintaining
sufficient funding sources and assets readily convertible into cash to meet
these requirements.
Vail Banks has provided for its liquidity needs by maintaining adequate cash
balances, through growth in core deposits, maturing loans and investments in its
securities portfolio and by maintaining various short-term borrowing sources.
Vail Banks generally does not accept brokered deposits. Management believes that
maturing investment securities and unused borrowing sources will be adequate to
meet the liquidity needs for the foreseeable future.
Asset and Liability Management. The liquidity position of Vail Banks is
monitored by the Asset/Liability Committee of the Board of Directors. A
principal function of asset/liability management is to coordinate the levels of
interest-sensitive assets and liabilities to minimize net interest income
fluctuations in times of fluctuating market interest rates. Interest-sensitive
assets and liabilities are those that are subject to repricing in
B-32
<PAGE>
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 at December 31, 1999, 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.
B-33
<PAGE>
STATIC INTEREST RATE SENSITIVITY AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
(dollars in thousands) Maturing or Repricing
-----------------------------------------------------------------------------
Non-Sensitive
1 - 90 91 Days 1 Year and Over
Days to 1 Year to 5 Years 5 Years Total
-------- --------- ---------- ------------- -------
<S> <C> <C> <C> <C> <C>
Assets
Investment securities $ 2,112 5,657 14,474 14,548 36,791
Loans 175,145 29,917 104,578 27,095 336,735
Non-earning assets 91,436 91,436
-------- ------- ------- ------- -------
Total assets 177,257 35,574 119,052 133,079 464,962
Liabilities and shareholders' equity
Interest-bearing deposits:
Interest bearing checking* 32,377 19,426 12,950 64,753
Money market and other savings* 67,118 40,271 26,846 134,235
Certificates of deposit 25,415 49,744 11,588 16 86,763
-------- ------- ------- ------- -------
Total interest bearing deposits 124,910 109,441 51,384 16 285,751
Federal funds purchased and other
short-term borrowings 24,060 6,000 30,060
Non-interest bearing liabilities 89,769 89,769
Minority interest 655 655
Shareholders' equity 58,727 58,727
-------- ------- ------- ------- -------
Total liabilities and equity 148,970 115,441 51,384 149,167 464,962
Interest sensitivity gap $ 28,287 (79,867) 67,668 (16,088)
======== ======= ======= =======
Cumulative interest sensitivity gap $ 28,287 (51,580) 16,088
======== ======= =======
Cumulative gap as a percentage
of total assets 6.1% (11.1)% 3.5%
======== ======= =======
</TABLE>
*Vail Banks' experience with interest bearing checking accounts, money market
and savings deposits has been that, although these deposits are subject to
immediate withdrawal or repricing, a portion of the balances has remained
relatively constant in periods of both rising and falling rates. Therefore, a
portion of these deposits is included in all categories except for the
"Non-Sensitive and Over 5 Years" category.
B-34
<PAGE>
CAPITAL RESOURCES
On December 10, 1998 Vail Banks sold 1,680,000 shares of common stock in the
Offering, which generated $17.6 million in new equity. At the same time,
shareholders' equity was reduced by $467,000 due to the early conversion payment
upon the required conversion of preferred stock to common stock.
Shareholders' equity at December 31, 1999 increased to $58.7 million, or
8.0%, from $54.4 million at December 31, 1998. Shareholders' equity increased
$36.5 million, or 204.3%, from $17.9 million at December 31, 1997. The increase
in 1999 was solely due to the retention of current period earnings. In contrast,
the increase in 1998 was due to the Common Stock issued in connection with the
Independent merger, Telluride merger, a private offering of $2.0 million in
Common Stock, the stock issued in the Offering, and, to a lesser extent, the
retention of current period earnings. After netting the effects of the tax loss
carryforward and the "equivalent taxation" entry, the total increase in
shareholders' equity due to retention of earnings was $3.3 million at December
31, 1998, up $2.6 million from $748,000 at December 31, 1997.
Vail Banks is subject to various regulatory capital requirements administered by
the various governmental banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and additional discretionary,
actions by regulators that, if undertaken, could have a direct material effect
on Vail Banks' financial condition. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, Vail Banks must meet specific
guidelines that involve quantitative measures of assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices.
Vail Banks' capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the bank to maintain minimum amounts and ratios of Total and Tier 1
capital to risk-weighted assets, and of Tier 1 capital to average assets. See
"Supervision and Regulation" in Item 1 for explanations of these terms and
requirements.
Vail Banks currently maintains, and intends to continue to maintain, Tier 1
capital, Total capital and leverage (Tier 1 capital to average total assets)
ratios in excess of the minimum for a "well capitalized" rating.
YEAR 2000 COMPLIANCE
Vail Banks did not experience any material disruptions in its operations or
activities as a result of the so-called "Year 2000" problem. In addition, Vail
Banks did not incur material expenses in correcting perceived or suspected Year
2000 problems. Furthermore, Vail Banks is not aware that any of its suppliers or
customers have experienced any material disruptions in their operations or
activities due to Year 2000 problems. Vail Banks does not expect to encounter
any such problems in the foreseeable future, although it continues to monitor
its computer operations for signs or indications of such problems.
It is possible, however, that Year 2000 problems could still disrupt Vail Banks'
operations and the systems of other companies upon which their systems rely. If
Vail Banks' systems or the systems of its customers, product vendors, utility
vendors, and suppliers experience unforeseen Year 2000 problems in the future,
it may negatively impact Vail Banks' systems, operations and financial
performance.
EFFECT 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.
B-35
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
("the Statement') establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows gains and losses from derivatives to offset related results on the hedged
item in the income statement, and requires that a company formally document,
designate and assess the effectiveness of transactions for which hedge
accounting is applied.
Initially, the Statement was to be effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. In June 1999, the FASB amended SFAS No.
133, deferring the effective date by one year. It may be implemented earlier
provided adoption occurs as of the beginning of any fiscal quarter after
issuance. The Statement may not be applied retroactively. Vail Banks expects to
adopt the Statement in the first quarter of 2001. Based upon information
available, the impact of adoption is not expected to be material to the
Consolidated Financial Statements. Nevertheless, the adoption of the Statement
could increase the volatility of reported earnings and shareholders' equity in
future periods.
ITEM 7. FINANCIAL STATEMENTS.
The response to this item is included in Part IV, Item 13 of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On January 15, 1999, the Audit Committee of the Board of Directors of Vail
Banks, Inc. (the "Company") approved the dismissal of Fortner Bayens Levkulich &
Co., P.C. and the hiring of KPMG LLP. The decision to dismiss Fortner Bayens
Levkulich & Co., P.C. by the Audit Committee was based on the need to hire a
larger accounting firm to meet the Company's needs after the public offering in
December 1998.
The report of Fortner, Bayens, Levkulich & Co., P.C. on the Company's financial
statements for the fiscal year ended on December 31, 1997 did not contain an
adverse opinion or a disclaimer of opinion and was not qualified or modified as
to uncertainty, audit scope or accounting principles.
In connection with the audit of the Company's financial statements for the year
ended December 31, 1997, and in the subsequent interim period, there were no
disagreements with Fortner, Bayens, Levkulich & Co., P.C. on any matters of
accounting principles or practices, financial statement disclosure or auditing
scope and procedures which, if not resolved to the satisfaction of Fortner,
Bayens, Levkulich & Co., P.C., would have caused Fortner, Bayens, Levkulich &
Co., P.C. to make reference to the matter in their report.
During the fiscal year ended on December 31, 1997 and through January 15, 1999,
the Company did not consult with KPMG LLP on matters (i) regarding the
application of accounting principles to a specified transaction or the type of
audit opinion that might be rendered on the Company's financial statements, or
(ii) which concerned the subject matter of a disagreement or event identified in
response to paragraph (a) (1) (iv) of Item 304 of Regulation S-B with the former
auditor.
B-36
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information contained under the headings "Information About Nominees For
Director and Continuing Directors" and "Compliance with Section 16(a) of the
Exchange Act" in the definitive Proxy Statement to be used in connection with
the solicitation of proxies for Vail Banks' annual meeting of shareholders to be
held on May 16, 2000, to be filed with the Securities and Exchange Commission
("SEC"), is incorporated herein by reference. Information regarding executive
officers is included in "Executive Officers of Vail Banks" in Item 1 of this
Form 10-KSB.
ITEM 10. EXECUTIVE COMPENSATION.
The information contained under the heading "Executive Compensation" in the
definitive proxy statement to be used in connection with the solicitation of
proxies for Vail Banks' annual meeting of shareholders to be held on May 16,
2000, to be filed with the SEC, is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained under the heading "Beneficial Ownership of Securities
" in the definitive proxy statement to be used in connection with the
solicitation of proxies for Vail Banks' annual meeting of shareholders to be
held on May 16, 2000, to be filed with the SEC, is incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the heading "Certain Relationships and Related
Transactions" in the definitive Proxy Statement to be used in connection with
the solicitation of proxies for all Vail Banks' annual meeting of shareholders
to be held on May 16, 2000, to be filed with the SEC, is incorporated herein by
reference.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS.
The following financial statements and notes thereto of Vail Banks begin on page
F-1 of this report.
Independent Auditors' Reports
Consolidated Balance Sheets as of December 31, 1999 and 1998 Consolidated
Statements of Income for the years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements as of December 31, 1999 and
1998 and for the years ended December 31, 1999, 1998, and 1997.
B-37
<PAGE>
EXHIBITS
The following exhibits are required to be filed with this Report on 10-KSB
by Item 601 of Regulation S-B.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<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*
10.1 Stock Purchase Agreement by and between Vail Banks, Inc., WestStar Bank,
Cedaredge Financial Services, Inc., Western Community Bank, and certain
Company Shareholders, dated July 3, 1997*
10.2 Stock Incentive Plan, as amended*(1)
10.3 Change in Control Severance Payment Agreement by and between Vail Banks, Inc. and
E.B. Chester, dated November 19, 1999
10.4 Change in Control Severance Payment Agreement by and between Vail Banks, Inc. and
Lisa M. Dillon, dated November 19, 1999
10.5 Amended and Restated Stock Incentive Plan Restricted Stock Award Agreement by and
between Vail Banks, Inc. and Lisa M. Dillon, dated November 19, 1999
10.6 Amended and Restated Stock Incentive Plan Restricted Stock Award Agreement by and
between Vail Banks, Inc. and E.B. Chester, dated November 19, 1999
16.1 Letter of change of certifying accountant* 21.1 Subsidiaries of the
Registrant 24.1 Power of Attorney (on signature page) 27.1 Financial Data
Schedule
</TABLE>
--------------------
(1) Management contract or compensatory plan required to be filed as an
exhibit.
* Incorporated by reference from the Registrant's Form SB-2, as amended,
Commission File No. 333-60347.
** Incorporated by reference from the Registrant's Form SB-2, Commission
File No. 333-74571.
(b) REPORTS ON FORM 8-K.
NO REPORTS ON FORM 8-K WERE FILED.
B-38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report on Form 10-KSB to be
signed on its behalf by the undersigned, thereunto duly authorized, in the Town
of Vail, State of Colorado, on the 27th day of March, 2000.
VAIL BANKS, INC.
(REGISTRANT)
By: /s/ Lisa M. Dillon
-----------------------------------
Title: Lisa M. Dillon, President and
Chief Executive Officer
POWER OF ATTORNEY AND SIGNATURES
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints E.B. Chester, Jr. or Lisa M. Dillon and either of
them (with full power in each to act alone), as true and lawful
attorneys-in-fact, with full power of substitution, for him or her and in his or
her name, place and stead, in any and all capacities, to sign any amendments to
this Report on Form 10-KSB and to file the same, with all exhibits thereto and
other documents in connection therewith, with the SEC, hereby ratifying and
confirming all that said attorney-in-fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1934, this Report on
Form 10-KSB has been signed by the following persons in the capacities indicated
on the 27th day of March, 2000.
B-39
SIGNATURE TITLE
--------- -----
/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/ Kay H. Chester Director
-------------------------------------
Kay H. Chester
/s/ Dennis R. Devor Director
-------------------------------------
Dennis R. Devor
/s/ James G. Flaum Director
-------------------------------------
James G. Flaum
/s/ S. David Gorsuch Director
-------------------------------------
S. David Gorsuch
/s/ James M. Griffin Director
-------------------------------------
James M. Griffin
/s/ Martin T. Hart Director
-------------------------------------
Martin T. Hart
/s/ Garner F. Hill II Director
-------------------------------------
Garner F. Hill II
/s/ Robert L. Knous, Jr. Director
-------------------------------------
Robert L. Knous, Jr.
/s/ Kent Myers Director
-------------------------------------
Kent Myers
/s/ Byron A. Rose Director
-------------------------------------
Byron A. Rose
/s/ Donald L. Vanderhoof Director
-------------------------------------
Donald L. Vanderhoof
/s/ E. William Wilto Director
-------------------------------------
E. William Wilto
B-40
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
Vail Banks, Inc.:
We have audited the accompanying consolidated balance sheets of Vail Banks, Inc.
and subsidiary as of December 31, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity and comprehensive income, and cash
flows for each of the years in the two-year period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audits 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 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, 1999 and 1998, and the results of their operations
and their cash flows for each of the years in the two-year period ended December
31, 1999 in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Denver, Colorado
February 25, 2000
F-1
B-42
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Vail Banks, Inc.
Vail, Colorado
We have audited the accompanying consolidated statements of income,
stockholders' equity and comprehensive income, and cash flows of Vail Banks,
Inc. and Subsidiary for the year 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 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 results of operations of Vail
Banks, Inc. and Subsidiary and their cash flows for the year ended December 31,
1997 in conformity with generally accepted accounting principles.
/s/ FORTNER, BAYENS, LEVKULICH & CO., P.C.
Denver, Colorado
February 20, 1998
F-2
B-43
<PAGE>
VAIL BANKS, INC.
Consolidated Balance Sheets
December 31, 1999 and 1998
(In thousands, except share data)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks $ 29,971 28,469
Federal funds sold and other short-term investments -- 43,105
Investment securities, available for sale 31,446 33,022
Investment securities, held to maturity (market value of
$5,289 and $7,814 in 1999 and 1998, respectively) 5,345 7,713
Loans 336,735 269,191
Allowance for loan losses (2,739) (2,590)
--------- ---------
Net loans 333,996 266,601
--------- ---------
Premises and equipment, net 34,954 31,647
Interest receivable 2,724 2,425
Intangible assets 24,177 22,959
Other assets 2,349 3,182
--------- ---------
$ 464,962 439,123
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest bearing $ 86,991 91,510
Interest bearing 285,751 286,062
--------- ---------
Total deposits 372,742 377,572
Short-term borrowings:
Federal funds purchased 11,060 --
FHLB advances 19,000 --
--------- ---------
Total short-term borrowings 30,060 --
Notes payable -- 1,114
Interest payable and other liabilities 2,778 5,439
--------- ---------
Total liabilities 405,580 384,125
--------- ---------
Minority interest 655 621
--------- ---------
Shareholders' equity
Preferred stock -- $1 par value; 2,250,000 shares authorized, no shares
issued and outstanding at December 31, 1999 and
1998, respectively -- --
Common stock -- $1 par value; 20,000,000 shares authorized,
6,069,370 and 6,040,608 shares issued and outstanding at
December 31, 1999 and 1998, respectively 6,069 6,041
Additional paid-in capital 46,747 46,772
Retained earnings 6,378 1,522
Accumulated other comprehensive income (loss), net of taxes (467) 42
--------- ---------
Total shareholders' equity 58,727 54,377
--------- ---------
$ 464,962 439,123
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
B-44
<PAGE>
VAIL BANKS, INC.
Consolidated Statements of Income
Years ended December 31, 1999, 1998 and 1997 (In thousands, except share data)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Interest income
Interest and fees on loans $ 32,076 18,787 12,570
Interest on investment securities 2,152 1,137 956
Interest on federal funds sold and other
short-term investments 854 1,459 496
---------- ---------- ----------
Total interest income 35,082 21,383 14,022
---------- ---------- ----------
Interest expense
Deposits 10,378 7,526 4,251
Short-term borrowings 476 31 127
Notes payable 14 111 123
Mandatorily convertible debentures -- 141 13
---------- ---------- ----------
Total interest expense 10,868 7,809 4,514
---------- ---------- ----------
Net interest income 24,214 13,574 9,508
Provision for loan losses 455 -- 232
---------- ---------- ----------
Net interest income after provision
for loan losses 23,759 13,574 9,276
Non-interest income
Deposit related 2,414 1,404 916
Other 1,556 984 357
---------- ---------- ----------
3,970 2,388 1,273
Non-interest expense
Salaries and employee benefits 9,929 6,954 5,086
Occupancy 2,174 1,626 1,325
Furniture and equipment 1,696 1,151 852
Amortization of intangible assets 984 297 133
Other 5,049 3,020 2,391
---------- ---------- ----------
19,832 13,048 9,787
---------- ---------- ----------
Income before income taxes 7,897 2,914 762
Income taxes 3,041 955 288
---------- ---------- ----------
Net income $ 4,856 1,959 474
========== ========== ==========
Net income $ 4,856 1,959 474
Preferred stock dividends -- 690 --
---------- ---------- ----------
Net income available to common shareholders $ 4,856 1,269 474
========== ========== ==========
Earnings per share - basic and diluted $ 0.80 0.47 0.23
========== ========== ==========
Average common shares
Basic 6,040,618 2,691,987 2,100,423
Diluted 6,091,635 3,361,560 2,153,653
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
B-45
<PAGE>
VAIL BANKS, INC.
Consolidated Statements of Shareholders' Equity and Comprehensive Income
Years ended December 31, 1999, 1998 and 1997 (In thousands, except share data)
<TABLE>
<CAPTION>
SERIES A COMMON STOCK
PREFERRED STOCK MANDATORY $1 PAR VALUE
--------------------- CONVERTIBLE ---------------------
SHARES AMOUNT DEBENTURES SHARES AMOUNT
--------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 -- $ -- -- 1,782,510 $ 1,782
Issuance of common stock for services -- -- -- 13,580 14
Sale of common stock -- -- -- 454,890 455
Debentures assumed in acquisition -- -- 1,600 -- --
Issuance of preferred stock 34,258 2,960 -- -- --
Comprehensive income
Net income -- -- -- -- --
Net change in unrealized gains on investment
securities available for sale (net of taxes) -- -- -- -- --
--------- --------- --------- --------- ---------
Total comprehensive income -- -- -- -- --
Income tax benefit credited to shareholders' equity -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at December 31, 1997 34,258 2,960 1,600 2,250,980 2,251
Issuance of common stock for services -- -- -- 34,840 35
8% dividends declared on preferred stock -- -- -- -- --
Issuance of common stock at $10 per share, less
selling expenses of $36 -- -- -- 204,540 204
Issuance of common stock in conjunction with acquisitions -- -- -- 1,227,683 1,228
Issuance of common stock in conjunction with initial public
offering at $12 per share less selling expenses of $2,571 -- -- -- 1,680,000 1,680
Conversion of preferred stock to common stock including preferred stock dividend
in conjunction with initial public
offering less conversion costs of $20 (34,258) (2,960) -- 342,565 343
Conversion of mandatorily convertible debentures to
common stock in conjunction with initial public offering -- -- (1,600) 300,000 300
Comprehensive income
Net income -- -- -- -- --
Net change in unrealized gains on investment
securities available for sale (net of taxes) -- -- -- -- --
--------- --------- --------- --------- ---------
Total comprehensive income -- -- -- -- --
Income tax benefit credited to shareholders' equity -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at December 31, 1998 -- -- -- 6,040,608 6,041
Issuance of restricted common stock -- -- -- 28,762 28
Recognition of stock compensation on restricted stock -- -- -- -- --
Comprehensive income
Net income -- -- -- -- --
Net change in unrealized losses on investment
securities available for sale (net of taxes) -- -- -- -- --
--------- --------- --------- --------- ---------
Total comprehensive income -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at December 31, 1999 -- $ -- -- 6,069,370 $ 6,069
========= ========= ========= ========= =========
ACCUMULATED
ADDITIONAL RETAINED OTHER
PAID-IN EARNINGS COMPREHENSIVE
CAPITAL (DEFICIT) INCOME TOTAL
---------- --------- ------------- ---------
Balance at December 31, 1996 7,871 (221) (3) 9,429
Issuance of common stock for services 62 -- -- 76
Sale of common stock 2,571 -- -- 3,026
Debentures assumed in acquisition -- -- -- 1,600
Issuance of preferred stock -- -- -- 2,960
Comprehensive income
Net income -- 474 -- 474
Net change in unrealized gains on investment
securities available for sale (net of taxes) -- -- 29 29
--------- --------- --------- ---------
Total comprehensive income -- 474 29 503
Income tax benefit credited to shareholders' equity 274 -- -- 274
--------- --------- --------- ---------
Balance at December 31, 1997 10,778 253 26 17,868
Issuance of common stock for services 172 -- -- 207
8% dividends declared on preferred stock -- (243) -- (243)
Issuance of common stock at $10 per share, less
selling expenses of $36 1,806 -- -- 2,010
Issuance of common stock in conjunction with acquisitions 12,867 -- -- 14,095
Issuance of common stock in conjunction with initial public
offering at $12 per share less selling expenses of $2,571 15,909 -- -- 17,589
Conversion of preferred stock to common stock including
preferred stock dividend in conjunction with initial public
offering less conversion costs of $20 2,597 (447) -- (467)
Conversion of mandatorily convertible debentures to
common stock in conjunction with initial public offering 1,300 -- -- --
Comprehensive income
Net income -- 1,959 -- 1,959
Net change in unrealized gains on investment
securities available for sale (net of taxes) -- -- 16 16
--------- --------- --------- ---------
Total comprehensive income -- 1,959 16 1,975
Income tax benefit credited to shareholders' equity 1,343 -- -- 1,343
--------- --------- --------- ---------
Balance at December 31, 1998 46,772 1,522 42 54,377
Issuance of restricted common stock (28) -- -- --
Recognition of stock compensation on restricted stock 3 -- -- 3
Comprehensive income
Net income -- 4,856 -- 4,856
Net change in unrealized losses on investment
securities available for sale (net of taxes) -- -- (509) (509)
--------- --------- --------- ---------
Total comprehensive income -- 4,856 (509) 4,347
--------- --------- --------- ---------
Balance at December 31, 1999 46,747 6,378 (467) 58,727
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
B-46
<PAGE>
VAIL BANKS, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 4,856 1,959 474
Adjustments to reconcile net income to net cash provided from
operating activities, net of effects of purchase business combinations:
Amortization of intangible assets 984 297 133
Depreciation and amortization of premises and equipment 2,026 1,421 885
Provision for loan losses 455 -- 232
Recognition of stock compensation on restricted stock 3 -- --
Net amortization of premiums (accretion of discounts) on
investment securities 92 11 (82)
Deferred income tax expense 593 902 274
Changes in operating assets and liabilities:
Decrease (increase) in interest receivable (298) 119 (348)
Decrease (increase) in intangible and other assets (723) (903) 20
Increase (decrease) in interest payable and other liabilities (2,839) (1,406) 3,954
Other, net 34 (9) (11)
-------- -------- --------
Net cash provided by operating activities 5,183 2,391 5,531
-------- -------- --------
Cash flows from investing activities, net of effects of
purchase business combinations
Net decrease (increase) in federal funds sold 43,105 (12,867) (10,403)
Purchase of investment securities available for sale (16,869) (575) (238)
Proceeds from maturities of investment securities held to maturity 2,368 7,760 450
Proceeds from maturities of investment securities available for sale 17,516 2,412 4,610
Net increase in loans (67,819) (15,467) (13,943)
Purchase of premises and equipment (4,822) (5,252) (2,205)
Net cash received in (paid for) acquisitions 35,551 (8,259) (1,353)
-------- -------- --------
Net cash provided (used) by investing activities 9,030 (32,248) (23,082)
-------- -------- --------
Cash flows from financing activities, net of effects of
purchase business combinations
Net increase (decrease) in deposits (41,657) 24,058 19,857
Net increase in federal funds purchased 11,060 -- --
Net increase in FHLB advances 19,000 -- --
Net decrease in repurchase agreements -- (308) (1,339)
Proceeds from issuance of common stock -- 19,806 3,026
Cash paid in conversion of preferred stock to common stock -- (20) --
Dividends paid -- (690) --
Repayments of notes payable (1,114) (1,200) (4,765)
-------- -------- --------
Net cash provided (used) by financing activities (12,711) 41,646 16,779
-------- -------- --------
Net increase (decrease) in cash and due from banks 1,502 11,789 (772)
Cash and due from banks at beginning of year 28,469 16,680 17,452
-------- -------- --------
Cash and due from banks at end of year $ 29,971 28,469 16,680
======== ======== ========
Supplemental disclosures of cash flow information Cash paid during the year for:
Interest $ 10,991 7,584 4,360
======== ======== ========
Income taxes $ 2,470 71 8
======== ======== ========
Noncash investing and financing transactions
Foreclosure of collateralized loans, net of reserve $ 306 -- --
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
B-47
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Vail Banks, Inc. (VBI) and its wholly owned subsidiary, WestStar Bank
(WestStar). WestStar and VBI own a 54.04% interest in Avon 56 Limited which
is also included in the accompanying consolidated financial statements. All
entities are collectively referred to as the Company. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
In 1993, VBI was formed as a bank holding company for WestStar and is
engaged in the management and operation of financial institutions primarily
in the western slope region of Colorado. Colorado counties served by the
Company include Summit, Eagle, Delta, Garfield, Ouray, San Miguel and
Montrose, as well as the Denver Metropolitan area. The Company offers a
full range of loan and deposit products to local consumers and commercial
businesses.
On December 10, 1998, the Company sold shares of its $1 par value common
stock in an initial public offering (the offering). In conjunction with the
offering, VBI issued 1,680,000 new shares at $12 per share. Also in
conjunction with the offering, the Company acquired Telluride Bancorp,
Ltd., which was merged into VBI, and its two subsidiary banks, Bank of
Telluride and Western Colorado Bank, both of which are now operated as
branches of WestStar.
(b) CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers cash
equivalents to represent cash and due from banks. Cash equivalents include
uninsured deposits in financial institutions approximating $20,828 and
$6,597 at December 31, 1999 and 1998, respectively, other than amounts on
deposit at the Federal Home Loan Bank of Topeka and the Federal Reserve
Bank.
(c) INVESTMENT SECURITIES
Debt securities that the Company has the positive intent and ability to
hold to maturity are classified as held-to-maturity and reported at cost,
adjusted for amortization or accretion of premiums or discounts. Other
investment securities are classified as available-for-sale and reported at
fair value. Unrealized gains and losses, net of the related tax effect, on
available-for-sale securities are reported as a separate component of
shareholders' equity, and the annual change of such gains and losses are
reported as other comprehensive income. Transfer of securities between
categories are recorded at fair value on the date of transfer.
Realized gains and losses on the sale of investment securities are
determined using the specific identification method at the time of sale or
redemption at maturity. Discounts or premiums are accreted or amortized
using the level-yield method to the earlier of call date or maturity of the
related held-to-maturity security.
F-7
B-48
<PAGE>
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
(d) LOANS AND INTEREST INCOME
Loans are reported net of unearned interest and unamortized deferred fees
and costs. Interest income on loans is accrued daily on the principal
balance outstanding, if such income is deemed collectible. Generally, the
Company places loans on nonaccrual status when payments are more than 90
days past due or when management believes it is probable that the Company
will not collect all of its outstanding principal. When placing a loan on
nonaccrual status, interest accrued to date is generally reversed unless
the net realizable value of the underlying collateral is sufficient to
cover principal and accrued interest. When such a reversal is made,
interest accrued during prior years is charged to the allowance for loan
losses. All other interest reversed on nonaccrual loans is charged against
current year interest income.
Loans are considered impaired when it is probable that the Company will be
unable to fully collect amounts due in accordance with the contractual
terms of the loans. Impaired loans are measured by using discounted cash
flows, except when it is determined that the sole source of repayment for
the loan is operation or liquidation of the collateral. In such case, the
current fair value of the collateral, reduced by estimated selling costs,
is used in place of discounted cash flows. If the measurement of the
impaired loan is less than the recorded investment in the loan, impairment
is recognized by creating or adjusting an existing allocation of the
allowance for losses on loans.
The Company calculates gains or losses on sales of participating interests
in loans receivable by determining the difference between the weighted
average yield of the loans sold and the yield rate guaranteed to the
purchaser, adjusted for estimated cost of servicing the loans receivable.
The resulting premium or discount is amortized or accreted to interest
income using the level-yield method over the contractual life of the loans.
Loans held for sale are recorded at the lower of cost or estimated market
value.
Loan and commitment fees, net of certain loan origination costs, are
deferred and recognized as an adjustment of yield using the level-yield
method over the contractual lives of the loans.
(e) PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Company's allowance for loan losses (the allowance) is increased by
provisions charged to expenses and reduced by loans charged off, net of
recoveries. It is maintained at a level considered adequate to absorb
potential loan losses determined on the basis of management's continuing
review and evaluation of the loan portfolio and its judgment as to the
impact of economic conditions on the portfolio. The evaluation by
management includes consideration of past loan loss experience and trends,
changes in the composition of the loan portfolio, the current volume and
condition of loans outstanding and the probability of collecting all
amounts due. The allowance is based primarily on management's estimates of
possible loan losses from these procedures and historical experiences.
These estimates involve judgments and a certain level of subjectivity;
changes in economic conditions may necessitate revisions in future years.
Various regulatory agencies, as an integral part of their examination
process, periodically review the allowance. Such agencies may require the
Company to record additional provisions for potential losses based upon
their evaluation of information available at the time of their examination.
F-8
B-49
<PAGE>
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
(f) PREMISES AND EQUIPMENT
Premises and equipment are recorded at cost less accumulated depreciation
and amortization. Depreciation and amortization are calculated using the
straight-line method over the estimated useful lives of the related assets,
which are estimated at up to 50 years for buildings and three to seven
years for equipment.
In 1999, the Company changed the estimated useful lives of certain
buildings from 36 to 50 years. The effect on income before income taxes,
net income, basic earnings per share and diluted earnings per share for the
year ended December 31, 1999 was $160, $98, $0.01 and $0.02, respectively.
(g) INTANGIBLE ASSETS
Intangible assets primarily represent goodwill related to the excess of
cost paid in purchase transactions over the fair value of the net assets
acquired. Amortization is computed using the straight-line method over 25
years. Capitalized costs and accumulated amortization for costs in excess
of fair value of net assets acquired as of December 31 are as follows:
1999 1998
------- ------
Capitalized costs $25,773 23,545
Accumulated amortization (1,596) (586)
------- ------
$24,177 22,959
======= ======
The Company assesses the recoverability of intangible assets by determining
whether the amortization of goodwill over its remaining life can be
recovered through undiscounted future net cash flows of the acquired
institutions. The assessment of the recoverability of goodwill will be
impacted if estimated undiscounted future net cash flows are not achieved.
(h) FORECLOSED PROPERTIES
Included in other assets on the accompanying consolidated balance sheets
are foreclosed properties which were acquired through foreclosure, deed in
lieu of foreclosure, or repossession. Foreclosed properties are recorded at
the lower of cost or fair value less estimated costs to sell. Losses at the
time of transfer from loans are charged to the allowance for loan losses.
Subsequent adjustments to value and gains or losses on sales are included
in operating expenses. Rental income and costs of maintaining the
properties are also included in operations.
(i) 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 financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. VBI and its subsidiary file consolidated income tax returns.
(j) CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk arise when a number of counterparties have
similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or
other conditions. The Company's loan portfolio consists primarily of
F-9
B-50
<PAGE>
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
commercial and real estate loans located in Colorado, making the value of
the portfolio more susceptible to declines in real estate values and other
changes in economic conditions in Colorado. The Company does not believe it
has a significant exposure to any individual customer.
(k) DISCLOSURES OF FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosure
about Fair Value of Financial Instruments, requires the Company to disclose
estimated fair values of its financial instruments. Fair value estimates
are made at a specific point in time, based on relevant market information.
These estimates do not reflect any premium or discount that could result
from offering for sale at one time the Company's entire holdings of a
particular financial instrument. Because no market exists for a portion of
the Company's financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments and other
factors. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on financial instruments owned at December
31, 1999 and 1998 without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not
considered financial instruments, including deferred tax assets and
premises and equipment. In addition, the tax ramifications related to the
realization of unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in these estimates.
(l) EARNINGS PER SHARE
The Company computes basic and diluted earnings per share in accordance
with SFAS No. 128, Earnings per Share (Statement 128). Basic earnings per
share is computed by dividing net income available to common shareholders
by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share is computed similar to basic earnings
per share, except that the denominator is increased to include the number
of additional common shares that would have been outstanding if dilutive
potential common shares had been issued. In addition, the numerator is
adjusted for any changes in net income that would have resulted from the
assumed conversion of the potential common shares and includes the
preferred stock dividends.
(m) STOCK INCENTIVE PLAN
The Company accounts for its stock incentive plans in accordance with SFAS
No. 123, Accounting for Stock-Based Compensation (Statement 123), which
permits entities to expense over the vesting period the fair value of
stock-based awards as measured on the date of grant. Alternatively,
Statement 123 allows entities to apply the provisions of APB Opinion No. 25
while disclosing pro forma net income and pro forma earnings per share for
employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in Statement 123 had been applied. The
Company has elected to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of Statement 123.
F-10
B-51
<PAGE>
(n) USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
(o) RECLASSIFICATIONS
Certain reclassifications have been made to the previous financial
statements to conform to their 1999 presentation.
(2) BUSINESS COMBINATIONS
(a) WORLD SAVINGS BRANCH
On May 21, 1999, WestStar Bank purchased certain assets and assumed certain
liabilities of the Glenwood Springs, Colorado branch of World Savings Bank,
FSB, Oakland, California for $1,346 in cash. Cash and deposits of $36,897
and $36,835, respectively, were acquired in the purchase, and goodwill of
$997 was recorded.
(b) TELLURIDE BANCORP, LTD.
On December 15, 1998, the Company purchased all of the outstanding stock of
Telluride Bancorp, Ltd. (Telluride) and its wholly owned subsidiaries, Bank
of Telluride and Western Colorado Bank, for $13,331 in cash and 908,913
shares of stock.
The acquisition has been accounted for under the purchase method of
accounting, and accordingly, the purchase price has been allocated to the
assets acquired and the liabilities assumed based on the estimated fair
value at the date of acquisition. The excess of purchase price over the
fair value of net assets acquired has been recorded as goodwill and is
being amortized over 25 years. The estimated fair values of assets and
liabilities acquired are summarized as follows (in thousands):
Cash and due from banks $ 7,340
Federal funds sold 10,825
Investment securities 23,078
Loans, net of allowance for loan losses of $1,153 80,598
Premises and equipment 9,366
Other assets 1,703
Goodwill 14,395
Deposits (119,897)
Notes payable (1,114)
Other liabilities (1,510)
---------
Consideration and expenses paid $ 24,784
=========
F-11
B-52
<PAGE>
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
(c) INDEPENDENT BANKSHARES, INC.
On July 31, 1998, the Company purchased all of the outstanding stock of
Independent Bankshares, Inc. (Independent) and its subsidiary bank,
Glenwood Independent Bank (Glenwood), for $3,816 in cash and 318,770 shares
of stock.
The acquisition has been accounted for under the purchase method of
accounting, and accordingly, the purchase price has been allocated to the
assets acquired and the liabilities assumed based on the estimated fair
value at the date of acquisition. The excess of the purchase price over the
net assets acquired of $7,120 has been recorded as goodwill and is being
amortized over 25 years.
(d) CEDAREDGE FINANCIAL SERVICES, INC.
On November 30, 1997, the Company purchased all of the outstanding stock of
Cedaredge Financial Services, Inc. (Cedaredge) and its wholly owned
subsidiary, Western Community Bank. These entities were merged into the
Company. The Company paid cash of $3,250 and assumed Cedaredge's
mandatorily convertible debentures of $1,600.
The acquisition has been accounted for under the purchase method of
accounting, and the excess of the purchase price over the fair value of net
assets acquired of $1,831 has been recorded as goodwill and is being
amortized over 25 years.
F-12
B-53
<PAGE>
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
The Company has entered into consulting and non-complete agreements with
two of Cedaredge's executives. Under the agreement, annual payments of $110
are payable to these individuals for five years, beginning in 1997. Future
maturities of the remaining obligation are as follows:
YEAR ENDING PRINCIPAL
DECEMBER 31, MATURITIES INTEREST TOTAL
------------ ---------- -------- -----
2000 $ 93 17 110
2002 102 8 110
---------- -------- -----
$ 195 25 220
========== ======== =====
(e) VNB BUILDING CORPORATION
In 1994, the Company purchased a 28% interest in Vail 108 Limited (Vail
108), the only asset owned at the time by VNB Building Corporation (VNB).
In December 1997, the Company acquired the remaining interest in Vail 108
through a merger with VNB. VNB owned the property in which the Company's
main branch in Vail is located. In connection with the merger, the Company
issued 34,258 shares of Series A Preferred Stock for $2,960 and cash of
$300. Such preferred stock was converted to common shares on a
share-for-share basis in conjunction with the Company's initial public
offering.
(f) PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
The operating results of the Company's acquisitions are included in the
Company's consolidated results of operations from the dates of acquisition.
The following unaudited pro forma summary presents the consolidated results
of operations as if the acquisitions of Telluride and Independent had
occurred at the beginning of 1997, after giving effect to certain
adjustments, including depreciation, amortization of intangible assets,
debt repayment, dividends on preferred stock and income taxes. These pro
forma results have been prepared for comparative purposes only and do not
purport to be indicative of either what would have occurred had the
acquisitions been made as of those dates or results which may occur in the
future.
1998 1997
------- -------
Interest income $32,053 28,303
Interest expense 11,519 9,801
------- -------
20,534 18,502
Provision for loan losses 442 475
------- -------
Net interest income after provision for loan losses 20,092 18,027
Non-interest income 3,418 3,181
Non-interest expense 19,581 19,092
------- -------
Income before income taxes 3,929 2,116
Income taxes 1,464 907
------- -------
Net income $ 2,465 1,209
======= =======
F-13
B-54
<PAGE>
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
(3) INVESTMENT SECURITIES
Investment securities at December 31 consist of the following:
<TABLE>
<CAPTION>
1999
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Available-for-sale
U.S. Treasury $ 1,808 -- (4) 1,804
Government agencies 13,664 -- (246) 13,418
State and municipal 6,128 10 (83) 6,055
Mortgage-backed securities 8,190 -- (384) 7,806
Equity securities 2,363 -- -- 2,363
------- ------- ------- -------
$32,153 10 (717) 31,446
======= ======= ======= =======
Held-to-maturity
U.S. Treasury $ 3,994 -- (25) 3,969
Mortgage-backed securities 1,351 -- (31) 1,320
------- ------- ------- -------
$ 5,345 -- (56) 5,289
======= ======= ======= =======
1998
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
Available-for-sale
U.S. Treasury $ 8,466 27 (2) 8,491
Government agencies 13,723 8 (2) 13,729
State and municipal 7,928 29 (5) 7,952
Mortgage-backed securities 811 1 -- 812
Equity securities 2,038 -- -- 2,038
------- ------- ------- -------
$32,966 65 (9) 33,022
======= ======= ======= =======
Held-to-maturity
U.S. Treasury $ 5,986 63 -- 6,049
State and municipal 50 -- -- 50
Mortgage-backed securities 1,677 38 -- 1,715
------- ------- ------- -------
$ 7,713 101 -- 7,814
======= ======= ======= =======
</TABLE>
F-14
B-55
<PAGE>
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
Expected maturities of investment securities may differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Maturities of
investment securities at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
----------------------- -----------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Due within one year $ 7,076 7,061 -- --
Due after one year through five years 11,139 10,952 3,994 3,968
Due after five years through ten years 2,807 2,712 381 375
Due after ten years 11,131 10,721 970 946
------- ------- ------- -------
$32,153 31,446 5,345 5,289
======= ======= ======= =======
</TABLE>
Securities with a carrying value of $21,739 and $30,329 at December 31,
1999 and 1998, respectively, are pledged as collateral to secure public
deposits and for other purposes as permitted or required by law.
As a member of the Federal Home Loan Bank (FHLB) system, the Company is
required to maintain an investment in stock of the FHLB equal to the
greater of 1% of certain residential mortgages or 5% of FHLB advances. The
Company has a blanket pledge with the FHLB and has pledged all of its stock
in the FHLB, and all otherwise unpledged or unencumbered federal funds
sold, government agency securities, certain qualifying loans and
mortgaged-backed securities.
(4) LOANS
Loans at December 31 consist of the following:
1999 1998
-------- --------
Commercial and industrial $165,373 130,677
Real estate - construction 80,959 55,642
Real estate - mortgage 59,898 51,000
Consumer and other 30,505 31,872
-------- --------
$336,735 269,191
======== ========
Transactions in the allowance for loan losses are summarized as follows:
1999 1998 1997
------- ------- -------
Allowance at beginning of year $ 2,590 1,364 823
Loans charged off (381) (168) (58)
Recoveries on loans previously charged off 75 48 24
Provision for loan losses 455 -- 232
Acquired through acquisition -- 1,346 343
------- ------- -------
Allowance at end of year $ 2,739 2,590 1,364
======= ======= =======
F-15
B-56
<PAGE>
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
The principal balance of loans on which the accrual of interest has been
discontinued was $1,843 and $322 at December 31, 1999 and 1998, respectively.
Interest income that would have been recorded for nonaccrual loans had they been
performing in accordance with their contractual requirements was $127 and $74
for the years ended December 31, 1999 and 1998, respectively. Actual interest
income recorded for these loans was $84 and $44 for the years ended December 31,
1999 and 1998, respectively.
The recorded investment in impaired loans and the related impairment allowance
determined under SFAS No. 114, Accounting by Creditors for Impairment of a Loan
and SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures (collectively referred to as Statement 114), was
$854 and $494, respectively, at December 31, 1999 and $1,616 and $350,
respectively, at December 31, 1998. All impaired loans have associated
impairment allowances. The majority of impaired loans requiring a Statement 114
allowance are measured using the fair value of the underlying collateral since
these loans are considered collateral dependent.
The average recorded investment in impaired loans for the years ended December
31, 1999 and 1998 was $890 and $108, respectively. Interest recorded on impaired
loans for the years ended December 31, 1999 and 1998 was $42 and $266,
respectively.
(5) PREMISES AND EQUIPMENT
Premises and equipment at December 31 consist of the following:
1999 1998
-------- --------
Land $ 6,207 5,922
Buildings 22,377 19,521
Leasehold improvements 2,141 3,662
Furniture, fixtures and equipment 9,504 8,510
-------- --------
40,229 37,615
Accumulated depreciation and amortization (5,275) (5,968)
-------- --------
Premises and equipment, net $ 34,954 31,647
======== ========
Depreciation and amortization expense on premises and equipment was $2,026,
$1,421 and $885 for the years ended December 31, 1999, 1998 and 1997,
respectively.
F-16
B-57
<PAGE>
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
(6) DEPOSITS
Deposits at December 31 consist of the following:
1999 1998
-------- --------
Non-interest bearing checking $ 86,991 91,510
Interest bearing checking 64,753 61,050
Money market 102,784 90,839
Savings 31,451 42,165
Certificates of deposit under $100,000 58,246 47,536
Certificates of deposit $100,000 and over 28,517 44,472
-------- --------
$372,742 377,572
======== ========
Scheduled maturities of time deposits at December 31, 1999 are as follows:
2004 AND
2000 2001 2002 2003 THEREAFTER TOTAL
------- ------- ------- ------- ---------- -------
Certificates of deposit
under $100,000 $48,620 6,049 2,264 863 450 58,246
Certificates of deposit
$100,000 and over 26,539 1,034 742 202 -- 28,517
------- ------- ------- ------- ------- -------
$75,159 7,083 3,006 1,065 450 86,763
======= ======= ======= ======= ======= =======
(7) RELATED PARTY TRANSACTIONS
The Company had net loans receivable from directors, executive officers and
principal shareholders (more than ten percent ownership through
attribution) of the Company and their related businesses at December 31 as
follows:
1999 1998
------ ------
Directors and principal shareholders $6,124 322
Executive officers 99 85
------ ------
$6,223 407
====== ======
(8) SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 1999 consist of the following:
WEIGHTED
AVERAGE
AMOUNT MATURITY INTEREST RATE
------- -------- -------------
Federal funds purchased $11,060 -- 6.00%
FHLB advances 19,000 2000 5.92%
-------
$30,060
=======
F-17
B-58
<PAGE>
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
Advances from the FHLB are secured by the Company's FHLB stock, qualifying
loans receivable and investment securities.
(9) COMMITMENTS
LEASES
The Company leases facilities and equipment under leases that expire
through the year 2010. Several leases have renewal options. Future minimum
rental commitments under the leases as of December 31, 1999 are as follows:
FACILITIES EQUIPMENT TOTAL
---------- --------- ------
2000 $ 570 40 610
2001 436 18 454
2002 416 -- 416
2003 417 -- 417
2004 and thereafter 1,020 -- 1,020
------ ------ ------
$2,859 58 2,917
====== ====== ======
Rental expense for December 31, 1999, 1998 and 1997 was $590, $587 and
$749, respectively.
(10) INCOME TAXES
Income taxes for the years ended December 31 were allocated as follows:
1999 1998 1997
------- ------- -------
Income from continuing operations $ 3,041 955 288
Shareholders' equity for unrealized gains (losses)
on investment securities (254) 5 9
------- ------- -------
$ 2,787 960 297
======= ======= =======
Income taxes (benefit) for the years ended December 31, consists of the
following:
CURRENT DEFERRED TOTAL
------- -------- ------
Year ended December 31, 1999
Federal $2,183 537 2,720
State 265 56 321
------ ------ ------
$2,448 593 3,041
====== ====== ======
Year ended December 31, 1998
Federal $ 53 960 1,013
State -- (58) (58)
------ ------ ------
$ 53 902 955
====== ====== ======
F-18
B-59
<PAGE>
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
CURRENT DEFERRED TOTAL
------- -------- -----
Year ended December 31, 1997
Federal $ 14 274 288
State -- -- --
---- ---- ----
$ 14 274 288
==== ==== ====
Income taxes differs from the amounts computed by applying the U.S. federal
income tax rate to pretax earnings as a result of the following:
1999 1998 1997
------- ------- -------
Computed "expected" tax expense $ 2,685 991 259
State income taxes, net of federal
income tax effects 175 (38) --
Decrease in valuation allowance on
deferred tax assets -- (58) --
Tax-exempt interest (91) (53) (8)
Goodwill amortization 334 93 41
Other, net (62) 20 (4)
------- ------- -------
$ 3,041 955 288
======= ======= =======
The significant components of deferred income taxes attributable to income
from continuing operations for the years ended December 31 are as follows:
1999 1998 1997
---- ---- ----
Deferred tax expense (exclusive of the
effects of other components below) $593 960 274
Decrease in beginning-of-the-year
balance of the valuation allowance for
deferred tax assets -- (58) --
---- ---- ----
$593 902 274
==== ==== ====
F-19
B-60
<PAGE>
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
Temporary differences between financial statement carrying amounts and tax
bases of assets and liabilities resulting in significant components of
deferred income taxes at December 31 are as follows:
1999 1998
------ ------
Deferred tax assets
Net operating loss carryforwards $ 845 1,349
Allowance for loan losses 277 425
Unrealized losses on investment securities
available for sale 240 --
Other 306 380
------ ------
Total deferred tax assets 1,668 2,154
------ ------
Deferred tax liabilities
Allowance for loan losses -- 307
Basis of premises and equipment 1,004 815
Unrealized gains on investment securities
available for sale -- 14
Other 79 47
------ ------
Total deferred tax liabilities 1,083 1,183
------ ------
Net deferred tax asset $ 585 971
====== ======
In assessing the realization of deferred tax assets, management considers
the reversal of existing temporary differences and estimated future taxable
income. The ultimate realization of deferred tax assets is dependent on the
generation of future taxable income in the period in which temporary
differences become deductible. The Company believes that it is more likely
than not that the deferred tax assets will be realized.
The Company's net operating loss carryforwards are attributable to the
prior operations of a bank that was merged into the Company in January 1993
for which a quasi reorganization was effected. Therefore, the realization
of such carryforwards were recognized as a direct addition to shareholders'
equity in accordance with SFAS No. 109, Accounting for Income Taxes.
At December 31, 1999, the Company has net operating loss carryforwards for
federal income tax purposes of $1,600, the components of which expire in
the years 2006 and 2007. The Company also has $8,800 of additional net
operating loss carryforwards for state income tax purposes, the components
of which expire in the years 2006 through 2010. These net operating loss
carryforwards are subject to separate return limitations.
F-20
B-61
<PAGE>
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
(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 letters of credit.
Those instruments involve, to a varying degree, elements of credit risk in
excess of the amount recognized in the balance sheet. The contract amounts
of those instruments reflect the extent of involvement the Company has in
particular classes of financial instruments.
The Company's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
amount of those instruments. The Company uses the same credit policies in
making commitments and conditional obligations as it does for on-balance
sheet instruments. At December 31 these commitments are as follows:
1999 1998
------- ------
Financial instruments whose contractual
amounts represent credit risk
Commitments to extend credit $52,600 54,963
Letters of credit 2,193 3,502
------- ------
$54,793 58,465
======= ======
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 commitments do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained 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.
F-21
B-62
<PAGE>
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
(12) SHAREHOLDERS' EQUITY
(a) SHAREHOLDERS' AGREEMENTS
During 1996 through 1998, the Company and certain of its shareholders
entered into shareholder agreements containing terms and conditions
affecting the ownership of shares covered by such agreements. In December
1998, these agreements were terminated in conjunction with the initial
public offering.
In 1998 and 1997, shares of common stock totaling 34,840, and 13,580,
respectively, were issued for services under the agreements. The services
were valued at the book value of the stock issued of $207 and $76,
respectively. These amounts were charged to income in the year incurred.
(b) STOCK INCENTIVE PLAN
InJanuary 1998, the Company adopted a Stock Incentive Plan (the Plan)
pursuant to which the Compensation Committee of the Board of Directors may
grant incentive stock options, nonqualified stock options, restricted stock
awards and performance share awards to certain employees, directors and
others that perform services for the Company.
The number of shares available for grant of awards under the Plan, if any,
will be determined by the Company's shareholders. If granted, outstanding
options will be counted against the authorized pool of shares, regardless
of their vested status.
The option price for each grant of a stock option will not be less than the
fair market value on the date the option is granted. The committee may
determine the restrictions and conditions under which options may be
exercised. Options must be exercised within ten years of the date granted.
The Plan provides for the grant of restricted stock awards subject to
restrictions, which the committee may determine. The restrictions would
typically require continued employment in order to vest in the restricted
stock. Vesting may also be based upon attainment of certain performance
measures.
At December 31, 1999, there were 444,118 shares available for grant under
the Plan. The per share weighted-average fair value of stock options
granted during 1999 was $3.55 on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions: 1999
- expected dividend yield of 0.0%, risk-free interest rate of 6.6%,
expected life of 4 years, and calculated volatility of the stock over the
life of the options of 27.0%.
The Company applies APB Opinion No. 25 in accounting for options granted
under the Plan and, accordingly, no compensation cost has been recognized
for its stock options in the financial statements.
F-22
B-63
<PAGE>
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under Statement 123, the Company's net
income would have been reduced to the pro forma amounts indicated below:
1999 1998
--------- ---------
Net income
As reported $ 4,856 1,959
Pro forma 4,626 1,855
Earnings per share - diluted
As reported $ 0.80 0.47
Pro forma 0.76 0.47
Stock option activity since the Plan's inception in 1999 is as
follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
Options outstanding at December 31, 1997 -- $ --
Granted 319,000 8.66
Forfeited (3,000) 8.54
-------
Options outstanding at December 31, 1998 316,000 8.66
Granted 124,270 11.48
Forfeited (7,150) 9.65
-------
Options outstanding at December 31, 1999 433,120 $ 9.46
======= ======
Options exercisable at December 31, 1999 83,000 $ 8.66
======= ======
At December 31, 1999, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $8.54 to $12.25 and
3.3 to 9.9 years, respectively.
In November 1999, the Company granted 28,762 restricted shares of common
stock to officers of the Company. These shares were granted under the Plan.
The Company will recognize compensation expense of $302 ratably over the
vesting period of 10 years. For the year ended December 31, 1999,
compensation expense related to the vested shares was $3.
(c) MANDATORILY CONVERTIBLE DEBENTURES
In connection with its acquisition of Cedaredge, the Company assumed
mandatorily convertible debentures totaling $1,600. In connection with the
Company's initial public offering, the debentures were mandatorily
converted to 300,000 shares of the Company's common stock.
F-23
B-64
<PAGE>
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
(d) PREFERRED STOCK
In connection with the Company's initial public offering, each share of
Series A preferred stock, was mandatorily converted into one share of
common stock. Dividends on the stock were payable quarterly at the rate of
8% in either cash or in shares of Series B Preferred stock at the option of
the Board of Directors. Series A and Series B preferred stock of 200,000
and 50,000 shares, respectively, remain authorized as of December 31, 1999.
In December 1998, the Company's Board of Directors authorized an additional
2,000,000 shares of preferred stock. None of these shares were issued in
1999 or 1998.
(e) EARNINGS PER SHARE
The following table presents the income and average outstanding share
amounts used to calculate earnings per share for the years ended December
31:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Basic earnings per share computation
Net income $ 4,856 1,959 474
Preferred stock dividends -- (690) --
---------- ---------- ----------
Income available to shareholders $ 4,856 1,269 474
========== ========== ==========
Average shares outstanding - basic 6,040,618 2,691,987 2,100,423
Basic earnings per share $ 0.80 0.47 0.23
========== ========== ==========
Diluted earnings per share computation
Income available to shareholders $ 4,856 1,269 474
Income impact of assumed conversions:
Preferred stock -- 690 --
Mandatorily convertible debentures -- 141 13
---------- ---------- ----------
Net income available to shareholders
plus assumed conversions $ 4,856 2,100 487
========== ========== ==========
Weighted-average shares
Average shares outstanding - basic 6,040,618 2,691,987 2,100,423
Shares assumed issued:
Options 50,136 65,723 --
Restricted stock plan 881 -- --
Preferred stock -- 321,931 28,230
Mandatorily convertible debentures -- 281,919 25,000
---------- ---------- ----------
Average shares outstanding - diluted 6,091,635 3,361,560 2,153,653
========== ========== ==========
Diluted earnings per share $ 0.80 0.47 0.23
========== ========== ==========
</TABLE>
F-24
B-65
<PAGE>
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
(13) NOTES PAYABLE
At December 31, 1998, notes payable consist of three notes with maturities
ranging from January 1, 1999 to August 29, 2001, with interest rates
ranging from 8.25% to 8.75%. In February 1999, the Company repaid all
outstanding balances on its notes payable.
(14) 401(K) PLAN
In August 1996, the Company established a qualified 401(k) Plan (the 401(k)
Plan) covering all full-time employees, as defined in the 401(k) Plan.
Employees who are eligible may defer up to 15% of their compensation,
subject to the annual limitations imposed by the Internal Revenue Code. The
Company matches a discretionary percentage of the employees' contributions;
these matches vest ratably over five years. In addition, the Company may
make additional profit sharing contributions. Employers' contributions to
the 401(k) Plan for the years ended December 31, 1999, 1998 and 1997 were
$56, $50 and $40, respectively. The Company does not have a defined benefit
plan.
(15) 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 Company to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 1999, that the Company meets all capital adequacy requirements
to which it is subject.
F-25
B-66
<PAGE>
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
The most recent notification from the Federal Reserve categorized the
Company as "well capitalized" under the regulatory framework. To be
categorized as "well capitalized" the Company must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage capital ratios as set
forth in the following table:
<TABLE>
<CAPTION>
ADEQUATELY WELL
ACTUAL CAPITALIZED CAPITALIZED
------------------ ------------------------------ -------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ ------- ---------------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total capital
(to risk weighted assets) $38,411 11.59% $26,510 > or equal to 8% $33,138 > or equal to 10%
Tier 1 capital
(to risk weighted assets) $35,672 10.76% $13,255 > or equal to 4% $19,883 > or equal to 6%
Tier 1 leverage capital
(to average assets) $35,672 8.14% $13,150 > or equal to 3% $21,916 > or equal to 5%
As of December 31, 1998
Total capital
(to risk weighted assets) $34,586 12.34% $22,414 > or equal to 8% $28,017 > or equal to 10%
Tier 1 capital
(to risk weighted assets) $31,996 11.42% $11,207 > or equal to 4% $16,810 > or equal to 6%
Tier 1 leverage capital
(to average assets) $31,996 7.69% $12,485 > or equal to 3% $20,808 > or equal to 5%
</TABLE>
(16) 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 theinformation
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 due from banks are valued at their carrying amounts, which are
reasonable estimates of fair value, due to the relatively short period to
maturity of the instruments.
Investments securities are valued based on quoted bid prices, if available.
If quoted bid prices are not available, fair value is estimated using
quoted market prices for similar securities.
The fair value of fixed rate loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities. For variable rate loans, the carrying amount is a reasonable
estimate fair value.
F-26
B-67
<PAGE>
VAIL BANKS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
The fair value of non-interest bearing and interest bearing demand deposits
and savings accounts is determined to be the amount payable on demand at
the reporting date. The fair value of fixed maturity certificates of
deposit is estimated using a discounted cash flow calculation that applies
the rates currently offered for deposits of similar remaining maturities.
For short-term borrowings, the carrying amount is a reasonable estimate of
fair value.
The fair value of long-term borrowings is estimated by discounting the
future cash flows using the current rate at which a similar borrowing could
be financed.
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms
of the agreements and the present credit worthiness of the counterparts.
For fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair
value of letters of credit and lines of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them
or otherwise settle the obligations with the counterparts at the reporting
date.
The carrying amounts and estimated fair values of financial instruments at
December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Financial assets
Cash and due from banks $ 29,971 29,971 28,469 28,469
Investment securities 36,791 36,735 40,735 40,837
Loans, net 333,996 329,985 266,601 266,429
Financial liabilities
Deposits, demand and savings 285,979 285,979 285,564 285,564
Deposits with stated maturities 86,763 86,778 92,008 92,289
Short-term borrowings 30,060 30,060 -- --
Notes payable -- -- 1,114 1,114
</TABLE>
(17) SUBSEQUENT EVENT
Effective January 1, 2000, WestStar acquired First Western Mortgage
Services, Inc. (First Western) for consideration that includes cash, VBI
common stock and installment notes. First Western will operate as a
wholly-owned subsidiary of WestStar.
F-27
B-68
<PAGE>
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
(18) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data of the Company for the eight quarters
ended December 31, 1999 are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------- --------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 March 31 June 30 September 30 December 31
-------- ------- ------------ ----------- -------- ------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest income $7,914 8,687 9,094 9,387 4,645 5,191 5,493 6,054
Net interest income 5,278 6,133 6,466 6,337 2,896 3,318 3,452 3,908
Provision for loans losses -- 80 150 225 -- -- -- --
Net interest income after
provision for loan losses 5,278 6,053 6,316 6,112 2,896 3,318 3,452 3,908
Income before income taxes 1,206 2,018 2,374 2,299 522 758 795 839
Net income 716 1,253 1,480 1,407 340 495 510 614
Earnings per share - diluted $ 0.12 0.21 0.24 0.23 0.12 0.18 0.16 0.03
</TABLE>
F-28
B-69
<PAGE>
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
(19) PARENT COMPANY FINANCIAL INFORMATION
Condensed parent company financial information is as follows: Condensed
Balance Sheets December 31,
1999 1998
------- -------
ASSETS
Cash $ 2,958 5,192
Investment in subsidiary 52,335 49,934
Other assets 3,468 2,712
------- -------
$58,761 57,838
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $ -- 1,114
Other liabilities 34 2,347
------- -------
34 3,461
Shareholders' equity 58,727 54,377
------- -------
$58,761 57,838
======= =======
Condensed Statements of Income
Years ended December 31,
1999 1998 1997
------ ------ ------
Income
Equity in earnings of subsidiary $5,475 2,386 996
Other 72 -- --
Expenses
Interest 14 252 136
Salaries, benefits and other compensation 469 248 404
Other 499 120 250
------ ------ ------
982 620 790
------ ------ ------
Income before income taxes 4,565 1,766 206
Income tax benefit 291 193 268
------ ------ ------
Net income $4,856 1,959 474
====== ====== ======
F-29
B-70
<PAGE>
VAIL BANKS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share data)
Condensed Statements of Cash Flows
Years ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 4,856 1,959 474
Adjustments to reconcile net income to net
cash provided from operating activities,
net of effects of business combinations:
Equity in undistributed income from
subsidiaries (2,909) -- (786)
Depreciation and amortization 111 19 10
Common stock issued for services 3 207 76
Change in other assets and accrued liabilities (3,181) 105 (287)
------- ------- -------
Net cash provided (used) by
operating activities (1,120) 2,290 (513)
------- ------- -------
Cash flows from investing activities
Acquisition of subsidiary banks -- (15,121) (2,160)
Other -- -- (60)
------- ------- -------
Net cash used by investing activities -- (15,121) (2,220)
------- ------- -------
Cash flows from financing activities
Repayments of notes payable (1,114) (1,200) (200)
Proceeds from issuance of common stock -- 19,806 3,026
Preferred dividends paid -- (690) --
Cash paid in conversion of preferred stock
to common stock -- (20) --
------- ------- -------
Net cash provided (used) by
financing activities (1,114) 17,896 2,826
------- ------- -------
Net increase (decrease) in cash
and due from banks (2,234) 5,065 93
Cash and due from banks - beginning of year 5,192 127 34
------- ------- -------
Cash and due from banks - end of year $ 2,958 5,192 127
======= ======= =======
</TABLE>
F-30
B-71
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<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*
10.1 Stock Purchase Agreement by and between Vail Banks, Inc., WestStar Bank,
Cedaredge Financial Services, Inc., Western Community Bank, and certain
Company Shareholders, dated July 3, 1997*
10.2 Stock Incentive Plan, as amended*(1)
10.3 Change in Control Severance Payment Agreement by and between Vail Banks, Inc. and
E.B. Chester, dated November 19, 1999
10.4 Change in Control Severance Payment Agreement by and between Vail Banks, Inc. and
Lisa M. Dillon, dated November 19, 1999
10.5 Amended and Restated Stock Incentive Plan Restricted Stock Award Agreement by and
between Vail Banks, Inc. and Lisa M. Dillon, dated November 19, 1999
10.6 Amended and Restated Stock Incentive Plan Restricted Stock Award Agreement by and
between Vail Banks, Inc. and E.B. Chester, dated November 19, 1999
16.1 Letter of change of certifying accountant* 21.1 Subsidiaries of the
Registrant 24.1 Power of Attorney (on signature page) 27.1 Financial Data
Schedule
</TABLE>
--------------------
(1) Management contract or compensatory plan required to be filed as an
exhibit.
* Incorporated by reference from the Registrant's Form SB-2, as amended,
Commission File No. 333-60347.
** Incorporated by reference from the Registrant's Form SB-2, Commission
File No. 333-74571.
B-72
<PAGE>
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 March 31, 2000
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 April 30, 2000 there were 6,081,180 shares of common stock ($1.00 par
value per share) outstanding.
B-73
<PAGE>
Vail Banks, Inc.
INDEX
<TABLE>
<S> <S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at March 31, 2000 and December 31, 1999 3
Consolidated Statements of Income for the Three Months Ended
March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2000 and 1999 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
-2-
B-74
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VAIL BANKS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
ASSETS March 31, December 31,
2000 1999
------------------ ----------------
(unaudited)
<S> <C> <C>
Cash and due from banks $ 24,320 $ 29,971
Investment securities, available for sale 29,639 31,446
Investment securities, held to maturity 5,329 5,345
Loans 352,390 336,735
Allowance for loan losses (2,984) (2,739)
------------------ ----------------
Net loans 349,406 333,996
------------------ ----------------
Premises and equipment, net 35,015 34,954
Interest receivable 2,881 2,724
Intangible assets 25,340 24,177
Other assets 2,378 2,349
------------------ ----------------
$ 474,308 $ 464,962
================== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest bearing $ 78,402 $ 86,991
Interest bearing 302,075 285,751
------------------ ----------------
Total deposits 380,477 372,742
Short-term borrowings:
Federal funds purchased 8,410 11,060
FHLB advances 21,000 19,000
------------------ ----------------
Total short-term borrowings 29,410 30,060
Interest payable and other liabilities 3,933 2,778
------------------ ----------------
Total liabilities 413,820 405,580
Minority interest 667 655
------------------ ----------------
Shareholders' equity
Common stock 6,081 6,069
Additional paid-in capital 46,744 46,747
Retained earnings 7,560 6,378
Accumulated other comprehensive (loss), net of taxes (564) (467)
------------------ ----------------
Total shareholders' equity 59,821 58,727
------------------ ----------------
$ 474,308 $ 464,962
================== ================
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
B-75
<PAGE>
VAIL BANKS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except share data)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------
2000 1999
------------ ------------
(unaudited) (unaudited)
<S> <C> <C>
Interest income
Interest and fees on loans $ 9,028 $ 6,897
Interest on investment securities 505 493
Interest on federal funds sold and other short-term investments 7 524
------------ -----------
Total interest income 9,540 7,914
------------ -----------
Interest expense
Deposits 2,724 2,622
Short-term borrowings 474 ---
Notes payable --- 14
------------ -----------
Total interest expense 3,198 2,636
------------ -----------
Net interest income 6,342 5,278
Provision for loan losses 300 ---
------------ -----------
Net interest income after provision for loan losses 6,042 5,278
Non-interest income
Deposit related 659 539
Mortgage banking 475 ---
Other 597 388
------------ -----------
1,731 927
Non-interest expense
Salaries and employee benefits 3,038 2,613
Occupancy 650 571
Furniture and equipment 670 439
Amortization of intangible assets 273 234
Other 1,157 1,142
------------ -----------
5,788 4,999
------------ -----------
Income before income taxes 1,985 1,206
Income taxes 803 490
------------ -----------
Net income 1,182 716
(97) 3
Unrealized gain (loss) on available for sale securities
------------ -----------
Comprehensive income $ 1,085 $ 719
============ ===========
Earnings per share
Basic $ 0.20 $ 0.12
============ ===========
Diluted $ 0.19 $ 0.12
============ ===========
Average common shares
Basic 6,041,806 6,040,608
Diluted 6,107,869 6,129,502
See accompanying notes to consolidated financial statements.
</TABLE>
-4-
B-76
<PAGE>
VAIL BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------------
2000 1999
------------- ---------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,182 $ 716
Adjustments to reconcile net income to net cash provided from
Operating activities, net of effects of purchase business
combinations:
Amortization of intangible assets 273 234
Depreciation and amortization of premises and equipment 531 496
Provision for loan losses 300 ---
Recognition of stock compensation on restricted stock 9 ---
Net amortization of premiums on investment securities 16 33
Deferred income tax expense --- 208
Changes in operating assets and liabilities:
Decrease (increase) in interest receivable (157) 170
Decrease in intangible and other assets 30 861
Increase (decrease) in interest payable and other liabilities 667 (2,050)
Other, net 12 7
--------------------------------
Net cash provided by operating activities 2,863 675
--------------------------------
Cash flows from investing activities, net of effects of purchase business
combinations
Net (increase) in federal funds sold --- (11,755)
Purchase of investment securities available for sale (371) (4,534)
Proceeds from maturities of investment securities held to maturity 19 2,128
Proceeds from maturities of investment securities available for sale 2,012 7,071
Net (increase) decrease in loans (15,710) 3,142
Purchase of premises and equipment (478) (1,989)
Net cash (paid for) acquisitions (1,071) ---
--------------------------------
Net cash provided (used) by investing activities (15,599) (5,937)
--------------------------------
Cash flows from financing activities, net of effects of purchase
business
combinations
Net increase (decrease) in deposits 7,735 (72)
Net (decrease) in federal funds purchased (2,650) ---
Net increase in FHLB advances 2,000 ---
Repayments of notes payable --- (1,114)
--------------------------------
Net cash provided (used) by financing activities 7,085 (1,186)
--------------------------------
Net (decrease) in cash and due from banks (5,651) (6,448)
Cash and due from banks at beginning of period 29,971 28,469
--------------------------------
Cash and due from banks at end of period $ 24,320 22,021
================================
Supplemental disclosures of cash flow information Cash paid during the period
for:
Interest expense $ 3,255 $ 2,748
================================
Income taxes $ --- $ 25
================================
Noncash investing and financing transactions
Foreclosure of collateralized loans, net of reserve $ 659 $ 40
================================
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
B-77
<PAGE>
Vail Banks, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
As of March 31, 2000
(in thousands, except share data)
(1) Organization and Basis of Presentation
The accompanying unaudited consolidated financial statements include
the accounts of Vail Banks, Inc. (VBI or the Company) and its wholly owned
subsidiary, WestStar Bank (WestStar). WestStar and VBI own a 54.04% interest in
Avon 56 Limited which is also included in the accompanying consolidated
financial statements. All entities are collectively referred to as "Vail Banks."
All significant intercompany accounts and transactions have been eliminated in
consolidation.
The accompanying unaudited consolidated financial statements, which are
for interim periods, do not include all disclosures provided in the consolidated
financial statements as of December 31, 1999. 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,
1999.
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
months ended March 31, 2000 are not necessarily indicative of the results that
may be expected for the full year.
(2) Provision and Allowance for Loan Losses
Vail Banks' lending personnel are responsible for the continuous
monitoring of the quality of its loan portfolio. In connection with the
determination of the allowance for loan losses, management obtains independent
appraisals for significant properties and assesses estimated future cash flows
from borrowers' operations and the liquidation of loan collateral. The allowance
for loan losses is based primarily on management's estimate of possible loan
losses from these procedures and historical experiences. These estimates involve
judgements and a certain level of subjectivity; changes in economic conditions
may necessitate revisions in future years.
Various regulatory agencies, as an integral part of their examination
process, periodically review Vail Banks' allowance for loan losses. Such
agencies may require Vail Banks to record additional provisions for potential
losses based upon their evaluation of information available at the time of their
examination.
Vail Banks provides for loan losses by a charge to current year's
income based on the character of the loan portfolio, current economic conditions
and such factors as, in management's best judgment, deserve current recognition
in estimating loan losses. In addition, recoveries realized on loans previously
charged off are credited to the allowance for loan losses.
(3) Earnings Per Share
The Company computes basic and diluted earnings per share in accordance
with SFAS No. 128, Earnings per Share (Statement 128). Basic earnings per share
is computed by dividing net income available to common shareholders by the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share is computed similar to basic earnings per share, except that
the denominator is increased to include the number of additional common shares
that would have been outstanding if dilutive potential common shares had been
issued. In addition, the numerator is adjusted for any changes in net income
that would have resulted from the assumed conversion of the potential common
shares.
(4) 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.
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<PAGE>
(5) Investment Securities
Debt securities that the Company has the positive intent and ability to
hold to maturity are classified as held-to-maturity and reported at cost,
adjusted for amortization or accretion of premiums or discounts. Other
investment securities are classified as available-for-sale and reported at fair
value. Unrealized gains and losses, net of the related tax effect, on
available-for-sale securities are reported as a separate component of
shareholders' equity, and the change of such gains and losses are reported as
other comprehensive income. Transfer of securities between categories is
recorded at fair value on the date of transfer.
Realized gains and losses on the sale of investment securities are determined
using the specific identification method at the time of sale or redemption at
maturity. Discounts or premiums are accreted or amortized using the level-yield
method to the earlier of call date or maturity of the related held-to-maturity
security.
(6) 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.
(7) Acquisitions
On January 1, 2000 WestStar Bank acquired First Western Mortgage
Services, Inc., ("First Western"), a Colorado corporation, for consideration
that included cash, and installment notes whichtogether totaled $1,488. The
excess of the purchase price over the fair value of net assets acquired has been
recorded as goodwill and is being amortized over 25 years. In addition to
handling mortgages through its mortgage offices in Eagle-Vail and Steamboat
Springs, First Western now has representatives in several other WestStar Bank
offices.
The Boards of Directors of Estes Bank Corporation and Vail Banks, Inc.
have agreed on a merger transaction that will result in United Valley Bank
becoming part of WestStar Bank. Subject to certain regulatory approvals and
customary conditions to closing, the sale is expected to close in the third
quarter of 2000 or shortly thereafter. United Valley is expected to have assets
of approximately $90,000 when the merger is completed in mid 2000. If the merger
is approved, Estes Bank shareholders will receive in total approximately $21,500
in cash and shares of Vail Banks common stock. The merger will be accounted for
as a purchase.
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 March 31, 2000 and its results of operations
for the three months ended March 31, 2000 in comparison to the three months
ended March 31, 1999. 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, and in conjunction with Vail Banks'
Annual Report on Form 10-KSB for the year ended December 31, 1999.
OVERVIEW
Net income was $1.2 million for the three months ended March 31, 2000 up
from $716,000 for the three months ended March 31, 1999, an increase of 68%. The
current quarter's net income decreased $225,000 from $1.4 million for the
quarter ended December 31, 1999. Traditionally, first quarter earnings are lower
than subsequent quarters and the 16% decrease from the December 31, 1999 quarter
was anticipated.
Diluted earnings per share for the quarter ended March 31, 2000 was $0.19
compared to $0.12 for the quarter ended March 31, 1999, an increase of 58%, and
$0.23 for the quarter ended December 31, 1999, a 17% decrease.
As the result of acquisitions since 1995, Vail Banks had goodwill of
$25.3 million and $24.2 million at March 31, 2000 and December 31, 1999,
- 7 -
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<PAGE>
respectively. Since the amortization of goodwill does not result in a cash
expense, Vail Banks believes that supplemental reporting of its operating
results on a "cash" (or "tangible") basis (which excludes the effect of
amortization of goodwill) represents a relevant measure of financial
performance. The supplemental cash basis data presented herein does not exclude
the effect of other non-cash operating expenses such as depreciation, provision
for loan losses, or deferred income taxes associated with the results of
operations.
On an operating basis, cash earnings (defined as net income plus
amortization) for the quarter ended March 31, 2000 was $1.5 million ($0.24 per
share, diluted) compared with $1.7 million for the quarter ended December 31,
1999 ($0.27 per share, diluted) and $950,000 ($0.15 per share, diluted) for the
quarter ended March 31, 1999. This quarter's cash operating income decreased 12%
from fourth quarter of 1999 but improved by 58% from first quarter of 1999.
Operating income (cash earnings) to average tangible assets was 1.31% for
the quarter ended March 31, 2000 compared to 1.51% for the quarter ended
December 31, 1999 and 0.94% for the quarter ended March 31, 1999.
The return on average equity was 7.98% for the quarter ended March 31,
2000, versus 9.61% for the quarter ended December 31, 1999 and 5.30% for the
quarter ended March 31, 1999.
CONSOLIDATED CONDENSED BALANCE SHEETS
The Company's assets increased by $9.3 million, or 2%, to $474.3 million
as of March 31, 2000, from $465.0 million as of December 31, 1999 and by $37.7
million, or 9%, from $436.6 million as of March 31, 1999.
Cash and due balances decreased by $5.7 million from $30.0 million at
December 31, 1999 to $24.3 million at March 31, 2000. Cash was higher than
average at December 31, 1999 due to the seasonal fluctuations of our resort
communities and the excess cash maintained for compliance with our Year 2000
contingency plan. In addition, management has made a concerted effort to
decrease balances maintained in correspondent banks.
The loan portfolio growth, particularly in its Western Slope markets,
is the result of a healthy Colorado economy. During the three months ended March
31, 2000, the loan portfolio increased by $15.7 million or 5%, from $336.7
million as of December 31, 1999 to $352.4 million, and by $86.5 million, or 33%,
from $265.9 million as of March 31, 1999. Future increases in the loan portfolio
are not expected to keep pace with first quarter's performance due to the high
loan to deposit ratio.
Investment securities were $35.0 million as of March 31, 2000 compared to
$36.8 million as of December 31, 1999 (a decrease of 5%) and $36.0 million as of
March 31, 1999 (a decrease of 3%).
The increase in intangible assets from $24.2 million at December 31,1999
to $25.3 million at March 31, 2000 is the result of the acquisition of First
Western.
Deposits increased by $7.8 million, or 2%, to $380.5 million as of March
31, 2000, from $372.7 million as of December 31, 1999 and increased by $3.0
million, or .8%, from $377.5 million as of March 31, 1999. The increase in
deposits experienced in the first quarter of 2000 was largely attributable to
seasonal factors.
During the first quarter of 2000, noninterest-bearing deposits decreased
by $8.6 million, or 10%, while interest-bearing deposits increased by $16.3
million, or 6%, as compared to December 31, 1999. Noninterest-bearing demand
deposits comprised 21% of total deposits as of March 31, 2000, 23% as of
December 31, 1999 and 22% as of March 31, 1999. This stability in the mix of
non-interest deposits to total deposits was maintained throughout 1999.
There were no federal funds sold at either March 31, 2000 or December 31,
1999. Federal funds purchased and Federal Home Loan Bank borrowings decreased
$650,000, or 2% from December to March. The absence of federal funds sold and
the presence of short- term borrowings is a result of funding the growth in the
loan portfolio.
- 8 -
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<PAGE>
RESULTS OF OPERATIONS
Net Interest Income. Net interest income was $6.3 million for the three
months ended March 31, 2000, unchanged from the previous quarter. This
represents an increase of $1.1 million, or 20%, from the three-month period
ended March 31, 1999.
The net interest margin of 6.70% for the quarter ended March 31, 2000
remained unchanged from the quarter ended December 31, 1999. The first quarter
2000 net interest margin was up from the 6.13% for the quarter ended March 31,
1999. This increase was due primarily to the yield on an increasing loan
portfolio coupled with decreases in the level of high cost deposits.
Additionally, growth of the Company's average earning assets also supported the
margin increase. Average earning assets increased 9%, or $31.3 million, to
$383.2 million as of March 31, 2000, from $351.9 million as of March 31, 1999.
Provision and Allowance for Loan Losses. Provision expense for the
three months ended March 31, 2000 totaled $300,000 compared to none recorded in
the three months ended March 31, 1999. This provision for loan losses was over
five time's net charge off during the quarter. Up 11% from the $2.7 million
level as of December 31, 1999, the allowance for loan losses of $3.0 million as
of March 31, 2000 represents .85% of total loans and 241% of non-performing
loans. The increase of $540,000 from $2.4 million at March 31, 1999 was 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 the
average level of outstanding loans have increased to $347.0 million for the
quarter ended March 31, 2000 from $337.5 million for the quarter ended December
31, 1999, and $268.0 million for the quarter ended March 31, 1999.
The allowance for loan losses represents management's recognition of
the risks of extending credit and its evaluation of the potential loss content
of the loan portfolio. The Company maintains an allowance for loan losses based
upon, among other things, such factors as the amount of problem loans, 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 (in thousands) Three months ended
March 31,
--------------------------------
2000 1999
------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Average total loans $ 346,992 $ 268,010
============= ============
Total loans at end of period $ 352,390 $ 265,903
============= ============
Allowance at beginning of period $ 2,739 $ 2,590
Charge-offs (67) (166)
Recoveries 12 20
Provision for loan losses 300 ---
------------- ------------
Allowance at end of period $ 2,984 $ 2,444
============= ============
Annualized net charge-offs to average total loans 0.06% 0.22%
Allowance to total loans at end of period 0.85% 0.92%
</TABLE>
B-81
<PAGE>
NONINTEREST INCOME. Total noninterest income increased by $704,000, or
69%, to $1.7 million for the three months ended March 31, 2000, from $1.0
million for the three months ended December 31, 1999 and by $804,000, or 87%,
from $927,000 for the three months ended March 31, 1999. These increases were
primarily attributable to mortgage banking fees at First Western.
Noninterest Expenses. Noninterest expense, before amortization expense,
increased by $931,000, or 20%, to $5.85 million for the three months ended March
31, 2000, from $4.6 million for the three months ended December 31, 1999.
Non-interest expenses increased by $750,000 or 16%, from $4.8 million for the
three months ended March 31, 1999. This increase is largely attributable to
operating expenses of First Western and to a lesser degree the increasing costs
of employee related and occupancy expenses generated by internal growth.
The efficiency ratio, before amortization expense, was 68% for the
quarter ended March 31, 2000, compared to 76% for the first quarter of 1999 and
62% for the fourth quarter of 1999. The improvements in the efficiency ratio
throughout 1999 were achieved through management's concerted effort to
consolidate operating activities of branches and recently acquired banks. The
decrease from the fourth quarter of 1999 to the first quarter of 2000 is
generally attributable to the acquisition of First Western.
INCOME TAXES. For six 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 have been paid for
taxation. A federal taxation rate of 34% was used during 1999 and a federal
taxation rate of 36.5% is being used during 2000 for this purpose. The taxes
saved by use of the NOL carryforward before 1999 have been recorded directly to
additional paid-in capital, resulting in a reduction in reported earnings, which
is offset by an increase to additional paid-in capital.
NON-PERFORMING ASSETS. The Company's non-performing assets consist of
nonaccrual loans, restructured loans, and other real estate owned.
Non-performing assets were $1.6 million as of March 31, 2000, (0.34% of total
assets) compared with $2.1 million as of December 31, 1999, (0.46% of total
assets) and $581,000 as of March 31, 1999 (0.13% of total assets). The following
table presents information regarding non-performing assets as of the dates
indicated:
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS (in thousands) March 31,
-------------------------------
2000 1999
------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Nonaccrual loans $ 1,236 $ 132
Restructured loans --- ---
------------- ------------
Total non-performing loans 1,236 132
Foreclosed properties 386 449
------------- ------------
Total non-performing assets 1,622 581
Loans 90 days or more past due and accruing --- 57
------------- ------------
Total risk assets $ 1,622 $ 638
============= ============
Non-performing loans to total loans 0.35% 0.05%
Non-performing assets to total loans plus foreclosed properties 0.46% 0.22%
Non-performing assets to total assets 0.34% 0.13%
Risk assets to total loans plus foreclosed properties 0.46% 0.24%
</TABLE>
The increase in non-performing assets since March 31, 1999 is comprised
primarily of two loans, both of which were in a previously acquired bank's loan
portfolio. Management believes Vail Banks is adequately collateralized to
recover the majority of the balance of these nonaccrual loans. Vail Banks has
reviewed and analyzed each of these loans and has implemented strategies to
resolve the issues with the few loans that caused these measures to rise.
Management generally obtains and maintains appraisals on real estate collateral.
Management is not aware of any adverse trends relating to Vail Banks' loan
portfolio.
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<PAGE>
CAPITAL RESOURCES
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 was 10.37% as of
March 31, 2000, down from 10.76% as of December 31, 1999, and 11.43% as of March
31, 1999. The total risk-based capital ratio decreased to 11.24% as of March 31,
2000 from 11.59% as of December 31, 1999 and 12.28% as of March 31, 1999. The
decrease in the total risk-based capital ratio experienced in 1999 and for the
first quarter of 2000 was largely attributable to a shift from federal funds
sold to loans, which are assigned a higher risk weighting.
LIQUIDITY
The Company's liquidity management objective is to ensure its ability
to satisfy the cash requirements of depositors and borrowers and allow the
Company to meet its own cash needs. Historically, the Company's primary source
of funds has been customer deposits. Scheduled loan repayments are a relatively
stable source of funds. Deposit inflows and unscheduled loan repayments, which
are influenced by fluctuations in the general level of interest rates, returns
available on other investments, competition, economic conditions and other
factors, are relatively unstable. Company borrowing may be used on a short-term
basis to compensate for reductions in other sources of funds (such as deposit
inflows at less than projected levels). Company borrowing may also be used on a
longer-term basis to support expanded lending activities and to match the
maturity or repricing intervals of assets.
YEAR 2000 COMPLIANCE
Vail Banks did not experience any disruptions in its operations or
activities as a result of the so-called "Year 2000" problem. In addition, Vail
Banks did not incur material expenses in correcting perceived or suspected Year
2000 problems. Furthermore, Vail Banks is not aware that any of its suppliers or
customers have experienced any material disruptions in their operations or
activities due to Year 2000 problems. Vail Banks does not expect to encounter
any such problems in the foreseeable future, although it continues to monitor
its computer operations for signs or indications of such problems.
It is possible, however, that Year 2000 problems could still disrupt
Vail Banks' operations and the systems of other companies upon which their
systems rely. If Vail Banks' systems or the systems of its customers, product
vendors, utility vendors, and suppliers experience unforeseen Year 2000 problems
in the future, it may negatively impact Vail Banks' systems, operations and
financial performance.
SUBSEQUENT EVENTS
Dividend Declaration
On April 24, 2000 Vail Banks declared a cash dividend of $.04 per share
payable on May 18, 2000 to shareholders of record on May 4, 2000. This is the
first dividend the Company has paid since becoming a public company in December
1998. The Company declared this dividend to enhance shareholder value.
De Novo Branch Application
A Notice of Intent to Establish a Branch Banking Facility has been
filed by the Company to establish a de novo branch in Aspen, Colorado. Aspen, a
popular resort community on the Western Slope of Colorado, is located adjacent
to the Company's Garfield County market. It is anticipated this branch will open
during the second quarter of 2000.
Estes Bank Merger Announced
The boards of directors of Estes Bank Corporation and Vail Banks, Inc.
have agreed on a merger transaction that will result in United Valley Bank
becoming part of WestStar Bank. United Valley Bank operates branches in Estes
Park, Granby and Grand Lake, Colorado. United Valley is expected to have assets
of approximately $90 million when the merger is completed in mid 2000. If the
- 11 -
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<PAGE>
Merger is approved, Estes Bank shareholders will receive in total approximately
$21.5 million in cash and shares of Vail Banks common stock in proportion to
their respective holdings of Estes Bank stock. The combined entity is
anticipated to have assets in excess of $575 million. It is anticipated that
marketable investment securities will be sold to fund the cash portion of this
purchase.
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 "Year 2000 Compliance" in this report.
- 12 -
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<PAGE>
PART II OTHER INFORMATION
Item 6. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) EXHIBITS
--------
The following exhibits are required to be filed with this Report on
10-QSB by Item 601 of Regulation S-B.
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
2.1 Agreement and Plan of Reorganization, dated March 21,
2000, by and between Estes Bank Corporation, Jack G.
Haselbush, Bradley D. Sishc and Vail Banks, Inc.
27.1 Financial Data Schedule (for SEC use only)
(b) REPORTS ON FORM 8-K.
-------------------
There were no 8-K filings.
- 13 -
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<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: May 12, 2000 /s/ Lisa M. Dillon
-------------------------------------
Lisa M. Dillon,
Title: President and Chief Executive Officer
Date: May 12, 2000 /s/ Peg A. Brown
-------------------------------------
Peg A. Brown
Title: Executive Vice President and
Controller of WestStar Bank
(principal financial officer)
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<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(6)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
VAIL BANKS, INC.
--------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
N/A
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
--------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
--------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
--------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
--------------------------------------------------------------------------------
(3) Filing Party:
--------------------------------------------------------------------------------
(4) Date Filed:
--------------------------------------------------------------------------------
B-87
<PAGE>
[Vail Banks, Inc. LOGO]
108 SOUTH FRONTAGE ROAD WEST, NO. 101
VAIL, CO 81657
970-476-2002
970-476-0200/FACSIMILE
April 14, 2000
Dear Fellow Shareholders:
It is my pleasure to invite you to attend the 2000 Annual Meeting of
Shareholders of Vail Banks, Inc. which will be held Tuesday, May 16, 2000 at
10:00 a.m. at the Sonnenalp Resort of Vail, 82 East Meadow Drive, Vail,
Colorado. The accompanying Notice of Annual Meeting of Shareholders and Proxy
Statement describe the items of business that will be discussed during the
meeting. A copy of Vail Banks' Form 10-KSB, which contains audited financial
statements and certain other information about the Vail Banks' business, is also
enclosed.
TO BE SURE THAT YOUR VOTE IS COUNTED, WE URGE YOU TO CAREFULLY REVIEW THE
PROXY STATEMENT AND VOTE YOUR CHOICES ON THE ENCLOSED PROXY CARD AS SOON AS
POSSIBLE. If you wish to attend the meeting, any ballot that you submit at the
meeting will override your proxy.
On behalf of the management, associates and directors of Vail Banks, Inc.,
I want to thank you for your continued support.
Sincerely,
/s/ LISA M. DILLON
Lisa M. Dillon
President and Chief Executive Officer
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<PAGE>
VAIL BANKS, INC.
108 SOUTH FRONTAGE ROAD WEST
VAIL, COLORADO 81657
------------------------------------------------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
------------------------------------------------------------------------------
TO BE HELD ON MAY 16, 2000
The annual meeting of shareholders of Vail Banks, Inc. ("Vail Banks") will
be held on Tuesday, May 16, 2000 at 10:00 a.m. at the Sonnenalp Resort of Vail,
82 East Meadow Drive, Vail, Colorado, for the purposes of considering and voting
upon:
1. The election of four directors whose terms will expire in 2003; and
2. Such other matters as may properly come before the meeting or any
adjournment or postponement thereof.
Only shareholders of record at the close of business on March 31, 2000 will
be entitled to notice of and to vote at the meeting or any adjournment thereof.
A Proxy Statement and a Proxy solicited by the Board of Directors are
enclosed herewith. Please sign, date, and return the Proxy promptly in the
enclosed business reply envelope. If you attend the meeting you may, if you
wish, withdraw your Proxy and vote in person.
By Order of the Board of Directors,
/s/ LISA M. DILLON
Lisa M. Dillon
President and Chief Executive
Officer
April 14, 2000
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE ANNUAL MEETING, PLEASE FILL IN,
DATE, SIGN, AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED BUSINESS
REPLY ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. THE
PROXY MAY BE REVOKED AT ANY TIME PRIOR TO EXERCISE, AND IF YOU ARE PRESENT AT
THE ANNUAL MEETING, YOU MAY, IF YOU WISH, REVOKE YOUR PROXY AT THAT TIME AND
EXERCISE THE RIGHT TO VOTE YOUR SHARES PERSONALLY.
B-89
<PAGE>
VAIL BANKS, INC.
108 SOUTH FRONTAGE ROAD WEST
VAIL, COLORADO 81657
------------------------------
PROXY STATEMENT
------------------------------
This Proxy Statement is furnished in connection with the solicitation of
Proxies by the Board of Directors of Vail Banks, Inc. ("Vail Banks") for use at
the Annual Meeting of Shareholders ("Annual Meeting") of Vail Banks to be held
on May 16, 2000, and any postponement, adjournments, or adjournment thereof, for
the purposes set forth in the accompanying notice of the meeting. The expenses
of this solicitation, including the cost of preparing and mailing this Proxy
Statement, will be paid by Vail Banks. Copies of solicitation materials may be
furnished to banks, brokerage houses and other custodians, nominees and
fiduciaries for forwarding to beneficial owners of shares of Vail Banks' Common
Stock, and normal handling charges may be paid for such forwarding services. In
addition to solicitations by mail, directors and regular employees of Vail Banks
may solicit Proxies in person or by telephone. It is anticipated that this Proxy
Statement and the accompanying Proxy will first be mailed to shareholders on
April 17, 2000.
The record of shareholders entitled to vote at the Annual Meeting was taken
as of the close of business on March 31, 2000. On that date, Vail Banks had
outstanding and entitled to vote 6,081,180 shares of common stock, par value
$1.00 per share (the "Common Stock"). Holders of Common Stock are entitled to
one vote per share on all matters voted on by shareholders, including elections
of directors.
Any Proxy given pursuant to this solicitation may be revoked by any
shareholder who attends the meeting and gives oral notice of his or her election
to vote in person, without compliance with any other formalities. In addition,
any Proxy given pursuant to this solicitation may be revoked prior to the
meeting by delivering an instrument revoking it or a duly executed Proxy bearing
a later date to the Secretary of Vail Banks. If the Proxy is properly completed
and returned by the shareholder and is not revoked, it will be voted at the
meeting in the manner specified thereon. If the Proxy is returned but no choice
is specified thereon, it will be voted for all the persons named below under the
caption "Information About Nominees For Director and Continuing Director."
A copy of the Vail Banks' 1999 Annual Report to shareholders (including the
Vail Banks' Annual Report on Form 10-KSB) is being furnished herewith to each
shareholder of record as of the close of business on March 31, 2000. Additional
copies of the 1999 Annual Report to shareholders will be provided free of charge
upon written request to:
LISA M. DILLON
VAIL BANKS, INC.
108 SOUTH FRONTAGE ROAD WEST
VAIL, COLORADO 81657
If the person requesting the Annual Report was not a shareholder of record
on March 31, 2000, the record date, the request must include a representation
that the person was a beneficial owner of Common Stock on that date. Copies of
any exhibits to Vail Banks' Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1999 will also be furnished on request and upon payment of
Vail Banks' expenses in furnishing the exhibits.
1
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<PAGE>
BENEFICIAL OWNERSHIP OF SECURITIES
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock, as of March 8, 2000 by (1) each person known to
Vail Banks to be the beneficial owner of more than 5% 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(1)
-------------------
BENEFICIAL OWNER NUMBER PERCENT
- ---------------- --------- -------
<S> <C> <C>
E.B. Chester, Jr.(2)(3)..................................... 1,273,466 20.5%
Kay H. Chester(3)(4)........................................ 1,213,888 19.5%
Byron A. Rose(5)............................................ 269,701 4.3%
Donald L. Vanderhoof(6)..................................... 186,985 3.0%
James M. Griffin(7)......................................... 129,447 2.1%
Lisa M. Dillon(8)........................................... 143,034 2.3%
Martin T. Hart(9)........................................... 82,465 1.3%
Garner F. Hill, II(10)...................................... 54,875 *
Kent Myers(11).............................................. 18,595 *
S. David Gorsuch(12)........................................ 14,607 *
James G. Flaum(13).......................................... 12,401 *
Robert L. Knous, Jr.(14).................................... 11,836 *
E. William Wilto(15)........................................ 4,807 *
Dennis R. Devor(16)......................................... 1,375 *
All directors and executive officers as a group (14
persons).................................................. 2,206,469 35%
</TABLE>
- ---------------
* Denotes less than 1%
(1) The percentages shown are based on 6,219,620 shares of Common Stock
outstanding on March 8, 2000 which includes, as to each person and group
listed, the number of shares of Common Stock deemed owned by such holder
pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), assuming the exercise of options held by such
holder that are exercisable within 60 days of March 1, 2000.
(2) Includes (i) 431,627 shares owned by Mr. Chester's wife, Kay H. Chester, as
to which he disclaims beneficial ownership, (ii) currently exercisable
options for 62,453 shares, and (iii) 18,286 shares of restricted stock
which have not vested, but which Mr. Chester holds the power to vote.
(3) Mr. and Mrs. Chester's address is care of Vail Banks, Inc., 108 South
Frontage Road West, Suite 101, Vail, Colorado 81657.
(4) Includes (i) 761,100 shares beneficially owned by Mrs. Chester's husband,
E.B. Chester, Jr. and 18,286 shares of restricted stock which have not
vested, but which Mr. Chester holds the power to vote, as to which she
disclaims beneficial ownership and (ii) currently exercisable options for
2,875 shares.
(5) Includes currently exercisable options for 2,875 shares.
(6) Includes (i) currently exercisable options for 375 shares and (ii) 25,570
shares owned by Mr. Vanderhoof's wife, Eddie Vanderhoof, as to which he
disclaims beneficial ownership.
(7) Includes currently exercisable options for 2,875 shares.
(8) Includes (i) currently exercisable options for 49,362 shares, and (ii)
10,476 shares of restricted stock which have not vested, but which Ms.
Dillon holds the power to vote.
(9) Includes currently exercisable options for 2,875 shares.
(10) Includes currently exercisable options for 375 shares.
(11) Includes currently exercisable options for 2,875 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.
2
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<PAGE>
(12) Includes currently exercisable options for 2,875 shares.
(13) Includes currently exercisable options for 2,875 shares and 4,260 shares
owned jointly with Mr. Flaum's wife, Ronna J. Flaum.
(14) Includes currently exercisable options for 2,875 shares.
(15) Includes currently exercisable options for 2,875 shares.
(16) Includes currently exercisable options for 375 shares.
NOMINATION AND ELECTION OF DIRECTORS
The Amended and Restated Articles of Incorporation of Vail Banks provide
that the Board of Directors shall consist of not less than ten but no more than
eighteen directors. Currently, there are 14 directors, 10 of whom are
independent directors. Upon the initial public offering, the Board of Directors
was divided into three classes of directors serving staggered three-year terms:
Four directors are to be elected at the annual meeting for a three-year term
expiring at the annual meeting in 2003 and until his or her successor is elected
and qualified. The Board has nominated Dennis R. Devor, Lisa M. Dillon, Kent
Myers, and E. William Wilto, constituting Class 1, for re-election to a
three-year term. After the re-election at the meeting, the Vail Banks will have
14 directors, including the 10 directors whose present terms currently extend
beyond the meeting. Information on the nominees and the continuing directors is
set forth below.
Each Proxy executed and returned by a shareholder will be voted as
specified thereon by the shareholder. If no specification is made, the Proxy
will be voted for the re-election of the nominees. In the event that any nominee
withdraws or for any reason is not able to serve as a director, the Proxy will
be voted for such other person as may be designated by the Board of Directors as
a substitute nominee, but in no event will the Proxy be voted for more than four
nominees. Management of Vail Banks has no reason to believe that the nominees
will not serve if elected.
Directors are elected by a plurality of the votes cast by the holders of
the shares entitled to vote in an election at a meeting at which a quorum is
present. A majority of the votes entitled to be cast on a matter by a class of
stock which votes as a separate class "a voting group" constitutes a quorum. An
abstention and a broker non-vote would be included in determining whether a
quorum is present at a meeting, but would not have an effect on the outcome of a
vote.
3
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<PAGE>
INFORMATION ABOUT NOMINEES FOR DIRECTOR AND CONTINUING DIRECTORS
The following information as of February 28, 2000 has been furnished by the
nominees for director and the continuing directors. Except as otherwise
indicated, the nominees and the continuing directors have been or were engaged
in their present or last principal employment, in the same or a similar
position, for more than five years.
<TABLE>
<CAPTION>
NAME (AGE) INFORMATION ABOUT THE NOMINEE AND THE CONTINUING DIRECTORS
- ---------- ----------------------------------------------------------
<S> <C>
Nominees for Directors Whose Terms Expire in 2003
Dennis R. Devor (49)........... Mr. Devor became a director in February 1999, following the
merger with Telluride Bancorp, Ltd. ("Telluride"). Mr. Devor
is an attorney in Montrose, Colorado and has previously
served on other bank boards.
Lisa M. Dillon (46)............ 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 Bank ("WestStar") in
1979, served as President of WestStar from 1989 to 1999, and
has served as Chief Executive Officer and a director of
WestStar since 1989.
Kent Myers (50)................ 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. He previously served as Senior
Vice President and Chief Operating Officer of Vail Resorts,
a resort management company, where he worked from 1988 to
1997.
E. William Wilto (53).......... Mr. Wilto has been a director of Vail Banks since 1993 and a
director of WestStar since 1985. He is a Realtor and has
owned RE/MAX Vail, Inc., a real estate firm, since 1991.
Directors Whose Term Will Expire in 2002
Kay H. Chester (53)............ Mrs. Chester has been a director of Vail Banks since 1993
and a director of WestStar since 1992. She has been active
in investing since 1989.
James G. Flaum (55)............ 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. He started his career with Slifer, Smith &
Frampton/Vail Associates Real Estate in 1987.
Robert L. Knous, Jr. (52)...... Mr. Knous has been a director of Vail Banks and WestStar
since 1997. He is a partner of East West Partners, a real
estate development company, where he has worked since 1993.
Byron A. Rose (58)............. 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.
Donald L. Vanderhoof (68)...... Mr. Vanderhoof has served as a director of Vail Banks since
August 1998 and an Executive Vice President of WestStar
since August 1998. He was formerly the Chairman of Glenwood
Independent Bank, where he had been employed since 1956.
</TABLE>
4
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<PAGE>
<TABLE>
<CAPTION>
NAME (AGE) INFORMATION ABOUT THE NOMINEE AND THE CONTINUING DIRECTORS
- ---------- ----------------------------------------------------------
<S> <C>
Directors Whose Terms Expire in 2001
E.B. Chester, Jr. (57)......... 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 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.
S. David Gorsuch (61).......... 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.
James M. Griffin (53).......... Mr. Griffin has been a director of Vail Banks since 1993.
Mr. Griffin was employed by the Estee Lauder Companies
beginning 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.
Martin T. Hart (64)............ 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., and Ardent Software.
Garner F. Hill, II (62)........ Mr. Hill became a director of Vail Banks in January 1999,
following the merger with Telluride. 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 1998 and served as the
Chairman of the Board of Western Colorado Bank from 1991
through 1998.
</TABLE>
Mr. and Mrs. Chester are husband and wife.
5
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<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------- --------------------------------------
SECURITIES
SALARY AND ALL OTHER RESTRICTED UNDERLYING
NAME AND DIRECTORS ANNUAL STOCK OPTIONS/ ALL OTHER
PRINCIPAL POSITION YEAR FEES BONUS COMPENSATION AWARDS(3) SAR COMPENSATION
- ------------------ ---- ---------- ------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
E.B. Chester, Jr.,... 1999 $208,400 0 * 18,256 23,810 $3,472(4)
Chairman 1998 150,700 0 * 0 113,000 2,876(5)
1997 123,700 $30,000(1) $10,770(2) 0 N/A 2,972
Lisa M. Dillon,...... 1999 $158,400 0 * 10,476 23,810 $2,898(4)
President and Chief 1998 140,900 0 * 0 87,000 2,740(5)
Executive Officer 1997 121,700 $30,000(1) $10,770(2) 0 N/A 2,078
</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) Vest at 10% per year for ten years.
(4) Reflects 401(k) matching contributions ($2,500 for Mr. Chester and $2,250
for Ms. Dillon) and term life insurance premiums ($972 for Mr. Chester and
$648 for Ms. Dillon).
(5) 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).
The following table sets forth further information on grants of stock
options during 1999 to each of the Named Executive Officers, if any were
granted. No stock appreciation rights ("SARs") were granted during 1999.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES UNDERLYING OPTIONS/SARS GRANTED
OPTIONS/SARS TO EMPLOYEES IN EXERCISE EXPIRATION
NAME GRANTED(1) FISCAL YEAR(2) PRICE DATE
- ---- --------------------- -------------------- -------- ----------
<S> <C> <C> <C> <C>
E.B. Chester, Jr. .................. 23,810 19.5% $10.50 2009
Lisa M. Dillon...................... 23,810 19.5% $10.50 2009
</TABLE>
- ---------------
(1) The options vest in 25% increments annually, commencing on November 19,
2000.
(2) Based upon 122,120 options granted in 1999.
No options were exercised during 1999.
6
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<PAGE>
The following chart shows the value of unexercised options held by the
Named Executive Officers:
FY-END OPTIONS/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT FY-END OPTIONS/SARS AT FY-END
(EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)(1)
--------------------------- ------------------------------
<S> <C> <C>
E.B. Chester, Jr. ........................... 28,250/108,560 $27,795/$83,386
Lisa M. Dillon............................... 21,750/88,960 $29,102/$87,171
</TABLE>
- ---------------
(1) Based on the closing sale price of the Common Stock on The Nasdaq Stock
Market on December 31, 1999 -- $9.875.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 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.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Vail Banks Board of Directors held six meetings during 1999. Martin T.
Hart and Byron A. Rose attended less than seventy-five percent (75%) of the
meetings of the Board and committees of the Board on which they sat that were
held during their tenure as directors.
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 three directors, Martin T. Hart,
Byron A. Rose and E. William Wilto, all of which are independent directors. The
Audit Committee 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.
The Audit Committee held two meeting during 1999.
The Compensation Committee presently consists of five directors, E.B.
Chester, Lisa M. Dillon, S. David Gorsuch, Martin T. Hart, and Robert L. Knous,
Jr., of whom three are independent directors. The Compensation Committee 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 Compensation Committee held two meetings during 1999.
The Executive Committee presently consists of three directors, E.B.
Chester, Lisa M. Dillon, and Byron A. Rose, of whom one is an independent
director. The Executive Committee 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. The Executive Committee held two meetings
during 1999.
7
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<PAGE>
DIRECTOR 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, receive $100 per committee meeting at
which such member is in attendance. On January 25, 1999, options for 1,500
shares of Common Stock, of which a quarter become exercisable on January 1 of
each year until 2003, were granted to Kay H. Chester, James G. Flaum, S. David
Gorsuch, James M. Griffin, Martin T. Hart, Robert L. Knous, Jr., Kent Myers,
Byron A. Rose, Donald L. Vanderhoof, and E. William Wilto, all of the directors
at such time, except for E.B. Chester and Lisa M. Dillon.
CHANGE IN CONTROL AGREEMENTS
In November 1999, each of the named executive officers of the Company
entered into "change in control agreements" with the Company. The agreements
provide for the payment of compensation and benefits in the event of a "Change
in Control" (as defined in the agreements) of the Company and the provision for
additional benefits if the executive's employment is terminated under certain
circumstances in connection with a Change in Control.
If a Change in Control of the Company occurs, the named executive officers
will be entitled to receive the following benefits: (i) 200% of the executive's
then-current salary, paid in a lump sum; (ii) 200% of the incentive payment the
executives would have received for the year during which the Change in Control
occurs under the Company's annual incentive plan, assuming the target level of
performance had been met for such year; (iii) a pro rated incentive bonus for
the year of the Change in Control; (iv) the amount of any annual or long-term
bonus with respect to any year that has then ended which has not yet been paid;
(v) an additional contribution to any deferred compensation plan, based on the
payments made pursuant to paragraphs (i), (ii), (iii), and (iv) above. In
addition, the executive will immediately vest in all unvested employee stock
options and restricted stock awards in the event of a Change in Control. After a
Change in Control, if the Company terminates the executive's employment without
"cause" (as defined in the agreement) or if the executive resigns for "Good
Reason" (as defined in the agreement), the executive shall be entitled to
receive the following benefits: (vi) the executive's full base salary through
the date of termination at the rate in effect at the time notice of termination
is given, (vii) payment for unused vacation days, and (viii) continuation of
health and life insurance coverage for 2 years from the date of termination. If
the payment of any such benefits would result in the imposition of an excise tax
under Section 4999 of the Internal Revenue Code, the executive is entitled to
receive a "gross-up" payment to cover the amount of the excise taxes and any
related taxes on the gross-up payment.
The agreements run for an initial term of two years and renew annually for
an additional year, such that the remaining term is always two years. The
Company generally may terminate the agreements upon two years' notice, except
that if a Change in Control occurs during the term, the Agreement will not
expire sooner than 3 years after the date of the Change in Control, such notice
may only be given after the third anniversary of the date of the agreement.
INFORMATION CONCERNING VAIL BANKS' ACCOUNTANTS
On January 15, 1999, the Audit Committee of the Board of Directors of Vail
Banks (the "Company") approved the dismissal of Fortner Bayens Levkulich & Co.,
P.C. and the hiring of KPMG LLP. The decision to dismiss Fortner Bayens
Levkulich & Co., P.C. by the Audit Committee was based on the need to hire a
larger accounting firm to meet the Company's needs after the public offering in
December 1998.
The report of Fortner, Bayens, Levkulich & Co., P.C. on the Company's
financial statements for the fiscal year ended on December 31, 1997 did not
contain an adverse opinion or a disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope, or accounting principles.
In connection with the audit of the Company's financial statements for the
year ended December 31, 1997, and in the subsequent interim period, there were
no disagreements with Fortner, Bayens, Levkulich & Co., P.C. on any matters of
accounting principles or practices, financial statement disclosure or auditing
scope and
8
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<PAGE>
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 fiscal year ended on December 31, 1997 and through January 15,
1999, the Company did not consult with KPMG LLP on matters (i) regarding the
application of accounting principles to a specified transaction or the type of
audit opinion that might be rendered on the Company's financial statements, or
(ii) which concerned the subject matter of a disagreement or event identified in
response to paragraph (a)(1)(iv) of Item 304 of Regulation S-B with the former
auditor.
Representatives of KPMG LLP are expected to be present at the annual
meeting and will have the opportunity to make a statement if they desire to do
so and to respond to appropriate questions.
SHAREHOLDER PROPOSALS
Any proposals by shareholders intended for presentation at the 2001 annual
meeting must be received by Vail Banks at its principal executive offices,
attention of the Secretary, no later than December 15, 2000, in order to be
included in the proxy material for that meeting. Vail Banks must be notified of
any other shareholder proposal intended to be presented for action at the
meeting not later than 45 days before the Vail Banks 2001 annual meeting, or
else proxies may be voted on such proposal at the discretion of the person or
persons holding those proxies.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Pursuant to Section 16(a) of the Securities Exchange Act of 1934, as
amended, each executive officer, director and beneficial owner of 10% or more of
Vail Banks' Common Stock is required to file certain forms with the Securities
and Exchange Commission ("SEC"). A report of beneficial ownership of Vail Banks'
Common Stock on Form 3 is due at the time such person becomes subject to the
reporting requirement and a report on Form 4 or 5 must be filed to reflect
changes in beneficial ownership occurring thereafter. Form 5, Annual Statements
of Beneficial Ownership, reporting options and restricted stock granted in 1999,
for E.B. Chester, James E. Flaum, S. David Gorsuch, James M. Griffin, Martin T.
Hart, Robert L. Knous, Jr., Kent Myers, Byron A. Rose, Donald L. Vanderhoof,
Lisa M. Dillon, and Kay H. Chester were inadvertently filed late.
OTHER MATTERS THAT MAY COME BEFORE THE MEETING
Management of Vail Banks knows of no matters other than those stated above
that are to be brought before the meeting. If any other matters should be
presented for consideration and voting, however, it is the intention of the
persons named as proxies in the enclosed Proxy to vote in accordance with their
judgment as to what is in the best interest of Vail Banks.
By Order of the Board of Directors,
/s/ LISA M. DILLON
Lisa M. Dillon
President and Chief Executive
Officer
9
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<PAGE>
COMMON STOCK
OF VAIL BANKS, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF
DIRECTORS FOR THE 2000 ANNUAL MEETING OF SHAREHOLDERS.
This undersigned hereby appoints E.B. Chester, Jr. or Lisa M. Dillon the
proxy of the undersigned to vote the Common Stock of the undersigned at the
Annual Meeting of Shareholders of VAIL BANKS, INC. to be held on May 16, 2000,
and any adjournment thereof.
1. [ ] FOR all nominees for director listed below (except as indicated to the
contrary):
Dennis R. Devor
Lisa M. Dillon
Kent Myers
E. William Wilto
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, WRITE
THAT NOMINEE'S NAME ON THE SPACE PROVIDED BELOW)
--------------------------------------------------------------------------------
[ ] WITHHOLD AUTHORITY to vote for all nominees listed hereon.
2. In accordance with their best judgment with respect to any other matters that
may properly come before the meeting.
(Continued on reverse side.)
THE BOARD OF DIRECTORS FAVORS A VOTE "FOR" THE ELECTION AS DIRECTORS OF THE
PERSONS NAMED IN THE PROXY AND UNLESS INSTRUCTIONS TO THE CONTRARY ARE INDICATED
IN THE SPACE PROVIDED, THIS PROXY WILL BE SO VOTED.
-----------------------------------
Please sign this Proxy exactly as
name appears on the Proxy.
Note: When signing as an attorney,
trustee, administrator or guardian,
please give your title as such. In
the case of joint tenants, each
joint owner must sign.
Date:
-----------------------------------
B-99
<PAGE>
APPENDIX C
COLORADO DISSENTER'S RIGHTS STATUTES
ss. 7-113-101. Definitions
For purposes of this article:
(1) "Beneficial shareholder" means the beneficial owner of shares held
in a voting trust or by a nominee as the record shareholder.
(2) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring domestic or foreign
corporation, by merger or share exchange of that issuer.
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under section 7-113-102 and who exercises that right at the
time and in the manner required by part 2 of this article.
(4) "Fair value", with respect to a dissenter's shares, means the value
of the shares immediately before the effective date of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action except to the extent that exclusion would
be inequitable.
(5) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at the legal rate as
specified in section 5-12-101, C.R.S.
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares
that are registered in the name of a nominee to the extent such owner is
recognized by the corporation as the shareholder as provided in section
7-107-204.
(7) "Shareholder" means either a record shareholder or a beneficial
shareholder.
Section 7-113-102. Right to dissent
(1) A shareholder, whether or not entitled to vote, is entitled to
dissent and obtain payment of the fair value of the shareholder's shares in the
event of any of the following corporate actions:
(a) Consummation of a plan of merger to which the corporation is a
party if:
(I) Approval by the shareholders of that corporation is
required for the merger by section 7-111-103 or 7-111-104 or by the articles of
incorporation; or
(II) The corporation is a subsidiary that is merged with its
parent corporation under section 7-111-104;
C-1
<PAGE>
(b) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be acquired;
(c) Consummation of a sale, lease, exchange, or other disposition
of all, or substantially all, of the property of the corporation for which a
shareholder vote is required under section 7-112-102(1); and
(d) Consummation of a sale, lease, exchange, or other disposition
of all, or substantially all, of the property of an entity controlled by the
corporation if the shareholders of the corporation were entitled to vote upon
the consent of the corporation to the disposition pursuant to section
7-112-102(2).
(1.3) A shareholder is not entitled to dissent and obtain payment,
under subsection (1) of this section, of the fair value of the shares of any
class or series of shares which either were listed on a national securities
exchange registered under the federal "Securities Exchange Act of 1934", as
amended, or on the national market system of the national association of
securities dealers automated quotation system, or were held of record by more
than two thousand shareholders, at the time of:
(a) The record date fixed under section 7-107-107 to determine the
shareholders entitled to receive notice of the shareholders' meeting at which
the corporate action is submitted to a vote;
(b) The record date fixed under section 7-107-104 to determine
shareholders entitled to sign writings consenting to the corporate action; or
(c) The effective date of the corporate action if the corporate
action is authorized other than by a vote of
shareholders.
(1.8) The limitation set forth in subsection (1.3) of this section
shall not apply if the shareholder will receive for the shareholder's shares,
pursuant to the corporate action, anything except:
(a) Shares of the corporation surviving the consummation of the
plan of merger or share exchange;
(b) Shares of any other corporation which at the effective date of
the plan of merger or share exchange either will be listed on a national
securities exchange registered under the federal "Securities Exchange Act of
1934", as amended, or on the national market system of the national association
of securities dealers automated quotation system, or will be held of record by
more than two thousand shareholders;
(c) Cash in lieu of fractional shares; or
(d) Any combination of the foregoing described shares or cash in
lieu of fractional shares.
(2) Deleted by Laws 1996, H.B.96-1285, S 30, eff. June 1, 1996.
(2.5) A shareholder, whether or not entitled to vote, is entitled to
dissent and obtain payment of the fair value of the shareholder's shares in the
event of a reverse split that reduces the number of shares owned by the
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shareholder to a fraction of a share or to scrip if the fractional share or
scrip so created is to be acquired for cash or the scrip is to be voided under
section 7-106-104.
(3) A shareholder is entitled to dissent and obtain payment of the fair
value of the shareholder's shares in the event of any corporate action to the
extent provided by the bylaws or a resolution of the board of directors.
(4) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this article may not challenge the corporate action
creating such entitlement unless the action is unlawful or fraudulent with
respect to the shareholder or the corporation.
Section 7-113-103. Dissent by nominees and beneficial owners
(1) A record shareholder may assert dissenters' rights as to fewer than
all the shares registered in the record shareholder's name only if the record
shareholder dissents with respect to all shares beneficially owned by any one
person and causes the corporation to receive written notice which states such
dissent and the name, address, and federal taxpayer identification number, if
any, of each person on whose behalf the record shareholder asserts dissenters'
rights. The rights of a record shareholder under this subsection (1) are
determined as if the shares as to which the record shareholder dissents and the
other shares of the record shareholder were registered in the names of different
shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to the
shares held on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder causes the corporation to receive
the record shareholder's written consent to the dissent not later than the time
the beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder dissents with respect to all shares
beneficially owned by the beneficial shareholder.
(3) The corporation may require that, when a record shareholder
dissents with respect to the shares held by any one or more beneficial
shareholders, each such beneficial shareholder must certify to the corporation
that the beneficial shareholder and the record shareholder or record
shareholders of all shares owned beneficially by the beneficial shareholder have
asserted, or will timely assert, dissenters' rights as to all such shares as to
which there is no limitation on the ability to exercise dissenters' rights. Any
such requirement shall be stated in the dissenters' notice given pursuant to
section 7-113-203.
Section 7-113-201. Notice of dissenters' rights
(1) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is submitted to a vote at a shareholders' meeting, the notice
of the meeting shall be given to all shareholders, whether or not entitled to
vote. The notice shall state that shareholders are or may be entitled to assert
dissenters' rights under this article and shall be accompanied by a copy of this
article and the materials, if any, that, under articles 101 to 117 of this
title, are required to be given to shareholders entitled to vote on the proposed
action at the meeting. Failure to give notice as provided by this subsection (1)
shall not affect any action taken at the shareholders' meeting for which the
notice was to have been given, but any shareholder who was entitled to dissent
but who was not given such notice shall not be precluded from demanding payment
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for the shareholder's shares under this article by reason of the shareholder's
failure to comply with the provisions of section 7- 113-202(1).
(2) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is authorized without a meeting of shareholders pursuant to
section 7-107-104, any written or oral solicitation of a shareholder to execute
a writing consenting to such action contemplated in section 7-107-104 shall be
accompanied or preceded by a written notice stating that shareholders are or may
be entitled to assert dissenters' rights under this article, by a copy of this
article, and by the materials, if any, that, under articles 101 to 117 of this
title, would have been required to be given to shareholders entitled to vote on
the proposed action if the proposed action were submitted to a vote at a
shareholders' meeting. Failure to give notice as provided by this subsection (2)
shall not affect any action taken pursuant to section 7-107-104 for which the
notice was to have been given, but any shareholder who was entitled to dissent
but who was not given such notice shall not be precluded from demanding payment
for the shareholder's shares under this article by reason of the shareholder's
failure to comply with the provisions of section 7- 113-202(2).
Section 7-113-202. Notice of intent to demand payment
(1) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is submitted to a vote at a shareholders' meeting and if
notice of dissenters' rights has been given to such shareholder in connection
with the action pursuant to section 7-113-201(1), a shareholder who wishes to
assert dissenters' rights shall:
(a) Cause the corporation to receive, before the vote is taken,
written notice of the shareholder's intention to demand payment for the
shareholder's shares if the proposed corporate action is effectuated; and
(b) Not vote the shares in favor of the proposed corporate action.
(2) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is authorized without a meeting of shareholders pursuant to
section 7-107-104 and if notice of dissenters' rights has been given to such
shareholder in connection with the action pursuant to section 7-113-201(2) a
shareholder who wishes to assert dissenters' rights shall not execute a writing
consenting to the proposed corporate action.
(3) A shareholder who does not satisfy the requirements of subsection
(1) or (2) of this section is not entitled to demand payment for the
shareholder's shares under this article.
Section 7-113-203. Dissenters' notice
(1) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is authorized, the corporation shall give a written
dissenters' notice to all shareholders who are entitled to demand payment for
their shares under this article.
(2) The dissenters' notice required by subsection (1) of this section
shall be given no later than ten days after the effective date of the corporate
action creating dissenters' rights under section 7-113-102 and shall:
(a) State that the corporate action was authorized and state the
effective date or proposed effective date of the corporate action;
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(b) State an address at which the corporation will receive payment
demands and the address of a place where certificates for certificated shares
must be deposited;
(c) Inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment demand is received;
(d) Supply a form for demanding payment, which form shall request
a dissenter to state an address to which payment is to be made;
(e) Set the date by which the corporation must receive the payment
demand and certificates for certificated shares, which date shall not be less
than thirty days after the date the notice required by subsection (1) of this
section is given;
(f) State the requirement contemplated in section 7-113-103(3), if
such requirement is imposed; and
(g) Be accompanied by a copy of this article.
Section 7-113-204. Procedure to demand payment
(1) A shareholder who is given a dissenters' notice pursuant to section
7-113- 203 and who wishes to assert dissenters' rights shall, in accordance with
the terms of the dissenters' notice:
(a) Cause the corporation to receive a payment demand, which may
be the payment demand form contemplated in section 7-113-203(2)(d), duly
completed, or may be stated in another writing; and
(b) Deposit the shareholder's certificates for certificated
shares.
(2) A shareholder who demands payment in accordance with subsection (1)
of this section retains all rights of a shareholder, except the right to
transfer the shares, until the effective date of the proposed corporate action
giving rise to the shareholder's exercise of dissenters' rights and has only the
right to receive payment for the shares after the effective date of such
corporate action.
(3) Except as provided in section 7-113-207 or 7-113-209(1)(b), the
demand for payment and deposit of certificates are irrevocable.
(4) A shareholder who does not demand payment and deposit the
shareholder's share certificates as required by the date or dates set in the
dissenters' notice is not entitled to payment for the shares under this article.
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Section 7-113-205. Uncertificated shares
(1) Upon receipt of a demand for payment under section 7-113-204 from a
shareholder holding uncertificated shares, and in lieu of the deposit of
certificates representing the shares, the corporation may restrict the transfer
thereof.
(2) In all other respects, the provisions of section 7-113-204 shall be
applicable to shareholders who own uncertificated shares.
Section 7-113-206. Payment
(1) Except as provided in section 7-113-208, upon the effective date of
the corporate action creating dissenters' rights under section 7-113-102 or upon
receipt of a payment demand pursuant to section 7-113-204, whichever is later,
the corporation shall pay each dissenter who complied with section 7-113-204, at
the address stated in the payment demand, or if no such address is stated in the
payment demand, at the address shown on the corporation's current record of
shareholders for the record shareholder holding the dissenter's shares, the
amount the corporation estimates to be the fair value of the dissenter's shares,
plus accrued interest.
(2) The payment made pursuant to subsection (1) of this section shall
be accompanied by:
(a) The corporation's balance sheet as of the end of its most
recent fiscal year or, if that is not available, the corporation's balance sheet
as of the end of a fiscal year ending not more than sixteen months before the
date of payment, an income statement for that year, and, if the corporation
customarily provides such statements to shareholders, a statement of changes in
shareholders' equity for that year and a statement of cash flow for that year,
which balance sheet and statements shall have been audited if the corporation
customarily provides audited financial statements to shareholders, as well as
the latest available financial statements, if any, for the interim or full-year
period, which financial statements need not be audited;
(b) A statement of the corporation's estimate of the fair value of
the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment under
section 7- 113-209; and
(e) A copy of this article.
Section 7-113-207. Failure to take action
(1) If the effective date of the corporate action creating dissenters'
rights under section 7-113-102 does not occur within sixty days after the date
set by the corporation by which the corporation must receive the payment demand
as provided in section 7-113-203, the corporation shall return the deposited
certificates and release the transfer restrictions imposed on uncertificated
shares.
(2) If the effective date of the corporate action creating dissenters'
rights under section 7-113-102 occurs more than sixty days after the date set by
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the corporation by which the corporation must receive the payment demand as
provided in section 7-113-203, then the corporation shall send a new dissenters'
notice, as provided in section 7-113-203, and the provisions of sections
7-113-204 to 7-113-209 shall again be applicable.
Section 7-113-208. Special provisions relating to shares acquired after
announcement of proposed corporate action
(1) The corporation may, in or with the dissenters' notice given
pursuant to section 7-113-203, state the date of the first announcement to news
media or to shareholders of the terms of the proposed corporate action creating
dissenters' rights under section 7-113-102 and state that the dissenter shall
certify in writing, in or with the dissenter's payment demand under section
7-113-204, whether or not the dissenter (or the person on whose behalf
dissenters' rights are asserted) acquired beneficial ownership of the shares
before that date. With respect to any dissenter who does not so certify in
writing, in or with the payment demand, that the dissenter or the person on
whose behalf the dissenter asserts dissenters' rights acquired beneficial
ownership of the shares before such date, the corporation may, in lieu of making
the payment provided in section 7-113-206, offer to make such payment if the
dissenter agrees to accept it in full satisfaction of the demand.
(2) An offer to make payment under subsection (1) of this section shall
include or be accompanied by the information required by section 7-113-206(2).
Section 7-113-209. Procedure if dissenter is dissatisfied with payment or offer
(1) A dissenter may give notice to the corporation in writing of the
dissenter's estimate of the fair value of the dissenter's shares and of the
amount of interest due and may demand payment of such estimate, less any payment
made under section 7-113-206, or reject the corporation's offer under section
7-113-208 and demand payment of the fair value of the shares and interest due,
if:
(a) The dissenter believes that the amount paid under section
7-113-206 or offered under section 7-113-208 is less than the fair value of the
shares or that the interest due was incorrectly calculated;
(b) The corporation fails to make payment under section 7-113-206
within sixty days after the date set by the corporation by which the corporation
must receive the payment demand; or
(c) The corporation does not return the deposited certificates or
release the transfer restrictions imposed on uncertificated shares as required
by section 7-113-207(1).
(2) A dissenter waives the right to demand payment under this section
unless the dissenter causes the corporation to receive the notice required by
subsection (1) of this section within thirty days after the corporation made or
offered payment for the dissenter's shares.
Section 7-113-301. Court action
(1) If a demand for payment under section 7-113-209 remains unresolved,
the corporation may, within sixty days after receiving the payment demand,
commence a proceeding and petition the court to determine the fair value of the
shares and accrued interest. If the corporation does not commence the proceeding
within the sixty-day period, it shall pay to each dissenter whose demand remains
unresolved the amount demanded.
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(2) The corporation shall commence the proceeding described in
subsection (1) of this section in the district court of the county in this state
where the corporation's principal office is located or, if the corporation has
no principal office in this state, in the district court of the county in which
its registered office is located. If the corporation is a foreign corporation
without a registered office, it shall commence the proceeding in the county
where the registered office of the domestic corporation merged into, or whose
shares were acquired by, the foreign corporation was located.
(3) The corporation shall make all dissenters, whether or not residents
of this state, whose demands remain unresolved parties to the proceeding
commenced under subsection (2) of this section as in an action against their
shares, and all parties shall be served with a copy of the petition. Service on
each dissenter shall be by registered or certified mail, to the address stated
in such dissenter's payment demand, or if no such address is stated in the
payment demand, at the address shown on the corporation's current record of
shareholders for the record shareholder holding the dissenter's shares, or as
provided by law.
(4) The jurisdiction of the court in which the proceeding is commenced
under subsection (2) of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend a
decision on the question of fair value. The appraisers have the powers described
in the order appointing them, or in any amendment to such order. The parties to
the proceeding are entitled to the same discovery rights as parties in other
civil proceedings.
(5) Each dissenter made a party to the proceeding commenced under
subsection (2) of this section is entitled to judgment for the amount, if any,
by which the court finds the fair value of the dissenter's shares, plus
interest, exceeds the amount paid by the corporation, or for the fair value,
plus interest, of the dissenter's shares for which the corporation elected to
withhold payment under section 7-113-208.
Section 7-113-302. Court costs and counsel fees
(1) The court in an appraisal proceeding commenced under section
7-113-301 shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation; except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily, vexatiously, or not
in good faith in demanding payment under section 7-113-209.
(2) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any dissenters if the
court finds the corporation did not substantially comply with the requirements
of part 2 of this article; or
(b) Against either the corporation or one or more dissenters, in
favor of any other party, if the court finds that the party against whom the
fees and expenses are assessed acted arbitrarily, vexatiously, or not in good
faith with respect to the rights provided by this article.
(3) If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to said counsel reasonable fees to be paid out of the amounts
awarded to the dissenters who were benefited.
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APPENDIX D
FAIRNESS OPINION
Draft: 05/03/00
May ___, 2000
The Board of Directors
Estes Bank Corporation
363 E. Elkhorn Avenue
Estes Park, CO 80517
Members of the Board:
You have requested our opinion as to the fairness, from a financial
point of view, to the common stockholders of Estes Banking Corporation (the
"Company") of the merger Consideration (as defined below) in the proposed merger
(the "Merger") of the Company with and into Vail Banks, Inc., ("Vail Banks")
pursuant to the Agreement and Plan of Reorganization dated March 21, 2000 (the
"Agreement"). Under the terms of the Agreement, 100% of the Company's common
stock will be exchanged in aggregate for $21,500,000, payable $18,275,000 in
cash subject to adjustments as described in Article I of the Agreement and
$3,225,000 by the issuance of Vail Banks stock as described in Article I of the
Agreement. The cash and stock to be paid in the Merger and pursuant to the
Agreement are herein referred to as the "Merger Consideration."
In arriving at an opinion, The Wallach Company, Inc. ("Wallach") has,
among other things:
i. reviewed certain financial statements and other financial
information of the Company;
ii. reviewed the current condition and growth prospects for the
Company and its subsidiary bank, including financial
projections prepared by the Company's management;
iii. discussed the past and current operations and financial
conditions and the prospects of the Company with the Company's
management;
iv. evaluated the economic, banking and competitive climate for
banking institutions in Colorado;
v. reviewed the process used leading to the Vail Banks offer,
including a review of the potential acquirors contacted and
their responses relative to a potential acquisition of the
Company;
vi. compared the various offers received from interested parties
and determined that the terms of the Agreement represented the
highest value in absolute terms;
vii. compared the Vail Banks offer to recent transactions involving
other institutions of similar size, to the extent publicly
available; and
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viii. reviewed the Agreement.
Neither Vail Banks nor the Company imposed any limitations upon the
scope of the investigation performed by us in forming our opinion. In rendering
our opinion, we did not independently verify the asset quality and financial
condition of Vail Banks or the Company, but instead relied upon the data
provided by or on behalf of Vail Banks and the Company to be true and accurate
in all material respects.
We have assumed without independent verification the accuracy and
completeness of the financial and other information regarding the Company that
was provided to us or obtained from publicly available sources. We have not
prepared or acquired an independent valuation or appraisal of any of the assets
of the Company and we have assumed without independent verification that the
aggregate allowance for loan losses of the Company is adequate to cover such
losses. With respect to business plans and forecasts, we have assumed that they
have been reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of the Company as to the future
performance of the Company, its subsidiaries and business units. Furthermore, we
have assumed that the Merger will be consummated on a timely basis in accordance
with its terms and pursuant to the Agreement. We have also taken into account
our assessment of general economic, market and financial conditions as they
exist, as well as our experience in connection with similar transactions and
securities valuations generally. Our opinion necessarily is based upon
conditions as they exist and can be evaluated as of the date of this opinion.
Wallach is an investment banking firm engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
private placements, and valuations for corporate and other purposes. Wallach, as
the Company's financial adviser, assisted with the marketing and negotiations
leading to the Agreement for which it has and will receive compensation.
Wallach, from time to time, has provided strategic and advisory
services to Vail Banks in relation to financial planning and acquisition
analysis. Wallach is not engaged by Vail Banks with respect to the Merger and
will not receive any fee from Vail Banks thereby.
Based on our analysis of the foregoing, the assumptions described above
and upon such other factors we deem relevant, it is our opinion that, as of the
date hereof, the Merger Consideration is fair to the Company's shareholders from
a financial point of view.
The Wallach Company, Inc.
TWC/forms/fairness.doc
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PROXY
ESTES BANK CORPORATION
------------------------
THIS PROXY IS SOLICITED BY ESTES BANK CORPORATION BOARD OF DIRECTORS
WHEN THIS PROXY IS PROPERLY EXECUTED AND RETURNED, AND NOT REVOKED, THE
SHARES OF COMMON STOCK IT REPRESENTS WILL BE VOTED AT THE MEETING IN ACCORDANCE
WITH THE CHOICE SPECIFIED BELOW, AND IF NO CHOICE IS SPECIFIED, IT WILL BE VOTED
FOR APPROVAL OF THE AGREEMENT AND PLAN OF REORGANIZATION BETWEEN VAIL BANKS,
INC. AND ESTES BANK CORPORATION, DATED MARCH 21, 2000 (THE "REORGANIZATION
AGREEMENT").
The undersigned shareholder of Estes Bank Corporation hereby appoints
Jack G. Haselbush or Bradley D. Sishc, or either of them, with full power of
substitution to each, the proxies of the undersigned to vote, the shares of the
undersigned at the Special Meeting of Shareholders of Estes Bank Corporation to
be held on June __, 2000, and at any adjournments thereof as follows, revoking
any proxy previously given:
(a) To approve and adopt the AGREEMENT AND PLAN OF REORGANIZATION,
providing for the merger of a wholly-owned subsidiary of Vail Banks with and
into Estes Bank, pursuant to which Estes Bank will become a wholly-owned
subsidiary of Vail Banks all upon the terms and subject to the conditions set
forth in the Agreement and Plan of Reorganization, a copy of which is included
as Appendix A in the accompanying Proxy Statement-Prospectus; and to take such
further action by the Board of Directors and officers of Estes Bank as may be
necessary or appropriate to carry out the intent and purposes of the
Reorganization Agreement.
FOR |_| AGAINST |_| ABSTAIN |_|
(b) IN ACCORDANCE WITH THEIR BEST JUDGMENT with respect to any other
matters which may properly come before the Special Meeting of Shareholders and
any adjournment thereof.
Please date and sign this Proxy exactly as your name appears below:
Dated: , 2000
--------------------------
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[LABEL]
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NOTE: When signing as attorney, trustee, administrator, executor, or guardian,
please give your full title as such. If a corporation, please sign in full
corporate name by President or other authorized officer. In the case of joint
tenants, each joint owner must sign.
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