UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q

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(Mark One)

|/X/ | Quarterly Report Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934For the quarterly period ended September 30, 2001
|--- | ----------------------------------------------------------------------------------------------------------------------------------------
|/_/ | Transition Report Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition
period from _____ to _____   

Commission File Number
000-25081

VAIL BANKS, INC.

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|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 offices)     | (Zip Code)         

(970) 476-2002

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Indicate by check
mark 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 [   ]

Indicate the number
of shares outstanding of each of the issuers classes of common stock, as of the
latest practicable date: As of October 31, 2001, there were 5,793,959 shares of common stock ($1.00 par value per share) outstanding.

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FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER
30, 2001

TABLE OF CONTENTS

|PART
      I                                                     | FINANCIAL
      INFORMATION                                                                
|---------------------------------------------------------------- | -------------------------------------------------------------------------------------------
|ITEM 1.                                                          | FINANCIAL
      STATEMENTS                                                                 
|Consolidated
      Balance Sheets                                | 3                                                                                          
|Consolidated
      Statements of Income and Comprehensive Income | 4                                                                                          
|Consolidated
      Statements of Cash Flow                       | 5                                                                                          
|Notes
      to Unaudited Consolidated Financial Statements       | 7                                                                                          
|                                                                 |                                                                                            
|ITEM 2.                                                          | MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|Forward
      Looking Statements                                 | 9                                                                                          
|Basis
      of Presentation                                      | 10                                                                                         
|Restatement                                                      | 10                                                                                         
|Overview                                                         | 10                                                                                         
|Results
      Of Operations                                      | 11                                                                                         
|Financial
      Condition                                        | 11                                                                                         
|Asset
      Quality                                              | 12                                                                                         
|Liquidity                                                        | 14                                                                                         
|Capital
      Resources                                          | 14                                                                                         
|Subsequent
      Events                                          | 15                                                                                         
|                                                                 |                                                                                            
|ITEM 3.                                                          | QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                                                 |                                                                                            
|Part
      II                                                    | OTHER
      INFORMATION                                                                    
|                                                                 |                                                                                            
|ITEM 6.                                                          | EXHIBITS
      AND REPORTS ON FORM 8-K                                                     
|                                                                 |                                                                                            

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PART
I FINANCIAL INFORMATION

Item
1. FINANCIAL STATEMENTS

Vail Banks, Inc.Consolidated
Balance Sheets

(in thousands, except share data)

ASSETS
    
    September 30,
      2001
    
    December 31,
      2000(unaudited)Cash and due from banks
    $
    17,535
    
    24,670Federal funds sold
    
    11,155
    
    Investment securities,
      available for sale
    
    29,900
    
    24,994Investment securities, held
      to maturity (fair value of $1,105 and $5,217 as ofSeptember 30, 2001 (unaudited)
      and December 31, 2000, respectively)
    
    1,056
    
    5,208Loans held for sale
    
    4,219
    
    632Loans
    
    402,082
    
    427,136Allowance for loan losses
    
    (4,392)
    
    (4,440)Net loans
    
    397,690
    
    422,696Premises and equipment, net
    
    41,493
    
    40,369Interest receivable
    
    2,783
    
    3,425Intangible assets, net
    
    37,274
    
    38,519Other assets
    
    3,103
    
    2,758$
    546,208
    
    563,271LIABILITIES AND SHAREHOLDERS
      EQUITYLiabilitiesDepositsNon-interest bearing
    $
    106,665
    
    99,609Interest bearing
    
    346,651
    
    382,393Total deposits
    
    453,316
    
    482,002Short-term borrowingsFederal funds purchased
    
    
    
    8,410FHLB advances
    
    2,000
    
    Line of credit
    
    
    
    2,000Total short-term borrowings
    
    2,000
    
    10,410Interest payable and other
      liabilities
    
    3,307
    
    3,732Total liabilities
    
    458,623
    
    496,144Minority interest
    
    743
    
    697Trust preferred securities
    
    24,000
    
    Shareholders equityPreferred
        stock  $1 par value; 2,250,000 shares authorized, no shares
    
    
    
    issued
        and outstanding as of September 30, 2001 (unaudited) andDecember 31,
        2000, respectivelyCommon stock  $1 par
        value; 20,000,000 shares authorized, 5,793,959 and6,456,400 shares
        issued and outstanding as of September 30, 2001(unaudited) and December
        31, 2000
    
    5,794
    
    6,456Additional paid-in capital
    
    42,891
    
    49,933Retained earnings
    
    13,883
    
    10,143Accumulated other
      comprehensive gain (loss), net of taxes
    
    274
    
    (102)Total shareholders equity
    
    62,842
    
    66,430$
    546,208
    
    563,271




See accompanying notes to unaudited
consolidated financial statements.

3

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Vail Banks, Inc.Consolidated
Statements of Income and Comprehensive Income

(in thousands, except share data)

Three months ended
      September 30,
    
    Nine months ended
      September 30,2001
    
    2000
    
    2001
    
    2000(unaudited)
    
    (unaudited)
    
    (unaudited)
    
    (unaudited)Interest incomeInterest and fees on loans
    $
    9,726
    
    11,277
    
    30,711
    
    29,985Interest on investment
      securities
    
    470
    
    487
    
    1,221
    
    1,498Interest on federal funds
      sold and othershort-term investments
    
    105
    
    6
    
    574
    
    13Total interest income
    
    10,301
    
    11,770
    
    32,506
    
    31,496Interest expenseDeposits
    
    2,316
    
    3,821
    
    9,161
    
    9,443Short-term borrowings
    
    81
    
    516
    
    127
    
    1,683Trust preferred securities
    
    612
    
    
    
    1,412
    
    Total interest expense
    
    3,009
    
    4,337
    
    10,700
    
    11,126Net interest income
    
    7,292
    
    7,433
    
    21,806
    
    20,370Provision for loan losses
    
    75
    
    147
    
    575
    
    747Net interest income after
      provision
           for loan losses
    
    7,217
    
    7,286
    
    21,231
    
    19,623Non-interest incomeDeposit related
    
    967
    
    717
    
    2,938
    
    2,058Mortgage broker fees
    
    1,140
    
    845
    
    2,871
    
    1,864Other
    
    952
    
    739
    
    2,430
    
    1,9313,059
    
    2,301
    
    8,239
    
    5,853Non-interest expenseSalaries and employee
      benefits
    
    4,016
    
    3,831
    
    11,540
    
    9,936Occupancy
    
    754
    
    756
    
    2,260
    
    1,979Furniture and equipment
    
    744
    
    784
    
    2,142
    
    2,102Amortization of intangible
      assets
    
    415
    
    365
    
    1,247
    
    912Other
    
    1,526
    
    1,508
    
    4,476
    
    3,8477,455
    
    7,244
    
    21,665
    
    18,776Income before income taxes
    
    2,821
    
    2,343
    
    7,805
    
    6,700Income taxes
    
    1,160
    
    955
    
    3,263
    
    2,625Net income
    
    1,661
    
    1,388
    
    4,542
    
    4,075Unrealized gain on investment
      securities,
      available for sale, net of taxes
    
    242
    
    126
    
    376
    
    120Comprehensive income
    $
    1,903
    
    1,514
    
    4,918
    
    4,195Earnings per shareBasic
    $
    0.29
    
    0.22
    
    0.75
    
    0.66Diluted
    $
    0.28
    
    0.22
    
    0.73
    
    0.65Weighted average common
      sharesBasic
    
    5,810,000
    
    6,330,619
    
    6,042,894
    
    6,138,988Diluted
    
    5,967,266
    
    6,452,393
    
    6,195,372
    
    6,223,899




4

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Vail Banks, Inc.Consolidated
Statements of Cash Flows

(in thousands)

Nine months ended
      September 30,2001
    
    2000(unaudited)
    
    (unaudited)(as restated)Cash flows from operating
      activitiesNet income
    $
    4,542
    
    4,075Adjustments to reconcile
        net income to net cash provided by
            operating activitiesAmortization of
          intangible assets
    
    1,247
    
    912Depreciation and
          amortization of premises and equipment
    
    1,704
    
    1,629Provision for loan losses
    
    575
    
    747Recognition of stock
          compensation on restricted common stock
    
    81
    
    42Net amortization of
          premiums on investment securities
    
    
    
    44Deferred income tax
          expense
    
    216
    
    55Loss on sale of premises
          and equipment
    
    31
    
    Loss on sale of
          foreclosed properties
    
    43
    
    Changes in operating
          assets and liabilities, net of effect of
              purchase business
          combinationsDecrease in interest
        receivable
    
    642
    
    18(Increase) decrease in
        other assets
    
    (264)
    
    861Decrease in interest
        payable and other liabilities
    
    (425)
    
    (806)Other, net
    
    46
    
    32Net cash provided by
      operating activities
    
    8,438
    
    7,609Cash flows from investing
      activities, net of effect of purchase business
           combinationsNet (increase) decrease in
      federal funds sold
    
    (11,155)
    
    4,370Purchase of investment
      securities, available for sale
    
    (11,520)
    
    (663)Proceeds from sales of
      investment securities, available for sale
    
    
    
    19,799Proceeds from maturities of
      investment securities, held to maturity
    
    4,152
    
    81Proceeds from maturities of
      investment securities, available for sale
    
    7,206
    
    4,385Net increase in loans held
      for sale
    
    (3,587)
    
    (1,621)Net decrease (increase) in
      loans
    
    24,178
    
    (37,525)Purchase of premises and
      equipment
    
    (3,341)
    
    (3,034)Proceeds from sale of
      premises and equipment
    
    28
    
    Proceeds from sale of
      foreclosed properties
    
    151
    
    Net cash paid for
      acquisitions
    
    (2)
    
    (14,230)Net cash provided by (used
      in) investing activities
    
    6,110
    
    (28,438)Cash flows from financing
      activities, net of effect of purchase business     combinationsNet (decrease) increase in
      deposits
    
    (28,686)
    
    22,520Net decrease in federal funds
      purchased
    
    (8,410)
    
    (4,465)Net increase (decrease) in
      FHLB advances
    
    2,000
    
    (4,000)Repayment of line of credit
    
    (2,000)
    
    Issuance of trust preferred
      securities
    
    24,000
    
    Issuance of common stock
    
    86
    
    11Repurchase of common stock
    
    (7,871)
    
    Dividends paid
    
    (802)
    
    (500)Net cash (used in) provided
      by financing activities
    
    (21,683)
    
    13,566Net decrease in cash and due
      from banks
    
    (7,135)
    
    (7,263)Cash and due from banks at
      beginning of period
    
    24,670
    
    29,291Cash and due from banks at
      end of period
    $
    17,535
    
    22,028




5

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Vail Banks, Inc.
Consolidated Statements of Cash
Flows (Continued)

(in thousands)



Supplemental disclosures of
      cash flow informationCash paid during the period
      for:Interest expense
    $
    10,637
    
    11,002Income taxes
    $
    2,570
    
    2,710Non-cash investing and
      financing transactionsForeclosure of collateralized
      loans, net of reserve
    $
    253
    
    508Unrealized gain on
        investment securities available for sale,
               net of taxes
    $
    376
    
    120Reclassification of
        software from premises and equipment to other
                assets
    $
    454
    
    Issuance of restricted common
      stock
    $
    16
    
    62Intangible assets recorded in
      connection with acquisitionsCash outflows for business
      acquisitions (net of cash acquired)
    $
    2
    
    14,230Common stock issued
    
    
    
    3,225Notes payable issued
    
    
    
    355Acquisition costs
    
    
    
    312Total consideration
    
    2
    
    18,122Net assets acquired (assets
        acquired less liabilities issued and
               assumed)
    
    
    
    2,787Goodwill recorded
    $
    2
    
    15,335




See accompanying notes to unaudited
consolidated financial statements.

6

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Vail Banks, Inc.

Notes
to Unaudited Consolidated Financial Statements



(1)                 Organization and Basis of
Presentation

The accompanying unaudited
consolidated financial statements include the accounts of Vail Banks, Inc. (Vail
Banks) and its wholly owned subsidiaries, WestStar Bank (WestStar), Vail Banks
Statutory Trust I, and Vail Banks Statutory Trust II. WestStar and Vail Banks
own a combined 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.

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, 2000. These interim unaudited consolidated financial statements and the
notes thereto should be read in conjunction with the Companys Annual Report
on Form 10-KSB as of and for the year ended December 31, 2000.

In the opinion of the Company,
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 nine months ended  September 30,
2001, are not necessarily indicative of the results that may be expected for the
full year.

Certain reclassifications have
been made to the 2000 financial statements to conform to the 2001 presentation.

(2)               Restatement

During the first quarter of 2001, and prior to the filing of the Companys
    Annual Report on Form 10-KSB for the year ended December 31, 2000, the
    Company determined that certain correspondent bank account transactions were
    not properly recorded during the third quarter of 1999. As a result, the
    Company took a charge of $680,000, pre-tax, for the probable
    uncollectibility of these items and restated its 1999 annual financial
    statements. Certain 2000 amounts contained herein were revised to reflect
    the effects of this restatement.

(3)               Provision and Allowance for Loan Losses

The Companys lending
  personnel are responsible for the regular monitoring of the quality of the
  loan portfolio. In connection with the determination of the allowance for loan
  losses, independent appraisals are obtained for significant properties and are
  used to assess estimated future cash flows from borrowers operations and
  the liquidation of loan collateral. The allowance for loan losses is based
  primarily on the Companys estimate of probable loan losses from these
  procedures and historical experience. These estimates involve judgment and a
  certain level of subjectivity; changes in economic conditions may necessitate
  revisions in future years.

Various regulatory agencies,
  as an integral part of their examination process, periodically review the
  Companys allowance for loan losses. Such agencies may require the Company
  to record additional provisions for probable losses based upon their
  evaluation of information available at the time of their examination.

(4)               Earnings Per Share

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 basic weighted-average number of common shares outstanding is
  increased for the assumed vesting of restricted stock and conversion of
  outstanding stock options into common shares. The assumed vesting of
  restricted stock and conversion of outstanding stock options into common
  shares are not included in the computation of diluted earnings per share where
  inclusion would be antidilutive.   In addition, earnings are adjusted for any
  changes in net income that would have resulted from the assumed vesting of
  restricted stock and exercise of stock options.

7

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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 related 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
  in 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.

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.

During February 2001, Vail Banks
formed Vail Banks Statutory Trust I (Trust I), a wholly owned subsidiary. On
February 22, 2001, Trust I issued $16.5 million of 10.20% trust preferred
securities (the Trust I Securities). Interest on the Trust I Securities is
payable semi-annually. The Trust I Securities have a 30-year maturity with a
10-year call option. The 3% underwriting fee was capitalized and is being
amortized to expense over the 10-year call period. A portion of the proceeds
from the Trust I Securities was used to pay the $2 million outstanding principal
plus accrued interest on the line of credit with Bankers Bank of the West.
The remainder of the proceeds was used for general corporate purposes including
the repurchase of shares of common stock and for a capital contribution into
WestStar.

During March 2001, Vail Banks formed Vail Banks Statutory Trust II (Trust II), a
wholly owned subsidiary. On March 28, 2001, Trust II issued $7.5 million of
10.18% trust preferred securities (the Trust II Securities). Interest on the
Trust II Securities is payable semi-annually. The Trust II Securities have a
30-year maturity with a 10-year call option. The 3% underwriting fee was
capitalized and is being amortized to expense over the 10-year call period.
Proceeds from the Trust II Securities were used for general corporate purposes
including the repurchase of shares of common stock.

(8)              Stock Repurchase Program

During February 2001, the Board
of Directors authorized the repurchase of up to $10 million of the outstanding
shares of the Companys common stock. Subsequently, the Company repurchased
612,900 common shares at a cost of approximately $7.0 million. During September
2001, the Board of Directors authorized an additional $10 million for the
repurchase of common shares, for a total of $17 million. As of September 30,
2001, 687,900 shares had been repurchased at a cost of approximately $7.9
million, or an average price per share of approximately $11.44.

8

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Vail Banks, Inc.

Notes to Unaudited Consolidated
Financial Statements (continued)

(9)               Recently
Issued Accounting Standards

Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, was issued in June 1998 and established
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
The Financial Accounting Standards Board (FASB) has issued SFAS No. 137, Accounting
for Derivative Instruments and Hedging ActivitiesDeferral of the Effective
Date of SFAS No. 133,which delays the implementation date of SFAS 133 for
one year, to fiscal years beginning after June 15, 2000. Additionally, the FASB
has issued SFAS No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities, which addresses a limited number of issues
causing implementation difficulties for entities applying SFAS No. 133. The
Company has adopted these statements as of January 1, 2001. The Company has not
engaged in the use of derivatives, does not conduct hedging activities, and has
not entered into contracts containing embedded derivatives; therefore adoption
of the new statements did not have a significant effect on earnings or the
financial position of the Company.

In
September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS 140
revises the accounting standards for securitizations and other transfers of
financial assets and collateral and requires certain disclosures. SFAS 140 is
effective for transfers and servicing of financial assets and extinguishment of
liabilities occurring after March 31, 2001. The Company adopted SFAS 140 on
April 1, 2001, which did not have a significant effect on the Company's
financial statements.

During
2000, the Emerging Issues Task Force issued guidance on Issue 99-20 Recognition
of Interest Income and Impairment on Purchased and Retained Beneficial Interests
in Securitized Financial Assets. The Company adopted this guidance on April
1, 2001. Adoption of this guidance did not have a significant effect on the
Company's financial statements.

During
July 2001, the FASB issued SFAS No. 141, Business Combinations and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001 and discontinues the use of the pooling-of-interests method.
It is not anticipated that this statement will have a material effect on the
Companys financial statements. SFAS 142 provides guidance on how to account
for goodwill and intangible assets after an acquisition has been completed.
Specifically, all new and pre-existing goodwill will no longer be amortized, but
instead will be tested for impairment on an annual basis. The Company will adopt
the provisions of SFAS 142 on January 1, 2002. During the nine months ended
September 30, 2001 and 2000, the Company recorded goodwill amortization of $1.2
million and $912,000, respectively. Net unamortized goodwill as of September 30,
2001 was $37.3 million. Management is currently evaluating the permitted
methodologies for determining any potential impairment of the unamortized
goodwill.



Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Forward
Looking Statements

The
discussion in this report contains forward-looking statements made pursuant to
the safe harbor provision of the Private Securities Litigation Reform Act of
1995. The forward-looking statements involve risks and uncertainties that affect
the Company's operations, financial performance and other factors 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 compete in its
trade areas, changes in regulations and government policies and other factors
discussed in the Company's filings with the Securities and Exchange Commission.
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.

Basis
of Presentation

The
following discussion and analysis provides information regarding the Companys
financial condition as of September 30,

9

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2001, and its results of
operations for the three and nine months ended September 30, 2001, in comparison
to the three and nine months ended September 30, 2000. The following discussion
should be read in conjunction with the unaudited consolidated financial
statements and related notes included elsewhere in this Quarterly Report on Form
10-Q, and in conjunction with the Companys Annual Report on Form 10-KSB for
the year ended December 31, 2000.

Restatement

During
the first quarter of 2001, and prior to the filing of the Companys Annual
Report on Form 10-KSB for the year ended December 31, 2000, the Company
determined that certain correspondent bank account transactions were not
properly recorded during the third quarter of 1999. As a result, the Company
took a charge of $680,000, pre-tax, for the probable uncollectibility of these
items and restated its 1999 annual financial statements. Certain quarterly 2000
amounts and ratios contained herein were revised to reflect the effects of this
restatement.

Overview

Net
income was $4.5 million for the nine months ended September 30, 2001, up from
$4.1 million for the nine months ended September 30, 2000, an increase of 11%.
Net income for the three months ended September 30, 2001, was $1.7 million, as
compared to $1.4 million for the quarter ended September 30, 2000, an increase
of 20%.

Diluted
earnings per share for the nine months ended September 30, 2001, was $0.73
compared to $0.65 for the nine months ended September 30, 2000, an increase of
12%, and $0.28 for the quarter ended September 30, 2001 as compared to $0.22 for
the quarter ended September 30, 2000, an increase of 27%.

The
annualized return on average assets was 1.19% for the quarter ended September
30, 2001, compared to 1.00% for the quarter ended September 30, 2000.

The
annualized return on average equity was 10.51% for the quarter ended September
30, 2001, compared to 8.63% for the quarter ended September 30, 2000.

As a
result of the acquisitions and mergers completed since 1995, the Company had
unamortized goodwill of $37.3 million and $38.5 million as of September 30,
2001, and December 31, 2000, respectively. Since the amortization of goodwill
does not result in a cash expense, the Company believes that supplemental
reporting of its operating results on a "cash" (or
"tangible") basis (which excludes the before-tax effect of
amortization of goodwill) represents a relevant measure of financial
performance. The supplemental cash basis data presented herein does not exclude
the effects 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 (defined as net income plus amortization of intangible assets) for the
nine months ended September 30, 2001, was $5.8 million ($0.93 per share,
diluted) compared with $5.0 million for the nine months ended September 30,
2000, ($0.80 per share, diluted), an increase of 16% in cash earnings and 16% in
diluted cash earnings per share. Cash earnings for the three months ended
September 30, 2001, was $2.1 million ($0.35 per share, diluted) compared with
$1.8 million for the three months ended September 30, 2000, ($0.27 per share,
diluted), an increase of 18% in cash earnings and 30% in diluted cash earnings
per share.

The
annualized return on tangible assets (annualized cash earnings to average
tangible assets) was 1.48% for the nine months ended September 30, 2001,
and 1.41% for the nine months ended September 30, 2000. The annualized
return on tangible assets was 1.60% for the quarter ended September 30, 2001,
compared to 1.36% for the quarter ended September 30, 2000.

The
annualized return on tangible equity was 29.56% for the nine months ended
September 30, 2001, compared to 20.87% for the nine months ended September 30,
2000. The annualized return on tangible equity was 32.66% for the quarter ended
September 30, 2001, compared to 25.61% for the quarter ended September 30, 2000.

During
August 2001, the Company opened a new WestStar branch in Grand Junction,
Colorado.

10

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Results
of Operations

Net
Interest Income.Net interest income
increased by $1.4 million, or 7%, to $21.8 million for the nine months ended
September 30, 2001, from $20.4 million for the nine months ended September 30,
2000, and decreased by $141,000, or 2%, for the quarter ended September 30,
2001, from the quarter ended September 30, 2000.

The
interest margin on a fully tax-equivalent basis for the nine months ended
September 30, 2001, was 6.34% compared to 6.71% for the nine months ended
September 30, 2000. The interest margin on a fully tax-equivalent basis for the
quarter ended September 30, 2001, was 6.41% compared to 6.68% for the quarter
ended September 30, 2000. The decrease from the quarter ended September 2000 to
the quarter ended September 2001 was primarily due to the multiple interest rate
cuts implemented by the Federal Reserve during 2001. The yield on earning assets
decreased 152 basis points, from 10.56% for the quarter ended September 30, 2000
to 9.04% for the quarter ended September 30, 2001. This decrease was only
partially offset by a 137 basis point decrease in the cost of interest bearing
liabilities from 4.48% for the quarter ended September 30, 2000 to 3.11% for the
quarter ended September 30, 2001.

Non-Interest
Income. Non-interest income increased by
$2.4 million, or 41%, to $8.2 million for the nine months ended September 30,
2001, from $5.9 million for the nine months ended September 30, 2000, and by
$758,000, or 33%, for the quarter ended September 30, 2001, from the quarter
ended September 30, 2000. This increase over the third quarter of 2000 was
primarily attributable to an increase in mortgage broker fees as well as to an
increase in deposit related service charges. Mortgage broker fees increased 35%
from third quarter 2000 due to increased refinancing activity in light of the
recent decline in interest rates. Deposit related income increased 35% from
third quarter 2000 primarily due to an increased emphasis by the Company on
collecting deposit-related fees.

Non-Interest
Expense. Non-interest expense, before
amortization of intangible assets, increased by $2.6 million, or 14%, to $20.4
million for the nine months ended September 30, 2001, from $17.9 million for the
nine months ended September 30, 2000. During the three months ended September
30, 2001, non-interest expense, before amortization of intangible assets,
increased $161,000, or 2%, from $6.9 million for the three months ended
September 30, 2000. These increases are largely attributable to the increasing
costs of employee related and occupancy expenses, operating expenses of the
newly opened Grand Junction branch, and operating expenses of branches acquired
in the July 2000 United Valley merger.

The
efficiency ratio, before amortization expense on intangible assets, declined to
68% for the quarter ended September 30, 2001, from 71% for the quarter ended
September 30, 2000. This improvement in the efficiency ratio was due to the
revenue increases exceeding the increase in operating expenses.

Income
Taxes.The Companys effective income
tax rate (income tax expense as a percentage of pre-tax income) remained
unchanged at 41% for both the three months ended September 30, 2001 and the
three months ended September 30, 2000.

Financial
Condition

The
Company's assets decreased by $17.1 million or 3%, to $546.2 million as of
September 30, 2001, from $563.3 million as of December 31, 2000.

Federal
funds sold balances increased by $11.2 million as of September 30, 2001 from $0
as of December 31, 2000. The increase is primarily due to the overnight
investment of proceeds received from the $24 million issuance of trust preferred
securities during the first quarter of 2001, as well as to improved management
of cash levels in branches and correspondent accounts.

As of
September 30, 2001, the loan portfolio (including loans held for sale) decreased
$21.5 million, or 5%, from December 31, 2000, due to the general softening of
the Colorado economy, as well as an internal shift toward more conservative
underwriting policies in response to the slowing economy.

Investment
securities were $31.0 million as of September 30, 2001, compared to $30.2
million as of December 31, 2000, an increase of 2%. This increase is primarily
due to unrealized gains on the investment portfolio of $592,000 between December
31, 2000 and September 30, 2001.

Premises
and equipment increased by $1.1 million, or 3%, from $40.4 million as of
December 31, 2000, to $41.5 million as of September 30, 2001. This increase is
mainly attributable to the purchase of $3.3 million of premises and equipment
primarily

11

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related to the construction and
furnishing of the new Grand Junction, Colorado branch, the construction costs
for a new building in Dillon, Colorado, which will eventually replace the old
branch building in Dillon, and equipment upgrades. This increase was offset by
$1.7 million of depreciation expense.

The $1.2
milliondecrease in intangible assets from $38.5 million at December 31,
2000, to $37.3 million at September 30, 2001, is primarily due to amortization
expense.

Deposits
decreased by $28.7 million, or 6%, from $482.0 million as of December 31, 2000,
to $453.3 million as of September 30, 2001. The decrease in deposits was largely
attributable to the roll-off of interest-bearing accounts in response to
repricing of those deposit products to reflect the current interest rate
environment, as well as to seasonal factors. During this time period,
non-interest-bearing deposits increased by $7.1 million, or 7%, while
interest-bearing deposits decreased by $35.7 million, or 9%, as compared to
December 31, 2000. Non-interest-bearing demand deposits comprised 24% of total
deposits as of September 30, 2001 as compared to 21% as of December 31, 2000.

Short-term
borrowings decreased $8.4 million, or 81%, from December 31, 2000 to September
30, 2001. This decrease is primarily due to the repayment during the period of
$8.4 million of federal funds purchased and the $2 million line of credit. These
pay-downs were offset by net borrowings during the period of $2 million from the
Federal Home Loan Bank (FHLB).

Asset
Quality

Provision
and Allowance for Loan Losses.Provision
expense for the nine months ended September 30, 2001, was $575,000 compared to
$747,000 recorded in the nine months ended September 30, 2000. This provision
for loan losses covered net charge-offs for the first nine months of 2001 by
approximately 92%. During the three months ended September 30, 2001, provision
expense was $75,000 as compared to $147,000 recorded in the three months ended
September 30, 2000. The allowance for loan losses of $4.392 million as of
September 30, 2001, decreased 1% from the $4.440 million level as of December
31, 2000 and it represents 1.09% of total loans and 225% of non-performing loans
as of September 30, 2001. The $48,000 decrease in the allowance for loan losses
from the balance at December 31, 2000 reflects the Companys revised estimate
of probable losses in the decreased loan portfolio. While net charge-offs as a
percentage of average loans have been increasing during 2001, other key
indicators of asset quality remain positive. Additionally, the average level of
outstanding loans has decreased $22.4 million, or 5%, to $403.4 million for the
quarter ended September 30, 2001, from $425.9 million for the quarter ended
December 31, 2000.

The
allowance for loan losses represents the Companys recognition of the risks of
extending credit and its evaluation of the probable 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 not
probable by the Company. The Company actively monitors its asset quality and
will charge off loans against the allowance for loan losses when appropriate and
will provide specific loss allowances when necessary. Although the Company
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 periods indicated, an
analysis of the allowance for loan losses and other related data.

12

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Allowance for Loan Losses Analysis(in thousands)
      
      Nine months ended
        September 30,2001
      
      2000Average total loans
      $
      412,892
      
      372,179Total loans at end of
        period
      $
      402,082
      
      423,999Allowance at beginning of
        period
      $
      4,440
      
      2,739Loans
        charged off
      
      (745)
      
      (329)Recoveries
        on loans previously charged off
      
      122
      
      26Acquired
        through acquisition
      
      
      
      1,040Provision
        for loan losses
      
      575
      
      747Allowance at end of period
      $
      4,392
      
      4,223Annualized net charge-offs
        to average loans
      
      0.20%
      
      0.11%Allowance to total loans at
        end of period
      
      1.09%
      
      1.00%




Non-Performing
Assets. The Company's non-performing
assets consist of nonaccrual loans, restructured loans and foreclosed
properties. Non-performing assets were $2.1 million as of September 30, 2001,
(0.53% of loan related assets) compared with $1.8 million as of December 31,
2000, (0.42% of loan related assets), and $1.6 million as of September 30, 2000,
(0.38% of loan related assets). The following table presents information
regarding non-performing assets as of the dates indicated:

Non-Performing Assets(in
        thousands)
      
      September 30,2001
      
      2000Nonaccrual loans
      $
      1,849
      
      1,347Restructured loans
      
      101
      
      Total
        non-performing loans
      
      1,950
      
      1,347Foreclosed properties
      
      185
      
      282Total
        non-performing assets
      
      2,135
      
      1,629Loans 90 days or more past
        due and accruing
      
      
      
      Total
        risk assets
      $
      2,135
      
      1,629Non-performing loans to
        total loans
      
      0.48%
      
      0.32%Non-performing assets to
        loan related assets
      
      0.53%
      
      0.38%Non-performing assets to
        total assets
      
      0.39%
      
      0.29%Risk assets to loan related
        assets
      
      0.53%
      
      0.38%




The
Company believes that it has adequate collateral to recover the majority of the
balance of the nonaccrual and restructured loans. Foreclosed properties are
recorded at the lower of cost or fair value less estimated costs to sell. All
anticipated losses are recorded at the time of transfer from loans. Management
is not aware of any significant adverse trends relating to its loan portfolio.



13

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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 and investing activities and to match the maturity or
repricing intervals of assets.

During
the nine-month period ended September 30, 2001, cash of $8.4 million was
provided by operating activities consisting primarily of net income of $4.5
million plus non-cash expenses of $3.9 million. Non-cash expenses consisted
primarily of $1.2 million of intangible amortization expense, $1.7 million of
depreciation and amortization expense on premises and equipment, a $575,000 loan
loss provision, and $216,000 of deferred income tax expense. The net change in
operating assets and liabilities was not significant.

During
the nine-month period ended September 30, 2001, cash of $6.1 million was
provided by investing activities. These inflows consisted primarily of the
maturity and/or calls of $11.4 million of investment securities and a $20.6
million net decrease in loans and loans held for sale. These inflows were
partially offset by the $11.5 million purchase of investment securities, the
$11.2 million increase in federal funds sold, and the purchase of $3.3 million
of premises and equipment.

During
the nine-month period ended September 30, 2001, cash of $21.7 million was used
in financing activities consisting primarily of a decrease in deposits of $28.7
million, the repayment of $10.4 million of short-term borrowings, the repurchase
of $7.9 million of outstanding common stock of the Company, and the payment of
dividends of $802,000. These outflows were partially offset by the receipt of
$24 million of proceeds from the issuance of trust preferred securities and the
receipt of $2 million of proceeds from FHLB advances.

WestStar
is a member of the FHLB of Topeka and, as a regular part of its business,
obtains advances from the FHLB. Advances are collateralized by FHLB stock owned
by WestStar, as well as certain mortgage loans or deeds of trust. As of
September 30, 2001, the authorized borrowing line totaled $53.1 million. Of this
amount, $24 million was an irrevocable stand-by letter of credit pledged as
collateral for uninsured public fund deposits and $2 million was outstanding as
a short-term advance.

WestStar
has also established an unsecured, overnight federal funds line with Bankers
Bank of the West (Bankers Bank). As of September 30, 2001, the authorized
borrowing line totaled $37.3 million, with $0 outstanding.

During
December 2000, the Company obtained a credit facility from Bankers Bank
permitting borrowing of up to $2 million. Outstanding borrowings under the line
of credit were fully repaid prior to maturity on July 1, 2001.

As of
September 30, 2001, the Company had cash and due from banks of $17.5 million,
federal funds sold of $11.2 million, and investment securities of $31.0 million.
Based on current plans and business conditions, the Company expects that its
cash and due from banks, federal funds sold, investment securities and available
borrowings under its credit facilities, together with any amounts generated from
operations, will be sufficient to meet the Company's liquidity requirements for
the next 12 months. However, there can be no assurance that the Company will not
be required to seek other financing sooner or that such financing, if required,
will be available on terms satisfactory to the Company.

Capital
Resources

As of
September 30, 2001, shareholders equity had decreased $3.6 million, or 5%, to
$62.8 million from $66.4 million as of December 31, 2000. This decrease is
primarily related to the repurchase of 687,900 shares of common stock during
2001 at a cost of $7.9 million and the payment of common stock dividends of
$802,000, offset by the retention of $4.5 million of earnings and an increase in
accumulated other comprehensive income of $376,000 related to increased
unrealized gains on investment securities, available for sale.

14

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As of
September 30, 2001 and 2000, the Company met all capital adequacy requirements
to which it was subject. As of September 30, 2001, the Company had Tier 1 and
Total Risk-Based Capital ratios of 11.21% and 12.94%, respectively, and a
Leverage ratio of 9.14%. Regulatory guidelines permit the Companys trust
preferred securities, issued during the quarter ended March 31, 2001, to be
included in the calculation of Tier 1 and Total Risk-Based capital, subject to
certain limitations. As of September 30, 2000, the Company had Tier 1 and Total
Risk-Based Capital ratios of 6.96% and 8.01%, respectively, and a Leverage ratio
of 5.43%.

As of
September 30, 2001, WestStar met all capital adequacy requirements to which it
was subject and exceeded the minimum ratios to be designated as
"well-capitalized." As of September 30, 2001, WestStar had Tier
1 and Total Risk-Based Capital ratios of 10.43% and 11.48%, respectively, and a
Leverage ratio of 8.50%. As of September 30, 2000, WestStar had Tier 1 and Total
Risk-Based Capital ratios of 6.61% and 7.67%, respectively, and a Leverage ratio
of 5.15%. Management anticipated that WestStars capital ratios would fall
below the "well-capitalized" designation pursuant to the FDICs
prompt corrective action provisions during the third quarter of 2000 as a result
of the United Valley merger. Additionally, as of September 30, 2000, WestStars
Total Risk-Based Capital ratio fell to 7.67%, which was below the
"adequately capitalized" designation pursuant to the FDICs prompt
corrective action provisions. As a condition of approval of the United Valley
merger by the Federal Reserve, Vail Banks committed that WestStars capital
would exceed the minimum requirements for "well-capitalized" by June
30, 2001. As of February 2001, WestStar had restored all of its capital ratios
to "well-capitalized" levels as a result of Vail Banks issuing $16.5
million in trust preferred securities and contributing a portion of the proceeds
as capital into WestStar. See Item 1. "Financial StatementsNote 7"
for further information on this transaction.

Subsequent
Events

On October
22, 2001, the Company declared a cash dividend of $0.05 per share payable on
November 16, 2001, to shareholders of record on November 2,
2001.

During
October 2001, the Company notified the Federal Reserve Bank of Kansas City that
it would close five WestStar branch locations in January 2002. The branches to
be closed are limited service facilities and related customer accounts will be
consolidated into nearby WestStar branches. The Company expects limited customer
attrition as a result of these closings.

15

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Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative Disclosures About
Market Risk

The table
below provides information about the Companys financial instruments as of
December 31, 2000 that are
sensitive to changes in interest rates.

|                     |  | Principal
      Amount Maturing
      in: |      |     
|-------------------- |  | ----------------------------------------- | ---- | ----
|(In
      thousands) |  | 2001                                      | 2002 | 2003
|                    

---

|INTEREST
      RATE SENSITIVE ASSETS      
|------------------------------------------
|                                          
|Adjustable-rate loans                     
|Weighted average interest rate            
|Fixed-rate loans                          
|Weighted average interest rate            
|Adjustable-rate securities                
|Weighted average
      interest rate      
|Fixed-rate securities                     
|Weighted average interest rate            
|                                          
|Total interest rate sensitive
      assets
|                                          
|Weighted average interest rate            
|                                          

INTEREST RATE SENSITIVE LIABILITIES

|Interest-bearing checking,
      savings and
       money market accounts |       | $ 230,963                                       | $ 49,734 | $        | $       | $      | $    | $ 280,697 | $ 280,697
|------------------------------------------------------------------------- | ----- | ----------------------------------------------- | -------- | --------- | -------- | ------- | ----- | --------- | ---------
|Weighted average interest rate                                            |       | 4.27%                                           | 1.83%    | 0.00%     | 0.00%    | 0.00%   | 0.00% | 3.84%     | 3.84%    
|Fixed-rate time deposits                                                  |       | 86,171                                          | 12,152   | 2,528     | 352      | 493     |      | 101,696   | 101,714  
|Weighted average interest rate                                            | 5.95% | 5.94%                                           | 5.67%    | 4.88%     | 5.65%    | 0.00%   | 5.94% | 5.94%    
|Federal funds purchased                                                   |       | 8,410                                           |         |          |         |        |      | 8,410     | 8,410    
|Weighted average interest rate                                            | 6.97% | 0.00%                                           | 0.00%    | 0.00%     | 0.00%    | 0.00%   | 6.97% | 6.97%    
|Adjustable-rate borrowings                                                |       | 2,000                                           |         |          |         |        |      | 2,000     | 2,000    
|Weighted average interest rate                                            |       | 9.50%                                           | 0.00%    | 0.00%     | 0.00%    | 0.00%   | 0.00% | 9.50%     | 9.50%    
|                                                                          |       |                                                 |          |           |          |         |       |           |          
|                                                                          |       | Total interest rate sensitive
      liabilities |          | $ 327,544 | $ 61,886 | $ 2,528 | $ 352 | $ 493     | $       
|                                                                          |       |                                                 |          |           |          |         |       |           |          
|Weighted average interest rate                                            |       | 4.81%                                           | 2.64%    | 5.67%     | 4.88%    | 5.65%   | 0.00% | 4.48%     | 4.48%    
|                                                                          |       |                                                 |          |           |          |         |       |           |          

|*Vail Banks experience with
      interest bearing checking accounts 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 are
      included in 2001 as well as 2002.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Market
risk is the exposure to loss resulting from changes in interest rates, foreign
currency exchange rates, commodity prices and equity prices. The primary market
risk to which the Company is exposed is interest rate risk arising from the
instruments and transactions entered into. They include loans, securities
available for sale, deposit liabilities, and borrowings. Interest rate risk
occurs when interest-sensitive assets and liabilities reprice at different times
as market interest rates change. 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 that are approaching maturity.
For example, if fixed-rate assets are funded with floating-rate debt, the spread
between asset and liability rates will decline or turn negative if rates
increase. Additionally, interest rate risk results from changing spreads between
asset and liability rates.

Interest
rate risk is managed by the Companys management. The principal objective of
asset/liability management is to manage the levels of interest-sensitive assets
and liabilities to minimize net interest income fluctuations in times of
fluctuating market interest rates. To effectively measure and manage interest
rate risk, the Company uses computer simulations that determine the impact on
net interest income of numerous interest rate scenarios, balance sheet trends
and strategies. These simulations cover the following

16

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financial instruments: short-term
financial instruments, investment securities, loans, deposits, and borrowings.
These simulations incorporate assumptions about balance sheet dynamics, such as
loan and deposit growth and pricing, changes in funding mix, and asset and
liability repricing and maturity characteristics. Simulations are run under
various interest rate scenarios to determine the impact on net income and
capital. From these computer simulations, interest rate risk is quantified and
appropriate strategies are developed and implemented. During 2000 and 2001, the
Company did not use interest rate derivative financial instruments as an
asset/liability management tool to hedge mismatches in interest rate exposures.

During
the first nine months of 2001, Vail Banks experienced increased liquidity as the
result of the issuance of trust preferred securities and a decrease in loan
balances. The increase in liquidity was used to pay off federal funds purchased
and invest in short term federal funds sold. This increased liquidity position
lessened the liability sensitive nature of the balance sheet. Therefore, Vail
Banks was less sensitive to changes in interest rates at September 30, 2001 than
at December 31, 2000.

During
the remainder of 2001, the Company will face risk primarily from the possibility
of lower interest rates. With the changes in the balance sheet from December 31,
2000 to September 30, 2001, the Companys gap position has changed from
negative to positive at September 30, 2001. Given this positive gap at September
30, 2001, if rates fall, asset yields will decline faster than the cost of
interest bearing liabilities, leading to a decline in the margin. The extent of
this decline will depend on the degree to which retail deposit rates change
relative to market rates. The 350 basis point reduction in short-term rates by
the Federal Reserve Bank during the first nine months of 2001 has effectively
repriced a significant portion of the Companys loan portfolio. While it also
produced an opportunity to reduce funding costs, at the current level of
interest rates, further reductions in funding costs may be limited.



17

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PART
II OTHER INFORMATION

Item 6. EXHIBITS
AND REPORTS ON FORM 8-K.

> (a)         Exhibits

None

> (b)        Reports
>     on Form 8-K

None.

18

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SIGNATURES



In
accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.



VAIL
        BANKS, INC.Date: November
        2, 2001
      /s/
        Lisa M. DillonLisa
        M. Dillon
             PresidentDate: November
        2, 2001
      /s/ Peter G. WillistonPeter
        G. Williston
             Senior Executive Vice
        President and Chief
             Financial Officer