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 June 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 July 31, 2001, there were 5,868,458 shares of common stock ($1.00 par value per share) outstanding.

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Form 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001



INDEX





|PART I  |         | FINANCIAL INFORMATION
|------- | ------- | ---------------------
|        |         |                      
|        | Item 1. | Financial Statements 
|        |         |                      
|        |         |                      
|        |         |                      
|        |         |                      
|        |         |                      
|        |         |                      
|        |         |                      
|        |         |                      
|        |         |                      
|        |         |                      
|        | Item 2. |                      
|        |         |                      
|        |         |                      
|        | Item 3. |                      
|        |         |                      
|PART II |         | OTHER INFORMATION    
|        |         |                      
|        | Item 4. |                      
|        |         |                      
|        | Item 6. |                      



2

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PART I
          FINANCIAL
INFORMATION

Item 1.
          FINANCIAL STATEMENTS



Vail Banks, Inc.Consolidated Balance Sheets(in thousands)



ASSETS
      
      June 30,
        2001
      
      December 31,
         2000(unaudited)Cash and due from banks
  
      $
  22,042
      $
  24,670Federal funds sold
      
      11,065
      
      Investment securities, available for sale
      
      28,595
      
      24,994Investment securities, held to maturity (fair value of
        $1,166 and $5,217 as of
               June 30, 2001 (unaudited) and
        December 31, 2000, respectively)
      
      1,138
      
      5,208Loans held for sale
      
      5,044
      
      632Loans
      
      404,867
      
      427,136Allowance for loan losses
      
      (4,608)
      
      (4,440)Net loans
      
      400,259
      
      422,696Premises and equipment, net
      
      40,595
      
      40,369Interest receivable
      
      2,987
      
      3,425Intangible assets, net
      
      37,689
      
      38,519Other assets
      
      3,452
      
      2,758$
  552,866
      $
  563,271LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesDeposits:Non-interest bearing
  
      $
  95,241
      $
  99,609Interest bearing
      
      355,816
      
      382,393Total deposits
      
      451,057
      
      482,002Short-term borrowings:Federal funds purchased
      
      
      
      8,410FHLB advances
      
      7,000
      
      Line of credit
      
      
      
      2,000Total short-term borrowings
      
      7,000
      
      10,410Interest payable and other
        liabilities
      
      8,059
      
      3,732Total liabilities
      
      466,116
      
      496,144Minority interest
      
      726
      
      697Trust preferred securities
      
      24,000
      
      Shareholders equityPreferred stock   $1 
        par
        value; 2,250,000 shares authorized, no sharesissued and outstanding as of
        June 30, 2001 (unaudited) andDecember 31, 2000,
        respectively
      
      
      
      Common stock   $1 par value; 20,000,000 shares
        authorized, 5,868,458 and6,456,400 shares issued and
        outstanding as of June 30, 2001(unaudited) and December 31,
        2000
      
      5,868
      
      6,456Additional paid-in capital
      
      43,609
      
      49,933Retained earnings
      
      12,515
      
      10,143Accumulated other comprehensive gain (loss), net of
        taxes
      
      32
      
      (102)Total shareholders equity
      
      62,024
      
      66,430$
  552,866
      $
  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
        June 30,
      
      Six months ended
        June 30,2001
      
      2000
      
      2001
      
      2000(unaudited)
      
      (unaudited)
      
      (unaudited)
      
      (unaudited)Interest incomeInterest and fees on loans
  
      $
  10,311
      
      9,680
      
      20,985
      
      18,708Interest on investment
        securities
      
      356
      
      506
      
      751
      
      1,011Interest on federal funds sold
        and othershort-term investments
      
      249
      
      
      
      469
      
      7Total interest income
      
      10,916
      
      10,186
      
      22,205
      
      19,726Interest expenseDeposits
      
      2,975
      
      2,898
      
      6,845
      
      5,622Short-term borrowings
      
      8
      
      693
      
      46
      
      1,167Trust preferred securities
      
      614
      
      
      
      800
      
      Total interest expense
      
      3,597
      
      3,591
      
      7,691
      
      6,789Net interest income
      
      7,319
      
      6,595
      
      14,514
      
      12,937Provision for loan losses
      
      200
      
      300
      
      500
      
      600Net interest income after
        provisionfor loan losses
      
      7,119
      
      6,295
      
      14,014
      
      12,337Non-interest incomeDeposit related
      
      1,021
      
      682
      
      1,971
      
      1,341Mortgage broker fees
      
      1,058
      
      544
      
      1,731
      
      1,019Other
      
      713
      
      595
      
      1,478
      
      1,1922,792
      
      1,821
      
      5,180
      
      3,552Non-interest expenseSalaries and employee benefits
      
      3,864
      
      3,067
      
      7,524
      
      6,105Occupancy
      
      770
      
      573
      
      1,506
      
      1,223Furniture and equipment
      
      694
      
      648
      
      1,398
      
      1,318Amortization of intangible
        assets
      
      416
      
      274
      
      832
      
      547Other
      
      1,543
      
      1,182
      
      2,950
      
      2,3397,287
      
      5,744
      
      14,210
      
      11,532Income before income taxes
      
      2,624
      
      2,372
      
      4,984
      
      4,357Income taxes
      
      1,096
      
      867
      
      2,103
      
      1,670Net income
      
      1,528
      
      1,505
      
      2,881
      
      2,687Unrealized (loss) gain on available for salesecurities, net of taxes
      
      (8)
      
      91
      
      134
      
      (6)Comprehensive income
  
      $
  1,520
      
      1,596
      
      3,015
      
      2,681Earnings per shareBasic
  
      $
  0.26
      
      0.25
      
      0.47
      
      0.44Diluted
  
      $
  0.25
      
      0.25
      
      0.46
      
      0.44Weighted average common sharesBasic
      
      5,944,163
      
      6,042,432
      
      6,161,271
      
      6,042,119Diluted
      
      6,121,741
      
      6,108,924
      
      6,311,315
      
      6,108,397




See accompanying notes to unaudited consolidated financial
statements.



4

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



Six months ended
        June 30,2001
      
      2000(unaudited)
      
      (unaudited)(as
      restated)Cash flows from operating activitiesNet income
  
    $
  2,881
    $
  2,687Adjustments to reconcile net
      income to net cash provided byoperating activities:Amortization of intangible assets
    
    832
    
    547Depreciation and amortization of
      premises and equipment
    
    1,128
    
    1,068Provision for loan losses
    
    500
    
    600Recognition of stock compensation
      on restricted common
    
    53
    
    19stockNet amortization of premiums on
      investment securities
    
    19
    
    31Deferred income tax expense
    
    76
    
    Gain on sale of premises and
      equipment
    
    (1)
    
    Loss on sale of foreclosed
      properties
    
    28
    
    Changes in operating assets and
      liabilities, net of effect ofpurchase
      business combinations:Decrease (increase) in interest
      receivable
    
    438
    
    (144)(Increase) decrease in other
      assets
    
    (462)
    
    666Increase (decrease) in interest
      payable and other liabilities
    
    4,327
    
    (516)Other, net
    
    29
    
    24Net cash provided by operating
      activities
    
    9,848
    
    4,982Cash flows from investing activities, net of effect of
      purchase business
            combinationsNet increase in federal funds sold
    
    (11,065)
    
    Purchase of investment securities
      available for sale
    
    (9,520)
    
    (663)Proceeds from maturities of
      investment securities held to maturity
    
    4,070
    
    60Proceeds from maturities of
      investment securities available for sale
    
    6,109
    
    3,474Net increase in loans held for
      sale
    
    (4,412)
    
    (853)Net decrease (increase) in loans
    
    21,864
    
    (19,707)Purchase of premises and equipment
    
    (1,826)
    
    (787)Proceeds from sale of premises and
      equipment
    
    19
    
    Proceeds from sale of foreclosed
      properties
    
    116
    
    Net cash paid for acquisitions
    
    (2)
    
    (1,049)Net cash provided by (used in)
      investing activities
    
    5,353
    
    (19,525)Cash flows from financing activities, net of effect of
      purchase business
      combinationsNet (decrease) increase in
      deposits
    
    (30,945)
    
    1,382Net decrease in federal funds
      purchased
    
    (8,410)
    
    (10,205)Net increase in FHLB advances
    
    7,000
    
    16,000Repayment of line of credit
    
    (2,000)
    
    Issuance of trust preferred
      securities
    
    24,000
    
    Issuance of common stock
    
    81
    
    Repurchase of common stock
    
    (7,046)
    
    Dividends paid
    
    (509)
    
    (244)Net cash (used in) provided by
      financing activities
    
    (17,829)
    
    6,933Net decrease in cash and due from
      banks
    
    (2,628)
    
    (7,610)Cash and due from banks at beginning of period
    
    24,670
    
    29,291Cash and due from banks at end of period
    $
    22,042
    $
    21,681




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
      $
      7,301
  
      $
  6,861Income taxes
      $
      1,330
  
      $
  1,550Non-cash investing and financing transactionsForeclosure of
        collateralized loans, net of reserve
      $
      73
      $
      601Unrealized gain (loss) on
        investments available for sale, net of taxes
      $
      134
      $
      (6)Reclassification of software
        from premises and equipment to otherassets
      $
      454
      $
      Issuance of restricted common
        stock
      $
      16
      $
      12Intangible assets recorded in connection with
        acquisitions:Cash outflows for business
        acquisitions (net of cash acquired)
      $
      2
      $
      1,049Common stock issued
      
      
      
      Notes payable issued
      
      
      
      355Acquisition costs
      
      
      
      Total consideration
      
      2
      
      1,404Net assets acquired (assets
        acquired less liabilities issued andassumed)
      
      0
      
      (64)Goodwill recorded
      $
      2
      $
      1,468




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 subsidiary, WestStar Bank (WestStar). WestStar and
Vail Banks 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.

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 six months ended June 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.

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.

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.

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 is 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
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 of the related held-to-maturity security.

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 were 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 will
be 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. As of June 30, 2001, 612,900 shares had
been repurchased at a cost of $7.0 million, or an average price per share of
$11.50.

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. The Company has adopted
this statement 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
statement did not have a significant effect on earnings or the financial
position of the Company.



8

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Vail Banks, Inc.

Notes to Unaudited Consolidated Financial Statements
(continued)



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
material 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 material 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 six months ended June 30, 2001 and
2000, the Company recorded goodwill amortization of $832,000 and $547,000,
respectively. Net unamortized goodwill as of June 30, 2001 was $37.7 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 June
30, 2001, and its results of operations for the three and six months ended June
30, 2001, in comparison to the three and six months ended June 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.

9

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Overview

Net income was $2.9 million for the
six months ended June 30, 2001, up from $2.7 million for the six months ended
June 30, 2000, an increase of 7%. Net income for the three months ended June 30,
2001, was $1.5 million, as compared to $1.5 million for the quarter ended June
30, 2000.

Diluted earnings per share for the
six months ended June 30, 2001, was $0.46 compared to $0.44 for the six months
ended June 30, 2000, an increase of 5%, and $0.25 for the quarter ended June 30,
2001 as compared to $0.25 for the quarter ended June 30, 2000.

The annualized return on average
assets was 1.09% for the quarter ended June 30, 2001, compared to 1.26% for the
quarter ended June 30, 2000.

The annualized return on average
equity was 9.75% for the quarter ended June 30, 2001, compared to 10.08% for the
quarter ended June 30, 2000.

As a result of the acquisitions and
mergers completed since 1995, the Company had unamortized goodwill of $37.7
million and $38.5 million as of June 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 six months ended June 30, 2001,
was $3.7 million ($0.59 per share, diluted) compared with $3.2 million for the
six months ended June 30, 2000, ($0.53 per share, diluted), an increase of 15%
in cash earnings and 11% in diluted cash earnings per share. Cash earnings for
the three months ended June 30, 2001, was $1.9 million ($0.32 per share,
diluted) compared with $1.8 million for the three months ended June 30, 2000,
($0.29 per share, diluted), an increase of 9% in cash earnings and 10% in
diluted cash earnings per share.

The annualized return on tangible
assets (annualized cash earnings to average tangible assets) was 1.42% for the
six months ended June 30, 2001, and 1.44% for the six months ended June 30,
2000. The annualized return on tangible assets was 1.48% for the quarter ended
June 30, 2001, compared to 1.57% for the quarter ended June 30, 2000.

The annualized return on tangible
equity was 28.07% for the six months ended June 30, 2001, compared to 18.96% for
the six months ended June 30, 2000. The annualized return on tangible equity was
31.27% for the quarter ended June 30, 2001, compared to 20.53% for the quarter
ended June 30, 2000.

Results Of Operations

Net Interest Income. Net interest
income increased by $1.6 million, or 12%, to $14.5 million for the six months
ended June 30, 2001, from $12.9 million for the six months ended June 30, 2000,
and by $724,000, or 11%, for the quarter ended June 30, 2001, from the quarter
ended June 30, 2000.

The interest margin on a fully tax
equivalent basis for the six months ended June 30, 2001, was 6.30% compared to
6.74% for the six months ended June 30, 2000. The interest margin on a fully tax
equivalent basis for the quarter ended June 30, 2001, was 6.34% compared to
6.77% for the quarter ended June 30, 2000. The decrease from the quarter ended
June 2000 to the quarter ended June 2001 was primarily due to the yield on
earning assets decreasing 100 basis points, from 10.44% for the quarter ended
June 30, 2000 to 9.44% for the quarter ended June 30, 2001. This decrease was
only partially offset by a 69 basis point decrease in the cost of interest
bearing liabilities from 4.28% for the quarter ended June 30, 2000 to 3.59% for
the quarter ended June 30, 2001.



10

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Non-interest Income. Non-interest income increased by
$1.6 million, or 46%, to $5.2 million for the six months ended June 30, 2001,
from $3.6 million for the six months ended June 30, 2000, and by $971,000, or
53%, for the quarter ended June 30, 2001, from the quarter ended June 30, 2000.
This increase over the second quarter of 2000 was primarily attributable to an
increase in service charges on deposits on customer accounts acquired in the
United Valley Bank (United Valley) merger in July 2000, and an increased
emphasis by the Company on collecting deposit-related fees. Additionally,
mortgage broker fees have increased 94% from second quarter 2000 due to
increased refinancing activity in light of the recent decline in interest rates.

Non-interest Expense. Non-interest expense, before
amortization of intangible assets, increased by $2.4 million, or 22%, to $13.4
million for the six months ended June 30, 2001, from $11.0 million for the six
months ended June 30, 2000. During the three months ended June 30, 2001,
non-interest expense, before amortization of intangible assets, increased $1.4
million, or 26%, from $5.5 million for the three months ended June 30, 2000.
These increases are largely attributable to operating expenses of branches
acquired in the United Valley Bank merger in July 2000, and to the increasing
costs of employee related and occupancy expenses generated by internal growth.

The efficiency ratio, before amortization expense,
deteriorated slightly to 68% for the quarter ended June 30, 2001, from 65% for
the quarter ended June 30, 2000. This slight deterioration in the efficiency
ratio was in large part due to the increase in non-interest expense, discussed
above.

Income Taxes. The Companys effective income tax rate
(income tax expense as a percentage of pre-tax income) increased to 42% for the
three months ended June 30, 2001 from 37% for the three months ended June 30,
2000. The increase in the effective income tax rate is primarily due to the
increase in amortization expense on intangible assets, which is not deductible
for income tax purposes. Additionally, the average balance of tax-exempt
securities has decreased from $6.0 million during the quarter ended June 30,
2000 to $4.0 million during the quarter ended June 30, 2001.

Financial Condition

The Companys assets decreased by $10.4 million or 2%, to
$552.9 million as of June 30, 2001, from $563.3 million as of December 31, 2000.

Cash and due from banks balances decreased by $2.6 million,
or 11%, from $24.7 million at December 31, 2000, to $22.0 million at June 30,
2001. Cash was higher than average at December 31, 2000, due to the seasonal
fluctuations of the Companys resort communities.

Federal funds sold balances increased by $11.1 million as of
June 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 of June 30, 2001, the loan portfolio (including loans held
for sale) decreased $17.9 million, or 4%, 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 soft economy.

Investment securities were $29.7 million as of June 30, 2001,
compared to $30.2 million as of December 31, 2000, a decrease of 2%. The
decrease is primarily due to the maturity of $10.2 million of investment
securities during 2001, partially offset by the purchase of $9.5 million of
additional investment securities.

The netdecrease in intangible assets from $38.5
million at December 31, 2000, to $37.7 million at June 30, 2001, is due to
amortization expense.

Deposits decreased by $30.9 million, or 6%, from $482.0
million as of December 31, 2000, to $451.1 million as of June 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 decreased by $4.4
million, or 4%, while interest-bearing deposits decreased by $26.6 million, or
7%, as compared to December 31, 2000. Non-interest-bearing demand deposits
comprised 21% of total deposits as of June 30, 2001 as compared to 21% as of
December 31, 2000.



11

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Short-term borrowings decreased $3.4 million, or 33%, from
December 31, 2000 to June 30, 2001. This decrease is primarily due to the payoff
of the $2 million line of credit outstanding at December 31, 2000 using a
portion of the proceeds received from the $24 million issuance of trust
preferred securities.

Asset Quality

Provision and Allowance for Loan Losses. Provision
expense for the six months ended June 30, 2001, was $500,000 compared to
$600,000 recorded in the six months ended June 30, 2000. This provision for loan
losses covered net charge-offs for the first six months of 2001 by approximately
151%. Provision expense for the three months ended June 30, 2001, was $200,000
compared to $300,000 recorded in the three months ended June 30, 2000. This
provision for loan losses covered net charge-offs for the quarter ended June
2001 by approximately 114%. The allowance for loan losses of $4.6 million as of
June 30, 2001, increased 4% from the $4.4 million level as of December 31, 2000
and it represents 1.14% of total loans and 397% of non-performing loans as of
June 30, 2001. The $168,000 increase in the allowance for loan losses from the
balance as of December 31, 2000 is intended to support the normal probable loss
content in the Companys loan portfolio.While net charge-offs as a
percentage of total loans have increased slightly over the past two quarters,
other key indicators of asset quality remain positive. Additionally, the average
level of outstanding loans has decreased to $413.3 million for the quarter ended
June 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.





Allowance for Loan Losses Analysis(in thousands)
    
    Six months ended
      June 30,2001
    
    2000Average total loans
    
    $
  417,707
    $
  352,984Total loans at end of period
    
    $
  404,867
    $
  355,694Allowance at beginning of period
    
    $
  4,440
    $
  2,739Charge-offs
    
    (424)
    
    (165)Recoveries
    
    92
    
    18Provision for loan losses
    
    500
    
    600Allowance at end of period
    
    $
  4,608
    $
  3,192Annualized net charge-offs to average loans
    
    0.16%
    
    0.08%Allowance to total loans at end of period
    
    1.14%
    
    0.90%




12

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Non-performing Assets





|Non-performing Assets(in
      thousands)    |   | June 30,
|-------------------------------------------- | - | --------
|                                             |   |         
|                                             |   | 2001    
|                                             |   |         
|                                             |   |         
|Nonaccrual loans                             | $ | 1,161   
|Restructured loans                           |   |        
|                                             |   |         
|Total non-performing loans                   |   | 1,161   
|Foreclosed properties                        |   | 58      
|                                             |   |         
|Total non-performing assets                  |   | 1,219   
|Loans 90 days or more past due and accruing  |   |        
|                                             |   |         
|Total risk assets                            | $ | 1,219   
|                                             |   |         
|                                             |   |         
|Non-performing loans to total loans          |   | 0.29%   
|                                             |   |         
|Non-performing assets to loan related assets |   | 0.30%   
|                                             |   |         
|Non-performing assets to total assets        |   | 0.22%   
|                                             |   |         
|Risk assets to loan related assets           |   | 0.30%   



The Company believes that it has adequate collateral to
recover the majority of the balance of the nonaccrual loans. It is not aware of
any adverse trends relating to its loan portfolio.

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.

During the six-month period ended June 30, 2001, cash of $9.8
million was provided by operating activities consisting of net income of $2.9
million plus non-cash expenses of $2.6 million and net changes in operating
assets and liabilities of $4.3 million. These changes in operating assets and
liabilities consisted primarily of (1) a decrease in interest receivable of
$438,000, (2) an increase in other assets of $462,000, and (3) an increase in
interest payable and other liabilities of $4.3 million. The decrease in interest
receivable is due to a decrease of $12.6 million, or 3%, in the average loan
balance from December 31, 2000 as well as a decrease in interest rates by the
Federal Reserve which caused the Companys yield on earning assets to decrease
78 basis points from December 31, 2000. The increase in interest payable and
other liabilities is primarily due to the purchase of $4.5 million of investment
securities during June 2001 that did not settle until July 2001.

During the six-month period ended June 30, 2001, cash of $5.4
million was provided by investing activities. These inflows consisted primarily
of the maturity and/or calls of $10.2 million of investment securities and a
$17.4 million net decrease in loans and loans held for sale. These inflows were
partially offset by the $9.5 million purchase of investment securities, the
$11.1 million increase in federal funds sold, and the purchase of $1.8 million
of premises and equipment. The increase in federal funds sold was primarily the
result of investing the proceeds from the issuance of $24 million of trust
preferred securities during first quarter 2001. See Item 1. "Financial
Statements-Note 7" for further information on this transaction. The net
decrease in loans and loans held for sale is due to the general softening of the
Colorado economy, as well as an internal shift toward more conservative
underwriting policies in response to the soft economy.



13

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During the six-month period ended June 30, 2001, cash of
$17.8 million was used by financing activities consisting primarily of a
decrease in deposits of $30.9 million, the repayment of $10.4 million of
short-term borrowings, the repurchase of $7.0 million of outstanding common
stock of the Company, and the payment of dividends of $509,000. These outflows
were partially offset by the receipt of $24 million of proceeds from the
issuance of trust preferred securities and the receipt of $7 million of proceeds
from Federal Home Loan Bank (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 mortgages or
deeds of trust. As of June 30, 2001, the authorized borrowing line totaled $49.0
million. Of this amount, $24.0 million was an irrevocable stand-by letter of
credit pledged as collateral for uninsured public fund deposits and $7 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 June 30,
2001, authorized borrowing lines totaled $25 million, of which no amounts were
outstanding.

During December 2000, the Company obtained a credit facility
from Bankers Bank permitting borrowing of up to $2.0 million. Outstanding
borrowings under the line of credit are due at maturity on July 1, 2001. As of
June 30, 2001, no amounts were outstanding.

As of June 30, 2001, the Company had cash and due from banks
of $22.0 million, federal funds sold of $11.1 million, and investment securities
of $29.7 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 June 30, 2001, shareholders equity decreased $4.4
million, or 7%, to $62.0 million from $66.4 million as of December 31, 2000.
This decrease is primarily related to the repurchase of 612,900 shares of common
stock during 2001 at a cost of $7.0 million and the payment of a common stock
dividend of $509,000, offset by the retention of $2.9 million of earnings and an
increase in accumulated other comprehensive income of $134,000 due to an
increase in unrealized gains on investment securities available for sale.

As of June 30, 2001 and 2000, the Company met all capital
adequacy requirements to which it was subject. As of June 30, 2001, the Company
had Tier 1 and Total Risk-Based Capital ratios of 10.99% and 12.83%,
respectively, and a Leverage ratio of 8.74%. 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 June 30, 2000, the Company had
Tier 1 and Total Risk-Based Capital ratios of 10.81% and 11.74%, respectively,
and a Leverage ratio of 8.10%.

As of June 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 June 30, 2001, WestStar
had Tier 1 and Total Risk-Based Capital ratios of 9.85% and 10.96%,
respectively, and a Leverage ratio of 7.83%. As of June 30, 2000, WestStar met
all capital adequacy requirements to which it was subject. As of June 30, 2000,
WestStar had Tier 1 and Total Risk-Based Capital ratios of 9.53% and 10.48%,
respectively, and a Leverage ratio of 7.13%.

Subsequent Events

On July 16, 2001, the Company declared a cash dividend of
$0.05 per share payable on August 17, 2001, to shareholders of record on August
3, 2001.

14

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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%       | 4.43%      
|                                                              |       |                                           |            |             |            |           |         |             |            



|*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.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Qualitative Disclosures About Market Risk

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 which
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 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.

15

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During the first six 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 June 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 June 30, 2001, the Companys gap
position has changed from negative to slightly positive at June 30, 2001. Given
this positive gap at June 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 275 basis point reduction in
short term rates by the Federal Reserve Bank during the first half of 2001
effectively repriced approximately half 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.

We believe that there have not been any material changes in
quantitative and qualitative information about market risk since December 31,
2000.



16

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PART II           OTHER INFORMATION



Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On May 21, 2001, the Company held its annual meeting of
shareholders. At that meeting, the security holders voted on the election of
directors with the following results:



|Name               | Term    | Votes CastFor Election | Votes CastAgainst Election | VotesWithheld | Abstentions | Broker Non-Votes
|------------------ | ------- | ---------------------- | -------------------------- | ------------- | ----------- | ----------------
|                   |         |                        |                            |               |             |                 
|E.B. Chester, Jr.  | 3 years | 4,865,953              | 0                          | 11,120        | 0           | 0               
|S. David Gorsuch   | 3 years | 4,865,953              | 0                          | 11,120        | 0           | 0               
|James M. Griffin   | 3 years | 4,865,953              | 0                          | 11,120        | 0           | 0               
|Martin T. Hart     | 3 years | 4,668,512              | 0                          | 208,561       | 0           | 0               
|Garner F. Hill, II | 3 years | 4,668,512              | 0                          | 208,561       | 0           | 0               





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

> (a)         Exhibits
>     
>     None
> (b)        Reports on Form 8-K

> Vail Banks filed a Current Report on Form 8-K on April 25,
>     2001 and an amendment to the Form 8-K on May 8, 2001, reporting a matter
>     under Item 4.
>     Vail Banks filed a Current Report on Form 8-K on May 25,
>     2001, reporting a matter under Item 4.





17

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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.
(Registrant)Date: August 10, 2001
      /s/
        Lisa M. DillonLisa M. Dillon
             Title:     PresidentDate: August 10, 2001
      /s/ Peter G. WillistonPeter G. Williston
           Title:     Senior Executive Vice President 
                        and Chief Financial Officer