---

---

Table of Contents

UNITED STATESSECURITIES AND EXCHANGE
COMMISSIONWashington, D.C.  20549

_______________________

FORM 10-Q

S
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934


For the quarterly period ended March 31, 2003

 ̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934


For the transition period from __________ to
___________

__________________________________

Commission File Number: 000-25081

VAIL BANKS, INC.(Exact name of registrant as specified in its charter)




Colorado

84-1250561(State or other jurisdiction of

(I.R.S. Employerincorporation or organization)

Identification No.)




108 South Frontage Road West, Vail, Colorado 81657(Address of principal executive offices)


(970) 476-2002
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last
report)

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. YesTNo ̈.

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes ̈NoT

Indicate the number of shares outstanding of each of the
issuer’s classes of common stock, as of the latest practicable date: As
of April 30, 2003, there were 5,665,154 shares of common stock ($1.00 par value
per share) outstanding.

---

---



VAIL BANKS, INC.

FORM 10-QFOR THE QUARTER ENDED MARCH 31,
2003

TABLE OF CONTENTS

PART 1
FINANCIAL INFORMATIONITEM 1.
FINANCIAL STATEMENTSConsolidated Balance Sheets
3Consolidated Statements of Income and Comprehensive Income
4Consolidated Statements of Cash Flows
5Notes to Unaudited Consolidated Financial Statements
7ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSForward Looking Statements
13Basis of Presentation
13Overview
13Results of Operations
13Financial Condition
15Asset Quality
15Liquidity
17Capital Resources
18Recent Accounting Pronouncements
19ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
20ITEM 4.
CONTROLS AND PROCEDURES
21PART 1I
OTHER INFORMATIONITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
22SIGNATURESSECTION 302 CERTIFICATION STATEMENTS


2


Table of Contents

PART
I    FINANCIAL INFORMATION

Item 1.       FINANCIAL
STATEMENTS

VAIL
BANKS, INC.Consolidated Balance
SheetsMarch 31,

December 31,(in thousands, except share data)

2003

2002ASSETS


(unaudited)Cash and due from banks
$
21,999

24,940Federal funds sold

45,210

50,040Investment securities, available for sale

106,031

57,634Investment securities, held to maturity (fair value of$654(unaudited) and $731 as of March 31, 2003 and December 31,
2002,respectively)

611

684Investments in bank stocks, at cost

4,213

3,703Loans held for sale

5,747

9,879Gross loans (includes related party loans of $6,546 (unaudited) and
$4,733as of March 31, 2003 and December 31, 2002, respectively)

332,001

331,162Allowance for loan losses

(3,381)

(3,747)Net deferred loan fees

(498)

(159)Premises and equipment, net

38,370

39,005Interest receivable

2,264

1,914Goodwill, net

35,970

35,970Other intangible assets, net

797

816Other assets


3,720

2,422$
593,054

554,263LIABILITIES AND SHAREHOLDERS’ EQUITYLiabilitiesDeposits (includes related party deposits of $2,458 (unaudited) and
$3,425 atMarch 31, 2003 and December 31, 2002, respectively)Non-interest bearing
$
95,479

97,383Interest bearing

360,816

331,315Total deposits

456,295

428,698Federal Home Loan Bank advances

43,202

30,000Guaranteed preferred beneficial interest in Company’s subordinated
debt

24,000

24,000Interest payable and other liabilities

3,351

4,080Total liabilities

526,848

486,778Minority interest

713

713Shareholders’ equityPreferred stock - $1 par value; 2,250,000 shares authorized, no sharesissued and outstanding at March 31, 2003 (unaudited) and December 31,
2002,respectively

-

-Common stock - $1 par value; 20,000,000 shares authorized,5,706,808(unaudited) and 5,734,303 issued and outstanding atMarch 31, 2003 and December 31, 2002, respectively

5,707

5,734Additional paid-in capital

39,538

41,123Retained earnings

20,124

19,492Accumulated other comprehensive income, net of tax expense of 
     $73 (unaudited) and $243 at March 31, 2003 and
December 31, 2002,     respectively

124


423Total shareholders’ equity

65,493

66,772$
593,054

554,263The accompanying unaudited notes are an integral part of these consolidated
financial statements


3


Table of Contents

VAIL BANKS, INC.Consolidated Statements of Income and
Comprehensive Income(in thousands, except share data)

Three months endedMarch 31,2003

2002(unaudited)

(unaudited)Interest incomeInterest and fees on loans
$
6,749

7,888Interest on investment securities

869

728Interest on federal funds sold and
other short-term investments

132

82Total interest income

7,750

8,698Interest expenseDeposits

1,172

1,337Borrowings

309

183Trust preferred securities

612

612Total interest expense

2,093

2,132Net interest income

5,657

6,566Provision for loan losses

125

212Net interest income after provision
for loan losses

5,532

6,354Non-interest incomeDeposit related

752

882Mortgage broker fees

1,450

1,134Other

681

9042,883

2,920Non-interest expenseSalaries and employee benefits

4,325

4,073Occupancy

820

791Furniture and equipment

708

706Amortization of intangible assets

19

-Other

1,152

1,3487,024

6,918Income before income tax expense

1,391

2,356Income tax expense

416

836Net income

975

1,520Net change in unrealized gain/loss on investment securities available for
sale,      net of taxes

(299)

(460)Comprehensive income
$
676

1,060Earnings per shareBasic
$
0.18

0.27Diluted
$
0.17

0.26Weighted average common sharesBasic

5,507,487

5,680,277Diluted

5,833,830

5,943,687


The accompanying unaudited notes are an integral part of these consolidated
financial statements

4


Table of Contents

VAIL BANKS, INC.Consolidated Statements of Cash
Flows(in thousands)

Three months endedMarch 31,2003

2002(unaudited)

(unaudited)Cash flows from operating activitiesNet income
$
975

1,520Adjustments to reconcile net income to net cash provided by
   operating
activitiesNet amortization of premiums on investment securities

113

65Provision for loan losses


125

212Depreciation and amortization

599

578Gain on sale of loans

95

-Recognition of stock compensation on restricted common stock and
     stock options

79

57Deferred income tax expense

(44)

-Other

(10)

(72)Changes in operating assets and liabilitiesLoans held for sale

4,132

1,791Interest receivable

(350)

(224)Other assets

(311)

(220)Interest payable and other liabilities

(729)

318Other, net

-

22Net cash provided by operating activities

4,674

4,047Cash flows from investing activitiesPurchases of investment securities, available for sale

(59,308)

(36,679)Purchases of bank stocks

(510)

(1,125)Proceeds from redemption of bank stocks

-

598Proceeds from maturities of investment securities, held to maturity

73

76Proceeds from maturities/calls of investment securities, available for sale

10,328

3,900Net (increase) decrease in loans

(1,691)

24,000Purchases of premises and equipment


(219)

(1,027)Proceeds from sales of premises and equipment

51

-Proceeds from sales of foreclosed properties

66

308Net cash used by investing activities

(51,210)

(9,949)Cash flows from financing activitiesNet increase in deposits

27,597

13,699Net increase in Federal Home Loan Bank advances

13,202

8,900Repurchase of common stock

(1,691)

-Payment of cash dividends on common stock

(343)

(287)Net cash provided by financing activities

38,765

22,312Net (decrease) increase in cash and cash equivalents

(7,771)

16,410Cash and cash equivalents at beginning of period

74,980

35,526Cash and cash equivalents at end of period
$
67,209

51,936


5


Table of Contents

VAIL BANKS, INC.
Consolidated Statements of Cash Flows (Continued)
(in thousands)



Three months endedMarch 31,2003

2002(unaudited)

(unaudited)Supplemental disclosures of cash flow informationCash paid during the period for:Interest expense
$
2,267

2,368Income taxes
$

275

-Non-cash investing and financing transactions    Foreclosure of collateralized
loans, net of reserve
$
642

289Net change in unrealized gain/loss on investment securities     available
for sale, net of taxes
$
(299)

(460)Reclassification of idle premises and equipment to other assets
$
(274)

-Reclassification of other assets to premises and equipment
$
57

-Issuance of restricted common stock
$
112

117




|The accompanying unaudited notes are an integral part of these consolidated
financial statements
|------------------------------------------------------------------------------------------------



6


Table of Contents

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 and WestStar owns a 100%
interest in First Western Mortgage Services which are 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, 2002.  These interim unaudited consolidated financial statements and the
notes thereto should be read in conjunction with the Company’s Annual
Report on Form 10-K as of and for the year ended December 31, 2002.

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 three months ended March 31, 2003, are not necessarily
indicative of the results that may be expected for the full year.

Certain reclassifications have been made to the 2002 financial
statements to conform to the 2003 presentation.

2.    INVESTMENT SECURITIES

Investment securities consist of the
following:

March 31, 2003

December 31, 2002Amortized

Fair

Amortized

Fair(in thousands)

Cost

Value

Cost

Value(unaudited)

(unaudited)Securities available for saleGovernment agencies
$
26,927

26,871

13,299

13,323State and municipal

17,666

17,420

3,851

3,880Mortgage-backed securities

52,241

52,747

35,318

35,931FHLMC preferred stock

9,000

8,993

4,500

4,500Total securities available for sale
$
105,834

106,031

56,968

57,634Securities held to maturityMortgage-backed securities
$
611

654

684

731Total securities held to maturity
$
611

654

684

731Investments in bank stocksFederal Home Loan Bank stock
$
2,160

2,160

1,650

1,650Federal Reserve Bank stock

1,869

1,869

1,869

1,869Bankers’ Bank of the West stock

184

184

184

184$
4,213

4,213

3,703

3,703




7


Table of Contents

The following table presents the
components of investment income for the three months ended March 31, 2003 and
2002.

(in thousands)

March 31,2003

March 31,2002(unaudited)

(unaudited)Taxable interest income
$
652

587Nontaxable interest income

168

92Dividends

49

49$
869

728


3.     LOANS

Gross loans consist of the
following:

(in thousands)

March 31,2003

December 31,2002(unaudited)Commercial, industrial and land
$
205,476

203,932Real estate - construction

56,217

55,275Real estate - mortgage

61,665

62,188Consumer and other

8,643

9,767$
332,001

331,162


As of March 31, 2003 and December 31,
2002, $106,000 and $172,000, respectively, of deposit account overdrafts have
been reclassified to loans.

In the ordinary course of business,
the Company had loans receivable from directors, executive officers and
principal shareholders (holders of more than five percent of the outstanding
shares of common stock) of the Company and their affiliates as follows:

(in thousands)

2003Balance at January 1, 2003
$
4,733New loans, including renewals **

2,341Payments, including renewals

(528)Balance at March 31, 2003 (unaudited)
$
6,546** Comprised of $1,391,000 of new loans and $950,000 relating to the repurchase
of a loan participation.


4.     PROVISION AND ALLOWANCE FOR LOAN LOSSES

Transactions in the allowance are summarized as follows:

(in thousands)

2003Allowance at January 1, 2003
$
3,747Loans charged off

(534)Recoveries on loans previously charged off

43Provision for loan losses

125Allowance at March 31, 2003 (unaudited)
$
3,381




8


Table of Contents

5.    BORROWINGS

WestStar is a member of the Federal
Home Loan Bank of Topeka (FHLB) and, as a regular part of its business, obtains
both short and long-term advances from this FHLB. Advances are collateralized
primarily by FHLB stock owned by WestStar and loans secured by certain mortgages
or deeds of trust. As of March 31, 2003, the Company’s total borrowing
capacity was $121.0 million of which $43.2 million of borrowings were
outstanding ($11.2 million was short-term and $32.0 million was long-term) and
$24.0 million in the form of stand-by irrevocable letters of credit issued by
the FHLB were pledged as collateral for uninsured public fund deposits.

WestStar has established an unsecured,
overnight federal funds line with Bankers’ Bank of the West that expires
on August 31, 2003.  As of March 31, 2003, this authorized borrowing line
totaled $41.5 million with $0 outstanding.

WestStar has also established
overnight federal funds lines with First Tennessee Bank, N.A. (First Tennessee)
totaling $20.0 million.  If drawn upon, $10.0
million will be a secured line and $10.0 million will be an unsecured line.
These lines are subject to cancellation by First Tennessee at any time upon the
occurrence of certain conditions.  As of March 31, 2003, no amounts were
outstanding under the lines.

6.       SHAREHOLDERS’ EQUITY

Stock Repurchase
Plan

On October 15, 2002, the
Company’s Board of Directors reauthorized the Company’s stock
repurchase program, allowing additional repurchases of up to $10 million through
October 2003.  Since inception of the program in March 2001, the Company has
repurchased 1,023,790 shares at an average cost of $11.57 per share.  During the
first quarter 2003, the Company repurchased 139,500 common shares at an average
cost of $12.12.

Restricted Stock

The Company accounts for its
restricted stock grants in accordance with Accounting Principles Board (APB)
Opinion No. 25.  Accordingly, compensation expense is recorded over the vesting
period of the restricted stock equal to the value of the restricted shares using
the market price of the stock on the grant date. On February 18, 2003, the Board
granted 112,005 shares of restricted stock to several officers of the Company.
The Company is recognizing compensation expense of $1.3 million ratably over the
vesting period of 10 years.

Earnings Per Share

Basic earnings per share represents
net income available to common shareholders divided 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 weighted
average common shares outstanding is increased to include the number of
additional common shares that would have been outstanding if dilutive potential
common shares had been issued.  Common equivalent shares are not included where
inclusion would be anti-dilutive.

The following table presents the net
income and weighted average common shares outstanding used to calculate earnings
per share for the three months ended March 31, 2003 and 2002:

March 31,(in thousands, except share data)

2003

2002(unaudited)Basic earnings per share computationNet income available to common shareholders
$
975

1,520Weighted average shares outstanding - basic

5,507,487

5,680,277Basic earnings per share
$
0.18

0.27


9

---

Table of Contents



March 31,(in thousands, except share data)

2003

2002(unaudited)Diluted earnings per share computationNet income available to common shareholders
$
975

1,520Weighted average shares outstanding - basic

5,507,487

5,680,277Shares assumed issued:Stock options

123,027

110,851Restricted stock

203,316

152,559Weighted average shares outstanding - diluted

5,833,830

5,943,687Diluted earnings per share
$
0.17

0.26


During the three months ended March
31, 2003 and 2002, options to purchase an average of 72,000 shares of common
stock at average exercise prices of $12.23 and $12.14 per share, respectively,
were outstanding, but were not included in the computation of diluted earnings
per share because the exercise prices of these options were greater than the
average market prices of the common stock during such quarter.

Stock Options

On February 10, 2003, the Board
approved the grant of 26,000 stock options to employees and directors of the
Company.

The Company accounts for its stock
options in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to expense over the vesting period the fair
value of stock-based awards as measured on the date of grant.  Alternatively, SFAS 123 allows entities to apply the provisions of APB Opinion No. 25 while
disclosing pro forma net income and pro forma earnings per share for employee
stock option grants made in 1995 and future years as if the fair-value-based
method defined in SFAS 123 had been applied.  The Company has elected to apply
the accounting provisions of APB Opinion No. 25 to employee stock option grants
and provide the pro forma disclosure provisions of SFAS 123.  Accordingly,
stock-based compensation expense for employee option grants is not recognized in
the consolidated financial statements, as options granted under the Plan
generally have an exercise price equal to the market value of the underlying
common stock on the date of grant.  However, during May 2002, approximately
20,000 stock options were granted at a strike price below market value.  The
Company recognized $1,000 of compensation expense during the quarter ended March
31, 2003 related to these options.  Any non-employee stock option grants are
accounted for under SFAS 123.

The fair value of each employee stock
option grant was estimated on the date of grant using the Black-Scholes
option-pricing model.  The following weighted-average assumptions were used:

2003

2002(unaudited)

(unaudited)Dividend yield

2.0%

2.0%Expected life

7 years

6 yearsExpected volatility

26.0%

27.0%Risk-free interest rate

3.6%


4.8%


Had the Company determined
compensation cost based on the fair value accounting provisions prescribed by
SFAS 123 and using the assumptions listed above, the Company’s net income
and earnings per share would have been adjusted to the pro forma amounts
indicated below:

10


Table of Contents



Three months endedMarch 31,(in thousands, except share data)

2003

2002(unaudited)

(unaudited)Net incomeAs reported
$
975

1,520Deduct:  Total stock-based employee       compensation determined under
      the fair value method, net of tax

(53)

(86)Pro forma

922

1,434Earnings per share - basicAs reported
$
0.18

0.27Pro forma

0.17

0.25Earnings per share - dilutedAs reported

0.17

0.26Pro forma

0.15

0.24


7.     REGULATORY MATTERS

As of March 31, 2003, the Company met
all capital adequacy requirements to which it was subject.  As of that date, the
Company had Tier 1 and Total Risk-Based Capital ratios of 13.57% and 14.99%,
respectively, and a Leverage ratio of 9.59%.  Regulatory guidelines permit the
Company’s trust preferred securities to be included in the calculation of
Tier 1 and Total Risk-Based capital, subject to certain limitations.

As of March 31, 2003, WestStar met all
capital adequacy requirements to which it was subject and exceeded the minimum
ratios to be designated as “well-capitalized.”  As of March 31,
2003, WestStar had Tier 1 and Total Risk-Based Capital ratios of 13.04% and
13.94%, respectively, and a Leverage ratio of 9.21%.

8.      SEGMENT INFORMATION

Information about reportable segments
and reconciliation of such information to the consolidated financial statements
as of and for the three months ended March 31 is as follows:

Three Months Ended March 31, 2003 (unaudited)Mortgage(in thousands)

Banking

Brokerage

Other

TotalCondensed income statementTotal income
$
9,184

1,448

1

10,633Total expense

7,079

1,122

1,041

9,242Income before income taxes

2,105

326

(1,040)

1,391Income taxes

677

119


(380)

416Net income
$
1,428

207

(660)

975




11


Table of Contents



Three Months Ended March 31, 2002 (unaudited)Mortgage(in thousands)

Banking

Brokerage

Other

TotalCondensed income statementTotal income
$
10,483

1,134

1

11,618Total expense

7,367

891

1,004

9,262Income before income taxes



3,116

243

(1,003)

2,356Income taxes

1,124

79

(367)

836Net income
$
1,992

164

(636)

1,520


9.       RECENT ACCOUNTING PRONOUNCEMENTS

During June 2002, the FASB issued SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal
Activities.  This statement is effective for exit or disposal activities
initiated after December 31, 2002.  These activities may include sale or
termination of a line of business, the closure of business activities in a
particular location, the relocation of business activities from one location to
another, changes in management structure, and a fundamental reorganization that
affects the nature and focus of operations.  The Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and requires companies to recognize liabilities associated with exit or disposal
activities at the time that they are incurred rather than at the date of a
commitment to the exit or disposal plan.  The Company adopted this standard on
January 1, 2003.  Adoption of this standard did not have an effect on the
Company’s consolidated financial condition or results of operations.

10.       SUBSEQUENT EVENTS

On April 22, 2003, the Board of
Directors declared a regular quarterly dividend of $0.06 per share payable on
May 19, 2003 to shareholders of record on May 5, 2003.

On April 25, 2003, the Board approved
the grant of 18,272 shares of restricted stock to an officer of the Company.
The Company is recognizing compensation expense of $226,000 ratably over the
vesting period of 10 years.

Between April 1, 2003 and April 30,
2003, the Company repurchased 70,900 shares of common stock at a total cost of
$868,000, or $12.25 per share.  These transactions would have materially changed
the number of shares outstanding at March 31, 2003, had these transactions
occurred prior to quarter-end.



12


Table of Contents

|Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

Forward Looking Statements

This
Quarterly Report on Form 10-Q contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.  These
forward-looking statements include, but are not limited to, statements about our
plans, objectives, expectations and intentions and other statements contained in
this report that are not historical facts.  When used in this report, the words
“expects,” “anticipates,” “intends,”
“plans,” “believes,” “seeks,”
“estimates” and similar expressions are generally intended to
identify forward-looking statements.  These forward-looking statements are
inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control.  In
addition, these forward-looking statements are subject to assumptions with
respect to future business strategies and decisions that are subject to change.
Actual results may differ materially from the results discussed in these
forward-looking statements as a result of 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.  Vail
Banks does not intend to update any forward-looking statements whether written
or oral, relating to matters discussed in this Quarterly Report on Form
10-Q.

Basis of Presentation

The
following discussion and analysis provides information regarding the
Company’s financial condition as of March 31, 2003, and its results of
operations for the three months ended March 31, 2003, in comparison to the three
months ended March 31, 2002. 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-K for the year
ended December 31, 2002.

Overview

Net
income was $975,000 for the three months ended March 31, 2003, down from $1.5
million for the three months ended March 31, 2002, a decrease of 36%.

Diluted earnings per share for the
three months ended March 31, 2003, was $0.17 compared to $0.26 for the three
months ended March 31, 2002, a decrease of 35%.

The annualized return on average
assets was 0.69% for the quarter ended March 31, 2003, compared to 1.09% for the
quarter ended March 31, 2002.

The annualized return on average
equity was 5.99% for the quarter ended March 31, 2003, compared to 9.63% for the
quarter ended March 31, 2002.

Results of Operations

Net
Interest Income.  Net interest income, on a fully tax-equivalent basis
(FTE), decreased by $873,000, or 13% to $5.7 million for the three months ended
March 31, 2003 from $6.6 million for the three months ended March 31, 2002. The
net interest margin on an FTE basis was 4.89% for the first quarter 2003 as
compared to 5.76% for the first quarter 2002.  Net interest margin is influenced
by the level and relative mix of earning assets, interest bearing liabilities,
non-interest bearing liabilities and shareholders’ equity as well as the
cost of interest bearing liabilities as compared to the yield on earnings
assets.  The decrease in net interest margin during first quarter 2003 was
primarily due to (1) the 50 basis point interest rate cut implemented by the
Federal Reserve in November 2002, (2) a shift in the mix of earning assets from
higher yielding loans to lower yielding investments and federal funds sold, (3)
an increase in higher cost borrowings relative to lower cost deposits as a
result of the Company’s leverage strategy, and (4) an increase in the
deferral of loan fees in the first quarter of 2003 when compared with first
quarter 2002.  During the first quarter 2003, the Company deferred $375,000
($240,000, or $0.04 diluted earnings per share, after tax) in loan fees,

13


Table of Contents

reflecting a more conservative approach that more closely recognizes loan fee
income over the lives of the related loans.  A portion of the deferral also
included fees on long-term loans now being funded with long-term borrowings.  A
substantial portion of such deferred fees will be recognized as income in
subsequent quarters of calendar year 2003. The net interest margin on an FTE
basis would have been 5.21% including the recognition of deferred fees.  Vail
Banks has experienced increased liquidity as the result of a decrease in loan
demand attributable to the soft economy and more conservative underwriting
policies and an increase in deposits.  In response, the Company capitalized on
the low interest rate environment and its wholesale funding source to extend
fixed rate financing to several customers, thereby locking in a spread.  Between
March 31, 2002 and March 31, 2003 the Company’s borrowings increased $13.2
million and investments increased $36.8 million, while at the same time deposits
remained unchanged and loans dropped $35.8 million.

Interest income FTE decreased
$912,000, or 10% for first quarter 2003 as compared to the same period in 2002
despite the fact that earning assets increased $10.3 million or 2% during the
same period.  Subsequent to March 31, 2002, the mix of earning assets shifted
away from higher yielding loans toward lower yielding investment securities and
federal funds sold.  During first quarter 2003, average loans declined to 71% of
earning assets as compared to 82% during first quarter 2002.  During this time,
loans had a yield of 8.09% as compared to the 4.64% yield on investment
securities and 1.19% yield on federal funds sold. As a result of this shift, the
total yield on average earnings assets decreased 94 basis points to 6.67% for
first quarter 2003, as compared to 7.61% for first quarter 2002.

Interest expense decreased $39,000, or
2% for first quarter 2003 as compared to the same period during 2002. This
decrease was primarily due to the 50 basis point decline in interest rates
during November 2002 as well as the effect of maturing certificates of deposit
renewing at significantly lower interest rates.  This decrease was offset by an
$11.1 million increase in average borrowings during first quarter 2003 as
compared to first quarter 2002.  As a result, the total cost of interest-bearing
liabilities decreased 11 basis points to 2.09% for first quarter 2003, as
compared to 2.20% for first quarter 2002. This decrease in cost of interest
bearing liabilities, however, was not in proportion to the decrease in yield on
average interest earning assets, resulting in an overall decrease in the net
interest margin for first quarter 2003.

Non-Interest Income.
Non-interest income decreased by $37,000, or 1%, to $2.88 million for the three
months ended March 31, 2003, from $2.92 million for the three months ended March
31, 2002.  This decrease over the first quarter of 2002 was primarily
attributable to a decrease in deposit related service charges and other
non-interest income, partially offset by an increase in mortgage broker fees.
Deposit related income decreased $130,000, or 15%, from first quarter 2002
primarily due to a $111,000, or 19%, decrease in insufficient funds charges.
Other non-interest income decreased $223,000, or 25%, from first quarter 2002
primarily due to the outsourcing of the Company’s merchant card program.
This outsourcing accounted for a $122,000 reduction in other non-interest income
and a $148,000 decrease in other non-interest expense from first quarter 2002,
discussed below.  Mortgage broker fees increased $316,000, or 28%, from first
quarter 2002 due to increased refinancing activity as a result of continued low
interest rates.

Non-Interest Expense.
Non-interest expense increased by $106,000, or 2%, to $7.0 million for the three
months ended March 31, 2003, from $6.9 million for the three months ended March
31, 2002.  This increase is largely attributable to the increasing costs of
employee related and occupancy expenses.  Mortgage broker commissions increased
$180,000, or 36%, from first quarter 2002 due to increased refinancing activity.
These increases were offset by a $148,000 savings in expense related to the
outsourcing of the merchant card program during first quarter 2003.

The efficiency ratio increased to 82% for the quarter ended March
31, 2003, from 73% for the quarter ended March 31, 2002. This increase in the
efficiency ratio was due to the decline in revenue (net interest income plus
non-interest income) of $946,000 during first quarter 2003 while non-interest
expenses increased by $106,000 during the same period.

Income Taxes.  The
Company’s effective income tax rate (income tax expense as a percentage of
pre-tax income) was 29.9% for the three months ended March 31, 2003 as compared
to 35.5% for the three months ended March 31, 2002.  This decrease in the
effective income tax rate was primarily due to an increase in the deferred tax
asset of $44,000 resulting from a change in the deferred income tax rate as well
as an increase in tax-exempt interest income generated from municipal securities
purchased during first quarter 2003.

14


Table of Contents

Financial Condition

The Company’s assets increased
by $38.8 million or 7%, to $593.1 million as of March 31, 2003, from $554.3
million as of December 31, 2002.

Federal funds sold balances decreased
by $4.8 million, or 10%, to $45.2 million as of March 31, 2003 from $50.0
million at December 31, 2002.  Investment securities increased to $110.9 million
as of March 31, 2003, compared to $62.0 million as of December 31, 2002, a 79%
increase.  During this period, quality loan demand remained flat while deposits
continued to grow, resulting in additional cash inflows to invest. In response,
the Company capitalized on the low interest rate environment and its wholesale
funding source to extend fixed rate financing to several customers, thereby
locking in a spread.  Between December 31, 2002 and March 31, 2003, FHLB
borrowings increased $13.2 million, or 44%.

As of March 31, 2003, loans held for
sale decreased $4.1 million, or 42%, from December 31, 2002.  The ending balance
of loans held for sale at any particular date is dependent on the timing of the
closing and ultimate funding of these loans by the outside investor.  Thus, an
increase or decrease in the ending balance is primarily a function of this
timing and not indicative of trends in mortgage loan demand.

Gross loans increased $839,000, or
less than 1%, from December 31, 2002.

Premises and equipment decreased by
$635,000, or 2%, from $39.0 million as of December 31, 2002, to $38.4 million as
of March 31, 2003.  This decrease was mainly attributable to $580,000 of
depreciation expense and the transfer of $274,000 of idle assets to other
assets, offset by the purchase of $219,000 of premises and equipment primarily
related to equipment upgrades and the remodeling of branches.

Deposits increased by $27.6 million,
or 6%, from $428.7 million as of December 31, 2002, to $456.3 million as of
March 31, 2003.  The increase in deposits was largely attributable to a $16.6
million increase in public funds between December 31, 2002 and March 31, 2003.
Public funds increased during this time frame due, to some degree, to customer
property tax deposits.

Asset Quality

Provision
and Allowance for Loan Losses. Provision expense for the three months ended
March 31, 2003, was $125,000 compared to no provision for the three months ended
December 31, 2002 and $212,000 recorded in the three months ended March 31,
2002.  The allowance for loan losses of $3.4 million as of March 31, 2003,
decreased 10% from the $3.7 million level as of December 31, 2002 and it
represents 1.02% of total loans and 109% of non-performing loans as of March 31,
2003.  Although gross loans increased $839,000, or less than 1%, between
December 31, 2002 and March 31, 2003, non-performing loans decreased $645,000,
or 17% during the same time period.  Accordingly, the $366,000 decrease in the
allowance for loan losses from December 31, 2002 reflects the Company’s
revised estimate of probable losses in the loan portfolio.

The amount of the provision for loan
losses is based on regular evaluations of the loan portfolio, with particular
attention directed toward non-performing, delinquent, and other potential
problem loans.  During these evaluations, consideration is also given to such
factors as management’s evaluation of specific loans, the level and
composition of delinquent and non-performing loans, historical loan loss
experience, results of examinations by regulatory agencies, external and
internal asset review processes, the market value of collateral, the strength
and availability of guarantees, concentrations of credit and other judgmental
factors.



15


Table of Contents

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)

Three months endedMarch 31,2003

2002(unaudited)

(unaudited)Average total loans
$
338,411

383,272Total loans at end of period
$
331,503

367,326Allowance at beginning of period
$
3,747

4,375Loans charged off

(534)

(171)Recoveries on loans previously charged
off

43

61Provision for loan losses

125

212Allowance at end of period
$
3,381

4,477Annualized net charge-offs to average loans

0.59

0.12%Allowance to total loans at end of period

1.02

1.22%


Non-Performing Assets. The following table presents
information regarding non-performing assets as of the dates indicated:

Non-Performing Assets  (in thousands)

March 31,2003

2002(unaudited)

(unaudited)Nonaccrual loans
$
3,089

3,198Restructured loans

-

-Total non-performing loans

3,089

3,198Foreclosed properties

796

284Total non-performing assets

3,885

3,482Loans 90 days or more past due and accruing

83

124Total risk assets
$
3,968

3,606Non-performing loans to total loans

0.93%

0.87%Non-performing assets to loan related assets

1.17%

0.95%Non-performing assets to total assets

0.66%

0.60%Risk assets to loan related assets

1.19%

0.98%


The Company believes that it has
adequate collateral to recover the majority of the balance of the nonaccrual
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.

16


Table of Contents

Liquidity

Liquidity
is a measure of the Company’s ability to meet its commitments and
obligations with available funds. These commitments may include paying dividends
to shareholders, funding new loans for borrowers, funding withdrawals by
depositors, paying general and administrative expenses, and funding capital
expenditures. 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.  Other sources of liquidity include sale or maturity of investment
securities and the ability to borrow funds.  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.

As of March 31, 2003, the Company had
cash and cash equivalents (including federal funds sold) of $67.2 million and
investment securities of $110.9 million.  Almost 96% of the Company’s
investment portfolio is classified as available-for-sale and can be readily sold
to meet liquidity needs.  Based on current plans and business conditions, the
Company expects that its cash, cash equivalents, investment securities and
available borrowing capacity 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.

Cash Flows

Net Cash from Operating Activities

During the three-month period ended
March 31, 2003, cash of $4.7 million was provided by operating activities
consisting primarily of net income of $975,000 plus non-cash expenses of
$957,000 and net decreases in operating assets and liabilities of $2.7 million.
Non-cash expenses consisted primarily of $580,000 of depreciation and
amortization expense on premises and equipment, a $125,000 loan loss provision
and $113,000 of net amortization of premiums on investment securities.  The net
decrease in operating assets and liabilities was primarily due to a $4.1 million
decrease in loans held for sale offset by a $729,000 decrease in interest
payable and other liabilities, a $350,000 increase in interest receivable and a
$311,000 increase in other assets.

During the three-month period ended
March 31, 2002, cash of $4.0 million was provided by operating activities
consisting primarily of net income of $1.5 million plus non-cash expenses of
$840,000 and net decreases in operating assets and liabilities of $1.7 million.
Non-cash expenses consisted primarily of $578,000 of depreciation and
amortization expense on premises and equipment and a $212,000 loan loss
provision.  The net decrease in operating assets and liabilities was primarily
due to a $1.8 million decrease in loans held for sale, a $318,000 increase in
interest payable and other liabilities, a $220,000 increase in other assets, and
a $224,000 increase in interest receivable.  The decrease in loans held for sale
was primarily due to reduced loan demand as mortgage interest rates began to
rise.

Net Cash from Investing Activities

During the three-month period ended
March 31, 2003, cash of $51.2 million was used for investing activities.  These
outflows consisted primarily of the purchase of $59.8 million of investment
securities and a $1.7 million increase in loans, offset by the maturity and/or
calls of $10.4 million of investment securities.

During the three-month period ended
March 31, 2002, cash of $9.9 million was used for investing activities.  These
outflows consisted primarily of the purchase of $37.8 million of investment
securities and the purchase of $1.0 million of premises and equipment, offset by
a $24.0 million decrease in loans, the maturity and/or calls of $4.6 million of
investment securities and $308,000 of proceeds from sales of foreclosed
properties.

Net Cash from Financing Activities

During the three-month period ended
March 31, 2003, cash of $38.8 million was provided by financing activities
consisting primarily of an increase in deposits of $27.6 million and the receipt
of $13.2 million of proceeds from FHLB advances, offset by the repurchase of
$1.7 million of common stock and the payment of dividends on common stock of
$343,000.



17


Table of Contents

During the three-month period ended
March 31, 2002, cash of $22.3 million was provided by financing activities
consisting primarily of an increase in deposits of $13.7 million and the receipt
of $8.9 million of proceeds from FHLB advances, offset by the payment of
dividends on common stock of $287,000.

Borrowings

WestStar is a member of the Federal
Home Loan Bank of Topeka (FHLB) and, as a regular part of its business, obtains
both short and long-term advances from this FHLB. Advances are collateralized
primarily by FHLB stock owned by WestStar and loans secured by certain mortgages
or deeds of trust. As of March 31, 2003, the Company’s total borrowing
capacity was $121.0 million of which $43.2 million of borrowings were
outstanding ($11.2 million was short-term and $32.0 million was long-term) and
$24.0 million in the form of stand-by irrevocable letters of credit issued by
the FHLB were pledged as collateral for uninsured public fund deposits.

WestStar has established an unsecured,
overnight federal funds line with Bankers’ Bank of the West that expires
on August 31, 2003.  As of March 31, 2003, this authorized borrowing line
totaled $41.5 million with $0 outstanding.

WestStar has also established
overnight federal funds lines with First Tennessee Bank, N.A. (First Tennessee)
totaling $20.0 million.  If drawn upon, $10.0 million will be a secured line and
$10.0 million will be an unsecured line.  These lines are subject to
cancellation by First Tennessee at any time upon the occurrence of certain
conditions.  As of March 31, 2003, no amounts were outstanding under the lines.

Dividends

Payment of dividends is at the
discretion of the Board and is determined by taking into account the earnings,
capital levels, cash requirements, and the financial condition of Vail Banks and
WestStar, as well as applicable government regulations and other relevant
factors.  On April 22, 2003, the Board declared a regular quarterly dividend of
$0.06 per share payable on May 19, 2003 to shareholders of record on May 5,
2003.

Stock Repurchase Plan

On October 15, 2002, the
Company’s Board of Directors reauthorized the Company’s stock
repurchase program, allowing additional repurchases of up to $10 million through
October 2003.  Since inception of the program in March 2001, the Company has
repurchased 1,023,790 shares at an average cost of $11.57 per share.  During the
first quarter 2003, the Company repurchased 139,500 common shares at an average
cost of $12.12.

Capital Resources

As of
March 31, 2003, shareholders’ equity had decreased $1.3 million, or 2%, to
$65.5 million from $66.8 million as of December 31, 2002.  This decrease is
primarily related to the repurchase of common stock at a cost of $1.7 million,
the payment of common stock dividends of $343,000 and a decrease in accumulated
other comprehensive income of $299,000 related to decreased unrealized gains on
investment securities available for sale, offset by the retention of $975,000 of
earnings.

As of March 31, 2003 and 2002, the
Company met all capital adequacy requirements to which it was subject.  As of
March 31, 2003, the Company had Tier 1 and Total Risk-Based Capital ratios of
13.57% and 14.99%, respectively, and a Leverage ratio of 9.59%.  Regulatory
guidelines permit the Company’s trust preferred securities to be included
in the calculation of Tier 1 and Total Risk-Based capital, subject to certain
limitations.  As of March 31, 2002, the Company had Tier 1 and Total Risk-Based
Capital ratios of 12.46% and 14.11%, respectively, and a Leverage ratio of
9.50%.

As of March 31, 2003 and March 31,
2002, WestStar met all capital adequacy requirements to which it was subject and
exceeded the minimum ratios to be designated as “well-capitalized.”
As of March 31, 2003, WestStar had Tier 1 and Total Risk-Based Capital ratios of
13.04% and 13.94%, respectively, and a Leverage ratio of 9.21%.  As of March 31,
2002, WestStar had Tier 1 and Total Risk-Based Capital ratios of 12.01% and
13.12%, respectively, and a Leverage ratio of 9.15%.

18


Table of Contents

Recent Accounting Pronouncements

During June 2002, the FASB issued SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities.  This
statement is effective for exit or disposal activities initiated after December
31, 2002.  These activities may include sale or termination of a line of
business, the closure of business activities in a particular location, the
relocation of business activities from one location to another, changes in
management structure, and a fundamental reorganization that affects the nature
and focus of operations.  The Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and requires
companies to recognize liabilities associated with exit or disposal activities
at the time that they are incurred rather than at the date of a commitment to
the exit or disposal plan.  The Company adopted this standard on January 1,
2003.  Adoption of this standard did not have an effect on the Company’s
consolidated financial condition or results of operations.







19


Table of Contents

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, 2002 that are sensitive to changes in interest
rates.

Principal Amount Maturing (b)
in:(in thousands)

2003
2004
2005
2006
2007
Thereafter or Non-Maturing
Total
Fair Value
December 31, 2002INTEREST RATE SENSITIVE ASSETS




Federal funds sold and interest earning deposits

$50,072
$              -
$         -
$             -
$             -
$             -
$50,072
$50,072Weighted average interest rate

1.09%
0.00%
0.00%
0.00%
0.00%
0.00%
1.09%Adjustable-rate securities

-
-
-
-
2,001
26,451
28,452
28,565Weighted average interest rate (a)

0.00%
0.00%
0.00%
0.00%
3.25%
5.08%
4.95%Fixed-rate securities

851
458
5
1,119
116
26,651
29,200
29,800Weighted average interest rate (a)

5.97%
5.26%
7.00%
5.36%
6.48%
5.79%
5.77%Investments in bank stocks

-
-
-
-
-
3,703
3,703
3,703Weighted average interest rate

0.00%
0.00%
0.00%
0.00%
0.00%
4.90%
4.90%Loans held for sale

9,879
-
-
-
-
-
9,879
9,879Weighted average interest rate

5.20%
0.00%
0.00%
0.00%
0.00%
0.00%
5.20%Adjustable-rate loans

113,373
49,486
21,546
17,880
24,941
25,804
253,030
253,177Weighted average interest rate

7.19%
6.39%
6.51%
6.13%
6.79%
7.35%
6.88%Fixed-rate loans

23,911
19,501
11,212
7,472
2,875
13,002
77,973
81,246Weighted average interest rate

8.50%
8.73%
8.36%
8.23%
7.38%
7.32%
8.27%Total interest rate sensitive assets

$198,086
$69,445
$32,763
$26,471
$29,933
$95,611
$452,309
$456,442Weighted average
interest rate

5.71%
7.04%
7.15%
6.69%
6.61%
6.19%
6.24%


INTEREST RATE SENSITIVE LIABILITIES

Interest-bearing checking, savings and money market
accounts

$             -
$         -
$            -
$         -
$         -
$209,964
$209,964
$209,964Weighted average interest rate

0.00%
0.00%
0.00%
0.00%
0.00%
0.63%
0.63%Fixed-rate time deposits

106,668
12,026
1,639
381
637
-
121,351
122,215Weighted average interest rate
2.55%
3.19%
3.75%
4.04%
3.42%
0.00%
2.64%Fixed-rate borrowings

9,490
8,940
5,715
5,615
240
-
30,000
31,039Weighted average interest rate
2.91%
3.77%
3.99%
4.46%
4.80%
0.00%
3.68%Trust preferred

-
-
-
-
-
24,000
24,000
25,208Weighted average interest rate

0.00%
0.00%
0.00%
0.00%
0.00%
10.19%
10.19%Total interest rate sensitive liabilities

$116,158
$20,966
$7,354
$5,996
$877
$233,964
$385,315
$388,426Weighted average
interest rate

2.58%
3.44%
3.94%
4.43%
3.80%
1.61%
2.10%


(a)     These interest rates are not adjusted to
reflect tax equivalent yields. 
(b)     The above amounts represent scheduled
maturities and do not include prepayments that may occur.

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 by the Company.  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.

20


Table of Contents

The Company’s Asset/Liability
Management Committee manages interest rate risk.  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 2002 and the
first three months of 2003, 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 three months of 2003,
Vail Banks experienced increased liquidity, which was used in part to purchase
longer-term investment securities.  While the liquidity position increased, the
overall balance sheet restructuring decreased the asset sensitive nature of the
balance sheet.  Therefore, Vail Banks was less sensitive to changes in interest
rates at March 31, 2003 than at December 31, 2002.

During the remainder of 2003, the
Company will face risk primarily from the possibility of lower interest rates.
Although the Company’s gap position is slightly positive at March 31,
2003, due to the low level of deposit rates, the bank is more sensitive to
downward changes in rates.  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 525 basis point reduction in
short-term rates by the Federal Reserve Bank since December 2000 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.

Item 4.     CONTROLS AND PROCEDURES

Company
management, including the president and chief financial officer, supervised and
participated in an evaluation of the Company’s disclosure controls and
procedures (as defined in rules of the Securities and Exchange Commission)
within the 90 days prior to the filing of this report.  Based on, and as of the
date of, that evaluation, the Company’s president and chief financial
officer have concluded that the Company’s disclosure controls and
procedures were effective in accumulating and communicating information to
management, including the president and chief financial officer, as appropriate
to allow timely decisions regarding required disclosures of that information
under the Securities and Exchange Commission’s rules and forms and that
the disclosure controls and procedures are designed to ensure that the
information required to be disclosed in reports that are filed or submitted
under the Securities and Exchange Act of 1934, as amended, are recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms.

There were no significant changes in
the Company’s internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.





21


Table of Contents

PART IIOTHER
INFORMATION

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

(a)Exhibits

> 99.1
> Certification by Lisa M. Dillon, President of the Company, pursuant to 18 U.S.C.
> Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
> 200299.2
> Certification by Peter G. Williston, Senior Executive Vice President and Chief
> Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted
> pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b)Reports
on Form 8-K

No reports were filed during the first quarter of
2003.

22


Table of Contents

SIGNATURES

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



|                   | VAIL BANKS, INC.                                                                                      
|------------------ | ------------------------------------------------------------------------------------------------------
|                   |                                                                                                       
|Date:  May 7, 2003 | /s/ LISA M.
DILLON
Lisa M. Dillon
President                                                           
|Date: May 7, 2003  | /s/  PETER G.
WILLISTON
Peter G. Williston
Senior Executive Vice President and Chief Financial Officer











23


Table of Contents

302 CERTIFICATION FOR FORM 10-Q

CERTIFICATIONS

I, Lisa M. Dillon, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Vail Banks,
  Inc. (the registrant);
2. Based on my knowledge, this quarterly report does not
  contain any untrue statement of a material fact or omit to state a material
  fact necessary to make the statements made, in light of the circumstances
  under which such statements were made, not misleading with respect to the
  period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
  financial information included in this quarterly report, fairly present in all
  material respects the financial condition, results of operations and cash
  flows of the registrant as of, and for, the periods presented in this
  quarterly report;
4. The registrants other certifying officer and I are
  responsible for establishing and maintaining disclosure controls and
  procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
  registrant and we have:

|a) | designed such disclosure controls and
      procedures to ensure that material information relating to the registrant,
      including its consolidated subsidiaries, is made known to us by others
      within those entities, particularly during the period in which this
      quarterly report is being prepared;
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|b) | evaluated the effectiveness of the
      registrants disclosure controls and procedures as of a date within 90
      days prior to the filing date of this quarterly report (the Evaluation
      Date); and                                                                                                        
|c) | presented in this quarterly report our
      conclusions about the effectiveness of the disclosure controls and
      procedures based on our evaluation as of the Evaluation Date;                                                                                                                                    

1. The registrant’s other
certifying officer and I have disclosed, based on our most recent evaluation, to
the registrant’s auditors and the audit committee of registrant’s
board of directors (or persons performing the equivalent function):

|a) | all
significant deficiencies in the design or operation of internal controls which
could adversely affect the registrant’s ability to record, process,
summarize and report financial data and have identified for the
registrant’s auditors any material weaknesses in internal controls;
and
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|b) | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant’s internal
controls; and                                                                                                                                        

1. The registrant’s other certifying officer and I have
indicated in this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.



Date:  May 7, 2003

| | /s/ Lisa M.
      Dillon
      Lisa M. Dillon
      President
| | -------------------------------------------------------------



24


Table of Contents

302 CERTIFICATION FOR FORM 10-Q

CERTIFICATIONS

I, Peter G. Williston, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Vail Banks,
      Inc. (the registrant);
2. Based on my knowledge, this quarterly report does not
      contain any untrue statement of a material fact or omit to state a
      material fact necessary to make the statements made, in light of the
      circumstances under which such statements were made, not misleading with
      respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and
      other financial information included in this quarterly report, fairly
      present in all material respects the financial condition, results of
      operations and cash flows of the registrant as of, and for, the periods
      presented in this quarterly report;
4. The registrants other certifying officer and I are
      responsible for establishing and maintaining disclosure controls and
      procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
      registrant and we have:

|a) | designed such disclosure controls and
          procedures to ensure that material information relating to the
          registrant, including its consolidated subsidiaries, is made known to
          us by others within those entities, particularly during the period in
          which this quarterly report is being prepared;
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|b) | evaluated the effectiveness of the
          registrants disclosure controls and procedures as of a date within 90
          days prior to the filing date of this quarterly report (the
          Evaluation Date); and                                                                                                            
|c) | presented in this quarterly report our
          conclusions about the effectiveness of the disclosure controls and
          procedures based on our evaluation as of the Evaluation Date;                                                                                                                                            

1. The registrant’s other
certifying officer and I have disclosed, based on our most recent evaluation, to
the registrant’s auditors and the audit committee of registrant’s
board of directors (or persons performing the equivalent function):

|a) | all
significant deficiencies in the design or operation of internal controls which
could adversely affect the registrant’s ability to record, process,
summarize and report financial data and have identified for the
registrant’s auditors any material weaknesses in internal controls;
and
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|b) | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant’s internal
controls; and                                                                                                                                        

1. The registrant’s other certifying officer and I have
indicated in this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.



Date:  May 7, 2003

| | /s/ Peter G.
          Williston
          
          Peter G. Williston
          Senior Executive Vice President and Chief Financial Officer
| | ----------------------------------------------------------------------------------------------------------------------------------------------





25