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TABLE OF CONTENTS

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

FORM 10-K

For the fiscal year ended December 31, 2002

For the transition period from                                      to                                     

Commission File Number: 000-25081

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

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

Securities registered pursuant to Section 12(b) of the Act: None

Name of exchange on which registered: None

Securities registered pursuant to Section 12(g) of the Act: Common stock, $1.00 par value per share.

        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 ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o    No ý

        State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the registrant's most recently completed second fiscal quarter: As of June 28, 2002, 5,798,203 shares of common stock, $1.00 par value, were issued and outstanding with an aggregate value of $47,520,157 held by non-affiliates (based on market value of $13.49 per share) (computed by reference to the price at which the common stock was sold.)

        Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: As of February 28, 2003, there were issued and outstanding 5,758,408 shares of common stock.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held May 19, 2003, are incorporated by reference into Part III.

VAIL BANKS, INC.

ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2002

TABLE OF CONTENTS

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PART I

ITEM 1.    BUSINESS.

General

        Vail Banks, Inc. (Vail Banks) is a bank holding company headquartered in Vail, Colorado with consolidated assets of $554.3 million at December 31, 2002. Vail Banks has three wholly-owned subsidiaries, WestStar Bank (WestStar), Vail Banks Statutory Trust I, and Vail Banks Statutory Trust II. Additionally, WestStar and Vail Banks own a 54.04% interest in Avon 56 Limited, a real estate partnership, and WestStar owns a 100% interest in First Western Mortgage Services, Inc. (First Western). All entities are collectively referred to herein as the Company or Vail Banks.

        WestStar is a Colorado state bank with 22 retail offices located primarily in the Western Slope region of Colorado. It was formed in 1977 as a community bank to serve the local residents and businesses of Vail. In 1993, Vail Banks was formed as a bank holding company for WestStar. Vail Banks has maintained WestStar's position as an institution offering a relatively broad range of convenient banking services delivered with personalized customer service.

        On January 1, 2000, WestStar acquired First Western for consideration that included cash and installment notes. This acquisition added mortgage brokerage to WestStar's lending services. First Western continues to operate as a wholly-owned subsidiary of WestStar.

        On July 14, 2000, Vail Banks completed the acquisition of Estes Bank Corporation and its wholly owned subsidiary, United Valley Bank (collectively United Valley), and subsequently merged United Valley into WestStar. United Valley shareholders received 337,917 shares of Vail Banks' common stock and cash of $17.7 million. On the date of the merger, United Valley had net loans of $49.5 million, deposits of $75.9 million, and offices in Estes Park, Granby and Grand Lake, Colorado.

        On December 1, 2000, Vail Banks acquired East West Mortgage Company (East West). Vail Banks issued 21,053 shares of common stock and paid $200,000 in cash to the holders of East West common stock. East West was merged into First Western.

        WestStar currently has offices in the region of Colorado locally referred to as the "Western Slope," including Summit County (which includes the Breckenridge, Keystone and Copper Mountain ski resorts), Grand County (which serves the Winter Park ski resort), Eagle County (which includes the Vail and Beaver Creek ski resorts), Delta County, Garfield County, Pitkin County (which serves the Aspen and Snowmass ski resorts), Mesa County, Montrose County, San Miguel County (which includes the town and ski resort of Telluride), Routt County (which includes the town and ski resort of Steamboat Springs) and offices in the area locally known as the "Front Range", including Denver and Estes Park. These areas of Colorado are home to a variety of commercial, recreational, entertainment, and cultural enterprises.

        The Western Slope has experienced growth in recent years, primarily as a result of an expanding market for first and second homes, and summer and winter tourism. As the year-round population of this region has grown, local businesses have prospered by servicing this growth. Consequently, a large concentration of Vail Banks' business is in construction lending and providing banking services for small-to-medium size businesses in its markets. To meet the growing needs of its customers and to prepare for future growth, Vail Banks has developed a stronger infrastructure by (1) expanding its computer technology, (2) entering emerging growth markets by building and staffing new facilities, and (3) centralizing certain administrative, processing, accounting and other operational functions.

        Vail Banks' growth has been designed to maintain customer loyalty through continuity of operations and personnel. Historically, shareholders of entities merged into Vail Banks, who are typically members of the local community, elect to hold ownership stakes in Vail Banks after the merger. The additions of Bank of Telluride (founded in 1969), Western Colorado Bank (founded in

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1950), Glenwood Independent Bank (Glenwood) (founded in 1955) and United Valley (founded in 1908) expanded Vail Banks' presence in Western Slope and Front Range markets, as these were well-established community banks that had significant local sponsorship. Several directors of WestStar, as well as both its Chairman and President, have been associated with WestStar for more than ten years. Additionally, several WestStar directors who previously served as directors of acquired institutions had been associated with those banks for more than ten years.

History

        In December 1993, Vail Banks commenced operations by acquiring 100% of the outstanding shares of WestStar, which opened in December 1977. Since that time, Vail Banks has grown through a combination of internal growth, de novo establishment of retail offices and external growth, including the acquisition of community banks. In 1994, WestStar converted from a national bank to a state bank. In January 1994, WestStar opened a retail office in Avon to begin serving that growing community located west of Vail. In June 1995, Vail Banks acquired Snow Bancorp, a bank holding company located in Dillon, and merged its bank subsidiary into WestStar. In 1996, taking advantage of changes to Colorado bank branching laws that permitted subsidiary banks of Colorado bank holding companies to branch into additional locations, WestStar opened retail offices in Frisco and Edwards. In 1997, Vail Banks merged with Cedaredge Financial Services, Inc. (Cedaredge), a bank holding company with retail offices in Basalt, Cedaredge, Delta and Montrose that were converted to WestStar retail offices. WestStar's Gypsum, Breckenridge and Eagle retail offices were opened in 1997. The merger with Independent Bankshares, Inc. (Independent) added retail offices in Glenwood Springs and New Castle in 1998; the acquisition of Telluride Bancorp, Ltd. (Telluride) added retail offices in Telluride, Norwood and Montrose in 1998; the purchase of certain assets and assumption of certain liabilities of the Glenwood Springs branch of World Savings Bank, FSB, Oakland, California, added another office in Glenwood Springs in 1999; the acquisitions of First Western in January 2000 and East West in December 2000 added offices in Avon and Steamboat Springs; and the acquisition of United Valley in July 2000 added offices in Estes Park, Granby and Grand Lake. The Company opened de novo branches in Aspen during 2000 and Grand Junction during 2001. During 2001, the Company closed the Grand Lake branch. During 2002, the Company closed branches located in Eagle, Montrose, New Castle and West Vail. All of the branches that were closed were limited service facilities located near larger full-service WestStar branches. Also during 2002, both the Dillon branch and the Glenwood Springs downtown branch were relocated to newer facilities in more visible locations in their respective communities.

Community Banking Philosophy

        WestStar is a community bank that provides a relatively broad range of banking products and services to consumers and businesses in all of its retail offices. Retail offices are operated with the goal of offering individualized customer service and providing superior financial services. Many administrative operations, such as data processing, loan administration, account reconciliation and maintenance, accounting, compliance and broad policy decisions are centralized to ensure consistency, accuracy and efficiency and to allow retail office personnel to concentrate on providing superior customer service. The managers and associates of each retail office focus on day-to-day customer service, business development and selling. Management of Vail Banks believes that this organizational structure allows retail offices to offer the individualized customer service of a community bank while maximizing the benefits of technological expertise, operating synergies and other administrative cost savings and efficiencies.

        Management is committed to investing in its communities. Executive officers and regional presidents live in the communities served by their retail offices, and Vail Banks encourages board

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members and bank associates to be actively involved in civic and public service activities in their communities.

Growth Strategies

        Vail Banks intends to enhance and solidify its position as a major provider of community banking services for individuals and small-to-medium size businesses on the Western Slope and the Front Range. As a result of its significant investment in retail offices, technology and administration infrastructure, management believes that Vail Banks' growth, both internally and by merger or acquisition, has been quickly and efficiently integrated.

        Vail Banks believes that it will continue to grow through expansion of its existing market share, de novo establishment of retail offices, and mergers and acquisitions. Vail Banks' loan portfolio increased from $78.7 million to $331.0 million from December 31, 1995 to December 31, 2002, for a compound annual growth rate of almost 23%. During the same period, Vail Banks completed eight mergers and acquisitions and opened seven de novo branches.

        Expansion of Existing Market Share.    Vail Banks intends to continue to increase its overall market share in its markets by solidifying relationships with current customers and attracting new customers who desire a local banking relationship. Management believes that this can be accomplished by (1) evaluating the needs of its existing and potential customers to determine ways to enhance services and products, (2) increasing the focus on sales training and motivating its associates, (3) providing personalized customer service, and (4) further implementing technological advances to make banking more efficient and convenient.

        De Novo Establishment of Retail Offices.    Vail Banks intends to continue to expand by opening new retail offices. Management believes that initially establishing a small presence in growing communities positions Vail Banks to expand with the community, thereby fostering a local identity with existing businesses and consumers in these communities, as well as offering new customers an alternative to impersonal, institutional banks.

        Mergers and Acquisitions.    Vail Banks' merger and acquisition strategy is to increase its market share in its existing markets and to enter attractive new markets by merging with well-established community banks. In assessing potential mergers, Vail Banks focuses on credit quality, financial performance, market share, management, location, community demographics, strength of the local economy, potential merger synergies and the terms of the transaction. Management believes that there are a number of community banks that meet Vail Banks' criteria and whose owners may be interested in selling their banks to a community-based organization like Vail Banks. Additionally, management believes that merging with established banks and then methodically integrating their operations into Vail Banks allows Vail Banks to offer its relatively broad range of products and services while maintaining the merged bank's reputation and community ties. Vail Banks' strategy is to streamline operations judiciously to optimize the balance between cost savings and minimizing the interruption of community- based services of the acquired bank.

Segment Information

        Segment information is presented in accordance with Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures About Segments of an Enterprise and Related Information. This standard is based on a management approach, which requires segmentation based on the Company's internal organization and internal monitoring of operations. During 2002, the Company had two reportable segments, banking (WestStar) and mortgage origination (First Western). During 2001 and 2000, the Company had only one segment, banking, that met the quantitative threshold for disclosure. The banking segment provides a full range of commercial and consumer banking products to customers

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including deposit products, commercial loans, real estate loans, consumer loans and other business financing arrangements. The banking segment's principal source of income is the net spread between the interest earned on loans and investment securities and the interest cost associated with the deposits and borrowings used to finance such loans and investments. The mortgage origination segment originates mortgage loans and sells them at a guaranteed interest rate to investors in the secondary market. Its principal source of income is the origination and processing fees received upon funding of a loan by an outside investor. These two segments are strategic business units that offer different products and services. They are managed separately because each segment appeals to different markets and accordingly, requires different technology and marketing strategies.

        The accounting policies of the segments are the same as those described in the summary of significant accounting policies contained in "Notes to Consolidated Financial Statements—Note 1" contained in Item 15 of this Annual Report on Form 10-K. Company management evaluates the performance of each segment based on profit or loss from operations. Certain administrative costs, however, are borne by the banking segment and are not allocated to the mortgage origination segment. Accordingly, the information presented is not necessarily indicative of the segments' financial condition and results of operations had each been operating as independent entities. The measurements used in reporting these segments, below, are the same as those reviewed monthly by executive management.

        Parent company financial information is included in the "Other" category in the table below, and is deemed to represent an overhead function rather than an operating segment. Also included in this category are expenses related to the guaranteed preferred beneficial interests in Vail Banks' subordinated debentures (trust preferred securities).

        The Company does not have an external customer from whom it derives 10 percent or more of its revenues and operates in only one geographical area.

        Information about reportable segments and reconciliation of such information to the consolidated financial statements as of and for the years ended December 31 is contained in "Notes to Consolidated Financial Statements—Note 24" contained in Item 15 of this Annual Report on Form 10-K.

Products and Services

        WestStar serves the banking needs of its business and consumer customers by providing a relatively broad range of commercial and consumer banking products and services in all of its communities. These products and services include short-term and medium-term loans, revolving credit facilities, inventory and accounts receivable financing, equipment financing, short-term commercial mortgage lending and mortgage broker services, installment loans, home improvement loans, short-term loans for the purchase or refinancing of principal residences or second homes, personal banking through internet and telephone access, safe deposit box services and various savings accounts, money market accounts, time certificates of deposit and checking accounts, automated teller machines, depository services, and corporate cash management services. First Western originates mortgage loans and sells them at a guaranteed interest rate to investors in the secondary market.

        Lending.    WestStar offers loans for business and consumer purposes and focuses its lending activities on individuals and small-to-medium size businesses. Lending activities are funded primarily from core deposits gathered in the local communities. Loan products are concentrated in relatively short-term, variable rate loans, with 41% of the loans at December 31, 2002 having remaining terms of less than one year. Collateral for loans is concentrated in real estate and operating business assets. The mergers with Independent, Telluride and United Valley brought an expanded focus on consumer lending. WestStar also participates in Small Business Administration programs. The acquisitions of First Western and East West resulted in the creation of the Company's mortgage origination segment and added an expanded array of residential mortgage products. The activities of the mortgage origination segment are not seasonal in nature.

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        Deposits.    WestStar offers a relatively broad range of depository products including checking, savings and money market accounts, and certificates of deposit. Deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to statutory limits. Within ranges set by policies determined on a centralized basis, regional presidents have local authority to determine the type, mix and pricing of the depository products offered to best compete in a retail office's particular marketplace. Additionally, because many of WestStar's markets are located in resort areas, deposits tend to peak during the ski season. However, increases in deposits in non-resort markets have reduced the overall impact of such seasonality.

        Other Services.    WestStar offers its customers the flexibility of monitoring their loan and deposit account activity and conducting some banking transactions 24 hours a day from their homes or businesses via www.weststarbank.com on the internet. Additionally, telephone access allows customers to receive current account balances, deposit status, checks paid, withdrawals made, loan status, loan amounts due and other specifics relating to services provided by WestStar. As of February 28, 2003, WestStar had 19 automated teller machines, 15 which were located at retail offices and 4 which were located at remote locations.

Competition

        The banking business is highly competitive and the profitability of WestStar depends principally upon the ability to compete in its markets. Currently, the financial services industry is highly fragmented, but consolidation in the industry continues to reduce the number of independent banks. WestStar competes with other commercial banks, savings institutions, credit unions, finance companies, brokerage and investment banking firms, insurance companies, asset-based lenders and certain other nonfinancial institutions, including retail stores that offer credit programs and governmental organizations that offer financing programs. Many competitors of WestStar have much greater financial resources, greater name recognition and more offices than WestStar. Some of these entities and institutions are not subject to the same regulatory restrictions as WestStar. WestStar believes it has been able to compete effectively with other financial institutions by emphasizing customer service, technology and local office decision-making, by establishing long-term customer relationships and building customer loyalty, and by providing products and services designed to address the specific needs of its customers.

        Vail Banks believes that WestStar will continue to compete successfully in its communities and that its competitive strengths include its reputation for developing and continuing banking relationships, responsiveness to customer needs and individualized customer service, and skilled, resourceful personnel. Vail Banks believes that large, institutional banks cannot or are unwilling to offer a high level of individualized customer service, and that WestStar's customers and potential customers choose to bank with WestStar to take advantage of this attention while also receiving products and services at competitive prices. The factors affecting competition include banking and financial services provided, customer service and responsiveness, customer convenience and office location. Vail Banks further believes that the community commitment and involvement of its personnel and its commitment to providing quality financial services are factors that should allow it to continue to maintain and improve its competitive position.

        First Western competes with both retail and internet mortgage brokers. These competitors may have greater financial or other resources than First Western. First Western has been able to compete effectively with its competitors due to its desirable array of mortgage products and its longevity in the mortgage broker business as well as the longevity of certain of its loan officers with First Western.

        Vail Banks also faces competition in acquiring financial institutions. Colorado has experienced a significant consolidation of its banking industry, and many large holding companies with greater resources than Vail Banks (including several out-of-state holding companies) are actively pursuing

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acquisitions in Colorado. This competition affects the acquisition opportunities for Vail Banks and can affect the cost of such acquisitions.

Administration of WestStar

        The retail offices operate through a customer driven organization. Regional presidents operate with significant customer service-oriented local autonomy, within criteria established by WestStar, to provide financial services, make lending decisions, sell products and present a favorable impression of WestStar to the community in order to attract new customers. Administrative functions are centralized at the operations center in Gypsum.

        At the operations center, Vail Banks provides administrative services, oversight and support to the retail offices, including data processing, accounting services, investments, credit policy formulation, loan administration, a customer service center, internet banking support and other customer service assistance.

        Management believes that by standardizing products, services and systems, and providing appropriate holding company support, retail office personnel can concentrate on customer service and community relations. Management also believes that continued centralization of services benefits the individual retail offices by lowering expenses of administration and data processing services, streamlining credit administration and supervision, and facilitating compliance with the requirements of complex banking regulations. Ultimately, such standardization and centralization is intended to contribute to Vail Banks' acquisition strategy by improving the results of operations of acquired banks and retail offices. Vail Banks believes that autonomy at the retail office level allows its banking subsidiary to better serve customers in their respective communities, and thus enhances business opportunities and operations. This structure has served in the past to ease the integration of banks acquired by Vail Banks because it allows Vail Banks to maintain customer familiarity by maintaining existing management and retail office culture, while at the same time transitioning new retail offices to Vail Banks' policies and procedures.

Technology

        Vail Banks' use of advanced technology enables it to offer customers fast, efficient services and connects all of WestStar's associates with on-line access to information concerning all customer account data. Additionally, advanced hardware and software have been installed that allow images (or photographs) to be taken of all items (checks, deposit tickets and payments). Once processed, the images of checks and deposit tickets are simultaneously associated with the appropriate customer's account, where they are stored and retrieved to be printed with customer statements. An imaging system also allows, via a data network, instant access at all retail offices to loan files, customer signature cards and other data that was previously available only at the administrative center or the originating retail office. Vail Banks believes that its technology platform is among the most advanced for banks of its size in Colorado and provides it with the resources to continue to offer leading-edge services to customers.

Associates

        As of February 28, 2003, the Company employed approximately 245 persons, 241 on a full-time basis and 4 on a part-time basis. The Company is not a party to any collective bargaining agreement, and believes that its employee relations are good.

Certain Factors Affecting Forward-Looking Statements

        This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not

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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 factors set forth below. Vail Banks does not intend to update any forward-looking statements whether written or oral, relating to matters discussed in this Annual Report on Form 10-K.

Risks Involved in Merger and Acquisition Strategy

        Vail Banks believes that a portion of its growth will come from mergers with and acquisitions of banks and other financial institutions. Vail Banks merged with United Valley in July 2000, acquired First Western in January 2000, and acquired the assets of East West in December 2000. Mergers and acquisitions involve risk of (1) changes in results of operations, (2) unforeseen liabilities relating to the merged institutions, (3) asset quality problems of the merged entity and (4) other conditions not within the control of Vail Banks. Such other conditions include adverse personnel relations, loss of customers because of change of identity, deterioration in local economic conditions and other risks affecting the merged institutions.

        Vail Banks cannot assure that any acquisition or merger that it completes will enhance its business or results of operations. Mergers or acquisitions may have an adverse effect upon Vail Banks' results of operations, particularly during periods in which the mergers or acquisitions are being integrated into Vail Banks' operations. Vail Banks must compete with a variety of individuals and institutions for suitable merger and acquisition candidates. This competition includes bank holding companies with greater resources than Vail Banks. Furthermore, merger and acquisition candidates may not be available or available on terms favorable to Vail Banks. Such competition could affect Vail Banks' ability to pursue mergers and acquisitions.

        In addition, as a result of the growth from mergers, Vail Banks' management must successfully integrate the operations of merged institutions. Vail Banks must (1) consolidate data processing operations, (2) combine employee benefit plans, (3) integrate deposit and lending products, (4) develop unified marketing plans and (5) consolidate other related areas. Vail Banks will incur additional expenses to accomplish these goals. These expenditures could negatively impact Vail Banks' net income. Completion of these tasks could divert management's attention from other important issues. In addition, the process of merging and acquiring banks and other financial institutions could have a material adverse effect on the operation of their businesses. These effects could have an adverse impact on combined operations. Vail Banks may also incur additional unexpected costs in connection with the integration of merged and acquired banks which could negatively impact Vail Banks' net income.

Need for Additional Financing

        Vail Banks' ability to merge with and acquire financial institutions may depend on its ability to obtain additional debt or equity funding. Vail Banks cannot assure that it will be successful in consummating any future financing transactions. Factors that could affect Vail Banks' access to the capital markets, or the costs of such capital, include (1) changes in interest rates, (2) general economic conditions and the perception in the capital markets of Vail Banks' business, (3) results of operations, (4) leverage, (5) financial condition and (6) business prospects. Each of these factors is to a large extent subject to economic, financial, competitive and other factors beyond Vail Banks' control. Borrowing restrictions contained in certain regulations which apply to Vail Banks and its banking subsidiary may also have an effect on Vail Banks' ability to obtain additional financing. Vail Banks'

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future credit facilities may significantly restrict its ability to incur additional indebtedness. Vail Banks' ability to repay any then outstanding indebtedness at maturity may depend on its ability to refinance such indebtedness. Its ability to refinance could be adversely affected if Vail Banks is not able to sell additional debt or equity securities on terms reasonably satisfactory to Vail Banks.

Local Economic Conditions

        The success of Vail Banks depends to a significant extent upon general economic conditions in the communities it serves. Vail Banks primarily operates on the Western Slope of Colorado. Some parts of the Western Slope are largely dependent on seasonal tourism that particularly affects small-to-medium size businesses. These businesses are a significant portion of Vail Banks' customers. The seasonality of Vail Banks' business in those areas results in fluctuations in deposit and credit needs. Deposits tend to peak during the ski season. In addition, a decline in the economy of these areas could have a material adverse effect on Vail Banks' business. A decline could affect (1) the demand for new loans, (2) refinancing activity, (3) the ability of borrowers to repay outstanding loans and (4) the value of loan collateral. A decline could also adversely affect asset quality and net income. See "Business—General" in this Item 1.

Dependence Upon Key Personnel

        The continued success of Vail Banks substantially depends on the efforts of the directors and executive officers of Vail Banks. Vail Banks particularly depends on E.B. Chester, Jr. and Lisa M. Dillon. The success of Vail Banks depends in large part on the retention of present key management personnel. It also depends on Vail Banks' ability to hire and retain additional qualified personnel in the future. Neither Mr. Chester nor Ms. Dillon has entered into employment agreements with Vail Banks. Vail Banks does not maintain key-person life insurance coverage on either of them.

Certain Anti-Takeover Provisions

        Vail Banks' Articles of Incorporation and Bylaws contain certain provisions that may delay, discourage or prevent an attempted acquisition or change in control of Vail Banks. These provisions include (1) a Board of Directors classified into three classes of directors with the directors of each class having staggered, three-year terms and providing for the removal of directors only for cause, and (2) noncumulative voting for directors. Vail Banks' Articles of Incorporation authorize the Board of Directors of Vail Banks to issue shares of preferred stock of Vail Banks without shareholder approval. The preferred stock may be issued upon any terms that the Board of Directors may determine. The issuance of preferred stock may provide desirable flexibility in connection with possible mergers, acquisitions and financings and may be used for other corporate purposes. However, the issuance of preferred stock may make it more difficult for a third party to acquire, or could discourage a third party from acquiring, a controlling interest in Vail Banks.

Government Regulation

        The banking industry is regulated by federal and state regulatory authorities. The Federal Reserve Bank and the Colorado Division of Banking (CDB) supervise and regularly examine Vail Banks and WestStar. Federal and state banking law regulates and limits Vail Banks' credit extensions, securities purchases, dividend payments, acquisitions, branching and many other aspects of the banking business. Banking laws are designed primarily to protect depositors and customers, not investors. These laws include, among other things, (1) minimum capital requirements, (2) limitations on products and services offered, (3) geographical limits, (4) consumer credit regulations, (5) community investment requirements and (6) restrictions on transactions with affiliated parties.

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        Financial institution regulation has been the subject of significant legislation in recent years. This regulation may be the subject of further significant legislation in the future. Vail Banks has no control over changes in regulation. Regulations substantially affect the business and financial results of all financial institutions and holding companies, including WestStar and Vail Banks. Vail Banks cannot predict the impact of changes in such regulations on Vail Banks' business and profitability. Changes in regulation could adversely affect Vail Banks' financial condition and results of operations. See "Supervision and Regulation" in this Item 1.

Competition

        The banking business is highly competitive. The profitability of WestStar depends principally upon its ability to compete in its market areas. WestStar competes with other commercial banks, savings institutions, credit unions, finance companies, brokerage and investment banking firms, insurance companies, asset-based lenders and certain other nonfinancial institutions, including retail stores which offer credit programs and governmental organizations that offer financing programs. Many competitors may have greater financial and other resources than WestStar. WestStar has been able to compete effectively with other financial institutions by (1) emphasizing customer service, technology and local office decision-making, (2) establishing long-term customer relationships and building customer loyalty, and (3) providing products and services designed to address the specific needs of its customers. WestStar may not be able to continue to compete effectively in the future. Further, changes in government regulation of banking, particularly recent legislation which removes restrictions on interstate banking and permits interstate branching, are likely to increase competition by out-of-state banking organizations or by other financial institutions in WestStar's market areas. First Western competes with both retail and internet mortgage brokers. These competitors may have greater financial or other resources than First Western. First Western has been able to compete effectively with its competitors due to a desirable array of mortgage products and the longevity in the mortgage broker business of both the organization as well as certain of its loan officers. See "Business—Competition" in this Item 1.

Control by Management

        As of February 28, 2003, the directors and executive officers of Vail Banks beneficially own approximately 47% of the outstanding common stock, 24% of which is beneficially owned by E.B. Chester, Jr., Chairman of Vail Banks. Accordingly, these persons will have substantial influence over the business, policies and affairs of Vail Banks, including the ability to potentially control the election of directors and other matters requiring shareholder approval by simple majority vote.

Interest Rate Risk

        Vail Banks' earnings depend to a great extent on its net interest income. Net interest income is the difference between interest income earned on loans and investments and the interest expense paid on deposits and other borrowings. The net interest margin is highly sensitive to many factors that are beyond Vail Banks' control. These factors include general economic conditions and the policies of various governmental and regulatory authorities. Changes in the discount rate or targeted federal funds rate by the Federal Reserve Bank usually lead to general changes in interest rates. These interest rate shifts affect Vail Banks' interest income, interest expense and investment portfolio. Also, governmental policies, such as the creation of a tax deduction for individual retirement accounts, can increase savings and affect the cost of funds. From time to time, the interest rate structures of earning assets and liabilities may not be balanced, and a rapid increase or decrease in interest rates could have an adverse effect on the net interest margin and results of operations of Vail Banks. Vail Banks cannot predict the nature, timing and effect of any future changes in federal monetary and fiscal policies.

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Supervision and Regulation

        The following discussion of statutes and regulations affecting bank holding companies and banks is a summary thereof and is qualified in its entirety by reference to such statutes and regulations.

        General.    Vail Banks is a registered bank holding company subject to regulation by the Board of Governors of the Federal Reserve System (the Federal Reserve) under the Bank Holding Company Act of 1956, as amended (the Act). Vail Banks is required to file financial information with the Federal Reserve periodically and is subject to periodic examination by the Federal Reserve.

        The Act requires every bank holding company to obtain the Federal Reserve's prior approval before (1) it may acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank that it does not already control; (2) it or any of its non-bank subsidiaries may acquire all or substantially all of the assets of a bank; and (3) it may merge or consolidate with any other bank holding company. In addition, a bank holding company is generally prohibited from engaging in, or acquiring, direct or indirect control of the voting shares of any company engaged in non-banking activities. This prohibition does not apply to activities listed in the Act or found by the Federal Reserve, by order or regulation, to be closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the activities that the Federal Reserve has determined by regulation or order to be closely related to banking include:

•

making or servicing loans and certain types of leases;



•

performing certain data processing services;



•

acting as fiduciary or investment or financial advisor;



•

providing brokerage services;



•

underwriting bank eligible securities;



•

underwriting debt and equity securities on a limited basis through separately capitalized subsidiaries; and



•

making investments in corporations or projects designed primarily to promote community welfare.

        Although the activities of bank holding companies have traditionally been limited to the business of banking and activities closely related or incidental to banking, the Gramm-Leach-Bliley Act became effective in 2000 and relaxed the previous limitations, permitting bank holding companies to engage in a broader range of financial activities. Specifically, bank holding companies may elect to become financial holding companies which may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. Among the activities that are deemed "financial in nature" are:

•

lending, exchanging, transferring, investing for others or safeguarding money or securities;



•

insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providing and issuing annuities, and acting as principal, agent, or broker with respect thereto;



•

providing financial, investment, or economic advisory services, including advising an investment company;



•

issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly; and



•

underwriting, dealing in or making a market in securities.

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        A bank holding company may become a financial holding company under this statute only if each of its subsidiary banks is well capitalized, is well managed and has at least a satisfactory rating under the Community Reinvestment Act. A bank holding company that falls out of compliance with such requirements may be required to cease engaging in certain activities. Any bank holding company that does not elect to become a financial holding company remains subject to the current restrictions of the Bank Holding Company Act.

        Under the Gramm-Leach-Bliley Act, the Federal Reserve Board serves as the primary "umbrella" regulator of financial holding companies with supervisory authority over each parent company and limited authority over its subsidiaries. The primary regulator of each subsidiary of a financial holding company will depend on the type of activity conducted by the subsidiary. For example, broker-dealer subsidiaries will be regulated largely by securities regulators and insurance subsidiaries will be regulated largely by insurance authorities.

        Vail Banks cannot predict the full impact of this legislation and has no immediate plans to become a financial holding company.

        On October 26, 2001, the United States Congress adopted the USA Patriot Act of 2001 (Patriot Act) to combat terrorism. Under the Patriot Act, FDIC insured banks and commercial banks are required to increase their due diligence efforts for correspondent accounts and private banking customers. The Patriot Act requires WestStar to engage in additional record keeping and reporting, to obtain identification of account owners or customers of foreign bank account holders, and to restrict or prohibit certain correspondent accounts.

        Vail Banks must also register with the CDB and file periodic information with the CDB. As part of such registration, the CDB requires information with respect to, among other matters, the financial condition, operations, management and intercompany relationships of Vail Banks and its subsidiary. The CDB may also require such other information as is necessary to ascertain whether the provisions of Colorado law and the regulations and orders issued thereunder by the CDB have been complied with, and the CDB may examine Vail Banks and its subsidiary.

        Vail Banks is an "affiliate" of its banking subsidiary under the Federal Reserve Act, which imposes certain restrictions on (1) loans by WestStar to Vail Banks, (2) investments in the stock or securities of Vail Banks by its banking subsidiary, (3) its banking subsidiary's taking the stock or securities of an "affiliate" as collateral for loans by it to a borrower and (4) the purchase of assets from Vail Banks by its banking subsidiary. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services.

        WestStar is a member of the Federal Reserve System and is subject to the supervision of and is regularly examined by the Federal Reserve. Furthermore, WestStar, as a state banking association organized under Colorado law, is subject to the supervision of, and is regularly examined by, the CDB. Both the Federal Reserve and the CDB must grant prior approval of any merger, consolidation or other corporate reorganization involving WestStar. A bank can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of a commonly controlled institution.

        Payment of Dividends.    Vail Banks is a legal entity separate and distinct from its banking subsidiary. Most of the revenues of Vail Banks result from dividends paid to it by its banking subsidiary. There are statutory and regulatory requirements applicable to the payment of dividends by Vail Bank's banking subsidiary, as well as by Vail Banks to its shareholders.

        Under the regulations of the CDB and the Federal Reserve, approval of the regulators will be required if the total of all dividends declared by WestStar in any calendar year exceed the total of its

14

net profits of that year combined with its retained net profits of the preceding two years, less any required transfers to a fund for the retirement of any preferred stock.

        The payment of dividends by Vail Banks and WestStar may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. In addition, if, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending upon the financial condition of the bank, could include the payment of dividends), such authority may require, after notice and hearing, that such bank cease and desist from such practice. Capital adequacy considerations could further limit the availability of dividends. At December 31, 2002, net assets available from WestStar to pay dividends to Vail Banks without prior approval from regulatory authorities totaled $18.8 million.

        Monetary Policy.    The results of operations of WestStar are affected by credit policies of monetary authorities, particularly the Federal Reserve. The instruments of monetary policy employed by the Federal Reserve include open market operations in U.S. government securities, changes in the discount rate on bank borrowings and changes in reserve requirements against bank deposits. In view of changing conditions in the national economy and in the money markets, as well as the effect of actions by monetary and fiscal authorities, including the Federal Reserve, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of Vail Banks' banking subsidiary.

        Capital Adequacy.    The Federal Reserve and the FDIC have implemented substantially identical risk-based rules for assessing bank and bank holding company capital adequacy. These regulations establish minimum capital standards in relation to assets and off-balance sheet exposures as adjusted for credit risk. Banks and bank holding companies are required to have (i) a minimum level of total capital (as defined) to risk-weighted assets of 8%; (ii) a minimum Tier 1 capital (as defined below) to risk-weighted assets of 4%; and (iii) a minimum shareholders' equity to risk-weighted assets of 4%. In addition, the Federal Reserve and the FDIC have established a minimum 4% leverage ratio (Tier 1 capital to average assets) for all but the most highly rated banks and bank holding companies. "Tier 1 capital" generally consists of common equity not including unrecognized gains and losses on securities, minority interests in equity accounts of consolidated subsidiaries and certain perpetual preferred stock, less certain intangibles. The Federal Reserve and the FDIC use the leverage ratio in tandem with the risk-based ratio to assess the capital adequacy of banks and bank holding companies. The FDIC's and the Federal Reserve's capital adequacy standards also provide for the consideration of interest rate risk in the overall determination of a bank's capital ratio, requiring banks with greater interest rate risk to maintain greater capital for the risk.

        In addition, the FDIC regulations and Federal Reserve "prompt corrective action" provisions, designed to efficiently resolve failing financial institutions, set forth five regulatory zones in which all banks are placed largely based on their capital positions. Regulators are permitted to take increasingly harsh action as a bank's financial condition declines. Regulators are also empowered to place in receivership or require the sale of a bank to another depository institution when a bank's capital leverage ratio reaches 2%. Better-capitalized institutions are generally subject to less onerous regulation and supervision than banks with lesser capital ratios.

        The FDIC and the Federal Reserve regulations implementing "prompt corrective action" place financial institutions in the following five categories based on capitalization ratios (i) a "well capitalized" institution has a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6% and a leverage ratio of at least 5%; (ii) an "adequately capitalized" institution has a total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 4% and a leverage ratio of at least 4%; (iii) an "undercapitalized" institution has a total risk-based capital ratio of under 8%, a Tier 1 risk-based capital ratio of under 4% or a leverage ratio of under 4%; (iv) a "significantly undercapitalized" institution has a total risk-based capital ratio of under 6%, a Tier 1

15

risk-based capital ratio of under 3% or a leverage ratio of under 3%; and (v) a "critically undercapitalized" institution has a leverage ratio of 2% or less. Institutions in any of the three undercapitalized categories are prohibited from declaring dividends or making capital distributions without regulatory approval. The Federal Reserve regulations also establish procedures for "downgrading" an institution to a lower capital category based on supervisory factors other than capital.

        Under the Federal Reserve's regulations, both Vail Banks and WestStar met all capital adequacy requirements to which they were subject at December 31, 2002. Vail Banks had Tier 1 and total risk-based capital ratios of 14.15% and 15.61%, respectively, and a leverage ratio of 10.27%. WestStar was deemed to be "well capitalized" with Tier 1 and total risk-based capital ratios of 13.64% and 14.65%, respectively, and a leverage ratio of 9.88%. For further information, see "Notes to Consolidated Financial Statements—Note 19" contained in Item 15 of this Annual Report on Form 10-K.

Executive Officers of Vail Banks

        Certain information regarding the executive officers of the Company is set forth in the following table and paragraphs.

        Mr. Chester, who formed Vail Banks through a series of acquisitions, has served as Chairman of the Board of Directors of Vail Banks since 1993 and the Chairman of the Board of Directors of WestStar since 1989. Mr. Chester serves as Chairman of the Board of Directors of Camp Systems International, LLC, a supplier of database services to the commercial aviation industry and as Manager of King Creek Ranch LLC, a ranching business.

        Ms. Dillon has served as the President and a Director of Vail Banks since 1993. Ms. Dillon, who started her career with WestStar in 1979, also has served as President of WestStar from 1989 to 1999 and Chief Executive Officer of WestStar from 1989 until 2000. Ms. Dillon has served as a Director of WestStar since 1989.

        Mr. Williston has served as the Senior Executive Vice President and Chief Financial Officer of Vail Banks since June 30, 2000. Prior to joining Vail Banks, Mr. Williston was employed by Union Planters Bank in Memphis, Tennessee where he served as Senior Vice President and Regional Manager. Mr. Williston initially joined Union Planters Bank in 1983 and during his tenure there he also served as Senior Vice President and Controller, Vice President and Audit Department Manager, and Secretary to the Board of Directors. Mr. Williston is a certified public accountant.

        Mr. Godec has served as a Director of Vail Banks since July 2000 and has served as the President and a Director of WestStar since 1999. Prior to becoming President of WestStar, Mr. Godec served as Senior Executive Vice President of WestStar from January to April 1999 and served as the Senior Vice President of WestStar from January 1996 to January 1999.

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ITEM 2.    PROPERTIES.

        As of February 28, 2003, Vail Banks had 22 operating branch offices and an administrative center. Of these 23 properties, nine were leased and 14 were owned. Additionally, Vail Banks owned a vacant facility that had served as the previous Glenwood Springs Downtown branch prior to moving to a more strategically located facility. Vail Banks also leased three properties previously occupied by WestStar branches for which WestStar was still obligated. Leases on these three closed branches expire between 2005 and 2006. Plans are currently underway to either terminate these leases or find tenants to sublease the properties. Vail Banks is currently in the design phase for a new facility in Glenwood Springs to replace an existing branch office. All properties are located in Colorado and range in size from 450 square feet to 34,000 square feet. None of the properties owned by Vail Banks are encumbered. The aggregate annual lease payments for properties in 2002 were $1.1 million. Leases for the facilities expire at various periods between 2004 and 2011 with options to renew through 2028. Vail Banks considers its properties adequate for its current needs.

ITEM 3.    LEGAL PROCEEDINGS.

        Vail Banks and its banking subsidiary periodically are parties to or otherwise involved in legal proceedings arising in the normal course of business, such as claims to enforce liens, claims involving the making and servicing of real property loans and other issues incident to their business. Management does not believe that there is any pending or threatened proceeding against Vail Banks or its banking subsidiary which, if determined adversely, would have a material effect on the business, results of operations, or financial position of Vail Banks or its banking subsidiary.

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

        No matters were submitted to security holders during the fourth quarter of fiscal year 2002.

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Market Information

        Vail Banks' common stock began trading on The NASDAQ Stock Market under the symbol "VAIL" on December 10, 1998. Prior to that time, there was no formal trading market for the common stock. The following table sets forth, for the periods indicated, the high and low bid prices of the common stock on The NASDAQ Stock Market.

Holders

        As of February 28, 2003, there were 93 holders of record of the common stock. Investors who beneficially own common stock that is held in street name by brokerage firms or similar holders are not included in this number. Vail Banks believes there are approximately 2,000 beneficial holders of its common stock.

Dividends

        Cash dividends paid per share were as follows:

        Additionally, a cash dividend of $0.06 per share was declared on January 20, 2003 and paid on February 14, 2003 to shareholders of record on January 31, 2003.

        Holders of common stock are entitled to receive dividends when, as and if declared by Vail Banks' Board of Directors out of funds legally available therefore. The final determination of the timing, amount and payment of dividends on the common stock is at the discretion of the Board of Directors. The declaration of dividends will depend on conditions then existing, including Vail Banks' profitability, financial condition, capital requirements, future growth plans and other relevant factors. The principal source of Vail Banks' income is dividends received from WestStar. The payment of these dividends by WestStar is subject to certain restrictions imposed by the federal and state banking laws and regulations.

        Vail Banks' ability to pay cash dividends on the common stock is also subject to statutory restrictions, including banking regulations, and restrictions arising under the terms of securities or indebtedness which may be issued or incurred in the future. The terms of such securities or indebtedness may restrict payment of dividends on common stock until required payments and distributions are made on such securities or indebtedness. Under regulations of the CDB and the Federal Reserve, approval of the regulators will be required if the total of all dividends declared by any

18

banking subsidiary in any year exceeds the total of its net profits of that year combined with its retained net profits of the preceding two years. See "Supervision and Regulation" in Item 1.

ITEM 6.    SELECTED FINANCIAL DATA.

        The selected historical financial data set forth below should be read in conjunction with the "General," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Financial Statements and Notes to Consolidated Financial Statements" sections, as well other financial data contained elsewhere in this Annual Report on Form 10-K.

(1)

During 2002, the Company implemented Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, which eliminated goodwill amortization expense beginning January 1, 2002. The Company continued to amortize other intangible assets. For further information, see "Notes to Consolidated Financial Statements—Note 6" contained in Item 15 of this Annual Report on Form 10-K.

(2)

Expenses associated with the mandatorily convertible debentures of $141 in 1998 are not reflected in interest expense in calculating the margin as the debentures were converted to common stock in connection with the December 1998 Initial Public Offering.

(3)

Net interest margin is reported on a fully taxable equivalent basis.

(4)

Non-performing loans consist of non-accrual and restructured loans.

(5)

Non-performing assets consist of non-performing loans and foreclosed properties.

(6)

Loan related assets consist of total loans and foreclosed properties.

(7)

Risk assets consist of non-performing assets and loans 90 days or more past due but continuing to accrue interest.

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Introduction

        The following section presents management's review of the financial condition and operating results of Vail Banks, Inc. and its subsidiaries (collectively Vail Banks or the Company). It is intended to assist readers in evaluating Vail Banks' performance. Certain reclassifications have been made to previous periods' information to conform to the 2002 presentation. The following analysis should be read in conjunction with the Consolidated Financial Statements and accompanying notes as well as the selected financial information included elsewhere in this Annual Report on Form 10-K.

Corporate Profile

        Vail Banks is a bank holding company headquartered in Vail, Colorado with assets of $554.3 million at December 31, 2002. Vail Banks' wholly-owned subsidiary, WestStar Bank (WestStar), is a Colorado state bank with 22 retail offices as of February 28, 2003, located primarily in the Western Slope region of Colorado. Vail Banks has two other wholly-owned subsidiaries, Vail Banks Statutory Trust I (Trust I) and Vail Banks Statutory Trust II (Trust II). Trust I and Trust II were formed for the purpose of issuing trust preferred securities. WestStar and Vail Banks own a 54.04% interest in Avon 56 Limited, a real estate partnership, and WestStar owns a 100% interest in First Western Mortgage Services, Inc., which are also included in the consolidated financial statements. For further information, see "Notes to Consolidated Financial Statements—Note 12" contained in Item 15 of this Annual Report on Form 10-K.

Mergers

        Mergers and acquisitions continue to be part of Vail Banks' overall growth strategy. All mergers have been accounted for under the purchase method of accounting, and accordingly, the purchase price of each transaction has been allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the date of the merger. The Consolidated Financial Statements include the operations of each of the acquired entities since the date of the respective transactions. The excess of purchase price over net assets acquired was recorded as goodwill, which is included in intangible assets, and was being amortized over 25 years. As of January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, which provides new guidance on accounting for goodwill and intangible assets. Specifically, all new and pre-existing goodwill is no longer being amortized, but instead is tested for impairment on an annual basis. See Pro Forma Operating Results for further information.

        First Western Mortgage Services, Inc. (First Western).    On January 1, 2000, WestStar acquired First Western for consideration of $1.5 million that included cash and installment notes. The acquisition added mortgage brokerage services to WestStar's lending services.

        Estes Bank Corporation (United Valley).    On July 14, 2000, Vail Banks completed the United Valley merger by issuing 337,917 shares of Vail Banks common stock valued at $3.2 million and $17.7 million in cash. As of the merger date, United Valley had assets of $84.2 million, net loans of $49.5 million, deposits of $75.9 million and shareholders' equity of $7.5 million. See Item 15, "Financial Statements—Note 2" for pro forma results of operations as if the acquisition had occurred at the beginning of 2000.

        Other Transactions.    On December 1, 2000, Vail Banks acquired assets from East West Mortgage Company (East West) for consideration that included cash of $200,000 and 21,053 shares of Vail Banks common stock. See Item 1. "Business—General" for further information on these transactions and the mergers described above.

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Financial Overview

        Net income for 2002 decreased $490,000, or 8%, to $5.6 million from $6.1 million in 2001. This decrease was primarily due to a decrease in the net interest margin from 6.30% for 2001 to 5.49% for 2002, which was partially offset by the cessation of goodwill amortization expense with the implementation of SFAS No. 142 (see above). Net income for 2001 increased $1.1 million, or 23%, to $6.1 million from $5.0 million in 2000. The Company took charges during 2000 of $859,000 ($545,000, net of tax), including the write-off of certain correspondent bank account transactions, start-up expenses associated with the opening of its Aspen office, conversion expenses for the merger with United Valley, and employee-related costs for the restructuring of its management group.

        The return on average assets was 1.00% for the year ended December 31, 2002 compared to 1.09% for the year ended December 31, 2001 and 0.96% for the year ended December 31, 2000.

        The return on average equity was 8.62% for the year ended December 31, 2002 compared to 9.56% for the year ended December 31, 2001 and 7.96% for the year ended December 31, 2000.

        Assets decreased by $1.1 million, or less than 1%, to $554.3 million during 2002. This decrease was primarily due to a decrease in net loans of $60.1 million offset by an increase in cash, cash equivalents and investment securities of $59.9 million and an increase in loans held for sale generated by First Western of $2.9 million. In 2001, assets decreased by $7.9 million, or 1%, to $555.3 million. This decrease was primarily due to a decrease in net loans of $35.3 million offset by an increase in cash, cash equivalents and investment securities of $22.2 million and an increase in loans held for sale generated by First Western of $6.3 million.

        The decrease in net interest income on a fully taxable equivalent basis (FTE Net Interest Income) of 12% to $25.6 million in 2002 from $29.0 million in 2001 was primarily due to the multiple interest rate cuts implemented by the Federal Reserve throughout 2001 and in November 2002, as well as a shift in the mix of earning assets and interest bearing liabilities. The increase in FTE Net Interest Income of 5% to $29.0 million in 2001 from $27.7 million in 2000 was primarily from growth in net average earning assets (average earning assets less average interest bearing liabilities). Net average earning assets were $68.2 million in 2001, up 15% from $59.4 million in 2000.

Pro Forma Operating Results

        During June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, Goodwill and Other Intangible Assets, which 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. Amortization of other intangible assets will continue. The Company adopted the provisions of SFAS 142 on January 1, 2002 and determined that the net unamortized goodwill of $36.0 million was not impaired as of that date. Additionally, the Company reassessed the useful life of the core deposit intangible asset related to a previously acquired branch. The Company determined that as of January 1, 2002, the core deposit intangible asset had a remaining useful life of twelve years. Accordingly, the $890,000 unamortized balance as of January 1, 2002 will be amortized to expense on a straight-line basis over twelve years. This reduction in remaining life resulted in additional core deposit intangible amortization expense of $34,000 ($22,000 after tax) for the year ended December 31, 2002 over the comparable periods during 2001 and 2000.

        In addition to the transitional impairment test required as of January 1, 2002, SFAS 142 requires that an annual impairment test be performed. The Company performed this annual impairment test during the third quarter of 2002 and determined that the goodwill was not impaired as of that date.

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        The following table presents comparative net income and earnings per share information as if goodwill amortization expense had not been recorded for 2001 and 2000, and as if the remaining useful life of the core deposit intangible asset had been revised as of January 1, 2000:

Results of Operations

Net Interest Income

        Net interest income continues to be Vail Banks' principal source of income, representing the difference between interest and fees earned on loans and investments and interest paid on deposits and borrowings. In this discussion, FTE Net Interest Income includes tax exempt income, such as interest on securities of states and municipalities, increased to an amount that would have been earned had such income been taxable. This adjustment places taxable and nontaxable income on a common basis and permits comparisons of rates and yields.

        The following table sets forth the average balances, interest income and expense, and average yields and rates for Vail Banks' earning assets and interest bearing liabilities for the periods indicated on a fully tax-equivalent basis.

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Average Balance Sheet and Net Interest Income Analysis

(1)

Tax exempt securities have been adjusted to an FTE basis using a marginal tax rate of 36.5% in 2002, 2001 and 2000.

(2)

Loans are presented net of unearned income and include nonaccrual loans and loans held for sale.

(3)

Interest income on loans includes loan fees of $3.3 million, $3.1 million, and $2.8 million for 2002, 2001 and 2000, respectively.

(4)

FTE margin has been computed by dividing FTE net interest income by total earning assets.

        The amount of net interest income is affected by changes in the volume and mix of earning assets and interest bearing liabilities and the interest yields and rates on these assets and liabilities. An analysis of how changes in volume and yields and rates affected net interest income for the years ended December 31, 2002, 2001 and 2000 is presented below.

23

Analysis of Changes in Net Interest Income*

*

Fully taxable equivalent (FTE).

Notes: The change in interest that cannot be attributed to only a change in rate or a change in volume, but instead represents a combination of the two factors, has been allocated to the rate variance.

        Net interest income, on a fully tax-equivalent basis (FTE), decreased by $3.4 million, or 12% to $25.6 million for the year ended December 31, 2002 from $29.0 million for the year ended December 31, 2001. The net interest margin on an FTE basis was 5.49% for 2002 as compared to 6.30% for 2001. 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 2002 was primarily due to the multiple interest rate cuts implemented by the Federal Reserve throughout 2001 and in November 2002 as well as a shift in the mix of earning assets from loans to investments and federal funds sold, and in interest bearing liabilities from deposits to borrowings. During 2002, Vail Banks experienced increased liquidity as the result of a decrease in loan demand attributable to the soft economy and more conservative underwriting policies. In response, the Company completed a short-term leverage strategy that enabled it to add income by borrowing from the Federal Home Loan Bank (FHLB) and reinvesting those funds primarily in mortgage backed securities, resulting in a net spread. Although this strategy was designed to add net income, it did, however, have a somewhat negative impact on the net interest margin due to the smaller spread between rates offered on investments and charged on borrowings than would have been generated from the spread between loan and deposit rates.

        Interest income FTE decreased $8.0 million, or 19% for 2002 as compared to 2001 despite the fact that earning assets increased $4.9 million or 1% during the same period. During 2002, the mix of earning assets shifted away from loans and more toward investment securities and federal funds sold. Loans had a yield of 8.29% during 2002 as compared to the 5.15% yield on investment securities and 1.59% yield on federal funds sold. However, during 2002, average loans declined to 78% of earning assets as compared to 90% during 2001. As a result of this shift, the total yield on average earnings assets decreased 183 basis points to 7.32% for 2002, as compared to 9.15% for 2001.

        Interest expense decreased $4.6 million, or 35% for 2002 as compared to 2001 despite the fact that interest-bearing liabilities increased $1.3 million during the same period. This decrease was primarily due to the full year impact of the 475 basis point decline in interest rates that occurred throughout 2001. As a result, the total cost of interest-bearing liabilities decreased 118 basis points to 2.16% for

24

2002, as compared to 3.34% for 2001. 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 2002.

        The net interest margin on an FTE basis decreased to 6.30% for 2001 as compared to 6.59% for 2000. This decrease in net interest margin during 2001 was primarily due to the multiple interest rate cuts implemented by the Federal Reserve during 2001. The yield on earning assets decreased 117 basis points during 2001 from 10.32% for the year ended December 31, 2000 to 9.15% for the year ended December 31, 2001. This decrease was only partially offset by a 101 basis point decrease in the cost of interest bearing liabilities from 4.35% for the year ended December 31, 2000 to 3.34% for the year ended December 31, 2001.

        Contributing to the growth in the net interest income was the growth in average earning assets during 2001 of $40.4 million or 10%. Average federal funds sold increased to $15.4 million during 2001 from $274,000 during 2000, primarily due to the investment of proceeds received from the $24 million issuance of trust preferred securities during the first quarter of 2001 and improved management of cash levels in branches and correspondent accounts. Average loans (including loans held for sale) were $415.8 million during 2001 compared to $386.3 million during 2000, an 8% increase. This increase was primarily due to the full-year impact of loans obtained in the July 2000 United Valley merger. Although the average loan balance (including loans held for sale) increased during 2001, the general softening of the economy during 2001 as well as an internal shift toward more conservative underwriting policies in response to the slowing economy resulted in a $29.1 million decrease in the year-end loan balance (including loans held for sale) at December 31, 2001 from $427.8 million at December 31, 2000.

        During 2001, average interest-bearing liabilities also grew. This growth was largely due to an increase in average interest bearing deposits due to the full-year impact of deposits obtained in the July 2000 United Valley merger, a full-year effect of deposits from the Aspen branch opened during 2000, and new deposits obtained in connection with the opening of the Grand Junction office during 2001. Although average interest bearing deposits increased during 2001 as a result of the factors previously mentioned, interest bearing deposits at year-end decreased $43.8 million, or 11% between December 31, 2000 and December 31, 2001. This decrease in year-end balances was primarily related to deposit attrition resulting from repricing of interest bearing deposit products to reflect the current lower interest rate environment as well as the anticipated $15 million withdrawal during the second quarter 2001 of a temporary money market deposit account established in December 2000. Additionally, during 2001 average borrowings increased as a result of the issuance of $24.0 million of trust preferred securities during first quarter 2001. The receipt of the trust preferred proceeds enabled the Company to repay outstanding borrowings and resulted in the Company selling federal funds instead of purchasing them.

Provision for Loan Losses

        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.

        The provision for loan losses was $382,000 in 2002, compared to $800,000 in 2001 and $1.0 million in 2000. The decrease in the provision during 2002 was due to the Company's determination during 2002 that the current allowance for loan losses was adequate to absorb probable losses in the decreased loan portfolio (gross loans were $331.0 million at December 31, 2002 compared to $391.7 million at

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December 31, 2001). As a result, the Company took a smaller provision for loan losses during 2002 than it did during 2001. Net charge-offs during 2002 were $1.0 million, resulting in a net decrease in the allowance for loan losses of $628,000 compared to a net decrease of $65,000 during 2001 and a net increase of $661,000 in 2000. The decrease in the provision during 2001 was due to the Company's determination during 2001 that the current allowance for loan losses was adequate to absorb probable losses in the decreased loan portfolio (gross loans were $391.7 million at December 31, 2001 compared to $427.1 million at December 31, 2000). As a result, the Company took a smaller provision for loan losses during 2001 than it did during 2000. Net charge-offs during 2001 and 2000 were $865,000 and $386,000, respectively. During 2000, Vail Banks also acquired an additional $1.0 million allowance in connection with the United Valley merger.

        At December 31, 2002, the allowance was 1.13% of total loans and 100% of non-performing loans. While non-performing loans increased significantly during 2002 (to $3.7 million at December 31, 2002 from $2.0 million at December 31, 2001) causing the allowance to non-performing loans ratio to decline, the majority of the non-accrual loans are real estate secured, are recorded at net realizable value, and are subject to foreclosure or other collection proceedings that are well underway. At December 31, 2001, the allowance was 1.12% of total loans and 214% of non-performing loans. At December 31, 2000, the allowance was 1.04% of total loans and 264% of non-performing loans.

Non-Interest Income

        The following table sets forth Vail Banks' non-interest income for the years indicated.

        Non-interest income grew $627,000, or 6%, to $12.0 million in 2002 from $11.4 million in 2001. This increase was primarily due to an increase in mortgage broker fees partially offset by a decrease in deposit related service charges. Mortgage broker fees increased $868,000, or 21%, from 2001 due to continued refinancing activity. During 2002, deposit related income decreased $473,000, or 12% due primarily to a decline in the number of deposit account overdrafts and to some degree a general decrease in the number of transaction accounts (interest and non-interest bearing checking accounts) in response to lower interest rates. Non-interest income grew $3.3 million, or 41%, to $11.4 million in 2001 from $8.1 million in 2000. This increase was primarily due to an increase in mortgage broker fees as well as an increase in deposit related service charges. Mortgage broker fees increased $1.5 million, or 57%, from 2000 due to increased refinancing activity in light of the decline in interest rates. During 2000, WestStar commenced mortgage operations with the acquisition of First Western. During 2001, deposit related income increased $1.1 million, or 38% due to an increased emphasis by the Company on collecting deposit-related fees.

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Non-Interest Expense

        The following table sets forth Vail Banks' non-interest expense for the years indicated.

        Total non-interest expense decreased $566,000 during 2002, or 2%, from $29.0 million in 2001. The decrease is primarily due to the elimination of goodwill amortization effective January 1, 2002 and the Company's concerted efforts to reduce operational type costs such as postage, supplies and marketing. These expense reductions were offset by increasing costs of employee related expenses, occupancy expenses and professional fees as well as a full year of operating expenses for the Grand Junction branch that opened during third quarter 2001.

        Total non-interest expense increased by $2.8 million during 2001, or 11%, from $26.2 million in 2000. The increase was primarily due to a full year of operating expenses for branches acquired in the July 2000 United Valley merger, a full year of goodwill amortization from the United Valley merger transaction, operating expenses of the newly opened Grand Junction branch, and hiring of key management personnel.

        Salaries and employee benefits expense increased $1.4 million during 2002, or 9% from 2001. This increase is primarily due to a full year of salaries expense related to key management personnel hired during 2001, a full year of salaries expense for the Grand Junction branch opened in third quarter 2001, the replacement of terminated employees with higher costing employees, associated recruiting and hiring costs related to the forementioned employees, and to some extent, the rising cost of employer paid health benefits for employees. Salaries and employee benefits expense for 2001 was $15.4 million, an increase of $1.5 million from $13.8 million in 2000. This increase is primarily due to hiring of key management personnel, a partial year of salaries expense for the Grand Junction branch opened in 2001, a full year of salaries expense for the Aspen branch opened during 2000 and the United Valley branches acquired during 2000, the rising cost of employer paid health benefits for employees and an increased employer contribution to the 401(k) plan. Full-time equivalent associates at December 31, 2002, 2001 and 2000 were 254, 261 and 287, respectively.

        Expenses associated with fixed assets, including occupancy, furniture and equipment, rose $164,000 and $301,000 in 2002 and 2001, respectively. Increases in 2002 were primarily related to a full year of expense related to the Grand Junction branch opened in 2001, as well as cost of living increases in building rent and property taxes. Increases in 2001 were primarily related to a full year of expense related to the Aspen branch and the branches acquired in the July 2000 United Valley merger, as well as the opening of a new branch in Grand Junction during 2001.

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        During 2000, it was determined that certain correspondent bank account transactions were not properly recorded during the fourth quarter of 2000. As a result, the Company took charges of $139,000 during 2000 to account for the probable uncollectibility of such items.

        The efficiency ratio represents non-interest expense as a percentage of the sum of net interest income and non-interest income and is a measure of the cost to generate a dollar of revenue. The efficiency ratio increased in 2002 to 76% from 72% in 2001 and improved in 2001 from 74% in 2000. The increase in 2002 was largely due to the decline in revenue (net interest income plus non-interest income) of $2.8 million over 2001 while non-interest expenses only decreased $566,000 during the same period. The improvement in 2001 was largely due to the absence of certain non-recurring expenses in 2001 that were incurred during 2000 (i.e. the write-off of certain correspondent bank account transactions and non-capitalizable expenses related to the United Valley merger).

Income Taxes

        Income tax expense as a percentage of pre-tax income was 34.8% for 2002 compared with 41.5% and 40.8% for 2001 and 2000, respectively. The amortization of goodwill recorded in 2001 and 2000 was primarily non-deductible for income tax purposes, thus affecting the effective tax rates. During 2002, goodwill amortization was not recorded as a result of adopting SFAS No. 142 on January 1, 2002. Other intangibles continued to be amortized during 2002. Excluding amortization of non-deductible goodwill and other intangibles for 2002, 2001 and 2000, the effective tax rate in each period would have been 34.5%, 35.8% and 35.3%, respectively. A reconciliation of income tax expense to the amount computed by applying the statutory federal income tax rate to pre-tax income is provided in Note 10 of the Notes to Consolidated Financial Statements, contained in Item 15 of this Annual Report on Form 10-K.

Financial Condition

Investments

        Vail Banks' investment policy is designed primarily to ensure liquidity and to meet pledging requirements and secondarily to provide acceptable investment income. Management's focus is on maintaining a high-quality investment portfolio oriented toward mortgage-backed and other government agency securities. The determination of the amount and maturity of securities purchased is a function of liquidity and income projections based on the existing, and expected, balance sheet and interest rate forecasts. During 2001, the Company purchased two new types of securities for its available for sale investment portfolio, Federal Home Loan Mortgage Corporation (FHLMC) preferred stock and corporate trust preferred securities. These additional investments enabled the Company to further diversify the portfolio as well as to increase total investment yields.

        Vail Banks is required to account for investment securities in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. At the date of purchase, Vail Banks is required to classify debt and equity securities into one of three categories: held to maturity, trading, or available for sale. Investments in debt securities are classified as held to maturity and measured at amortized cost in the financial statements only if management has the positive intent and ability to hold those securities to maturity. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading and measured at fair value in the statements with unrealized gains and losses included in earnings. Since its inception, Vail Banks has not had any trading account activities. Investments not classified as either held to maturity or trading are classified as available for sale and measured at fair value in the financial statements with unrealized gains and losses reported, net of tax, as a separate component of other comprehensive income until realized. Since the initial classification of its investment securities, Vail Banks has not transferred any investment securities between categories, nor has it sold any investment securities classified as held to maturity. The

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following tables set forth information regarding the investment composition of Vail Banks as of the dates indicated.

Investment Securities Available for Sale at December 31,