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

_______________________

FORM 10‑Q

__________________________________

Commission File Number: 000-25081

Vail Banks, Inc.
(Exact name of registrant as specified in its charter)

0015 Benchmark Road, Suite 300, P.O. Box 6580, Avon, Colorado 81620
(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.    Yes  S  No ¨ .

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

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, 2004, there were 5,314,093 shares of common stock ($1.00 par value per share) outstanding.

Vail Banks, Inc.

FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2004

TABLE OF CONTENTS

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TABLE OF CONTENTS

PART I          FINANCIAL INFORMATION

Item 1.      FINANCIAL STATEMENTS

VAIL BANKS, INC.
Consolidated Balance Sheets

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

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

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

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

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

On January 1, 2004, the Company adopted Financial Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). As a result of adoption, the Company deconsolidated its two business trusts that had been formed in 2001 to issue trust preferred securities. As a result, the Company added to its balance sheet a $743,000 investment in the two trusts and $24.7 million of subordinated notes payable to the two trusts, and removed from its balance sheet the $24 million of trust preferred securities. In accordance with FIN 46, prior period information was not restated.

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

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VAIL BANKS, INC.
Notes to Unaudited Consolidated Financial Statements

1. ORGANIZATION AND BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include the accounts of Vail Banks, Inc. (Vail Banks) and its wholly owned subsidiary, WestStar Bank (WestStar). WestStar and Vail Banks own a combined 54.04% interest in Avon 56 Limited and WestStar owns a 100% interest in First Western Mortgage Services (See Note 11) that 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.

For prior years, the financial statements also included Vail Banks Statutory Trust I and Vail Banks Statutory Trust II, both wholly owned subsidiaries of Vail Banks. In January 2003, the FASB issued Financial Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements (ARB 51), addresses consolidation by business enterprises where ownership interests in an entity may vary over time.  FIN 46 requires that an enterprise’s consolidated financial statements include only subsidiaries in which the enterprise has a controlling financial interest. The Company adopted FIN 46 on January 1, 2004. As a result of adoption, the Company deconsolidated its two business trusts that had been formed in 2001 to issue trust preferred securities because the Company does not have controlling financial interests over the trusts, as specifically defined by FIN 46. In accordance with FIN 46, prior period information was not restated. Additionally, there was no cumulative effect on retained earnings or a change in the Company’s capital ratios as a result of this deconsolidation.

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, 2003. 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, 2003. 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, 2004, are not necessarily indicative of the results that may be expected for the full year.

Certain reclassifications have been made to the 2003 financial statements to conform to the 2004 presentation.

2.  INVESTMENT SECURITIES

Investment securities consist of the following:

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The following table presents the components of investment income for the three months ended March 31, 2004 and 2003.

3.  LOANS

Loans consist of the following:

As of March 31, 2004 and December 31, 2003, $144,000 and $116,000, 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:

4.  PROVISION AND ALLOWANCE FOR LOAN LOSSES

Transactions in the allowance are summarized as follows:

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5.  PREMISES AND EQUIPMENT

On March 5, 2004, the Company sold its bank building in Vail, Colorado and is leasing back a portion of the space. The sale resulted in a pre-tax gain of approximately $1.7 million, all of which was recognized at the time of sale. The lease, which is being accounted for as an operating lease, has a term of five years with three five-year renewal options and will require future minimum lease payments aggregating approximately $881,000. WestStar financed $7.9 million of the purchase price with a loan due in 2024 at an interest rate of 5.30% . Commissions related to the sale of $261,000 were paid to two related parties.

6.  SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date. At March 31, 2004 and December 31, 2003, the carrying amount of securities sold to secure repurchase agreements was $583,000 and $907,000, respectively. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities.

7.  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, 2004, the Company’s total borrowing capacity was $100.6 million of which $34.8 million of borrowings were outstanding ($10.8 million was short-term and $24.0 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, 2004. As of March 31, 2004, this authorized borrowing line totaled $42.1 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, 2004, no amounts were outstanding under the lines.

During 2003, the Company established a federal funds line with Provident Bank totaling $5.0 million. As of March 31, 2004, no amounts were outstanding under this line.

Stock Repurchase Plan

At its meeting on January 19, 2004, the Company’s Board of Directors reauthorized the Company’s stock repurchase program that was originally approved in February 2001. Since inception of the program through March 31, 2004, the Company has repurchased 1,535,380 shares at an average price of $12.10 per share, or approximately $19 million. The total amount of repurchases under the program, both previously completed and allowable up to January 2005, aggregate approximately $29 million. During the first three months of 2004, the Company did not repurchase any common shares.

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.

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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, 2004 and 2003:

During the three months ended March 31, 2003, options to purchase an average of 72,000 shares of common stock at an average exercise price of $12.23 per share 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 periods. There were no anti-dilutive options for the three months ended March 31, 2004.

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 both the three months ended March 31, 2004 and 2003 related to these options. Any non-employee stock option grants are accounted for under SFAS 123.

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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:

** There were no stock option grants during the first quarter of 2004

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:

9.    REGULATORY MATTERS

As of March 31, 2004, 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 12.02% and 14.04%, respectively, and a Leverage ratio of 7.88% . Regulatory guidelines permit the Company’s trust preferred securities to be included in the calculation of Tier 1, Total Risk-Based capital, and the Leverage Ratio, subject to certain limitations.

As of March 31, 2004, 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, 2004, WestStar had Tier 1 and Total Risk-Based Capital ratios of 11.54% and 12.47%, respectively, and a Leverage ratio of 7.54% .

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10. SEGMENT INFORMATION

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

11.  SUBSEQUENT EVENTS 

On April 19, 2004, the Board of Directors (Board) declared a regular quarterly dividend of $0.07 per share payable on May 14, 2004 to shareholders of record on April 30, 2004.

On April 19, 2004, the Board approved the merger of First Western into WestStar, effectively dissolving the previously existing subsidiary relationship. This merger will be consummated subsequent to regulatory approval and will have no impact on the future financial condition or results of operations of the Company as First Western was owned 100% by WestStar and was included in the consolidated financial statements of the Company.

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

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, 2004, and its results of operations for the three months ended March 31, 2004, in comparison to the three months ended March 31, 2003. 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, 2003.

In January 2003, the FASB issued Financial Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements (ARB 51), addresses consolidation by business enterprises where ownership interests in an entity may vary over time.  FIN 46 requires that an enterprise’s consolidated financial statements include only subsidiaries in which the enterprise has a controlling financial interest. The Company adopted FIN 46 on January 1, 2004. As a result of adoption, the Company deconsolidated its two business trusts that had been formed in 2001 to issue trust preferred securities because the Company does not have controlling financial interests over the trusts, as specifically defined by FIN 46. In accordance with FIN 46, prior period information was not restated. Additionally, there was no cumulative effect on retained earnings or a change in the Company’s capital ratios as a result of this deconsolidation.

Net income was $1.5 million for the three months ended March 31, 2004, up from $975,000 for the three months ended March 31, 2003, an increase of 51%. First quarter 2004 revenue included a $1.7 million gain, pre-tax, on the sale of the Company’s Vail bank building. Without this gain, net income would have been $412,000 for the first quarter 2004.

Diluted earnings per share for the three months ended March 31, 2004, was $0.27 compared to $0.17 for the three months ended March 31, 2003, an increase of 59%. Excluding the gain on the building sale, diluted earnings per share would have been $0.07 for the first quarter 2004.

The annualized return on average assets was 1.00% for the three months ended March 31, 2004 compared to 0.69% for the three months ended March 31, 2003. Excluding the gain on the building sale, the annualized return on average assets would have been 0.28% for the first quarter 2004.

The annualized return on average equity was 10.13% for the three months ended March 31, 2004 compared to 5.99% for the three months ended March 31, 2003. Excluding the gain on the building sale, the annualized return on average equity would have been 2.88% for the first quarter 2004.

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Net Interest Income. Net interest income, on a fully tax-equivalent basis (FTE), decreased by $577,000, or 10% to $5.2 million for the three months ended March 31, 2004 from $5.7 million for the three months ended March 31, 2003. The net interest margin on an FTE basis was 4.17% for the three months ended March 31, 2004 as compared to 4.89% for the comparable period in 2003. 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 earning assets. The decrease in net interest margin during the first three months of 2004 as compared to the same period in 2003 was due primarily to four factors: (1) a $23.7 million decrease, or 7%, in average loan volumes since March 31, 2003 as a result of the soft economy and more conservative underwriting policies; (2) average interest bearing deposits increased $16.0 million, or 5%, resulting in additional liquidity that the Company used to purchase lower yielding investments and federal funds sold; (3) from January through July 2003, 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 (these borrowings came at a higher interest cost than deposits); and (4), the 25 basis point interest rate cut implemented by the Federal Reserve during second quarter 2003.

Interest income FTE decreased to $7.2 million for the three months ended March 31, 2004, as compared to $7.8 million for the three months ended March 31, 2003, despite the fact that average earning assets increased during this period. Average earning assets increased 5%, from $476.7 million for the three months ended March 31, 2003 to $498.6 million for the three months ended March 31, 2004. Subsequent to March 31, 2003, the mix of earning assets shifted away from higher yielding loans toward lower yielding investment securities and federal funds sold. During the first three months of 2004, average loans declined to 63% of earning assets as compared to 71% during the first three months of 2003 while average federal funds sold and investment securities increased to 36% of earning assets as compared to 27% during the first three months of 2003. During this time, loans had a yield of 7.75% as compared to the 4.05% yield on investment securities and 0.99% yield on federal funds sold. As a result of this shift, the total yield on average earning assets decreased 87 basis points to 5.80% for the first three months of 2004, as compared to 6.67% for the first three months of 2003.

Interest expense decreased to $2.02 million for the three months ended March 31, 2004, as compared to $2.09 million for the corresponding period in 2003. This decrease was comprised primarily of a $153,000 decrease in interest expense on deposits, offset by a $63,000 increase in interest expense on borrowings. Although average interest bearing deposits increased $16.0 million, or 5%, in 2004 over the corresponding period in 2003, all of the growth was in lower cost checking, savings and money market accounts resulting in this decrease in interest expense. The volume of higher cost certificates of deposits decreased during this period, declining from an average of $129.1 million during first quarter 2003 to $121.9 million during first quarter 2004. Additionally, maturing certificates of deposit renewed at significantly lower interest rates. The increase in interest expense on borrowings was due to higher average borrowings at a slightly lower average cost during 2004 over 2003. During the three months ended March 31, 2004, average borrowings were $62.3 million at an average cost of 6.38% as compared to $57.5 million at 6.50% for the three months ended March 31, 2003. As a result of these factors, the total cost of interest-bearing liabilities decreased 19 basis points to 1.90% for the first three months of 2004, as compared to 2.09% for the first three months of 2003. 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 net interest income and net interest margin for the first three months of 2004.

Non-Interest Income. During the three months ended March 31, 2004, non-interest income increased by $961,000, or 33%, to $3.8 million for the three months ended March 31, 2004, from $2.9 million for the three months ended March 31, 2003. This increase was primarily attributable to the $1.7 million gain on the sale of the Vail bank building during March 2004. This increase was partially offset by a $647,000 decrease in mortgage broker fees. During first quarter 2004, refinancing activity slowed as compared to the refinancing boom of 2002 and 2003.

Non-Interest Expense. Non-interest expense decreased $508,000, or 7%, to $6.5 million for the three months ended March 31, 2004, from $7.0 million for the three months ended March 31, 2003. This decrease was largely attributable to a decrease in salaries and benefits of $306,000 compared to first quarter 2003 and a decrease in furniture and equipment expense of $146,000. Salaries and benefits decreased primarily due to (1) a $361,000 decrease in mortgage incentive pay as a result of lower mortgage origination volume and (2) a $100,000 decrease in employee insurance costs primarily due to favorable healthcare claim volumes, partially offset by (3) $225,000 of salaries and benefits expense attributable to the new Denver Tech branch opened during third quarter 2003. Furniture and equipment expense decreased primarily due to a decrease in depreciation and amortization expense related to the fourth quarter 2003 write-off of $1.6 million of obsolete fixed assets.

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The efficiency ratio improved to 73% for the quarter ended March 31, 2004 from 82% for the quarter ended March 31, 2003. This decrease in the efficiency ratio was due to the increase in revenue (net interest income plus non-interest income) of $341,000 from first quarter 2003 to first quarter 2004, while at the same time non-interest expenses decreased by $508,000. Excluding the gain on the building sale, the efficiency ratio would have been 90% for the first quarter 2004.

Income Taxes. The Company’s effective income tax rate (income tax expense as a percentage of pre-tax income) was 33.3% for the three months ended March 31, 2004 as compared to 29.9% for the three months ended March 31, 2003. This increase in the effective income tax rate was primarily due to an increase in pre-tax income during 2004. During the first quarter 2004, tax-exempt interest from municipal securities represented a lower percentage of pre-tax income than it did during 2003, thus resulting in a higher effective tax rate.

Financial Condition

The Company's assets increased by $31.7 million or 6%, to $607.4 million as of March 31, 2004, from $575.6 million as of December 31, 2003.

Federal funds sold balances increased by $2.0 million, or 2%, to $81.3 million as of March 31, 2004 from $79.3 million at December 31, 2003. Investment securities increased to $110.2 million as of March 31, 2004, compared to $76.6 million as of December 31, 2003, a 44% increase. During this period, deposits grew more quickly than quality loan demand, resulting in additional funds to invest.

As of March 31, 2004, loans held for sale decreased $2.0 million, or 78%, from December 31, 2003. 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 $8.1 million, or 3%, from December 31, 2003. This increase was due to an increase in loan demand as the economy began to improve.

Premises and equipment decreased by $3.9 million, or 10%, from $38.1 million as of December 31, 2003, to $34.2 million as of March 31, 2004. This decrease was mainly attributable to the sale of the Vail bank building, which had a net book value of $5.8 million, and $445,000 of depreciation and amortization expense, offset by the purchase of $2.5 million of premises and equipment primarily related to equipment upgrades, remodeling of branches, the construction of a new branch facility in Glenwood Springs to replace an older building and the purchase of land to build a new branch facility in Fruita.

Goodwill decreased by $789,000, or 2%, from $36.8 million as of December 31, 2003 to $36.0 million as of March 31, 2004 in conjunction with the sale of the Vail bank building.

Deposits increased by $33.7 million, or 8%, from $448.5 million as of December 31, 2003, to $482.2 million as of March 31, 2004. The largest increase was in the money market category, with a $30.0 million, or 29% increase, due in part to the seasonal increase in deposits during the winter ski season. Additionally, the Company continued to focus on attracting new deposit relationships. Finally, customers have been keeping their money in short-term interest bearing accounts presumably so they can easily reinvest it as the economy and markets improve.

Provision and Allowance for Loan Losses. Provision expense for the three months ended March 31, 2004, was $158,000 compared to $125,000 for the three months ended March 31, 2003. The allowance for loan losses of $3.4 million as of March 31, 2004, decreased 4% from the $3.5 million level as of December 31, 2003 and represents 1.05% of total loans and 205% of non-performing loans as of March 31, 2004 as compared to 1.02% and 109%, respectively at December 31, 2003. During this same time period, average loans increased $3.7 million, or 1%, however non-performing loans decreased $111,000, or 6%. Accordingly, the $142,000 decrease in the allowance for loan losses from December 31, 2003 reflects the Company’s revised estimate of probable losses in the loan portfolio.

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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 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 ended March 31,
		2004		2003
		(unaudited)		(unaudited)
Average total loans	$	314,667		338,411
Total loans at end of period	$	319,882		331,503
Allowance at beginning of period	$	3,503		3,747
Loans charged off		(338)		(534)
Recoveries on loans previously charged off		38		43
Provision for loan losses		158		125
Allowance at end of period	$	3,361		3,381
Annualized net charge-offs to average loans		0.38		0.59
Allowance to total loans at end of period		1.05		1.02

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

Non-Performing Assets  (in thousands)		March 31,
		2004		2003
		(unaudited)		(unaudited)
Nonaccrual loans	$	1,636		3,089
Restructured loans		—		—
Total non-performing loans		1,636		3,089
Foreclosed properties		674		796
Total non-performing assets		2,310		3,885
Loans 90 days or more past due and accruing		15		83
Total risk assets	$	2,325		3,968
Non-performing loans to total loans		0.51%		0.93%
Non-performing assets to loan related assets		0.72%		1.17%
Non-performing assets to total assets		0.38%		0.66%
Risk assets to loan related assets		0.73%		1.19%

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. 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.

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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 volatile. 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, 2004, the Company had cash and cash equivalents (including federal funds sold) of $95.8 million, interest-bearing deposits in banks of $2.0 million, and investment securities of $115.0 million. Approximately $110.2 million, or 96%, of the Company’s investment portfolio is classified as available-for-sale and can be readily sold, however $58.4 million of this amount has been pledged to secure public fund deposits and $583,000 of this amount has been sold under agreements to repurchase. Accordingly, these pledged amounts may not be available to meet general 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.

Net Cash from Operating Activities

During the three-month period ended March 31, 2004, cash of $2.0 million was provided by operating activities consisting primarily of net income of $1.5 million less non-cash income of $1.2 million plus net decreases in operating assets and liabilities of $1.7 million. Non-cash income consisted primarily of a $1.7 million gain on the sale of the Vail bank building and $334,000 of deferred loan fee amortization, offset by $471,000 of depreciation and amortization expense on premises, equipment and intangible assets, a $158,000 loan loss provision and $151,000 of net amortization of premiums on investment securities. The net decrease in operating assets and liabilities was primarily due to a $2.0 million decrease in loans held for sale and a $173,000 decrease in other assets, offset by a $283,000 increase in interest payable and other liabilities and a $119,000 decrease in interest receivable.

During the three-month period ended March 31, 2003, cash of $4.5 million was provided by operating activities consisting primarily of net income of $975,000 plus non-cash expenses of $767,000 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.

Net Cash from Investing Activities

During the three-month period ended March 31, 2004, cash of $35.6 million was used for investing activities. These outflows consisted primarily of the purchase of $43.1 million of investment securities, an $8.7 million increase in loans and $2.4 million in purchases of premises and equipment, offset by the maturity and/or calls of $9.9 million of investments and $8.3 million of proceeds from the sale of the Vail bank building.

During the three-month period ended March 31, 2003, cash of $51.0 million was used for investing activities. These outflows consisted primarily of the purchase of $59.8 million of investment securities and a $1.5 million increase in loans, offset by the maturity and/or calls of $10.4 million of investment securities.

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During the three-month period ended March 31, 2004, cash of $28.5 million was provided by financing activities consisting primarily of an increase in deposits of $33.7 million, offset by the repayment of FHLB advances of $4.7 million.

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.

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, 2004, the Company’s total borrowing capacity was $100.6 million of which $34.8 million of borrowings were outstanding ($10.8 million was short-term and $24.0 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.

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. The principal source of Vail Banks’ income is dividends from WestStar. There are statutory and regulatory requirements applicable to the payment of dividends by WestStar to Vail Banks, as well as by Vail Banks to its shareholders. Due to the high volume of dividends relative to earnings paid in earlier years, beginning in 2004, any dividend payments from WestStar to Vail Banks will require prior regulatory approval. Management believes that approval will be granted as long as WestStar maintains its well-capitalized regulatory status.

On April 19, 2004, the Board declared a regular quarterly dividend of $0.07 per share payable on May 14, 2004 to Vail Banks’ shareholders of record on April 30, 2004.

At its meeting on January 19, 2004, the Company’s Board of Directors reauthorized the Company’s stock repurchase program that was originally approved in February 2001. Since inception of the program through March 31, 2004, the Company has repurchased 1,535,380 shares at an average price of $12.10 per share, or approximately $19 million. The total amount of repurchases under the program, both previously completed and allowable up to January 2005, aggregate approximately $29 million. During the first three months of 2004, the Company did not repurchase any common shares.

As of March 31, 2004, shareholders’ equity had increased $1.7 million, or 3%, to $59.6 million from $57.9 million as of December 31, 2003. This increase is primarily related to the retention of earnings of $1.5 million and an increase in other comprehensive income of $404,000, offset by the payment of common stock dividends of $371,000.

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As of March 31, 2004 and 2003, the Company met all capital adequacy requirements to which it was subject. As of March 31, 2004, the Company had Tier 1 and Total Risk-Based Capital ratios of 12.02% and 14.04%, respectively, and a Leverage ratio of 7.88% . Regulatory guidelines permit the Company’s trust preferred securities to be included in the calculation of Tier 1, Total Risk-Based capital and the Leverage Ratio, subject to certain limitations. 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% .

As of March 31, 2004 and 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, 2004, WestStar had Tier 1 and Total Risk-Based Capital ratios of 11.54% and 12.47%, respectively, and a Leverage ratio of 7.54% . 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% .

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Item 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  Quantitative Disclosures About Market Risk

The table below provides information about the Company’s financial instruments as of December 31, 2003 that are sensitive to  changes in interest rates.