Vail Banks, Inc. Notice and Proxy Statemeny

DEF 14A 1 vail2003proxy.htm Vail Banks, Inc. Notice and Proxy Statemeny

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108 South Frontage Road West, Suite 101
Vail, CO 81657
970-476-2002
970-476-0200/Facsimile

April 18, 2003

Dear Fellow Shareholders:

It is my pleasure to invite you to attend the 2003 Annual Meeting of Shareholders of Vail Banks, Inc. which will be held Monday, May 19, 2003 at 10:00 a.m. at the Sonnenalp Resort of Vail, 82 East Meadow Drive, Vail, Colorado. The accompanying Notice of Annual Meeting of Shareholders and Proxy Statement describe the items of business that will be discussed during the meeting. A copy of Vail Banks’ Form 10-K, which contains audited financial statements and certain other information about Vail Banks’ business, is also enclosed.

To be sure that your vote is counted, we urge you to carefully review the Proxy Statement and vote your choices on the enclosed proxy card as soon as possible. If you wish to attend the meeting, any ballot that you submit at the meeting will override your proxy.

On behalf of the management, associates and directors of Vail Banks, Inc., I want to thank you for your continued support.

Sincerely,

/s/ Lisa M. Dillon
Lisa M. Dillon
President

VAIL BANKS, INC.
108 South Frontage Road West, Suite 101
Vail, Colorado 81657

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

To be Held on May 19, 2003

The annual meeting of shareholders of Vail Banks, Inc. (“Vail Banks”) will be held on Monday, May 19, 2003 at 10:00 a.m. at the Sonnenalp Resort of Vail, 82 East Meadow Drive, Vail, Colorado, for the purposes of considering and voting upon:

The election of five directors whose terms will expire in 2006;

The ratification of Dalby, Wendland & Co., P.C. as Vail Banks’ independent accountants for fiscal year 2003; and

Such other matters as may properly come before the meeting or any adjournment or postponement thereof.

Only shareholders of record at the close of business on April 1, 2003 will be entitled to notice of and to vote at the meeting or any adjournment thereof.

A Proxy Statement and a Proxy solicited by the Board of Directors are enclosed herewith. Please sign, date, and return the Proxy promptly in the enclosed business reply envelope. If you attend the meeting you may, if you wish, withdraw your Proxy and vote in person.

By Order of the Board of Directors,

/s/ Lisa M. Dillon
Lisa M. Dillon
President

April 18, 2003

Whether Or Not You Expect To Be Present At The Annual Meeting, Please Fill In, Date, Sign, And Promptly Return The Enclosed Proxy Card In The Enclosed Business Reply Envelope, Which Requires No Postage If Mailed In The United States. The Proxy May Be Revoked At Any Time Prior To Exercise. If You Are Present At The Annual Meeting, You May, If You Wish, Revoke Your Proxy At That Time And Exercise The Right To Vote Your Shares Personally.

VAIL BANKS, INC.

108 South Frontage Road West
Vail, Colorado 81657

PROXY STATEMENT

This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors of Vail Banks, Inc. (“Vail Banks”) for use at the Annual Meeting of Shareholders (“Annual Meeting”) of Vail Banks to be held on May 19, 2003, and any postponement, adjournments, or adjournment thereof, for the purposes set forth in the accompanying notice of the meeting. The expenses of this solicitation, including the cost of preparing and mailing this Proxy Statement, will be paid by Vail Banks. Copies of solicitation materials may be furnished to banks, brokerage houses and other custodians, nominees and fiduciaries for forwarding to beneficial owners of shares of Vail Banks’ common stock, and normal handling charges may be paid for such forwarding services. In addition to solicitations by mail, directors and regular employees of Vail Banks may solicit Proxies in person or by telephone. It is anticipated that this Proxy Statement and the accompanying Proxy will first be mailed to shareholders on April 18, 2003.

The record of shareholders entitled to vote at the Annual Meeting was taken as of the close of business on April 1, 2003. On that date, Vail Banks had outstanding and entitled to vote 5,706,708 shares of common stock, par value $1.00 per share (the “Common Stock”). Holders of Common Stock are entitled to one vote per share on all matters voted on by shareholders, including elections of directors.

Any Proxy given pursuant to this solicitation may be revoked by any shareholder who attends the meeting and gives oral notice of his or her election to vote in person, without compliance with any other formalities. In addition, any Proxy given pursuant to this solicitation may be revoked prior to the meeting by delivering an instrument revoking it or a duly executed Proxy bearing a later date to the Secretary of Vail Banks. If the Proxy is properly completed and returned by the shareholder and is not revoked, it will be voted at the meeting in the manner specified thereon. If the Proxy is returned but no choice is specified thereon, it will be voted for all the persons listed under the caption “Information About Nominees For Director and Continuing Director – Nominees for Directors Whose Terms Expire in 2006” and for the ratification of Dalby Wendland & Co., P.C. as Vail Banks’ independent public accountants for fiscal year 2003.

A copy of the Vail Banks’ 2002 Annual Report to shareholders (including the Vail Banks’ Annual Report on Form 10-K) is being furnished herewith to each shareholder of record as of the close of business on April 1, 2003. Additional copies of the 2002 Annual Report to shareholders will be provided free of charge upon written request to:

Lisa M. Dillon
Vail Banks, Inc.
108 South Frontage Road West
Vail, Colorado 81657

Copies of any exhibits to Vail Banks’ Annual Report on Form 10-K for the fiscal year ended December 31, 2002 will also be furnished on request and upon payment of Vail Banks’ expenses in furnishing the exhibits.

BENEFICIAL OWNERSHIP OF SECURITIES

The following table sets forth certain information regarding the beneficial ownership of the Common Stock, as of February 28, 2003 by (1) each person known to Vail Banks to be the beneficial owner of more than 5% of the outstanding shares of Common Stock; (2) each director of Vail Banks; (3) each of our most highly compensated executive officers; and (4) all directors and executive officers of Vail Banks as a group. Unless otherwise indicated, each of the shareholders listed below has sole voting and investment power with respect to the shares beneficially owned.

	Shares Beneficially Owned(1)
Beneficial Owner	Number	Percent

E.B. Chester, Jr.(2)(3)	1,379,941	23.96%
Kay H. Chester(3)(4)	1,257,459	21.84%
Byron A. Rose(5)	275,200	4.78%
Lisa M. Dillon(6)	254,794	4.42%
Donald L. Vanderhoof(7)	189,985	3.30%
Jack G. Haselbush(8)	154,120	2.68%
Dan E. Godec(9)	114,224	1.98%
Peter G. Williston(10)	86,736	1.51%
George N. Gillett, Jr.(11)	85,250	1.48%
James M. Griffin(12)	59,947	1.04%
Garner F. Hill II(13)	36,375	*
James G. Flaum(14)	23,198	*
S. David Gorsuch(15)	20,107	*
Robert L. Knous, Jr.(16)	16,955	*
Kent Myers(17)	10,575	*
Dennis R. Devor(18)	2,875	*
All directors and executive officers as a group (16 persons)(19)	2,718,657	47.21%

*	Denotes less than 1%
(1)	The percentages shown are based on 5,758,408 shares of Common Stock outstanding on February 28, 2003 which includes, as to each person and group listed, the number of shares of Common Stock deemed owned by such holder pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), assuming the exercise of options held by such holder that are exercisable within 60 days of February 28, 2003.
(2)	Includes (a) 431,627 shares owned by Mr. Chester’s wife, Kay H. Chester, as to which he disclaims beneficial ownership (b) 9,638 shares held in the Vail Banks, Inc. 401(k) Savings and Investment Plan and (c) currently exercisable options for 130,857 shares.
(3)	Mr. and Mrs. Chester’s address is care of Vail Banks, Inc., 108 South Frontage Road West, Suite 101, Vail, Colorado 81657.
(4)	Includes (a) 817,457 shares beneficially owned by Mrs. Chester’s husband, E.B. Chester, Jr., as to which she disclaims beneficial ownership and (b) currently exercisable options for 8,375 shares.
(5)	Includes currently exercisable options for 8,375 shares.
(6)	Includes (a) 722 shares held in the Vail Banks, Inc. 401(k) Savings and Investment Plan and (b) currently exercisable options for 104,857 shares.
(7)	Includes (a) currently exercisable options for 3,375 shares and (b) 25,570 shares owned by Mr. Vanderhoof’s wife, Eddie Vanderhoof.

(8)	Includes (a) 15,774 shares held by Haselbush Enterprises, LLP of which Mr. Haselbush is a general partner and (b) currently exercisable options for 750 shares.
(9)	Includes (a) 5,302 shares held in the Vail Banks, Inc. 401(k) Savings and Investment Plan and (b) currently exercisable options for 32,071 shares.
(10)	Includes (a) 2,698 shares held in the Vail Banks, Inc. 401(k) Savings and Investment Plan, (b) 4,545 shares owned by Mr. Williston’s wife, Martha Williston, as to which he disclaims beneficial ownership, and (c) currently exercisable options for 5,000 shares.
(11)	Includes currently exercisable options for 250 shares.
(12)	Includes currently exercisable options for 8,375 shares.
(13)	Includes currently exercisable options for 1,875 shares.
(14)	Includes (a) 4,260 shares owned jointly with Mr. Flaum’s wife, Ronna J. Flaum, (b) 1,000 shares owned by Mrs. Flaum and (c) currently exercisable options for 8,375 shares
(15)	Includes currently exercisable options for 8,375 shares.
(16)	Includes currently exercisable options for 8,375 shares.
(17)	Includes currently exercisable options for 8,375 shares.
(18)	Includes currently exercisable options for 1,875 shares.
(19)	Includes currently exercisable options for 339,535 shares.

NOMINATION AND ELECTION OF DIRECTORS
(Item Number 1 on the Proxy Card)

The Amended and Restated Articles of Incorporation of Vail Banks provide that the Board of Directors shall consist of not less than ten but no more than eighteen directors. Currently, there are fifteen directors, twelve of whom are non-employee directors. The Board of Directors is divided into three classes of directors serving staggered three-year terms: Five directors are to be elected at the annual meeting for a three-year term expiring at the annual meeting in 2006 or until his or her successor is elected and qualified. The Board has nominated Dennis R. Devor, Lisa M. Dillon, George N. Gillett, Jr., Jack G. Haselbush, and Kent Myers, constituting Class II, for re-election to the three-year term expiring in 2006. Ten directors are serving terms that extend beyond the annual meeting. Information on the nominees and the continuing directors is set forth below.

Each Proxy executed and returned by a shareholder will be voted as specified thereon by the shareholder. If no specification is made, the Proxy will be voted for the re-election of the nominees. In the event that any nominee withdraws or for any reason is not able to serve as a director, the Proxy will be voted for such other person as may be designated by the Board of Directors as a substitute nominee, but in no event will the Proxy be voted for more than five nominees. Management of Vail Banks has no reason to believe that the nominees will not serve if elected.

Directors are elected by a plurality of the votes cast by the holders of the shares entitled to vote in an election at a meeting at which a quorum is present. A majority of the votes entitled to be cast on a matter by a class of stock which votes as a separate class constitutes a quorum. An abstention and a broker non-vote would be included in determining whether a quorum is present at a meeting, but would not have an effect on the outcome of a vote.

INFORMATION ABOUT NOMINEES
FOR DIRECTOR AND CONTINUING DIRECTORS

The following information as of February 7, 2003 has been furnished by the nominees for director and the continuing directors. Except as otherwise indicated, the nominees and the continuing directors have been or were engaged in their present or last principal employment, in the same or a similar position, for more than five years.

Name (Age)	Information About the Nominees and the Continuing Directors
Nominees for Directors Whose Term Will Expire in 2006
Dennis R. Devor (52)	Mr. Devor became a director in 1999, following the merger with Telluride Bancorp, Ltd. Mr. Devor is an attorney in Montrose, Colorado and has previously served on other bank boards.
Lisa M. Dillon (49)	Ms. Dillon has served as the President and director of Vail Banks since 1993. Ms. Dillon, who started her career with WestStar Bank in 1979, served as President of WestStar from 1989 to 1999, and served as Chief Executive Officer from 1989 to 2000 and a director of WestStar since 1989.
George N. Gillett, Jr. (64)	Mr. Gillett became a director of Vail Banks and WestStar Bank in January 2001. Since the early nineties Mr. Gillett has owned and served as President of Booth Creek Management Corp., a company which has investments in a wide variety of businesses. He also currently serves on the board of directors of Booth Creek Ski Group, Inc. and Swift & Company.
Jack G. Haselbush (56)	Mr. Haselbush became a director of Vail Banks in July 2000 following the acquisition of Estes Bank Corporation. Mr. Haselbush has also served as a strategic advisor to Vail Banks and WestStar Bank from 2000 to 2001. Prior to the acquisition of Estes Bank Corporation in July 2000, Mr. Haselbush was the Chairman and Chief Executive Officer of United Valley Bank, the wholly owned subsidiary of Estes Bank Corporation.
Kent Myers (53)	Mr. Myers has been a director of Vail Banks and WestStar since 1997. Mr. Myers is currently a self-employed consultant. From December 2000 to December 2001, Mr. Myers was an Executive Manager for Resort Data Processing, Inc., a software company. From 1998 to 2001, Mr. Myers was the co-owner and Managing Partner of The Klein Group LLC, a local mortgage bank. He previously served as Senior Vice President and Chief Operating Officer of Vail Resorts, a resort management company, where he worked from 1988 to 1997.
Directors Whose Terms Expire in 2004
E.B. Chester, Jr. (60)	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. Currently, Mr. Chester also serves as Chairman of the Board of Directors of Camp International, Ltd., a supplier of database services to the commercial aviation industry, and as Manager of King Creek Ranch LLC, a ranching business.
S. David Gorsuch (64)	Mr. Gorsuch has been a director of Vail Banks since 1993 and has been a director of WestStar since 1977. Mr. Gorsuch is the President of Gorsuch Ltd., a retail clothing and ski equipment business.

James M. Griffin (56)	Mr. Griffin has been a director of Vail Banks since 1993. Since July 2002, Mr. Griffin has served as Vice Chairman of Overseas Military Sales Corporation.
Garner F. Hill II (65)	Mr. Hill became a director of Vail Banks in January 1999, following the merger with Telluride Bancorp, Ltd. Mr. Hill has also served as a strategic advisor to Vail Banks and WestStar Bank during 1999. Mr. Hill is currently a self-employed investor and the Vice President of Ferris Corporation, a company involved in real estate. Mr. Hill served as the Chairman of the Board of Telluride Bancorp and the Bank of Telluride from 1988 through 1998 and served as the Chairman of the Board of Western Colorado Bank from 1991 through 1998.
Directors Whose Terms Expire in 2005
Kay H. Chester (56)	Mrs. Chester has been a director of Vail Banks since 1993 and a director of WestStar since 1992. She has been active in investing since 1989.
James G. Flaum (58)	Mr. Flaum has been a director of Vail Banks and WestStar since 1996. Mr. Flaum has been the President of Slifer, Smith & Frampton/Vail Associates Real Estate, a real estate firm, since 1997. He started his career with Slifer, Smith & Frampton/Vail Associates Real Estate in 1987.
Dan E. Godec (47)	Mr. Godec became a director of Vail Banks in July 2000. Mr. Godec has served as the President and a director of WestStar since 1999 and as Chief Executive Officer of WestStar since 2000. 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.
Robert L. Knous, Jr. (55)	Mr. Knous has been a director of Vail Banks and WestStar since 1997. For the past eleven years he has been with East West Partners, a real estate development company. In January 2003 he began pursuing additional interests in business, education and foundation work, utilizing his legal and real estate experience.
Byron A. Rose (61)	Mr. Rose has been a director of Vail Banks since 1993 and a director of WestStar since 1989. Mr. Rose, who retired in 1987, served as a Managing Director of Morgan Stanley & Co. from 1978 to 1987.
Donald L. Vanderhoof (71)	Mr. Vanderhoof has served as a director of Vail Banks since 1998. From 1998 until 2001 Mr. Vanderhoof served as a Senior Executive Vice President of WestStar. Mr. Vanderhoof was formerly the Chairman of Glenwood Independent Bank, where he had been employed since 1956.

Mr. and Mrs. Chester are husband and wife.

Recommendation of the Board

The Board of Directors recommends a vote “FOR” the nominees.

RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
(Item Number 2 on the Proxy Card)

The Board of Directors has selected Dalby, Wendland & Co., P.C. (“Dalby Wendland”) to audit Vail Banks’ financial statements and other corporate records for fiscal year 2003. Dalby Wendland served as Vail Banks’ independent auditors for fiscal year 2002. Vail Banks’ shareholders are asked to ratify the selection of Vail Banks’ independent accountants. Representatives of Dalby Wendland are expected to be present at the annual meeting, will have an opportunity to make a statement if they desire, and are expected to be available to respond to questions of the shareholders. The affirmative vote of a majority of shares present, in person or represented by proxy, and entitled to vote at the annual meeting is required to ratify the appointment of Dalby Wendland as Vail Banks’ independent public accountants. See “Information Concerning Vail Banks’ Accountants.”

The Board of Directors recommends a vote “FOR” ratification of Dalby Wendland as Vail Banks’ independent public accountants.

EXECUTIVE COMPENSATION

The following table sets forth certain information for each of our last three fiscal years concerning compensation paid to our most highly compensated executive officers who were employed during fiscal year 2002. We refer to these individuals elsewhere in this proxy statement as the “named executive officers.”

Summary Compensation Table

Name and Principal Position	Year	Annual Compensation		Long-Term Compensation		All Other Compensation
Name and Principal Position	Year	Salary and Directors Fees	All Other Annual Compen- sation	10 Year Vesting Restricted Stock Awards(1)	Securities Underlying Options/ SAR	All Other Compensation
E.B. Chester, Jr., Chairman	2002 2001 2000	$222,020 $208,000 $203,300	* * *	$432,636(3) $427,448(4) $ 43,204(5)	0 0 0	$10,952(6) $ 5,179(7) $ 3,691(8)
Lisa M. Dillon, President	2002 2001 2000	$167,940 $156,000 $153,500	* * *	$283,920(3) $320,589(4) $ 33,405(5)	0 0 0	$ 6,244(6) $ 4,980(7) $ 3,037(8)
Peter G. Williston, Senior Executive Vice President and Chief Financial Officer (2)	2002 2001 2000	$144,000 $136,000 $130,000	* * *	$252,000(3) $279,485(4) $ 14,002(5)	0 0 10,000	$ 5,155(6) $ 4,190(7) $ 231(8)
Dan E. Godec, President and Chief Executive Officer of WestStar Bank	2002 2001 2000	$151,900 $140,000 $135,000	* * *	$255,504(3) $288,532(4) $ 29,397(5)	0 0 14,762	$ 5,641(6) $ 4,569(7) $ 2,999(8)

Does not meet the Securities and Exchange Commission’s threshold for disclosure.

(1)

Awards of restricted stock vest in increments of 10% per year. As of December 31, 2002, 169,784 shares of restricted stock were held by various executive officers of Vail Banks with an aggregate value of $2,037,408 (based on the closing price of our common stock on the Nasdaq National Market on December 31, 2002). Outstanding shares of restricted stock are entitled to receive dividends when and if declared on Vail Banks’ common stock.

(2)	Mr. Williston became Senior Executive Vice President and Chief Financial Officer of Vail Banks in July 2000.
(3)	On February 18, 2003, Vail Banks granted to Mr. Chester 36,053, Ms. Dillon 23,660 shares, Mr. Williston 21,000 shares and Mr. Godec 21,292 shares of restricted stock in connection with services rendered in fiscal year 2002. The closing sale price of our common stock on the Nasdaq National Market on that date was $12.00.
(4)	On January 24, 2002, Vail Banks granted to Mr. Chester 38,165 shares, Ms. Dillon 28,624 shares, Mr. Williston 24,954 shares and Mr. Godec 25,761 shares of restricted stock in connection with services rendered in fiscal year 2001. The closing sale price of our common stock on the Nasdaq National Market on that date was $11.20.
(5)	On January 25, 2001, Vail Banks granted to Mr. Chester 4,215 shares, Ms. Dillon 3,259 shares, Mr. Williston 1,366 and Mr. Godec 2,868 shares of restricted stock, respectively, in connection with services rendered in fiscal year 2000. The closing sale price of our common stock on the Nasdaq National Market on that date was $10.25.
(6)	Reflects 401(k) matching contributions ($5,913 for Mr. Chester, $5,089 for Ms. Dillon, $4,130 for Mr. Williston and $4,601 for Mr. Godec) and term life insurance premiums ($5,039 for Mr. Chester, $1,155 for Ms. Dillon, $1,025 for Mr. Williston and $1,040 for Mr. Godec).
(7)	Reflects 401(k) matching contributions ($3,824 for Mr. Chester, $3,856 for Ms. Dillon, $3,210 for Mr. Williston and $3,557 for Mr. Godec) and term life insurance premiums ($1,355 for Mr. Chester, $1,124 for Ms. Dillon, $980 for Mr. Williston and $1,012 for Mr. Godec).
(8)	Reflects the 401(k) matching contributions ($2,375 for Mr. Chester, $1,969 for Ms. Dillon and $2,038 for Mr. Godec) and term life insurance premiums ($1,316 for Mr. Chester, $1,068 for Ms. Dillon, $231 for Mr. Williston and $961 for Mr. Godec).

No options were exercised by executive officers during 2002. The following chart shows the value of unexercised options held by the named executive officers:

FY-End Options

Name	Number of Unexercised Options at Fiscal Year End Exercisable/Unexercisable	Value of Unexercised in the Money Options at Fiscal Year End(1) Exercisable/Unexercisable
E.B. Chester, Jr.	130,857/5,953	$378,093/$8,930
Lisa M. Dillon	104,857/5,953	$328,066/$8,930
Peter G. Williston	5,000/5,000	$12,500/$12,500
Dan E. Godec	26,881/8,881	$70,859/$18,914

__________________________
(1) Based on the closing sale price of the Common Stock on The Nasdaq Stock Market on December 31, 2002 - $12.00

The following table provides information about equity compensation awards under Vail Banks’ Amended and Restated Stock Incentive Plan.

Equity Compensation Plan Information

	(a)	(b)	(c)
Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by stockholders	640,253	$9.71	140,716(1)
Equity compensation plans not approved by stockholders	N/A	N/A	N/A
Total	640,253	$9.71	140,716(1)

(1)

Available for grant under the Vail Banks’ Amended and Restated Stock Incentive Plan as of December 31, 2002. The Vail Bank’s Amended and Restated Stock Incentive Plan provides for an adjustment of the number of shares available for grant under the plan commencing on January 1, 2003 and on each January 1 thereafter and ending on January 1, 2007. On each such January 1, an additional number of shares will be added to the total shares reserved for issuance equal to twenty percent (20%) of the increase in the total issued and outstanding shares as of such January 1^st date over the number of issued and outstanding shares on the immediately preceding January 1^st.

CERTAIN AGREEMENTS WITH EXECUTIVES

In November 1999, Lisa Dillon and E. B. Chester, Jr. each entered into “change in control” agreements with Vail Banks. The agreements provide for the payment of compensation and benefits in the event of a “Change in Control” (as defined in the agreements) of Vail Banks and the provision for additional benefits if the executive’s employment is terminated under certain circumstances in connection with a Change in Control. Each agreement has an initial term of two years and such term will be extended automatically for successive two year periods unless Vail Banks gives written notice of non-extension of the term or if Vail Banks terminates the officer’s employment for “Cause” (as defined in the agreement).

If a Change in Control of Vail Banks occurs, Ms. Dillon and Mr. Chester will each be entitled to receive the following benefits: (i) 200% of the executive’s then-current salary, paid in a lump sum; (ii) 200% of the incentive payment the executive would have received for the year during which the Change in Control occurs under Vail Banks’ annual incentive plan, assuming the target level of performance had been met for such year; (iii) a prorated incentive bonus for the year of the Change in Control; (iv) the amount of any annual or long-term bonus with respect to any year that has then ended which has not yet been paid; (v) an additional contribution to any deferred compensation plan based on the payments made pursuant to paragraphs (i), (ii), (iii), and (iv) above. In addition, the executive will immediately vest in all unvested employee stock options and restricted stock awards in the event of a Change in Control. After a Change in Control, if Vail Banks terminates the executive’s employment without “Cause” (as defined in the agreement) or if the executive resigns for “Good Reason” (as defined in the agreement), the executive shall be entitled to receive the following benefits: (vi) the executive’s full base salary through the date of termination at the rate in effect at the time notice of termination is given, (vii) payment for unused vacation days, and (viii) continuation of health and life insurance coverage for two years from the date of termination. If the payment of any such benefits would result in the imposition of an excise tax under Section 4999 of the Internal Revenue Code, the executive is entitled to receive a “gross-up” payment to cover the amount of the excise taxes and all other taxes on the gross-up payment.

In July 2000, Peter Williston entered into a “change in control” agreement with Vail Banks. The agreement has an initial term of two years and such term will be extended automatically for successive two year periods unless Vail Banks gives written notice of non-extension of the term or if Vail Banks terminates his employment for “Cause” (as defined in the agreement).

If a Change in Control (as defined in the agreement) occurs, and Mr. Williston’s employment is terminated within 12 months of such Change in Control by Vail Banks other than for “Cause,” death or “Disability” (as defined in the agreement), or if Mr. Williston terminates his employment for “Good Reason” (as defined in the agreement) within 12 months of a Change in Control, then Mr. Williston will be entitled to a severance payment of $390,000, provided, however that such severance payment will be reduced by the amount by which the fair market value of any of Mr. Williston’s exercised or unexercised options exceeds the exercise price of any such options or by any other payments that Mr. Williston receives for the value of any of his options.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Vail Banks and its bank subsidiary have had, and expect to have in the future, banking transactions in the ordinary course of business with, directors and officers of Vail Banks and its bank subsidiary and their associates, including corporations in which such officers or directors are shareholders, directors and/or officers, on the same terms (including interest rates and collateral) as then prevailing at the time for comparable transactions with other persons. Such transactions have not involved more than the normal risk of collectibility or presented other unfavorable features.

MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS

The Vail Banks Board of Directors held five meetings during 2002. All of the directors attended at least seventy-five percent (75%) of the meetings of the Board and committees of the Board on which he sat that were held during their tenure as directors.

Vail Banks’ Board of Directors has established three committees, an Audit Committee, a Compensation Committee and an Executive Committee.

The Audit Committee presently consists of three directors, Garner F. Hill II, Dennis R. Devor and Byron A. Rose, all of whom are independent directors. The audit committee is responsible for recommending the selection of independent auditors; meeting with the independent auditors to review the scope and results of the audit; reviewing with management and the internal auditor the system of internal control and internal audit reports; and ascertaining that any and all operational deficiencies are satisfactorily corrected. The Audit Committee is also responsible for reviewing related party transactions and potential conflicts of interest involving officers, directors, employees or affiliates of Vail Banks. The Audit Committee held five meetings during 2002.

The Compensation Committee presently consists of five directors, E.B. Chester, Lisa M. Dillon, George N. Gillett, Jr., S. David Gorsuch, and Robert L. Knous, Jr., of whom three are independent directors. The Compensation Committee is responsible for determining the compensation of Vail Banks’ executive officers. The Compensation Committee is also authorized to administer Vail Banks’ Amended and Restated Stock Incentive Plan. The Compensation Committee held two meetings during 2002.

The Executive Committee presently consists of five directors, E.B. Chester, Lisa M. Dillon, James G. Flaum, George N. Gillett, Jr. and Byron A. Rose, of whom three are independent directors. The Executive Committee is authorized to consider any matter that may be brought before a meeting of the full Board of Directors, subject to restrictions under Colorado law. The Executive Committee held ten meetings during 2002.

Compensation Committee Interlocks And Insider Participation

E.B. Chester and Lisa M. Dillon are on the Compensation Committee and are also executive officers of Vail Banks. Mr. Chester and Ms. Dillon do not participate in decisions regarding their respective compensation.

DIRECTOR COMPENSATION

Each member of the Board of Directors is paid a $2,500 annual retainer, $200 per board meeting at which such member is in attendance, and each member, other than Mr. Chester, Ms. Dillon and Mr. Godec, receive $100 per committee meeting at which such member is in attendance. In February 2003, all non-employee board members were granted 1,000 options each as compensation for board service in 2002.

REPORT OF COMPENSATION COMMITTEE

This report sets forth the current strategy and components of Vail Banks’ compensation programs for its executive officers, which for fiscal year 2002 included Mr. Chester, Ms. Dillon, Mr. Williston and Mr. Godec. This report also describes the basis on which compensation determinations were made with respect to these executive officers for the 2002 fiscal year.

The Compensation Committee

The Compensation Committee of the Board of Directors was formed in 1995 and is comprised of five directors, three of whom are not members of management. The Compensation Committee is responsible for the review and recommendation to the Board of Directors of the compensation of Vail Banks’ Chairman and other executive officers and of employee benefit plans.

Executive Compensation Policies

Vail Banks’ executive compensation strategy is designed to establish a strong connection between the creation of shareholder value and the compensation earned by its executives. The current general strategy was formulated in 1999 with the assistance of the international consulting firm of Towers Perrin. Vail Banks’ fundamental executive compensation objectives are to:

award compensation that will be effective in attracting, motivating and retaining key employees;

promote the achievement of growth and operational success, including, but not limited to, maintenance of satisfactory regulatory ratings and relationships; and

align the interest of executive officers with that of the shareholders through the use of equity compensation for the long-term benefit of shareholders.

All executive officers participate in the same compensation programs as other employees of Vail Banks, with the only differences being the amount of compensation that is at risk, the overall magnitude of the potential awards and the performance criteria for individual officers.

Stock Ownership by Officers and Other Employees. Vail Banks believes that stock options and other stock incentives play an integral role in its ability to attract and retain employees and directors and to provide incentives for such persons to promote Vail Banks’ financial success. Moreover, stock incentives benefit Vail Banks by closely aligning the interests of grantees with the interests of Vail Banks’ shareholders.

The amount of incentives payable to executive officers is determined as a range of percentages of an individual officer’s salary. The Committee uses a sliding scale based on the performance of Vail Banks to determine the level of incentive compensation to be received by the individual officer.

Principal Executive Compensation Elements

Vail Banks’ executive compensation program is comprised of the following principal elements: base salaries and annual issuances of long-term stock incentives.

Base Salary. Salaries for executive officers are established on the basis of the qualifications and experience of the executive, the nature of the job responsibilities and the range of salaries for similar positions at peer companies. Base salaries for executive officers tend to be below the market for similar companies, as Vail Banks’ compensation strategy is to emphasize performance-based compensation. Base salaries may be increased periodically for officers who meet or exceed their individual performance goals. The increases are based upon the improved performance of Vail Banks, the value created by the officers for Vail Banks and its shareholders and other successful business indicators.

Annual Issuances of Long-Term Stock Incentives. Vail Banks’ philosophy regarding long-term incentive compensation is to provide stock option and restricted stock grants upon the meeting and exceeding of certain defined quantitative and qualitative performance criteria. Vail Banks believes that stock options and other stock incentives play an integral role in the ability of Vail Banks to attract and retain employees and directors and to provide incentives for such persons to promote the financial success of Vail Banks. Restricted stock and stock options generally are granted pursuant to the Amended and Restated Stock Incentive Plan. In 2002, in recognition of meeting certain performance criteria, Vail Banks issued restricted stock as an annual bonus to the named executive officers.

The Chairman’s Compensation for Fiscal Year 2002

Compensation decisions for Mr. Chester, as Chairman, are made under the same methodology used in determining the compensation of other executives.

In January 2002, the Committee recommended that the Board increase Mr. Chester’s annual base salary from $208,000 to $216,320, a 4% increase. The Committee made its decision based upon the significant value created by Mr. Chester’s leadership, the Company’s improved performance and other successful business indicators.

Mr. Chester received 36,053 shares of restricted stock and was not granted options for fiscal 2002.

Compensation Deductibility Policy

It is the Committee’s intention that all executive compensation be deductible under the Internal Revenue Code of 1986, as amended, including the $1 million deductibility limitation of Section 162(m). Notwithstanding this policy, the Committee retains the right to provide non-deductible compensation if it determines that such action is in the best interests of Vail Banks and its shareholders.

Summary

The Committee believes the executive compensation policies and programs maintained by Vail Banks and described in this report serve the interests of Vail Banks and its shareholders and that executive compensation has been strongly linked to Vail Banks’ performance and the enhancement of shareholder value. The Committee intends to reevaluate these compensation policies from time to time, with the assistance of management and advisors, to ensure that they are appropriately configured to help continue to achieve Vail Banks’ long-term goals of performance, growth and enhancement of shareholder value.

Robert L. Knous, Jr., Chairman
E.B. Chester, Jr.
Lisa M. Dillon
George N. Gillett, Jr.
S. David Gorsuch

REPORT OF AUDIT COMMITTEE

Vail Banks has a standing Audit Committee. The Board of Directors has adopted a written Statement of Delegation for the Audit Committee. Each member of the Audit Committee is independent, as that term is defined in the listing standards of the Nasdaq National Market relating to audit committees.

Report of the Audit Committee

To the Board of Directors of Vail Banks:

We have reviewed and discussed with management Vail Banks’ audited financial statements as of and for the year ended December 31, 2002.

We have discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61, Communication with Audit Committees, as amended, by the Auditing Standards Board of the American Institute of Certified Public Accountants.

We have received and reviewed the written disclosures and the letter from the independent auditors required by Independence Standard No. 1, Independence Discussions with Audit Committee, as amended, by the Independence Standards Board, and have discussed with the auditors the auditors’ independence.

Based on the reviews and discussions referred to above, we recommend to the Board of Directors that the financial statements referred to above be included in Vail Banks’ Annual Report on Form 10-K for the year ended December 31, 2002.

This report is respectfully submitted by the Audit Committee of the Board of Directors.

Garner F. Hill II, Chairman
Dennis R. Devor
Byron A. Rose

STOCK PERFORMANCE GRAPH

Set forth below is a line graph comparing the semi-annual percentage change in the cumulative total shareholder return of Vail Banks’ Common Stock against the cumulative total return of the S&P 500 Index and the SNL Southwest Bank Index for the period commencing December 18, 1998 and ending December 31, 2002. Vail Banks will furnish, without charge, on the written request of any person who is a stockholder of record as of April 1, 2003, a list of the companies included in the SNL Southwest Bank Index. Requests for information should be addressed to Peter G. Williston, 20 Lindbergh Drive, P.O. Box 1210, Gypsum, Colorado 81637. For purposes of constructing this line graph, the returns of each company in the SNL Southwest Bank Index have been weighted according to that issuer’s market capitalization.

Index	12/18/98	12/31/98	12/31/99	12/31/00	12/31/2001	12/31/2002
Vail Banks, Inc.	100.00	100.52	81.44	86.63	92.50	103.80
S&P 500	100.00	103.51	125.29	113.88	100.35	78.07
SNL Southwest Bank Index	100.00	105.55	101.27	109.73	114.44	118.68

INFORMATION CONCERNING VAIL BANKS’ ACCOUNTANTS

KPMG was the principal independent public accountant for Vail Banks during the year ended December 31, 2000. On March 8, 2001, Vail Banks informed KPMG that it would request proposals from several accounting firms, including KPMG, for audit services for the years to end December 31, 2001, 2002 and 2003. On April 19, 2001, Vail Banks received a letter from KPMG which stated that it would not submit a proposal for future audit services and that it was resigning as Vail Banks’ independent auditors.

During the audit of Vail Banks’ financial statements for the fiscal year ended December 31, 2000 it was determined that certain correspondent bank account transactions were not properly recorded during the third quarter of 1999. As a result, Vail Banks took a charge of $432,000, after tax, (approximately $680,000 pre-tax) for the uncollectibility of these items and increased previously reported non-interest expense for the year ended December 31, 1999 by the same amount. In addition, it was determined that certain correspondent bank account transactions were not properly recorded in the fourth quarter of 2000, and as a result, management increased 2000 non-interest expense by $88,000, after tax (approximately $139,000 pre-tax). Vail Banks corrected the internal controls that allowed those errors to remain previously undetected; however, KPMG did not perform any procedures after January 19, 2001 on the controls and therefore it did not agree or disagree that the controls were corrected.

In connection with the audits of Vail Banks’ financial statements for each of the two (2) fiscal years ended December 31, 1999 and December 31, 2000, and in the subsequent interim period through January 19, 2001, there were no disagreements with KPMG on any matters of accounting principles or practices, financial statement disclosure or auditing scope and procedures which, if not resolved to the satisfaction of KPMG, would have caused KPMG to make reference to the matter in their report.

The above-described audit reports of KPMG on Vail Banks’ financial statements for fiscal years ended December 31, 1999 and December 31, 2000 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.

KPMG advised Vail Banks that the unreconciled correspondent bank accounts in 1999 and 2000 were matters which KPMG considered to be reportable conditions under standards established by the American Institute of Certified Public Accountants. Vail Banks authorized KPMG to respond fully to inquiries from the successor accountants with respect to such matter.

On May 7, 2001, the Audit Committee of Vail Banks recommended that the Board of Directors approve the engagement of Dalby Wendland as independent auditors of Vail Banks. On May 21, 2001, the Board of Directors of Vail Banks approved such engagement. Dalby Wendland served as the independent auditors of Vail Banks in 2002.

Vail Banks is seeking the shareholders’ ratification of Dalby Wendland as Vail Banks’ auditors for fiscal year 2003.

Audit Fees

Dalby Wendland billed Vail Banks aggregate fees of $102,750 for professional services rendered for the audit of financial statements for fiscal year 2002 and the reviews of financial statements included in Forms 10-Q filed during fiscal year 2002.

All Other Fees

Dalby Wendland billed Vail Banks aggregate fees of $43,777 for all other services rendered to it during fiscal year 2002. The Audit Committee has considered whether the provision of non-audit services by the independent accountants is compatible with maintaining the auditor’s independence.

SHAREHOLDER PROPOSALS

Any proposals by shareholders intended for presentation at the 2004 annual meeting must be received by Vail Banks at its principal executive offices, attention of the Secretary, no later than December 16, 2003, in order to be included in the proxy material for that meeting. Vail Banks must be notified of any other shareholder proposal intended to be presented for action at the meeting no later than March 1, 2004, or else proxies may be voted on such proposal at the discretion of the person or persons holding those proxies.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended, each executive officer, director and beneficial owner of 10% or more of Vail Banks’ Common Stock is required to file certain forms with the Securities and Exchange Commission (“SEC”). A report of beneficial ownership of Vail Banks’ Common Stock on Form 3 is due at the time such person becomes subject to the reporting requirement and a report on Form 4 or 5 must be filed to reflect changes in beneficial ownership occurring thereafter. During 2002, both Mr. Flaum and Mr. Knous did not timely file a Form 4 reflecting acquisition of stock.

OTHER MATTERS THAT MAY COME BEFORE THE MEETING

Management of Vail Banks knows of no matters other than those stated above that are to be brought before the meeting. If any other matters should be presented for consideration and voting, however, it is the intention of the persons named as proxies in the enclosed Proxy to vote in accordance with their judgment as to what is in the best interest of Vail Banks.

By Order of the Board of Directors,

/s/ Lisa M. Dillon
Lisa M. Dillon
President

ANNUAL MEETING PROXY CARD - COMMON STOCK

A	Election of Directors
1. The Board of Directors recommends a vote FOR the listed nominees.

	For	Withhold		For	Withhold
01 - Dennis R. Devor	¨	¨	04 - Jack G. Haselbush	¨	¨
02 - Lisa M. Dillon	¨	¨	05 - Kent Myers	¨	¨
03 - George N. Gillett, Jr.	¨	¨

B	Issues
The Board of Directors recommends a vote FOR the following proposals.

	For	Against	Abstain
2. Proposal to ratify Dalby, Wendland & Co., P.C. as Vail Banks' independent public accountants for fiscal year 2003.	¨	¨	¨

3. In accordance with their best judgment with respect to any other matters that may
properly come before the meeting.

C	Authorized Signatures - Sign Here - This section must be completed for your instructions to be executed.
Note: When signing as an attorney, trustee, administrator or guardian, please give your title as such. In the case of joint tenants, each joint owner must sign.

BACK OF PROXY CARD

Common Stock Proxy - Vail Banks, Inc.

THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
FOR THE 2003 ANNUAL MEETING OF SHAREHOLDERS.

The undersigned hereby appoints E. B. Chester, Jr., or Lisa M. Dillon the proxy of the undersigned to vote the Common Stock of the undersigned at the Annual meeting of Shareholders of VAIL BANKS, INC. to be held on May 19, 2003, and any adjournment thereof.

THE BOARD OF DIRECTORS FAVORS A VOTE "FOR" THE ELECTION AS DIRECTORS OF THE PERSONS NAMED IN THE PROXY AND RATIFICATION OF DALBY, WENDLAND & CO., P.C. AS ACCOUNTANTS AND UNLESS INSTRUCTIONS TO THE CONTRARY ARE INDICATED IN THE SPACE PROVIDED, THIS PROXY WILL BE SO VOTED.