VAIL Vail Banks (MM)

AVON, Colo., July 20 /PRNewswire-FirstCall/ -- Vail Banks, Inc. (NASDAQ:VAIL) today reported diluted earnings per share of $0.26 for the second quarter 2006 compared to $0.18 for the second quarter 2005 and $0.24 for the first quarter 2006. Net income for the quarter was $1,442,000 versus $971,000 in the second quarter of 2005 and $1,313,000 in the first quarter 2006. Core net income (excluding costs incurred related to the pending merger transaction with U.S. Bancorp.) was $1,668,000 for the second quarter 2006, or $0.30 diluted earnings per share. On June 1, 2006 the Company and U.S. Bancorp announced the signing of a definitive merger agreement on May 31, 2006, for U.S. Bancorp to acquire Vail Banks, Inc. On June 27th, the Company filed a preliminary proxy statement with the SEC for review. The merger is subject to approval by the Company's shareholders, the receipt of necessary regulatory and governmental approvals and the satisfaction of customary closing conditions. The merger will be completed as soon as practicable following satisfaction of these conditions, which the Company expects to be in the third or fourth quarter 2006. In 2006, through the second quarter, the Company incurred an estimated $439,000 of costs related to this transaction with $319,000 of these expenses incurred during the second quarter. All of these costs are expensed as incurred. "We are very pleased with our continued earnings growth, even with the costs we have incurred related to the pending transaction with U.S. Bancorp," stated Gary Judd, CEO of Vail Banks, Inc. Average earning assets increased $51.1 million, or 9 percent, since the second quarter 2005, while total average assets increased $54.3 million, or 8 percent, over the same period. The Company had $4,000 in net recoveries on previously charged-off loans in the second quarter 2006. Non-accrual loans increased by $2.3 million during the quarter, related to a single real estate secured relationship. Non-performing assets to loan-related assets increased from 0.25 percent for the first quarter of 2006 to 0.62 percent for the second quarter 2006. Loans past due 30 days or more and still accruing interest were 0.09 percent at the end of the second quarter 2006 compared to 0.78 percent at the end of the first quarter 2006. "Asset quality remains strong, as shown by the past-due loan trends. We recognized a loan loss provision expense of $240,000 during the quarter to provide for an adequate loan loss reserve given our continued strong loan growth. The allowance for loan losses to total loans was 0.92 percent for the second quarter compared to 0.93 percent for the first quarter," stated Mr. Judd. Average loan balances have increased $104.7 million, or 25 percent, compared to the second quarter 2005 and $17.5 million compared to the first quarter 2006. Year to date, commercial and industrial loans have increased by 11 percent and real estate mortgage secured loans increased by 28 percent. Core deposit balances plus balances tied to repurchase agreements improved $45.1 million, or 9 percent, since December 31, 2005. Money market and balances tied to repurchase agreements have grown 17 and 220 percent, respectively, since December 31, 2005. "Our balance sheet growth is a direct result of the execution by our knowledgeable and professional associates of our strategy to focus on creating strong banking relationships with our customers," commented Mr. Judd. Loan interest income increased $797,000, or 8 percent, compared to the first quarter 2006 and $3.4 million, or 46 percent, compared to the second quarter 2005. In addition, loan fees increased $257,000, or 31 percent, compared to the first quarter 2006. These increases were partially offset by an increased cost of funds, with net interest income increasing $1.6 million, or 24 percent, compared to the second quarter 2005. Interest bearing deposits and balances tied to repurchase agreements increased $46.7 million, or 11 percent, since December 31, 2005. Even with the increases in interest expense, our net interest margin, on a fully tax equivalent basis, improved to 5.68 percent for the quarter, compared to 5.49 percent for the first quarter 2006 and 5.00 percent for the second quarter in 2005. Non-interest income increased $118,000, or 8 percent, this quarter compared to the first quarter 2006. Deposit related charges consist of service charges, which contributed $43,000 of the increase. Mortgage broker fees increased $58,000, or 14 percent, from the previous quarter. Non-interest expenses increased $464,000, or 6 percent, this quarter compared to the previous quarter 2006. The primary contributors to this increase were the professional fees related to the merger transaction with U.S. Bancorp and expenses related to other real estate owned. At its meeting on July 17, the Board of Directors of Vail Banks declared a regular quarterly dividend of $0.07 per share payable August 11 to shareholders of record on July 28. On June 23, 2006, the Company closed its Stapleton banking office, which was within the city limits of Denver. Vail Banks, Inc., through its subsidiary WestStar Bank, has 23 banking offices in 19 communities in Colorado, including Aspen, Avon, Breckenridge, Cedaredge, Delta, Denver, Dillon, Edwards, Estes Park, Frisco, Fruita, Glenwood Springs, Granby, Grand Junction, Gypsum, Montrose, Norwood, Telluride and Vail. This news release contains forward-looking statements, including, without limitation, statements regarding certain of the Company's goals and expectations with respect to net income, net income per share, revenue, expenses and the growth rate in such items, as well as other measures of economic performance, including statements relating to estimates of credit quality trends, and statements preceded by, followed by or that include the words "may", "could", "should", "would", "believe", "anticipate", "estimate", "expect", "intend", "plan", "projects", "outlook" or similar expressions. Actual results may differ from those set forth in the forward-looking statements. Factors that may cause actual results or earnings to differ materially from such forward-looking statements include, among others, the following: (1) the ability to obtain governmental approvals of the merger on the proposed terms and schedule; (2) the failure of Vail Banks' shareholders to approve the merger; (3) the projected growth and profitability of the Company following the new branding and other business initiatives are lower than expected; (4) the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations may be different than expected resulting in, among other things, a deterioration in credit quality or a reduced demand for credit, including the resultant effect on the Company's loan portfolio and allowance for loan losses; (5) the effects of, and changes in, inflation, interest rate, market and monetary fluctuations; (6) the development of competitive new products and services by the Company and its competitors;( 7) the impact of changes in financial services' laws and regulations or other unanticipated regulatory or judicial proceedings or ruling; (8) changes in consumer spending and saving habits; (9) adverse changes in financial performance and/or condition of the Company's borrowers which could impact repayment of such borrowers' outstanding loans; (10) the impact of changes in accounting principles; and (11) decision to downsize, sell or close branches or otherwise change the business mix of the Company. The foregoing list of factors is not exclusive and you should refer to the section entitled "Certain Factors Affecting Forward-Looking Statement in the Company's annual report filed in Form 10-K with the Securities and Exchange Commission. The Company does not undertake any obligation to update any forward-looking statement, whether written or oral, relating to the matters discussed in this news release. Additional Information about the Merger and Where to Find It This communication is being made in respect of the proposed merger transaction involving U.S. Bancorp and Vail Banks, Inc. In connection with the transaction, Vail Banks will file a proxy statement with the SEC. Shareholders are urged to read the proxy statement when it becomes available because it will contain important information about the proposed transaction. The final proxy statement will be mailed to Vail Banks shareholders of record at the record date for the special meeting of the shareholders to be held to approve the proposed transaction. In addition, the preliminary and final proxy statements and other relevant documents will be available free of charge at the SEC's Internet Web site, http://www.sec.gov/. When available, the preliminary and final proxy statement and other relevant documents also may be obtained for free at Vail Banks' web site, http://www.weststarbank.com/, or by contacting Ray Verlinde, SEVP and chief administrative officer, or Lisa Dillon, vice chairman, Vail Banks, at telephone number (970) 328-9700. Vail Banks and its directors and officers and other members of management and employees may be deemed to be participants in the solicitation of proxies in respect to the proposed transaction. Vail Banks' shareholders may obtain information regarding the identity of each participant and a description of each participant's direct or indirect interest in the solicitation from Vail Banks' proxy statements and annual reports on Form 10-K previously filed with the SEC and Vail Banks' proxy statement relating to the proposed transaction, when it becomes available. Vail Banks, Inc. Financial Highlights (in thousands, except share data) (unaudited) Three Months Ended June 30, Mar. 31, Dec. 31, Sept. 30, June 30, 2006 2006 2005 2005 2005 Earnings and Performance Net income $1,442 $1,313 $1,290 $1,343 $971 Diluted net income per share 0.26 0.24 0.24 0.25 0.18 Return on assets 0.82% 0.77% 0.75% 0.79% 0.60% Return on equity 8.82 8.29 8.03 8.59 6.39 Net interest margin (FTE) 5.68 5.49 5.53 5.07 5.00 Efficiency ratio 78 78 76 79 84 Return on tangible equity 19.60 18.92 18.51 20.57 15.69 Asset Quality Ratios Net recoveries (charge-offs) to average loans 0.00% 0.00% (0.02)% 0.00% 0.05% Allowance for loan losses to loans 0.92 0.93 0.92 0.95 0.95 Non-performing assets to loan-related assets 0.62 0.25 0.13 0.14 0.14 Risk assets to loan-related assets (1) 0.63 0.30 0.14 0.47 0.18 Capital Ratios Equity to assets at period end 9.13% 9.18% 9.29% 9.33% 9.44% Tangible equity to assets at period end 4.15 4.06 4.03 3.96 3.93 Leverage ratio 8.25 8.14 8.24 8.13 8.12 Tier 1 capital ratio 9.74 9.87 10.00 10.61 10.70 Total capital ratio 10.95 11.18 11.13 11.84 12.05 Other Information at Period End Book value per share $11.79 $11.54 $11.37 $11.19 $11.05 Tangible book value per share 5.36 5.11 4.93 4.75 4.61 Closing market price 16.66 16.11 15.00 14.00 14.64 Shares outstanding 5,606,235 5,606,235 5,606,235 5,604,235 5,604,235 Associates 264 261 256 256 254 Banking offices 23 24 24 24 23 (1) Risk assets are non-performing assets plus loans 90 days or more past due and accruing. Vail Banks, Inc. Balance Sheet (in thousands, except share data) June 30, December 31, Percent 2006 2005 Change (unaudited) (unaudited) Assets Cash and due from banks $21,793 $20,728 5% Federal funds sold 4,990 10,630 (53) Investment securities Available for sale 79,081 87,265 (9) Held to maturity 158 175 (10) Investments in Trust I and Trust II 743 743 0 Gross loans 536,694 487,101 10 Allowance for loan losses (4,929) (4,473) 10 Net deferred loan fee income (1,081) (1,117) (3) Investment in bank stocks 4,612 4,558 1 Premises and equipment, net 38,775 38,686 0 Goodwill, net 35,970 35,970 0 Other intangible assets, net 99 119 (17) Other assets 7,230 5,934 22 $724,135 $686,319 6% Liabilities and Shareholders' Equity Liabilities Deposits $561,034 $552,508 2% Securities sold under agreements to repurchase 39,883 12,470 220 Federal Home Loan Bank advances 23,673 25,759 (8) Subordinated notes to Trust I and Trust II 24,743 24,743 0 Other liabilities 6,163 4,606 34 Total liabilities 655,496 620,086 6% Minority interest 2,547 2,500 2% Shareholders' equity Common equity 67,512 64,770 4% Accumulated other comprehensive loss (1,420) (1,037) 37 Total shareholders' equity 66,092 63,733 4 $724,135 $686,319 6% Loan Mix at Period End Commercial, industrial, and agricultural $187,373 $168,110 11% Real estate--construction 229,644 222,857 3 Real estate--mortgage 113,762 88,679 28 Consumer 5,915 7,455 (21) Total gross loans $536,694 $487,101 10% Deposit Mix at Period End Interest bearing checking $94,004 $97,058 (3)% Savings 27,851 30,860 (10) Money market 235,769 201,329 17 CDs under $100,000 39,376 42,516 (7) CDs $100,000 and over 41,516 47,495 (13) Interest bearing deposits 438,516 419,258 5 Non-interest bearing checking 122,518 133,250 (8) Total deposits $561,034 $552,508 2 Shares Outstanding at Period End 5,606,235 5,606,235 0% Vail Banks, Inc. Statement of Income by Quarter (in thousands, except share data) (unaudited) Three Months Ended June 30, Mar. 31, Dec. 31, Sept. 30, June 30, 2006 2006 2005 2005 2005 Interest income Interest on loans $10,820 $10,023 $9,179 $8,042 $7,410 Fees on loans 1,097 840 1,149 874 833 Interest on investment securities 825 845 846 852 1,028 Interest on federal funds sold 98 79 273 499 219 Investments in Trust I and Trust II 19 19 19 19 19 Total interest income 12,859 11,806 11,466 10,286 9,509 Interest expense Deposits 3,039 2,667 2,342 1,962 1,623 Borrowings 247 255 275 279 241 Securities sold under agreements to repurchase 370 221 133 122 98 Federal funds purchased 13 7 -- -- -- Subordinated notes to Trust I and Trust II 630 631 631 631 630 Total interest expense 4,299 3,781 3,381 2,994 2,592 Net interest income 8,560 8,025 8,085 7,292 6,917 Provision for loan losses 240 215 450 50 (36) Net interest income after provision 8,320 7,810 7,635 7,242 6,953 Non-interest income Deposit related 690 647 689 648 645 Mortgage broker fees 461 403 585 588 459 Gain (loss) on sale of fixed assets -- -- (28) -- 11 Other 481 464 494 887 426 Total non-interest income 1,632 1,514 1,740 2,123 1,541 Non-interest expense Salaries and employee benefits 4,580 4,578 4,368 4,596 4,109 Occupancy 939 976 881 837 909 Furniture and equipment 603 616 639 646 650 Amortization of intangible assets 10 10 10 10 10 Other 1,793 1,281 1,582 1,285 1,397 Total non-interest expense 7,925 7,461 7,480 7,374 7,075 Income before taxes 2,027 1,863 1,895 1,991 1,419 Income tax expense 585 550 605 648 448 Net Income $1,442 $1,313 $1,290 $1,343 $971 Diluted net income per share $0.26 $0.24 $0.24 $0.25 $0.18 Vail Banks, Inc. Statement of Income (in thousands, except share data) (unaudited) Three months ended Six months ended June 30, Percent June 30, Percent 2006 2005 Change 2006 2005 Change Interest income Interest on loans $10,820 $7,410 46% $20,843 $14,115 48% Fees on loans 1,097 833 32 1,937 1,742 11 Interest on investment securities 825 1,028 (20) 1,670 2,399 (30) Interest on federal funds sold 98 219 (55) 177 411 (57) Investments in Trust I and Trust II 19 19 0 38 38 0 Total interest income 12,859 9,509 35 24,665 18,705 32 Interest expense Deposits 3,039 1,623 87 5,706 2,952 93 Borrowings 247 241 2 502 605 (17) Securities sold under agreements to repurchase 370 98 278 591 123 380 Federal funds purchased 13 -- 0 20 -- 0 Subordinated notes to Trust I and Trust II 630 630 0 1,261 1,261 0 Total interest expense 4,299 2,592 66 8,080 4,941 64 Net interest income 8,560 6,917 24 16,585 13,764 20 Provision for loan losses 240 (36) 767 455 29 1,469 Net interest income after provision 8,320 6,953 20 16,130 13,735 17 Non-interest income 1,632 1,541 6 3,146 2,976 6 Non-interest expense 7,925 7,075 12 15,386 14,041 10 Income before taxes 2,027 1,419 43 3,890 2,670 46 Income taxes 585 448 31 1,135 814 39 Net Income $1,442 $971 49% $2,755 $1,856 48% Diluted net income per share $0.26 $0.18 44% $0.50 $0.34 47% Weighted average shares outstanding - diluted 5,498,264 5,335,764 (3) 5,481,567 5,403,438 (1) Profitability Ratios Return on assets 0.82% 0.58% 0.79% 0.57% Return on equity 8.82 6.41 8.56 6.12 Net interest margin (FTE) 5.68 5.00 5.58 5.07 Net (charge- offs) / recoveries 0.00 (0.05) 0.00 (0.04) Efficiency ratio 78 84 78 84 Average Balances Assets $708,698 $654,444 8% $701,854 $652,797 8% Earning assets 613,125 561,978 9 606,985 558,089 9 Loans 516,166 411,495 25 507,441 406,943 25 Deposits 552,037 523,298 5 551,373 520,309 6 Shareholders' equity 65,580 60,937 8 64,911 60,611 7 Vail Banks, Inc. Supplemental Information (in thousands) (unaudited) Three Months Ended June 30, Mar. 31, Dec. 31, Sept. 30, June 30, 2006 2006 2005 2005 2005 Average Balances Assets $708,698 $694,934 $682,827 $673,080 $654,444 Earning assets 613,125 600,777 588,081 580,370 561,978 Loans 516,166 498,619 458,128 421,678 411,495 Deposits 552,037 550,701 545,361 536,756 523,298 Interest bearing liabilities 514,391 497,516 483,324 477,432 468,261 Shareholders' equity 65,580 64,235 63,748 62,001 60,937 Average Deposit Mix Interest bearing checking 96,171 96,058 94,426 91,277 93,380 Savings 28,826 30,587 31,336 31,778 31,787 Money market 220,961 210,410 197,545 181,233 162,355 CDs under $100,000 40,244 41,996 43,205 45,736 48,993 CDs $100,000 and over 44,151 46,109 49,919 59,049 67,114 Interest bearing deposits 430,353 425,160 416,431 409,073 403,629 Non-interest bearing checking 121,684 125,541 128,930 127,683 119,669 Total deposits $552,037 $550,701 $545,361 $536,756 $523,298 Net Interest Margin Analysis Net interest income $8,560 $8,025 $8,085 $7,292 $6,917 Fully taxable equivalent adjustment 109 110 116 111 76 Net interest income (FTE) 8,669 8,135 8,201 7,403 6,993 Yields (FTE) Loans 9.26% 8.84% 8.94% 8.39% 8.04% Investment securities 4.57 4.50 4.05 3.87 3.75 Federal funds sold 4.82 4.25 3.82 3.50 2.91 Total earning assets 8.48 8.04 7.81 7.11 6.84 Cost of funds Interest bearing deposits 2.83 2.54 2.23 1.90 1.61 Other interest bearing liabilities 6.01 6.24 6.16 5.99 6.01 Total interest bearing liabilities 3.35 3.08 2.78 2.49 2.22 Total interest expense to earning assets 2.81 2.55 2.28 2.04 1.84 Net interest margin (FTE) 5.68% 5.49% 5.53% 5.07% 5.00% Vail Banks, Inc. Asset Quality (in thousands) (unaudited) Three Months Ended June 30, Mar. 31, Dec. 31, Sept. 30, June 30, 2006 2006 2005 2005 2005 Asset Quality Nonaccrual loans $2,532 $188 $41 $-- $-- Restructured loans -- -- -- -- -- Total non-performing loans 2,532 188 41 -- -- Foreclosed properties 795 1,093 572 617 589 Total non-performing assets 3,327 1,281 613 617 589 90+ days past due and accruing 27 247 83 1,399 181 Total risk assets $3,354 $1,528 $696 $2,016 $770 Allowance for Loan Losses Beginning Balance $4,685 $4,473 $4,050 $4,003 $3,989 Provision (credit) for loan losses 240 215 450 50 (36) Loan charge-offs -- (4) (28) (7) (1) Loan recoveries 4 1 1 4 51 Net (charge-offs) recoveries 4 (3) (27) (3) 50 Ending Balance $4,929 $4,685 $4,473 $4,050 $4,003 Net Recoveries (Charge-Offs) to Average Loans 0.00% 0.00% (0.02)% 0.00% 0.05% Loans Past Due 30 Days or More and Accruing to Total Loans 0.09 0.78 0.43 0.43 0.07 DATASOURCE: Vail Banks, Inc. CONTACT: Raymond E. Verlinde, Sr. EVP/Chief Administrative Officer, +1-970-328-9710, , or Brady T. Burt, EVP/Chief Financial Officer, +1-970-328-9711, , both for Vail Banks, Inc. Web site: http://www.weststarbank.com/

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