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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION   FORM 10-Q Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934 For quarter ended March 31, 2004
    
    Commission file number 333-40028
 Front Range Capital Corporation   Colorado
    
    84-0970160(State or other jurisdiction
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 1020 Century Drive, Suite 202, Louisville, Colorado
    
    80027(Address of principal executive offices)
    
    (Zip code)Registrants telephone number, including area code
    
    (303) 926-0300
 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     
 [   ]
    
                  
            No
       [X] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes     
 [   ]    
                  
            No
       [X] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date. Title of Class: Common stock, Class A Voting, $0.001 par value Outstanding shares as of June 24, 2004, were 1,849,264 Title of Class: Common stock, Class B Non-voting, $0.001 par value Outstanding shares as of June 24, 2004, were 38,105




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TABLE OF CONTENTS PageFORWARD-LOOKING STATEMENTS
    
    
    1PART I  FINANCIAL INFORMATION
    
    
    2Item 1. Unaudited Consolidated Financial Statements
    
    
    2Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    22PART II  OTHER INFORMATION
    
    
    24Item 1  Legal Proceedings
    
    
    24Item 5  Other Information
    
    
    24Item 6  Exhibits and Reports on Form 8-K
    
    
    26SIGNATURES
    
    
    27Rule 13a-14(a)/15d-14(a) Certification of CEORule 13a-14(a)/15d-14(a) Certification of CFOSection 1350 Certification of CEOSection 1350 Certification of CFO




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FORWARD-LOOKING STATEMENTS This report on Form 10-Q contains forward-looking statements about Front Range
Capital Corporation (the Company) for which it claims the protection of the
safe harbor provisions contained in the Private Securities Litigation Reform
Act of 1995. These forward-looking statements are based on managements
current knowledge and belief and include information concerning the Companys
possible or assumed future financial condition and results of operations. When
you see any of the words believes, expects, anticipates, estimates, or
similar expressions, it means we are making forward-looking statements. A
number of factors, some of which are beyond the Companys ability to predict or
control, could cause future results to differ materially from those
contemplated. These factors include but are not limited to:  §
    
    a continued slowdown in the national and Colorado economies;§
    
    increased economic uncertainty created by the recent war in Iraq;§
    
    the prospect of additional terrorist attacks in the United States and the
uncertain effect of these events on the national and regional economies;§
    
    changes in the interest rate environment;§
    
    changes in the regulatory environment;§
    
    significantly increasing competitive pressure in the banking industry;§
    
    operational risks including data processing system failures or fraud;§
    
    volatility of rate sensitive deposits; and§
    
    asset/liability matching risks and liquidity risks. Additional risk factors are described in the Companys Form 10-KSB for the year
ended December 31, 2003. - 1 -




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PART I  FINANCIAL INFORMATION 
 Item 1. Unaudited Consolidated Financial Statements REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders
Front Range Capital Corporation
    and Subsidiaries
Louisville, Colorado We have reviewed the accompanying interim consolidated balance sheet of
Front Range Capital Corporation and Subsidiaries as of March 31, 2004, and the
related interim consolidated statements of income and comprehensive income for
the three-month period and cash flows for the three-month period then ended.
These financial statements are the responsibility of the Companys management. We conducted our review in accordance with the standards of the Public
Company Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit in
accordance with the standards of the Public Company Accounting Oversight Board,
the objective of which is to express an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with U.S. generally accepted accounting principles. /s/ McGladrey & Pullen, LLP Des Moines, Iowa
June 24, 2004 - 2 -




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FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS At March 31,
    
    At December 31,2004
    
    2003*(unaudited)Assets:Cash and due from banks
    
    $
    13,202,000
    
    
    $
    16,304,000Federal funds sold
    
    
    
    
    
    
    Cash and cash equivalents
    
    
    13,202,000
    
    
    
    16,304,000Investment securities available for sale
    
    
    57,536,000
    
    
    
    62,591,000Nonmarketable securities
    
    
    3,989,000
    
    
    
    3,434,000LoansReal estate-construction
    
    
    62,441,000
    
    
    
    62,879,000Real estate-commercial
    
    
    131,854,000
    
    
    
    129,482,000Real estate-residential
    
    
    52,795,000
    
    
    
    52,656,000Commercial
    
    
    33,577,000
    
    
    
    34,733,000Consumer
    
    
    7,260,000
    
    
    
    7,056,000Total loans
    
    
    287,927,000
    
    
    
    286,806,000Less unearned income
    
    
    (1,190,000
    )
    
    
    (1,174,000
    )Loans, net of unearned income
    
    
    286,737,000
    
    
    
    285,632,000Allowance for loan losses
    
    
    (2,890,000
    )
    
    
    (2,872,000
    )Loans, net of allowance for loan losses
    
    
    283,847,000
    
    
    
    282,760,000Premises and equipment, net
    
    
    10,239,000
    
    
    
    10,355,000Cash value of life insurance
    
    
    8,085,000
    
    
    
    7,962,000Other real estate owned
    
    
    9,552,000
    
    
    
    9,714,000Foreclosed assets
    
    
    11,000
    
    
    
    614,000Accrued interest receivable
    
    
    1,491,000
    
    
    
    1,326,000Deferred income taxes
    
    
    1,661,000
    
    
    
    1,804,000Other assets
    
    
    1,299,000
    
    
    
    1,598,000Total Assets
    
    $
    390,912,000
    
    
    $
    398,192,000Liabilities:Deposits:Noninterest-bearing demand
    
    $
    56,962,000
    
    
    $
    53,609,000Interest-bearing demand
    
    
    114,018,000
    
    
    
    121,904,000Savings
    
    
    13,929,000
    
    
    
    14,160,000Time certificates, $100,000 and over
    
    
    67,508,000
    
    
    
    56,403,000Other time certificates
    
    
    65,743,000
    
    
    
    57,437,000Total deposits
    
    
    318,160,000
    
    
    
    303,513,000Short-term funds borrowed
    
    
    20,725,000
    
    
    
    41,075,000Long-term debt
    
    
    14,462,000
    
    
    
    16,981,000Trust preferred securities
    
    
    
    
    
    
    9,200,000Subordinated debentures
    
    
    9,485,000
    
    
    
    Accrued interest payable
    
    
    572,000
    
    
    
    521,000Other liabilities
    
    
    3,444,000
    
    
    
    3,730,000Total Liabilities
    
    $
    366,848,000
    
    
    $
    375,020,000Shareholders Equity:Convertible preferred stock, $.001 par value; authorized 100,000,000 shares,
issued and outstanding 14,117 shares
    
    
    
    
    
    
    Additional paid-in capital, preferred stock
    
    
    3,670,000
    
    
    
    3,670,000Common stock, Class A (voting) and Class B (non-voting), $.001 par value;
authorized 200,000,000 shares, issued and outstanding
1,887,369 shares (3/31/04 and 12/31/03) and 1,665,144 shares (3/31/03)
    
    
    2,000
    
    
    
    2,000Additional paid-in capital, common stock
    
    
    11,282,000
    
    
    
    11,282,000Retained earnings
    
    
    8,624,000
    
    
    
    7,975,000Accumulated other comprehensive income, net
    
    
    486,000
    
    
    
    243,000Total Shareholders Equity
    
    
    24,064,000
    
    
    
    23,172,000Total Liabilities and Shareholders Equity
    
    $
    390,912,000
    
    
    $
    398,192,000
 See accompanying notes to unaudited consolidated financial statements *Amounts restated from previously reported amounts. See Note 1 to the
unaudited consolidated financial statements. - 3 -




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FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME For the three month period ended March 31,2004
    
    2003(unaudited)Interest Income:Interest and fees on loans
    
    $
    5,138,000
    
    
    $
    5,353,000Interest on investment securities available for saleTaxable
    
    
    408,000
    
    
    
    376,000Tax exempt
    
    
    175,000
    
    
    
    137,000Dividends
    
    
    44,000
    
    
    
    38,000Interest on federal funds sold
    
    
    2,000
    
    
    
    36,000Total interest income
    
    
    5,767,000
    
    
    
    5,940,000Interest Expense:Interest on interest-bearing demand deposits
    
    
    274,000
    
    
    
    345,000Interest on savings
    
    
    9,000
    
    
    
    17,000Interest on time certificates of deposit
    
    
    755,000
    
    
    
    1,105,000Interest on short-term borrowing
    
    
    113,000
    
    
    
    71,000Interest on long-term debt
    
    
    197,000
    
    
    
    225,000Interest on trust preferred securities
    
    
    
    
    
    
    253,000Interest on subordinated debt
    
    
    275,000
    
    
    
    Total interest expense
    
    
    1,623,000
    
    
    
    2,016,000Net Interest Income
    
    
    4,144,000
    
    
    
    3,924,000Provision for loan losses
    
    
    110,000
    
    
    
    256,000Net Interest Income After Provision for Loan Losses
    
    
    4,034,000
    
    
    
    3,668,000Noninterest Income:Service charges and customer service fees
    
    
    585,000
    
    
    
    442,000Gain on sale of securities available for sale
    
    
    207,000
    
    
    
    Mortgage referral fees
    
    
    108,000
    
    
    
    255,000Other
    
    
    187,000
    
    
    
    94,000Total Noninterest Income
    
    
    1,087,000
    
    
    
    791,000Noninterest Expense:Salaries and employee benefits
    
    
    2,237,000
    
    
    
    2,294,000Occupancy expense
    
    
    427,000
    
    
    
    381,000Furniture and equipment
    
    
    192,000
    
    
    
    220,000Data processing
    
    
    199,000
    
    
    
    187,000Marketing
    
    
    132,000
    
    
    
    96,000Printing and supplies
    
    
    67,000
    
    
    
    78,000Loan and collection
    
    
    111,000
    
    
    
    115,000Other real estate  Heritage Place
    
    
    156,000
    
    
    
    34,000Loss on sale of OREO and other foreclosed assets
    
    
    99,000
    
    
    
    Other
    
    
    584,000
    
    
    
    486,000Total Noninterest Expense
    
    
    4,204,000
    
    
    
    3,891,000Income Before Income Taxes
    
    
    917,000
    
    
    
    568,000Provision for income taxes
    
    
    232,000
    
    
    
    139,000Net Income
    
    $
    685,000
    
    
    $
    429,000Comprehensive Income:Change in unrealized gain on securities available for sale, net
    
    
    243,000
    
    
    
    38,000Comprehensive Income
    
    $
    928,000
    
    
    $
    467,000Average Common Shares Outstanding
    
    
    1,887,369
    
    
    
    1,665,144Diluted Average Common Shares Outstanding
    
    
    1,898,369
    
    
    
    1,676,144Per Share DataBasic earnings
    
    $
    0.34
    
    
    $
    0.23Diluted earnings
    
    $
    0.34
    
    
    $
    0.23Dividends paid on common stock
    
    $
    0.00
    
    
    $
    0.00
 See accompanying notes to unaudited consolidated financial statements - 4 -




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FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY AccumulatedOtherPreferred
    
    Common
    
    Retained
    
    ComprehensiveStock
    
    Stock
    
    Earnings
    
    Income, Net
    
    Total(unaudited)Balance, December 31, 2002
(restatedsee Note 1)
    
    $
    3,670,000
    
    
    $
    8,523,000
    
    
    $
    7,348,000
    
    
    $
    495,000
    
    
    $
    20,036,000Net income for the period
    
    
    
    
    
    
    
    
    
    
    429,000
    
    
    
    
    
    
    
    429,000Net change in realized gain on securities
available for sale, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,000
    
    
    
    38,000Dividends declared on 2000 Series B
preferred stock
    
    
    
    
    
    
    
    
    
    
    (37,000
    )
    
    
    
    
    
    
    (37,000
    )Balance March 31, 2003
    
    $
    3,670,000
    
    
    $
    8,523,000
    
    
    $
    7,740,000
    
    
    $
    533,000
    
    
    $
    20,466,000Balance, December 31, 2003
(restatedsee Note 1)
    
    $
    3,670,000
    
    
    $
    11,284,000
    
    
    $
    7,975,000
    
    
    $
    243,000
    
    
    $
    23,172,000Net income for the period
    
    
    
    
    
    
    
    
    
    
    685,000
    
    
    
    
    
    
    
    685,000Net change in realized gain on securities
available for sale, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    243,000
    
    
    
    243,000Dividends declared on 2000 Series B
preferred stock
    
    
    
    
    
    
    
    
    
    
    (36,000
    )
    
    
    
    
    
    
    (36,000
    )Balance March 31, 2004
    
    $
    3,670,000
    
    
    $
    11,284,000
    
    
    $
    8,624,000
    
    
    $
    486,000
    
    
    $
    24,064,000
 See accompanying notes to unaudited consolidated financial statements - 5 -




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FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS For the three monthsended March 31,2004
    
    2003(unaudited)Cash Flows from Operating Activities:Net income
    
    $
    685,000
    
    
    $
    429,000Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization of property and equipment
    
    
    241,000
    
    
    
    266,000Amortization of investment securities premium, net
    
    
    71,000
    
    
    
    84,000Investment security gains, net
    
    
    (207,000
    )
    
    
    Provision for loan losses
    
    
    110,000
    
    
    
    256,000Loss on sale of OREO and foreclosed assets
    
    
    99,000
    
    
    
    Net change in assets and liabilities:Decrease (increase) in accrued interest receivable
    
    
    (165,000
    )
    
    
    (70,000
    )Decrease (increase) in other assets
    
    
    179,000
    
    
    
    52,000Increase (decrease) in accrued interest payable
    
    
    (51,000
    )
    
    
    (103,000
    )Increase (decrease) in other liabilities
    
    
    (286,000
    )
    
    
    20,000Net Cash Provided by Operating Activities
    
    
    802,000
    
    
    
    934,000Cash Flows from Investing Activities:Proceeds from sale of securities available-for-sale
    
    
    17,309,000
    
    
    
    Proceeds from maturities, payments and calls of securities
available-for-sale
    
    
    1,226,000
    
    
    
    11,048,000Purchases of securities available-for-sale
    
    
    (12,958,000
    )
    
    
    (8,522,000
    )Purchases of non-marketable securities
    
    
    (555,000
    )
    
    
    (21,000
    )Net increase in loans
    
    
    (1,336,000
    )
    
    
    (8,064,000
    )Purchases of property and equipment
    
    
    (125,000
    )
    
    
    (95,000
    )Proceeds from sale of other real estate owned
    
    
    288,000
    
    
    
    Proceeds from sale of foreclosed assets
    
    
    505,000
    
    
    
    30,000Net Cash Provided by (Used in) Investing Activities
    
    
    4,354,000
    
    
    
    (5,624,000
    )Cash Flows from Financing Activities:Net increase (decrease) in deposits
    
    
    14,647,000
    
    
    
    (8,808,000
    )Net increase in (decrease) in short-term borrowings
    
    
    (20,350,000
    )
    
    
    (4,500,000
    )Payments of principal on long-term debt
    
    
    (2,519,000
    )
    
    
    (18,000
    )Dividends paid on 2000 Series B Preferred Stock
    
    
    (36,000
    )
    
    
    (37,000
    )Net Cash (Used in) Financing Activities
    
    
    (8,258,000
    )
    
    
    (13,363,000
    )Net (Decrease) in Cash and Cash Equivalents
    
    
    (3,102,000
    )
    
    
    (18,053,000
    )Cash and Cash Equivalents and Beginning of Period
    
    
    16,304,000
    
    
    
    36,642,000Cash and Cash Equivalents at End of Period
    
    $
    13,202,000
    
    
    $
    18,589,000Supplemental Disclosure of Noncash Activities:Net change in realized gain on securities available for sale
    
    $
    243,000
    
    
    $
    38,000Loans transferred to other real estate owned
    
    $
    133,000
    
    
    $
    1,167,000Supplemental Disclosure of Cash Flow Activity:Cash paid for interest expense
    
    $
    1,572,000
    
    
    $
    2,119,000
 See accompanying notes to unaudited consolidated financial statements - 6 -




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Notes to Unaudited Consolidated Financial Statements Note 1: General Summary of Significant Accounting Policies The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. The results of operations reflect interim
adjustments, all of which are of a normal recurring nature and which, in the
opinion of management, are necessary for a fair presentation of the results for
the interim period presented. The interim results for the three-month periods
ended March 31, 2004 and 2003 are not necessarily indicative of the results
expected for the full year. The unaudited balance sheet information for
December 31, 2003, is derived from the Companys audited financial statements
for the year ended December 31, 2003, except for the restated amounts as
described in the next paragraph. These unaudited consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and accompanying notes as well as other information
included in the Companys Annual Report on Form 10-KSB for the year ended
December 31, 2003. Restatement of Prior Year Amounts The Company reviewed its previously adopted accounting treatment for its
Executive Retirement Plan adopted in 1995 and Indexed Salary Continuation Plan
adopted in 1998 (the Plans) in light of an Interagency Advisory released
jointly by federal bank regulatory agencies regarding the accounting treatment
for certain deferred compensation agreements. The agencies
approach has resulted in some restatements of financial statements
among banks with deferred compensation agreements. The
Companys Audit Committee, management and independent
accountants reviewed the Plans and determined that restatement of its
consolidated financial statements for 2003 and 2002 was appropriate.
Previously, the liability recorded by the Company for the Plans did not
consider a portion of the obligation which continues until the employees death
and certain vesting provisions. The amounts presented for the December 31, 2003 balance sheet and the 2003 and
2002 statements of changes in shareholders equity have been restated from
previously presented amounts to reflect a correction in the accounting for
certain deferred compensation agreements. The Company accrued an
additional deferred compensation liability of $973,000 related to the
Plans. As compared to amounts reported on
Form 10-KSB for the year ended December 31, 2003, assets have increased by
$360,000, liabilities have increased by $973,000 and shareholders equity has
been reduced by $613,000 to record accounting adjustments for periods
prior to 2003. There was no effect
on net income for 2003 (or any of the periods therein). The effect on net
income in 2002 was a reduction of $215,000 before tax and $135,000 after tax.
Shareholders equity at December 31, 2002 has also
been adjusted by $613,000 as compared to previously reported amounts. The remaining amounts of $758,000 before tax and $478,000 after tax effect
periods prior to 2002. The Companys current well-capitalized status with
federal and state banking authorities has not been affected by these
adjustments. Principles
of Consolidation
The consolidated financial statements include the accounts of the Company, and
its wholly owned subsidiaries, Heritage Bank (the Bank), and Front Range
Capital Trust I (the Trust). All significant intercompany accounts and
transactions have been eliminated in consolidation. - 7 -




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Nature
of Operations
Front Range Capital Corporation (the Company), is a registered bank holding
company under the Bank Holding Company Act of 1956 (the BHCA) headquartered
in Louisville, Colorado, southeast of Boulder along the Denver-Boulder business
corridor. Incorporated under the laws of the State of Colorado on January 7,
1985, the Company derives the majority of its income from, and its principal
asset is, all of the common stock of its wholly owned subsidiary bank, Heritage
Bank. The Bank has 12 full-service branches in the Denver-Boulder metropolitan
area and plans to open one additional branch in 2004 and another in 2005. The
Bank also offers investment services through its investment division, Heritage
Investments, and mortgage loans through its mortgage division, Heritage Bank
Mortgage Division. The Company operates under a community banking philosophy
with emphasis on local small to medium-sized businesses and individual
customers. Earnings per Common Share Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share is computed using additional common shares
that would have been outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income that would result from the assumed
issuance. For the three months ended March 31, 2004 and 2003, the effects of
converting convertible preferred stock was antidilutive and therefore
conversion was not assumed when computing diluted earnings per share. Basic and diluted earnings per common share have been computed based on the
following as of March 31, 2004 and 2003: For the three monthsended March 31,2004
    
    2003Numerator:Net income
    
    $
    685,000
    
    
    $
    429,000Less preferred stock dividends
    
    
    36,000
    
    
    
    37,000Net income applicable to common stock
    
    
    649,000
    
    
    
    392,000Denominator, average number of common shares outstanding
    
    
    1,887,000
    
    
    
    1,665,000Basic and diluted earnings per common share
    
    $
    0.34
    
    
    $
    0.23
 Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. On an on-going basis, the Company
evaluates its estimates, including those related to the adequacy of the
allowance for loan losses, investments, intangible assets, income taxes and
contingencies. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions. The one accounting estimate that
materially affects the financial statements is the allowance for loan losses. - 8 -




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Reclassifications In December 2000 the Company formed Front Range Capital Trust I (the Trust)
for the purpose of issuing trust preferred securities. Following generally
accepted accounting principles in effect as of December 31, 2003, the financial
statements of the Trust were consolidated with the Company and any intercompany
transactions were eliminated. As of March 31, 2004, generally accepted
accounting principles have been modified to state that the financial statements
of the Trust should not be consolidated with the Companys and intercompany
transactions should not be eliminated. The result of this change is that the
balance of subordinated debt/trust preferred securities has increased by
$285,000 which represents debt issued by the Company to the Trust. In
addition, other assets increased by $285,000 which represents the Companys
investment in the common stock of the Trust. The results of the Trust are
recorded on the books of the Company using the equity method of accounting.
There was no impact to net income as a result of this change. Impact of Recently Issued Financial Accounting Pronouncements FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51, (FIN 46) establishes
accounting guidance for consolidation of variable interest entities (VIE) that
function to support the activities of the primary beneficiary. Prior to the
implementation of FIN 46, VIEs were generally consolidated by an enterprise
when the enterprise had a controlling financial interest through ownership of a
majority of voting interest in the entity. The provisions of FIN 46 were
effective immediately for all arrangements entered into after January 31, 2003.
In December 2003, the FASB issued a revision to FIN 46 (FIN 46R) which
clarified certain implementation issues and revised implementation dates for
VIEs created before January 31, 2003. Under the new guidance, special
effective date provisions apply to enterprises that have fully or partially
applied FIN 46 prior to issuance of the revised Interpretation. Otherwise,
application by public entities that are not small business issuers for all
other types of VIEs is required in financial statements for periods ending
after March 15, 2004. The Company adopted FIN 46 in connection with its consolidated financial
statements for the year ending December 31, 2003. An unintended consequence of
this standard is requiring some companies to conclude deconsolidation is
necessary for certain transactions involving the issuance of trust preferred
securities. Based upon its interpretation of FIN 46, the Company
deconsolidated its wholly owned subsidiary Trust involved with the issuance of
its trust preferred securities for the quarter ending March 31, 2004. Such
deconsolidation had no effect on reported earnings or stockholders equity.
These securities qualify for treatment as Tier 1 capital for the Company,
subject to limitations. In July 2003, the Board of Governors of the Federal
Reserve System issued a supervisory letter instructing bank holding companies
to continue to include the trust preferred securities in Tier 1 capital for
regulatory capital purposes until notice is given to the contrary. There can
be no assurance that the Federal Reserve will continue to permit institutions
to include trust preferred securities in Tier 1 capital for regulatory capital
purposes. As of March 31, 2004, assuming the Company was not permitted to
include its trust preferred securities issued by the trust in its Tier 1
capital, the Company would still exceed the regulatory required minimums for
capital adequacy purposes. If the trust preferred securities were no longer
permitted to be included in Tier 1 capital, the Company would also be permitted
to redeem the capital securities without penalty. The interpretations of FIN 46 and its application to various transaction types
and structures are evolving. Management continuously monitors emerging issues
related to FIN 46, some of which could potentially impact the Companys
financial statements. The Accounting Standards Executive Committee has issued Statement of Position
03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer.
This Statement applies to all loans acquired in - 9 -




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a transfer, including those acquired in the acquisition of a bank or a branch,
and provides that such loans be accounted for at fair value with no allowance
for loan losses, or other valuation allowance, permitted at the time of
acquisition. The difference between cash flows expected at the acquisition
date and the investment in the loan should be recognized as interest income
over the life of the loan. If contractually required payments for principal
and interest are less than expected cash flows, this amount should not be
recognized as a yield adjustment, a loss accrual, or a valuation allowance.
For the Company, this Statement is effective for calendar year 2005 and, early
adoption, although permitted, is not planned. No significant impact is
expected on the consolidated financial statements at the time of adoption. - 10 -




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FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARIES
Financial Summary Three months endedMarch 31,2004
    
    2003Net interest income (FTE)
    
    $
    4,254,000
    
    
    $
    4,013,000Provision for loan losses
    
    
    (110,000
    )
    
    
    (256,000
    )Noninterest income
    
    
    1,087,000
    
    
    
    791,000Noninterest expense
    
    
    (4,204,000
    )
    
    
    (3,891,000
    )Provision for income taxes (FTE)
    
    
    (342,000
    )
    
    
    (228,000
    )Net income
    
    $
    685,000
    
    
    $
    429,000Average common shares outstanding
    
    
    1,887,369
    
    
    
    1,665,144Diluted average common shares outstanding
    
    
    1,898,369
    
    
    
    1,676,144Common shares outstanding at period end
    
    
    1,887,369
    
    
    
    1,665,144As Reported:Basic earnings per common share
    
    $
    0.34
    
    
    $
    0.23Diluted earnings per common share
    
    $
    0.34
    
    
    $
    0.23Return on assets
    
    
    0.70
    %
    
    
    0.46
    %Return on equity
    
    
    11.76
    %
    
    
    8.65
    %Net interest margin
    
    
    4.74
    %
    
    
    4.68
    %Net loan charge-offs (recoveries) to average loans
    
    
    0.03
    %
    
    
    0.05
    %Efficiency ratio (FTE)
    
    
    78.71
    %
    
    
    81.00
    %Average Balances:Total assets
    
    $
    392,765,000
    
    
    $
    378,972,000Earning assets
    
    
    351,322,000
    
    
    
    340,261,000Total loans
    
    
    286,682,000
    
    
    
    275,353,000Total deposits
    
    
    301,401,000
    
    
    
    316,670,000Shareholders equity
    
    $
    23,431,000
    
    
    $
    20,125,000Balances at Period End:Total assets
    
    $
    390,912,000
    
    
    $
    374,611,000Earning assets
    
    
    349,035,000
    
    
    
    333,586,000Total loans
    
    
    286,737,000
    
    
    
    275,286,000Total deposits
    
    
    318,160,000
    
    
    
    314,317,000Shareholders equity
    
    $
    24,064,000
    
    
    $
    20,466,000Financial Ratios at Period End:Allowance for loan losses to loans
    
    
    1.01
    %
    
    
    0.91
    %Book value per common share
    
    $
    10.52
    
    
    $
    9.74Equity to assets
    
    
    6.16
    %
    
    
    5.46
    %Regulatory total capital to risk-weighted assets
    
    
    10.80
    %
    
    
    9.99
    %Dividends paid per common share
    
    $
    0.00
    
    
    $
    0.00
 - 11 -




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations As the Company has not commenced any business operations independent of the
Bank, the following discussion pertains primarily to the Bank. Average
balances, including such balances used in calculating certain financial ratios,
are generally comprised of average daily balances for the Company. Within
Managements Discussion and Analysis of Financial Condition and Results of
Operations, interest income and net interest income are generally presented on
a fully tax-equivalent (FTE) basis. The following discussion and analysis is designed to provide a better
understanding of the significant changes and trends related to the Company and
the Banks financial condition, operating results, asset and liability
management, liquidity and capital resources and should be read in conjunction
with the unaudited consolidated financial information of the Company and the
notes thereto under Item 1 of this report. Restatement of Prior Year Amounts As described in Note 1 to the unaudited consolidated financial statements, the
Company is restating its balance sheets as of December 31, 2003 and 2002. The
restatement had no effect on the previously reported results of operations for
the three months ended March 31, 2003. Critical Accounting Policies and Estimates The Companys discussion and analysis of its financial condition and results of
operations are based upon the Companys consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities. On an on-going basis, the Company
evaluates its estimates, including those related to the adequacy of the
allowance for loan losses, intangible assets, and contingencies. The Company
bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. (See caption Allowance for Loan Losses for a more detailed
discussion). Net Income The Company had quarterly earnings of $685,000, or $0.34 per diluted common
share, for the three months ended March 31, 2004. These results represent a
47.8% increase from the $0.23 earnings per diluted common share reported for
the three months ended March 31, 2003 on earnings of $429,000. The improvement
in results from the year-ago quarter was due to a $393,000 (19.5%) decrease in
interest expense to $1,623,000, and a $296,000 (37.4%) increase in noninterest
income to $1,087,000. These contributing factors were offset by a $173,000
(2.9%) decrease in interest income to $5,767,000 and a $313,000 (8.0%) increase
in noninterest expense to $4,204,000 for the quarter ended March 31, 2004. Following is a summary of the components of fully taxable equivalent (FTE)
net income for the periods indicated: - 12 -




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##### Table of Contents



Three months endedMarch 31, 20042004
    
    2003Net interest income (FTE)
    
    $
    4,254,000
    
    
    $
    4,013,000Provision for loan losses
    
    
    (110,000
    )
    
    
    (256,000
    )Noninterest income
    
    
    1,087,000
    
    
    
    791,000Noninterest expense
    
    
    (4,204,000
    )
    
    
    (3,891,000
    )Provision for income taxes (FTE)
    
    
    (342,000
    )
    
    
    (228,000
    )Net income
    
    $
    685,000
    
    
    $
    429,000
 Net income for the first quarter of 2004 was $256,000 (59.7%) more than for the
first quarter of 2003. An increase in fully taxable equivalent net interest
income (up $241,000 or 6.0%), and an increase in noninterest income (up
$296,000 or 37.4%) more than offset an increase in noninterest expenses (up
$313,000 or 8.0%). The increase in net interest income (FTE) was due to a 58
basis point decrease in interest expense cost compared to a 47 basis point
decrease in the yield on interest-bearing assets. This was partially offset by
an increase in the average balance of interest-bearing liabilities (up $6.1
million or 2.0%) and a $11.0 million (3.3%) increase in interest-earning
assets. The $146,000 (57.0%) decrease in provision for loan losses was due to
stable loan quality and the maintenance of an adequate allowance level. The
increase in noninterest income from the first quarter of 2003 was mainly due to
an increase in service charges and customer service fees (up $143,000 or 32.4%)
and a gain on the sale of investment securities ($207,000 in 2004 from $0 in
2003). Offsetting these increases in noninterest income were decreases in
mortgage referral fees (down $147,000 or 57.6%). The increase in noninterest
expense was mainly due to an increase in expenses for other real
estateHeritage Place (up $122,000 or 358.8% to $156,000) and loss on sale of
other real estate owned (up $99,000 from $0 in 2003). Net Interest Income Following is a summary of the components of net interest income for the periods indicated: Three months endedMarch 31,2004
    
    2003Interest income
    
    $
    5,767,000
    
    
    $
    5,940,000Interest expense
    
    
    (1,623,000
    )
    
    
    (2,016,000
    )FTE adjustment
    
    
    110,000
    
    
    
    89,000Net interest income (FTE)
    
    $
    4,254,000
    
    
    $
    4,013,000Average earning assets
    
    $
    347,972,000
    
    
    $
    336,968,000Net interest margin (FTE)
    
    
    4.92
    %
    
    
    4.82
    %
 The Companys primary source of revenue is net interest income, or the
difference between interest income on interest-earning assets and interest
expense on interest-bearing liabilities. Net interest income (FTE) during the
first quarter of 2004 increased $241,000 (6.0%) from the same period in 2003 to
$4,254,000. The increase in net interest income (FTE) was due to the decrease
in average balances of interest-bearing liabilities (down $6,068,000 or 2.0% to
$315.1 million) and a 58 basis point decrease in interest expense cost (FTE)
whereas interest income decreased $152,000 (2.5%) from the same period in 2003.
The decrease in interest income was due to a decrease in the interest yield on
interest-earning assets of 47 basis points from 7.26% to 6.79% and offset by an
increase in interest-earning assets of $11.0 million (3.3%) to $348.0 million. - 13 -




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##### Table of Contents



Interest and Fee Income Interest and fee income (FTE) for the first quarter of 2004 decreased $152,000
(2.5%) from the first quarter of 2003. The change in interest-earning assets
was made up of an $11.3 million (4.1%) increase in average loan balances to
$286.7 million, and an $11.5 million (22.1%) increase in average investment
balances. The average balance of federal funds sold decreased $11.4 million
(100%) to $0 in order to fund loans and investments. The average yield on the Companys interest-earning assets decreased to 6.79%
for the quarter ended March 31, 2004, from 7.26% for the quarter ended March
31, 2003. This downward trend in yields was reflective of general interest
rate markets during much of the twelve months ended March 31, 2004. Interest Expense Interest expense decreased $393,000 (19.5%) to $1,623,000 in the first quarter
of 2004 compared to $2,016,000 in the quarter ended March 31, 2003. The
average balance of interest-bearing liabilities increased $6.3 million (2.0%)
to $315.4 million in the first quarter of 2004 compared to $309.0 million in
the quarter ended March 31, 2003. The increase in interest-bearing liabilities
was concentrated in the lower earning short-term borrowings (mostly overnight)
(up $27.7 million or 271.5%), and interest-bearing demand deposits (up $2.0
million or 1.7%). The average balance of the higher interest-earning time
deposits was down $21.5 million (15.2%) from the year-ago quarter. In
addition, the average balance of noninterest-bearing deposits increased $4.3
million (9.4%) from the year-ago quarter, and the average balance of long-term
debt decreased $2.6 million (13.6%) to $16.0 million in the quarter ended March
31, 2004 compared to $18.6 million in the year-ago quarter. The average rate
paid for all categories of interest-bearing liabilities (2.07%) decreased in
the first quarter of 2004 from the average rate paid in the first quarter of
2003 (2.65%) as a result of general market interest rate changes. Net Interest Margin (FTE) The following table summarizes the components of the Companys net interest
margin for the periods indicated: Three months endedMarch 31,2004
    
    2003Yield on interest-earning assets
    
    
    6.79
    %
    
    
    7.26
    %Rate paid on interest-bearing liabilities
    
    
    2.07
    %
    
    
    2.65
    %Net interest spread
    
    
    4.72
    %
    
    
    4.61
    %Impact of all other net noninterest-bearing funds
    
    
    0.20
    %
    
    
    0.22
    %Net interest margin
    
    
    4.92
    %
    
    
    4.83
    %
 Net interest margin in the first quarter of 2004 has remained fairly stable
with an increase of 9 basis points compared to the first quarter of 2003.
Average balances on time deposits decreased during the period from March 31,
2003 to March 31, 2004 by $21.5 million and the cost of these funds decreased
64 basis points to 2.52% from 3.16%. Summary of Average Balances, Yields/Rates and Interest Differential The following table presents, for the period indicated, information regarding
the Companys consolidated average assets, liabilities and shareholders
equity, the amounts of interest income from average interest-earning assets and
resulting yields, and the amount of interest expense paid on interest-bearing
liabilities. Average loan balances include nonperforming loans. Interest
income includes proceeds from loans on nonaccrual only to the extent cash
payments have been received and applied to interest income. Yields on - 14 -




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##### Table of Contents



securities and certain loans have been adjusted upward to reflect the effect of
income thereon exempt from federal income taxation at the current statutory tax
rate. For the three months endedMarch 31, 2004Interest
    
    RatesAverage
    
    Income/
    
    Earned/Balance
    
    Expense
    
    PaidAssets:Loans
    
    $
    286,682,000
    
    
    $
    5,145,000
    
    
    
    7.22
    %Investment securities - taxable
    
    
    47,096,000
    
    
    
    452,000
    
    
    
    3.86
    %Investment securities - nontaxable
    
    
    16,281,000
    
    
    
    278,000
    
    
    
    6.87
    %Federal funds sold and due from banks
(interest-bearing)
    
    
    800,000
    
    
    
    2,000
    
    
    
    1.01
    %Allowance for loan loss
    
    
    (2,887,000
    )Total earning assets
    
    
    347,972,000
    
    
    
    
    
    
    
    6.79
    %Other assets
    
    
    44,790,000Total assets
    
    $
    392,765,000
    
    
    $
    5,877,000Liabilities and shareholders equity:Interest-bearing demand deposits
    
    $
    117,364,000
    
    
    $
    274,000
    
    
    
    0.94
    %Savings deposits
    
    
    13,838,000
    
    
    
    9,000
    
    
    
    0.26
    %Time deposits
    
    
    120,315,000
    
    
    
    755,000
    
    
    
    2.52
    %Federal funds purchased
    
    
    510,000
    
    
    
    2,000
    
    
    
    1.58
    %Other short-term borrowed funds
    
    
    37,834,000
    
    
    
    111,000
    
    
    
    1.18
    %Long-term debt
    
    
    16,040,000
    
    
    
    197,000
    
    
    
    4.94
    %Subordinated debentures
    
    
    9,485,000
    
    
    
    275,000
    
    
    
    12.02
    %Total interest-bearing liabilities
    
    
    315,386,000
    
    
    $
    1,623,000
    
    
    
    2.07
    %Noninterest-bearing deposits
    
    
    49,812,000Other liabilities
    
    
    3,884,000Shareholders equity
    
    
    23,683,000Total liabilities and shareholders equity
    
    $
    392,765,000Net interest spread(1)
    
    
    
    
    
    
    
    
    
    
    4.72
    %Net interest income and interest margin(2)
    
    
    
    
    
    $
    4,254,000
    
    
    
    4.92
    %
  (1)
    
    Net interest spread represents the average yield earned on
interest-earning assets minus the average rate paid on interest-bearing
liabilities.  (2)
    
    Net interest margin is computed by calculating the difference between
interest income and expense, divided by the average balance of
interest-earning assets. Summary of Changes in Interest Income and Expense due to Changes in Average
Asset & Liability Balances and Yields Earned & Rates Paid The following table sets forth a summary of the changes in interest income
(FTE) and interest expense from changes in average asset and liability balances
(volume) and changes in average interest rates for the periods indicated.
Changes not solely attributable to volume or rates have been allocated in
proportion to the respective volume and rate components. - 15 -




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##### Table of Contents



Three months ended March 31, 2004compared with three monthsended March 31, 2003Volume
    
    Rate
    
    TotalIncrease (decrease) in interest income:Loans
    
    $
    221,000
    
    
    ($
    437,000
    )
    
    ($
    216,000
    )Investments - taxable
    
    
    69,000
    
    
    
    (31,000
    )
    
    
    38,000Investments - nontaxable
    
    
    90,000
    
    
    
    (30,000
    )
    
    
    60,000Federal funds sold
    
    
    (34,000
    )
    
    
    (
    )
    
    
    (34,000
    )Total earning assets
    
    
    346,000
    
    
    
    (498,000
    )
    
    
    (152,000
    )Increase (decrease) in interest expense:Interest-bearing demand deposits
    
    
    6,000
    
    
    
    (77,000
    )
    
    
    (71,000
    )Savings deposits
    
    
    
    
    
    
    (8,000
    )
    
    
    (8,000
    )Time deposits
    
    
    (168,000
    )
    
    
    (182,000
    )
    
    
    (350,000
    )Federal funds purchased
    
    
    2,000
    
    
    
    (
    )
    
    
    2,000Other short term borrowings
    
    
    193,000
    
    
    
    (153,000
    )
    
    
    40,000Long-term debt
    
    
    (31,000
    )
    
    
    3,000
    
    
    
    (28,000
    )Trust preferred securities/subordinated debentures
    
    
    
    
    
    
    22,000
    
    
    
    22,000Total interest-bearing liabilities
    
    
    2,000
    
    
    
    (395,000
    )
    
    
    (393,000
    )Increase (decrease) in net interest income
    
    $
    344,000
    
    
    ($
    106,000
    )
    
    $
    241,000
 Provision for Loan Losses The Company provided $110,000 for loan losses in the first quarter of 2004
versus $256,000 in the first quarter of 2003. During the first quarter of
2004, the Company recorded $92,000 of net loan charge offs versus $135,000 of
net loan charge offs in the first quarter of 2003. The decrease of $146,000 in
the provision for loan losses was due to a decrease in net charge-offs. The
ratio of loan loss reserve to total loans was 1.0% at March 31, 2004 and 0.91%
at March 31, 2003. Noninterest Income The following table summarizes the components of noninterest income for the periods indicated. Three months endedMarch 31,2004
    
    2003Service charges on deposit accounts
    
    $
    585,000
    
    
    $
    442,000Gain on sale of investments
    
    
    207,000
    
    
    
    Mortgage referral fees
    
    
    108,000
    
    
    
    255,000Other noninterest income
    
    
    187,000
    
    
    
    94,000Total noninterest income
    
    $
    1,087,000
    
    
    $
    791,000
 Noninterest income for the first quarter of 2004 increased $296,000 (37.4%) to
$1,087,000 from $791,000 in the year-ago quarter. The increase in noninterest
income from the year-ago quarter was due to an increase in service charges on
deposit accounts of $143,000 (32.4%) to $585,000. Gain on the sale of
investment securities increased $207,000 (100%) for the first quarter of 2004
from the same quarter in 2003. Mortgage referral fees decreased $147,000
(57.6%) from the first quarter of 2003 to the first quarter of 2004 due to a
slower mortgage market. - 16 -




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##### Table of Contents



Noninterest Expense The following table summarizes the components of noninterest expense for the periods indicated. Three months endedMarch 31,2004
    
    2003Salaries and employee benefits
    
    $
    2,237,000
    
    
    $
    2,294,000Occupancy
    
    
    427,000
    
    
    
    381,000Furniture and Equipment
    
    
    192,000
    
    
    
    220,000Data processing
    
    
    199,000
    
    
    
    187,000Advertising and marketing
    
    
    132,000
    
    
    
    96,000Printing and supplies
    
    
    67,000
    
    
    
    78,000Loan and collection
    
    
    111,000
    
    
    
    115,000Other real estate, Heritage Place
    
    
    156,000
    
    
    
    34,000Net loss on sale of OREO and other foreclosed assets
    
    
    99,000
    
    
    
    Other
    
    
    584,000
    
    
    
    486,000Total
    
    $
    4,204,000
    
    
    $
    3,891,000Average full time equivalent staff
    
    
    154
    
    
    
    152Noninterest expense to revenue (FTE)
    
    
    78.71
    %
    
    
    81.00
    %
 Noninterest expense for the first quarter of 2004 increased $313,000 (8.0%) to
$4,204,000 from $3,891,000 in the first quarter of 2003. The increase in
noninterest expense was mainly due to a $122,000 (358.8%) increase in the
expense for other real estate, Heritage Place, to $156,000 from $34,000. The
increase in the Heritage Place expense was mainly due to an accrual on the
bonds issued by the City of Broomfield for an urban renewal project in the area
where Heritage Place is located, as further described at Part II - Item 5 of
this report. $99,000 of the increase in noninterest expense was due to losses
on the sale of OREO and foreclosed assets. Noninterest expense excluding other
real estate, Heritage Place and the OREO loss increased $92,000 (2.40%) to
$3,857,000. Provision for Income Tax The effective tax rate for the three months ended March 31, 2004 was 28.3% and
reflects a decrease from 29.2% for the three months ended March 31, 2003. The
provision for income taxes for all periods presented is primarily attributable
to the respective level of earnings and the incidence of allowable deductions,
particularly from tax-exempt loans, state and municipal securities, and bank
owned life insurance. Classified Assets The Company closely monitors the markets in which it conducts its lending
operations and continues its strategy to control exposure to loans with high
credit risk. Asset reviews are performed using grading standards and criteria
similar to those employed by bank regulatory agencies. Assets receiving lesser
grades fall under the classified assets category, which includes all
nonperforming assets and potential problem loans, and receive an elevated level
of attention to ensure collection. Classified assets, net of guarantees of the U.S. Government, including its
agencies and its government-sponsored agencies at March 31, 2004, decreased
$123,000 (8.3%) to $14.7 million from $14.8 million at December 31, 2003. - 17 -




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Nonperforming Loans Loans are reviewed on an individual basis for reclassification to nonaccrual
status when any one of the following occurs: the loan becomes 90 days past due
as to interest or principal, the full and timely collection of additional
interest or principal becomes uncertain, the loan is classified as doubtful by
internal credit review or bank regulatory agencies, a portion of the principal
balance has been charged off, or the Company takes possession of the
collateral. Loans that are placed on nonaccrual even though the borrowers
continue to repay the loans as scheduled are classified as performing
nonaccrual and are included in total nonperforming loans. The
reclassification of loans as nonaccrual does not necessarily reflect
managements judgment as to whether they are collectible. Interest income is not accrued on loans where management has determined that
the borrowers will be unable to meet contractual principal and/or interest
obligations, unless the loan is well secured and in the process of collection.
When a loan is placed on nonaccrual, any previously accrued but unpaid interest
is reversed. Income on such loans is then recognized only to the extent that
cash is received and where the future collection of principal is probable.
Interest accruals are resumed on such loans only when they are brought fully
current with respect to interest and principal and when, in the judgment of
management, the loans are estimated to be fully collectible as to both
principal and interest. Interest income on nonaccrual loans, which would have been recognized during
the three months ended March 31, 2004, if all such loans had been current in
accordance with their original terms, totaled $22,000. Interest income
actually recognized on these loans during the three months ended March 31, 2004
was $4,000. The Companys policy is to place loans 90 days or more past due on nonaccrual
status. In some instances when a loan is 90 days past due management does not
place it on nonaccrual status because the loan is well secured and in the
process of collection. A loan is considered to be in the process of collection
if, based on a probable specific event, it is expected that the loan will be
repaid or brought current. Generally, this collection period would not exceed
30 days. Loans where the collateral has been repossessed are classified as
OREO or, if the collateral is personal property, the loan is classified as
other assets on the Companys financial statements. Management considers both the adequacy of the collateral and the other
resources of the borrower in determining the steps to be taken to collect
nonaccrual loans. Alternatives that are considered are foreclosure, collecting
on guarantees, restructuring the loan or collection lawsuits. As shown in the following table, total nonperforming assets decreased $781,000
(22.9%) to $2,635,000 during the first three months of 2004. Nonperforming
assets net of guarantees represent 0.32% of total assets. All nonaccrual loans
are considered to be impaired when determining the need for a specific
valuation allowance. The Company continues to make a concerted effort to work
with problem and potential problem loan customers to reduce risk of loss. - 18 -




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##### Table of Contents



At March 31, 2004
    
    At December 31, 2003(unaudited)(dollars in thousands)Performing nonaccrual loans
    
    $
    578
    
    
    $
    337Nonperforming, nonaccrual loans
    
    
    654
    
    
    
    948Total nonaccrual loans
    
    
    1,232
    
    
    
    1,285Loans 90 days past due and still accruing
    
    
    11
    
    
    
    19Total nonperforming loans
    
    
    1,243
    
    
    
    1,304Other real estate owned
    
    
    1,381
    
    
    
    1,543Foreclosed assets
    
    
    11
    
    
    
    614Total nonperforming assets
    
    $
    2,635
    
    
    $
    3,461Nonperforming loans to total loans
    
    
    0.43
    %
    
    
    0.50
    %Allowance for loan losses/nonperforming loans
    
    
    232.50
    %
    
    
    220.20
    %Nonperforming assets to total assets
    
    
    0.67
    %
    
    
    0.87
    %Allowance for loan losses to nonperforming assets
    
    
    109.70
    %
    
    
    84.10
    %
 Allowance for Loan Losses Credit risk is inherent in the business of lending. As a result, the Company
maintains an Allowance for Loan Losses to absorb losses inherent in the
Companys loan portfolio. This is maintained through periodic charges to
earnings. These charges are shown in the Consolidated Income Statements as
provision for loan losses. All specifically identifiable and quantifiable
losses are immediately charged off against the allowance. However, for a
variety of reasons, not all losses are immediately known to the Company and, of
those that are known, the full extent of the loss may not be quantifiable at
that point in time. The balance of the Companys Allowance for Loan Losses is
meant to be an estimate of these unknown but probable losses inherent in the
portfolio. For purposes of this discussion, loans shall include all loans
and lease contracts that are part of the Companys portfolio. The Company formally assesses the adequacy of the allowance on a quarterly
basis. Determination of the adequacy is based on ongoing assessments of the
probable risk in the outstanding loan portfolio, and to a lesser extent the
Companys loan commitments. These assessments include the periodic re-grading
of credits based on changes in their individual credit characteristics
including delinquency, seasoning, recent financial performance of the borrower,
economic factors, changes in the interest rate environment, growth of the
portfolio as a whole or by segment, and other factors as warranted. Loans are
initially graded when originated. They are re-graded as they are renewed, when
there is a new loan to the same borrower, when identified facts demonstrate
heightened risk of nonpayment, or if they become delinquent. Re-grading of
larger problem loans occur at least quarterly. Confirmation of the quality of
the grading process is obtained by independent credit reviews conducted by
consultants specifically hired for this purpose and by various bank regulatory
agencies. The Companys method for assessing the appropriateness of the allowance
includes specific allowances for identified problem loans and leases as
determined by SFAS 114, formula allowance factors for pools of credits, and
allowances for changing environmental factors (e.g., interest rates, growth,
economic conditions, etc.). Allowance factors for loan pools are based on the
previous 5 years historical loss experience by product type. Allowances for
specific loans are based on SFAS 114 analysis of individual credits.
Allowances for changing environmental factors are managements best estimate of
the probable - 19 -




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impact these changes have had on the loan portfolio as a whole. This process is
explained in detail in the notes to the Companys Consolidated Financial
Statements in its Annual Report on Form 10-KSB for the year ended December 31,
2003. Based on the current conditions of the loan portfolio, management believes that
the $2,890,000 allowance for loan losses at March 31, 2004 is adequate to
absorb probable losses inherent in the Companys loan portfolio. No assurance
can be given, however, that adverse economic conditions or other circumstances
will not result in increased losses in the portfolio. The following table summarizes the loan loss provision, net credit losses and
allowance for loan losses for the periods indicated (dollars in thousands): Three months endedMarch 31,2004
    
    2003Balance, beginning of period
    
    $
    2,872
    
    
    $
    2,394Loan loss provision
    
    
    110
    
    
    
    256Loans charged off
    
    
    (108
    )
    
    
    (188
    )Recoveries of previously charged-off loans
    
    
    16
    
    
    
    53Net (charge-offs) recoveries
    
    
    (92
    )
    
    
    (135
    )Balance, end of period
    
    $
    2,890
    
    
    $
    2,515Allowance for loan losses/loans outstanding
    
    
    1.00
    %
    
    
    0.91
    %
 Capital Resources The current and projected capital position of the Company and the impact of
capital plans and long-term strategies are reviewed regularly by management.
The Companys primary capital resource is shareholders equity, which was $24.0
million at March 31, 2004. This amount represents an increase of $892,000
(3.8%) from December 31, 2003. The following summarizes the regulatory capital ratios for the periods indicated: To Be WellAt March 31,
    
    At  December 31,
    
    Minimum Regulatory
    
    Capitalized Under  Prompt Corrective2004
    
    2003
    
    2003
    
    Requirement
    
    Action ProvisionsTier I Capital (to risk-weighted assets)Consolidated
    
    
    8.1
    %
    
    
    6.9
    %
    
    
    7.8
    %Bank
    
    
    9.7
    %
    
    
    9.2
    %
    
    
    9.5
    %
    
    
    4.0
    %
    
    
    6.0
    %Total Capital (to risk-weighted assets)Consolidated
    
    
    10.8
    %
    
    
    10.0
    %
    

    
    10.6
    %Bank
    
    
    10.6
    %
    
    
    10.0
    %
    
    
    10.4
    %
    
    
    8.0
    %
    
    
    10.0
    %Tier I Leverage (to average assets)Consolidated
    
    
    6.7
    %
    
    
    5.8
    %
    
    
    6.6
    %Bank
    
    
    8.15
    %
    
    
    7.6
    %
    
    
    8.0
    %
    
    
    4.0
    %
    
    
    5.0
    %
 - 20 -




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Off-Balance Sheet Item The Company is a party to credit related financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
stand-by letters of credit and commercial letters of credit The Company has
not entered into any contracts for financial derivative instruments such as
futures, swaps, options, etc. Loan commitments increased $800,000 to $49.8
million at March 31, 2004, from $49.0 million at December 31, 2003. The
commitments represent 17.3% of the total loans outstanding at both March 31,
2004 and at December 31, 2003. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk Asset and Liability Management The goal for managing the assets and liabilities of the Company is to maximize
shareholder value and earnings while maintaining a high quality balance sheet
without exposing the Company to undue interest rate risk. The Board of
Directors has overall responsibility for the Companys interest rate risk
management policies and monitors guidelines to control the sensitivity of
earnings to changes in interest rates. Activities involved in asset/liability management include but are not limited
to lending, accepting and placing deposits, investing in securities and issuing
debt. Interest rate risk is the primary market risk associated with
asset/liability management. Sensitivity of earnings to interest rate changes
arises when yields on assets change in a different time period or in a
different amount from that of interest costs on liabilities. To mitigate
interest rate risk, the structure of the balance sheet is managed with the goal
that movements of interest rates on assets and liabilities are correlated and
contribute to earnings even in periods of volatile interest rates. The
asset/liability management policy sets limits on the acceptable amount of
variance in net interest margin, net income and market value of equity under
changing interest environments. Market value of equity is the net present
value of estimated cash flows from the Companys assets, liabilities and
off-balance sheet items. The Company uses simulation models to forecast net
interest margin, net income and market value of equity. Simulation of net interest margin, net income and market value of equity under
various interest rate scenarios is the primary tool used to measure interest
rate risk. Using computer-modeling techniques, the Company is able to estimate
the potential impact of changing interest rates on net interest margin, net
income and market value of equity. A balance sheet forecast is prepared using
inputs of actual loan, securities and interest-bearing liability (i.e.
deposits/borrowings) positions as the beginning base. In the simulation of net interest margin and net income under various interest
rate scenarios, the forecast balance sheet is processed against seven interest
rate scenarios. These seven interest rate scenarios include a flat rate
scenario, which assumes interest rates are unchanged in the future, and six
additional rate ramp scenarios ranging from +300 to -300 basis points around
the flat scenario in 100 basis point increments. These ramp scenarios assume
that interest rates increase or decrease evenly (in a ramp fashion) over a
twelve-month period and remain at the new levels beyond twelve months. In the simulation of market value of equity under various interest rate
scenarios, the forecast balance sheet is processed against seven interest rate
scenarios. These seven interest rate scenarios include the flat rate scenario
described above, and six additional rate shock scenarios ranging from +300 to
-300 basis points around the flat scenario in 100 basis point increments.
These rate shock scenarios assume that interest rates increase or decrease
immediately (in a shock fashion) and remain at the new level in the future. - 21 -




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At March 31, 2004 and 2003, the results of the simulations noted above indicate
that the balance sheet is slightly liability sensitive (earnings decrease when
interest rates rise). The magnitude of all the simulation results noted above
is within the Companys policy guidelines. The asset liability management
policy limits aggregate market risk, as measured in this fashion, to an
acceptable level within the context of risk-return trade-offs. The simulation results noted above do not incorporate any management actions,
which might moderate the negative consequences of interest rate deviations.
Therefore, they do not reflect likely actual results, but serve as conservative
estimates of interest rate risk. At March 31, 2004 and 2003, the Company had no derivative financial
instruments. Liquidity The Companys principal source of asset liquidity is cash and amounts due from
banks, federal funds sold, and marketable investment securities available for
sale. At March 31, 2004, cash and due from banks, federal funds sold and
investment securities available for sale totaled $70.7 million, representing a
decrease of $8.2 million or 10.3% from December 31, 2003, and an increase of
$3.4 million or 5.1% from March 31, 2003. The Company generates additional
liquidity from its operating activities. The Companys profitability during
the first three months of 2004 generated cash flows from operations of $802,000
compared to $934,000 during the first three months of 2003. Additional cash
flows may be provided by financing activities, primarily borrowings from banks
and the Federal Home Loan Bank. Sales and maturities of investment securities
produced cash inflows of $18.5 million during the three months ended March 31,
2004 compared to $11.0 million for the three months ended March 31, 2003.
During the three months ended March 31, 2004, the Company invested $13 million
and $1.3 million in securities and net loan growth, respectively, compared to
$8.5 million and $8.1 million used to purchase investments and net loan growth,
respectively, during the first three months of 2003. These changes in
investment and loan balances contributed to net cash provided by investing
activities of $4.4 million during the three months ended March 31, 2004,
compared to net cash used in investing activities of $5.6 million during the
three months ended March 31, 2003. Financing activities used net cash of $8.3
million during the three months ended March 31, 2004, compared to net cash used
by financing activities of $13.4 million during the three months ended March
31, 2003. Increases in deposit balances accounted for $14.6 million of
financing sources of funds during the three months ended March 31, 2004,
compared to deposit balance decreases that accounted for $8.8 million of the
funds used for financing activities during the three months ended March 31,
2003. Also, the Companys liquidity is dependent on dividends received from
the Bank. Dividends from the Bank are subject to certain regulatory
restrictions. 
 Item 4. Controls and Procedures The Companys principal executive officer, William A. Mitchell, Jr., and the
principal financial officer, Alice M. Voss, evaluated the effectiveness of the
Companys disclosure controls and procedures as of March 31, 2004 (Evaluation
Date). Based on that evaluation, they concluded that as of the Evaluation
Date the Companys disclosure controls and procedures are effective to allow
timely communication to them of information relating to the Company and the
Bank required to be disclosed in its filings with the Securities and Exchange
Commission (SEC) under the Securities Exchange Act of 1934, as amended
(Exchange Act). Disclosure controls and procedures are Company controls and
other procedures that are designed to ensure that information required to be
disclosed by the Company in the reports that it files under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms. - 22 -




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There were no changes in the Companys internal control over financial
reporting that occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. - 23 -




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PART II  OTHER INFORMATION 
 Item 1  Legal Proceedings Due to the nature of the banking business, the Bank is at times party to
various legal actions. All such actions are of a routine nature and arise in
the normal course of business of the Bank. 
 Item 5  Other Information Heritage Place In August 2001, the Bank purchased three parcels of undeveloped property in
Broomfield, Colorado. The first transaction involved a purchase of property
from Joseph J. Fuentes and Christine R. Fuentes of undeveloped property located
at 9590 Coalton Drive, Broomfield, Colorado 80020, also known as 604
Interlocken Boulevard, Broomfield, Colorado 80020, for a purchase price of
approximately $2,423,900. The second transaction involved the Banks purchase
from Coalton Acres, LLC of two parcels comprising 161,094 square feet of
undeveloped property adjacent to 9590 Coalton Drive and part of the development
known as The FlatIron, for a purchase price of approximately $3,942,495. The
aggregate combined purchase price for the properties was approximately
$6,367,000. The parcels are collectively referred to as Heritage Place.
When the Bank purchased the parcels that now comprise Heritage Place, the Bank
intended to sell Heritage Place to an investor or group to develop Heritage
Place and thereafter the Bank intended to purchase a pad within the newly
developed property to open a new branch and relocate some of the Companys and
the Banks administrative offices. The Bank entered into a letter of intent in September 2002 with Heritage Place
Holdings, LLC and Heritage Place Partners, LLC (together, the Developers)
that discussed the proposed sale of Heritage Place to the Developers along with
the Banks right to purchase a pad inside Heritage Place once the development
was complete. At the time the Bank executed the letter of intent, the
individual members of the Developers included Mr. Beauprez, as well as others
unaffiliated with the Company or the Bank. In September 2002, officers of the
Bank and the Company met with representatives of the Federal Reserve Bank and
the Colorado Division of Banking to discuss the relationship of the proposed
transaction to federal and state banking laws and regulations and to provide an
opportunity for federal and state banking regulators to comment upon the letter
of intent. In November 2002, the Bank and the Developers terminated the letter
of intent because the development project was no longer economically feasible
to the Developers due to market conditions. Following termination of the letter of intent, the Bank continues to consider
its best course of action regarding Heritage Place including, but not limited
to, structuring a similar transaction with developers if market conditions
improve in the future; preparing Heritage Place for sale to different
investors, except for the pad the Bank could develop for a new branch location;
or selling Heritage Place including the pad. Of the approximately 8.2 acre
Heritage Place site, a bank pad of approximately 1.5 acres has been carved
out for a potential branch building. In July 2003, the remaining 6.7 acres
were listed for sale with a commercial broker. If a potential buyer would have
an interest in purchasing the entire 8.2 acres, the Bank would be willing to
consider this also. The Bank has incurred and continues to incur costs while holding the Heritage
Place property for sale. As of March 31, 2004, the Bank had capitalized total
costs of $9,952,550 relating to preparing Heritage Place for sale and
development, including fees for a site plan, annexation, zoning, architectural
and tap fees. These costs are capitalized and are reflected as an asset on the
Companys unaudited consolidated balance sheet as presented in this report. In
addition, the Bank has incurred related expenses of $199,424 for the three
months ended March 31, 2004, largely related to holding the property. Of this
amount, $42,523 was - 24 -




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##### Table of Contents



accrued for real estate taxes and $145,839 was accrued pursuant to a
development and reimbursement agreement with the City and County of Broomfield
(City) relating to bonds issued by the City for an urban renewal project in
the area where Heritage Place is located. These costs are not capitalized and
are reflected as non-interest expense on the Companys unaudited consolidated
statements of income presented in this report. The Bank expects to incur
additional non-capitalized costs related to holding Heritage Place. Based on
an opinion letter from an independent certified general appraiser in May 2003,
the Banks management believes that the value of Heritage Place equals or
exceeds the costs capitalized to date. The Banks management believes that the
location of Heritage Place will become an important commercial site for a new
banking and office location. The capitalized and non-capitalized costs
incurred and to be incurred in the future to prepare the property for
development represent an investment in the property in order to obtain that
site. The Banks management also believes that it can receive a favorable
price for the sale of Heritage Place to recoup its investment and ongoing
carrying costs. Other Property In October 2002, the Bank purchased undeveloped property located at 8080 Weld
County Road 13, Firestone, Colorado 80520, for a purchase price of $600,000.
The Bank has started construction on a new branch on this property. An
application for a new branch has been approved by the Federal Reserve and the
CDB. The Bank anticipates opening the Firestone branch in the fourth quarter
of 2004. In December 2002, the Bank purchased undeveloped property located at the Home
Depot Center, South Hover Road, Longmont, Colorado 80501, for $550,000. The
Bank has entered into a contract to sell this property in the third quarter of
2004. In April 2004, the Bank entered into a non-binding letter of intent to purchase
undeveloped property located in Longmont, Colorado. The Bank intends to build
a new branch on this property. The purchase is contingent upon the parties
entering into an acceptable purchase agreement. - 25 -




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##### Table of Contents



Item 6  Exhibits and Reports on Form 8-K a. Exhibits. The following documents are included or incorporated by reference in this
quarterly report on Form 10-Q, and this list includes the Exhibit Index. Exhibit No.
    
    Description3.1*
    
    Articles of Incorporation of Front Range Capital Corporation.3.2**
    
    Articles of Third Amendment to the Articles of Incorporation.3.3*
    
    Bylaws of Front Range Capital Corporation4.1*
    
    Form of Indenture by and between Front Range Capital Corporation and
Wilmington Trust Company4.2*
    
    Form of Subordinated Debenture (included as an exhibit to Exhibit 4.1)4.3*
    
    Certificate of Trust of Front Range Capital Trust I, as amended and restated4.4*
    
    Trust Agreement between Front Range Capital Corporation, Wilmington Trust
Company and the Administrative Trustees named therein4.5*
    
    Form of Amended and Restated Trust Agreement between Front Range Capital
Corporation and Wilmington Trust Company and the Administrative Trustees
named therein4.6*
    
    Form of Trust Preferred Securities Certificate (included as an exhibit to
Exhibit 4.5)4.7*
    
    Form of Trust Preferred Securities Guarantee Agreement between Front
Range Capital Corporation and Wilmington Trust Company4.8*
    
    Revised Form of Agreement of Expenses and Liabilities (included as an
exhibit to Exhibit 4.5)10.1*
    
    Lease Agreement between Lafayette State Bank and Fruehauf Investments
Ltd.10.2*
    
    Promissory Note by Front Range Capital Corporation payable to Bankers
Bank of the West10.3*
    
    Amendment and Restatement of Executive Retirement Plan of Heritage Bank10.4*
    
    Indexed Salary Continuation Plan of Heritage Bank10.5*
    
    Flexible Premium Life Insurance Endorsement Method Split Dollar Plan Agreement31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1
    
    Section 1350 Certification of Chief Executive Officer32.2
    
    Section 1350 Certification of Chief Financial Officer
  *
    
    Previously filed with the Companys Registration Statement on Form SB-2
(333-40028 and 333-40028-01) and incorporated herein by reference.**
    
    Previously filed with the Companys Annual Report on Form 10-KSB for the
year ended December 31, 2000 and incorporated herein by reference b. Reports on Form 8-K During the quarter ended March 31, 2004, the Company filed no Current
Reports on Form 8-K. - 26 -




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized. FRONT RANGE CAPITAL CORPORATION
(Registrant)Date: June 24, 2004
    By:
    /s/ William A. Mitchell, Jr.
William A. Mitchell, Jr.
Chief Executive Officer and President
(Principal Executive Officer)Date: June 24, 2004
    By:
    /s/ Alice M. Voss
Alice M. Voss
Chief Financial Officer
(Principal Financial and Accounting Officer)
 - 27 -




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##### Table of Contents



EXHIBIT INDEX Exhibit No.
    
    Description3.1*
    
    Articles of Incorporation of Front Range Capital Corporation.3.2**
    
    Articles of Third Amendment to the Articles of Incorporation.3.3*
    
    Bylaws of Front Range Capital Corporation4.1*
    
    Form of Indenture by and between Front Range Capital Corporation and
Wilmington Trust Company4.2*
    
    Form of Subordinated Debenture (included as an exhibit to Exhibit 4.1)4.3*
    
    Certificate of Trust of Front Range Capital Trust I, as amended and restated4.4*
    
    Trust Agreement between Front Range Capital Corporation, Wilmington Trust
Company and the Administrative Trustees named therein4.5*
    
    Form of Amended and Restated Trust Agreement between Front Range Capital
Corporation and Wilmington Trust Company and the Administrative Trustees
named therein4.6*
    
    Form of Trust Preferred Securities Certificate (included as an exhibit to
Exhibit 4.5)4.7*
    
    Form of Trust Preferred Securities Guarantee Agreement between Front
Range Capital Corporation and Wilmington Trust Company4.8*
    
    Revised Form of Agreement of Expenses and Liabilities (included as an
exhibit to Exhibit 4.5)10.1*
    
    Lease Agreement between Lafayette State Bank and Fruehauf Investments
Ltd.10.2*
    
    Promissory Note by Front Range Capital Corporation payable to Bankers
Bank of the West10.3*
    
    Amendment and Restatement of Executive Retirement Plan of Heritage Bank10.4*
    
    Indexed Salary Continuation Plan of Heritage Bank10.5*
    
    Flexible Premium Life Insurance Endorsement Method Split Dollar Plan Agreement31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1
    
    Section 1350 Certification of Chief Executive Officer32.2
    
    Section 1350 Certification of Chief Financial Officer
  *
    
    Previously filed with the Companys Registration Statement on Form SB-2
(333-40028 and 333-40028-01) and incorporated herein by reference.**
    
    Previously filed with the Companys Annual Report on Form 10-KSB for the
year ended December 31, 2000 and incorporated herein by reference