##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934 For quarter ended September 30, 2004
    
    Commission file number 333-40028
 Front Range Capital Corporation 
  Colorado
    
    84-0970160(State or other jurisdiction
incorporation or organization)
    
    (I.R.S. Employer
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 X         No 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 November 12, 2004, were 1,849,264 Title of Class: Common stock, Class B Non-voting, $0.001 par value Outstanding shares as of November 12, 2004, were 38,105




---



TABLE OF CONTENTS PageFORWARD-LOOKING STATEMENTS
    
    
    1PART I  FINANCIAL INFORMATION
    
    
    2Item 1. Unaudited Consolidated Financial Statements
    
    
    2Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    23PART II  OTHER INFORMATION
    
    
    25Item 1 - Legal Proceedings
    
    
    25Item 5 - Other Information
    
    
    25Item 6 - Exhibits and Reports on Form 8-K
    
    
    27SIGNATURES
    
    
    28Rule 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




---



##### Table of Contents



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/A for the
year ended December 31, 2003. - 1 -




---



##### Table of Contents



PART I  FINANCIAL INFORMATION 
 Item 1. Unaudited Consolidated Financial Statements FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS At September 30,
    
    At December 31,2004
    
    2003
    
    2003(unaudited)
    
    (unaudited)Assets:Cash and due from banks
    
    $
    12,860,000
    
    
    $
    17,537,000
    
    
    $
    16,304,000Investment securities available for sale
    
    
    71,433,000
    
    
    
    61,173,000
    
    
    
    62,591,000Nonmarketable securities
    
    
    4,050,000
    
    
    
    3,410,000
    
    
    
    3,434,000LoansReal estate-construction
    
    
    59,862,000
    
    
    
    61,108,000
    
    
    
    62,879,000Real estate-commercial
    
    
    143,205,000
    
    
    
    123,122,000
    
    
    
    129,482,000Real estate-residential
    
    
    52,045,000
    
    
    
    51,397,000
    
    
    
    52,656,000Commercial
    
    
    33,943,000
    
    
    
    31,931,000
    
    
    
    34,733,000Consumer
    
    
    6,560,000
    
    
    
    7,249,000
    
    
    
    7,056,000Total loans
    
    
    295,615,000
    
    
    
    274,807,000
    
    
    
    286,806,000Less unearned income
    
    
    (1,209,000
    )
    
    
    (1,230,000
    )
    
    
    (1,174,000
    )Loans, net of unearned income
    
    
    294,406,000
    
    
    
    273,577,000
    
    
    
    285,632,000Allowance for loan losses
    
    
    (2,918,000
    )
    
    
    (2,567,000
    )
    
    
    (2,872,000
    )Loans, net of allowance for loan losses
    
    
    291,488,000
    
    
    
    271,010,000
    
    
    
    282,760,000Premises and equipment, net
    
    
    10,281,000
    
    
    
    10,232,000
    
    
    
    10,355,000Cash value of life insurance
    
    
    8,226,000
    
    
    
    7,172,000
    
    
    
    7,962,000Other real estate owned
    
    
    8,859,000
    
    
    
    9,531,000
    
    
    
    9,714,000Foreclosed assets
    
    
    85,000
    
    
    
    49,000
    
    
    
    614,000Accrued interest receivable
    
    
    1,602,000
    
    
    
    1,586,000
    
    
    
    1,326,000Deferred income taxes
    
    
    1,729,000
    
    
    
    1,663,000
    
    
    
    1,804,000Other assets
    
    
    1,609,000
    
    
    
    1,584,000
    
    
    
    1,328,000Total Assets
    
    $
    412,222,000
    
    
    $
    384,947,000
    
    
    $
    398,192,000Liabilities:Deposits:Noninterest-bearing demand
    
    $
    58,313,000
    
    
    $
    53,548,000
    
    
    $
    53,609,000Interest-bearing demand
    
    
    119,997,000
    
    
    
    127,455,000
    
    
    
    121,904,000Savings
    
    
    15,533,000
    
    
    
    14,611,000
    
    
    
    14,160,000Time certificates, $100,000 and over
    
    
    70,269,000
    
    
    
    50,990,000
    
    
    
    56,403,000Other time certificates
    
    
    77,199,000
    
    
    
    61,240,000
    
    
    
    57,437,000Total deposits
    
    
    341,311,000
    
    
    
    307,844,000
    
    
    
    303,513,000Short-term funds borrowed
    
    
    21,385,000
    
    
    
    22,645,000
    
    
    
    41,075,000Long-term debt
    
    
    11,671,000
    
    
    
    18,354,000
    
    
    
    16,981,000Trust preferred securities
    
    
    
    
    
    
    9,200,000
    
    
    
    9,200,000Subordinated debentures
    
    
    9,485,000
    
    
    
    
    
    
    
    Accrued interest payable
    
    
    592,000
    
    
    
    510,000
    
    
    
    521,000Other liabilities
    
    
    3,804,000
    
    
    
    3,534,000
    
    
    
    3,730,000Total Liabilities
    
    $
    388,248,000
    
    
    $
    362,087,000
    
    
    $
    375,020,000Shareholders Equity:Convertible preferred stock, $.001 par value;
authorized 100,000,000 shares; issued and outstanding
09/30/04 14,093 shares,12/31/03 and 09/30/03 14,117 shares
    
    
    
    
    
    
    
    
    
    
    Additional paid-in capital, preferred stock
    
    
    3,646,000
    
    
    
    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
    
    
    2,000
    
    
    
    2,000
    
    
    
    2,000Additional paid-in capital, common stock
    
    
    11,282,000
    
    
    
    11,282,000
    
    
    
    11,282,000Retained earnings
    
    
    8,674,000
    
    
    
    8,052,000
    
    
    
    7,975,000Accumulated other comprehensive income (loss), net
    
    
    370,000
    
    
    
    (146,000
    )
    
    
    243,000Total Shareholders Equity
    
    
    23,974,000
    
    
    
    22,860,000
    
    
    
    23,172,000Total Liabilities and Shareholders Equity
    
    $
    412,222,000
    
    
    $
    384,947,000
    
    
    $
    398,192,000
 See accompanying notes to unaudited consolidated financial statements - 2 -




---



##### Table of Contents



FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Three months ended September 30,
    
    Nine months ended September 30,2004
    
    2003
    
    2004
    
    2003(unaudited)
    
    (unaudited)Interest Income:Interest and fees on loans
    
    $
    5,242,000
    
    
    $
    5,262,000
    
    
    $
    15,458,000
    
    
    $
    15,807,000Interest on investment securities available for saleTaxable
    
    
    422,000
    
    
    
    319,000
    
    
    
    1,215,000
    
    
    
    1,055,000Tax exempt
    
    
    229,000
    
    
    
    159,000
    
    
    
    600,000
    
    
    
    440,000Dividends
    
    
    47,000
    
    
    
    39,000
    
    
    
    130,000
    
    
    
    110,000Interest on federal funds sold
    
    
    2,000
    
    
    
    2,000
    
    
    
    6,000
    
    
    
    41,000Total interest income
    
    
    5,942,000
    
    
    
    5,781,000
    
    
    
    17,409,000
    
    
    
    17,453,000Interest Expense:Interest on interest-bearing demand deposits
    
    
    326,000
    
    
    
    312,000
    
    
    
    859,000
    
    
    
    986,000Interest on savings
    
    
    10,000
    
    
    
    8,000
    
    
    
    27,000
    
    
    
    42,000Interest on time certificates of deposit $100,000 & more
    
    
    503,000
    
    
    
    392,000
    
    
    
    1,350,000
    
    
    
    1,364,000Interest on time certificates of deposit under $100,000
    
    
    475,000
    
    
    
    462,000
    
    
    
    1,299,000
    
    
    
    1,551,000Total deposit interest expense
    
    
    1,314,000
    
    
    
    1,174,000
    
    
    
    3,535,000
    
    
    
    3,943,000Interest on short-term borrowing
    
    
    65,000
    
    
    
    67,000
    
    
    
    227,000
    
    
    
    198,000Interest on long-term debt
    
    
    175,000
    
    
    
    227,000
    
    
    
    554,000
    
    
    
    677,000Interest on trust preferred securities
    
    
    
    
    
    
    275,000
    
    
    
    
    
    
    
    825,000Interest on subordinated debt
    
    
    275,000
    
    
    
    
    
    
    
    824,000
    
    
    
    Total interest expense
    
    
    1,829,000
    
    
    
    1,743,000
    
    
    
    5,140,000
    
    
    
    5,643,000Net Interest Income
    
    
    4,113,000
    
    
    
    4,038,000
    
    
    
    12,269,000
    
    
    
    11,810,000Provision for loan losses
    
    
    644,000
    
    
    
    557,000
    
    
    
    1,047,000
    
    
    
    1,405,000Net Interest
Income After Provision for Loan Losses
    
    
    3,469,000
    
    
    
    3,481,000
    
    
    
    11,222,000
    
    
    
    10,405,000Noninterest Income:Service charges and customer service fees
    
    
    589,000
    
    
    
    501,000
    
    
    
    1,788,000
    
    
    
    1,429,000Gain on sale of securities available for sale
    
    
    10,000
    
    
    
    
    
    
    
    217,000
    
    
    
    54,000Mortgage referral fees
    
    
    113,000
    
    
    
    269,000
    
    
    
    398,000
    
    
    
    863,000Other
    
    
    317,000
    
    
    
    106,000
    
    
    
    624,000
    
    
    
    317,000Total Noninterest Income
    
    
    1,029,000
    
    
    
    876,000
    
    
    
    3,027,000
    
    
    
    2,663,000Noninterest Expense:Salaries and employee benefits
    
    
    2,383,000
    
    
    
    2,367,000
    
    
    
    6,953,000
    
    
    
    7,031,000Occupancy expense
    
    
    390,000
    
    
    
    447,000
    
    
    
    1,236,000
    
    
    
    1,225,000Furniture and equipment
    
    
    205,000
    
    
    
    202,000
    
    
    
    594,000
    
    
    
    642,000Data processing
    
    
    206,000
    
    
    
    211,000
    
    
    
    607,000
    
    
    
    585,000Marketing
    
    
    123,000
    
    
    
    130,000
    
    
    
    447,000
    
    
    
    380,000Printing and supplies
    
    
    74,000
    
    
    
    44,000
    
    
    
    208,000
    
    
    
    193,000Loan and collection
    
    
    59,000
    
    
    
    128,000
    
    
    
    276,000
    
    
    
    259,000Other real estate  Heritage Place
    
    
    127,000
    
    
    
    109,000
    
    
    
    408,000
    
    
    
    200,000Loss (gain) on sale of OREO and other foreclosed assets
    
    
    (74,000
    )
    
    
    159,000
    
    
    
    (40,000
    )
    
    
    279,000Other
    
    
    647,000
    
    
    
    525,000
    
    
    
    1,926,000
    
    
    
    1,377,000Total Noninterest Expense
    
    
    4,140,000
    
    
    
    4,322,000
    
    
    
    12,615,000
    
    
    
    12,171,000Income Before Income Taxes
    
    
    358,000
    
    
    
    35,000
    
    
    
    1,634,000
    
    
    
    897,000Provision for income taxes (credit)
    
    
    30,000
    
    
    
    (102,000
    )
    
    
    310,000
    
    
    
    80,000Net Income
    
    $
    328,000
    
    
    $
    137,000
    
    
    $
    1,324,000
    
    
    $
    817,000Comprehensive Income (loss):Change in unrealized gain (loss) on
securities available for sale, net
    
    
    1,277,000
    
    
    
    (273,000
    )
    
    
    127,000
    
    
    
    (641,000
    )Comprehensive Income (loss)
    
    $
    1,605,000
    
    
    $
    (136,000
    )
    
    $
    1,451,000
    
    
    $
    176,000Average Common Shares Outstanding
    
    
    1,887,369
    
    
    
    1,747,271
    
    
    
    1,887,369
    
    
    
    1,692,820Diluted Average Common Shares Outstanding
    
    
    1,897,869
    
    
    
    1,757,771
    
    
    
    1,897,869
    
    
    
    1,703,320Per Share DataBasic earnings
    
    $
    0.15
    
    
    $
    0.06
    
    
    $
    0.64
    
    
    $
    0.42Diluted earnings
    
    $
    0.15
    
    
    $
    0.06
    
    
    $
    0.64
    
    
    $
    0.41Dividends paid on common stock
    
    $
    0.27
    
    
    $
    0.00
    
    
    $
    0.27
    
    
    $
    0.00
 See accompanying notes to unaudited consolidated financial statements - 3 -




---



##### Table of Contents



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
    
    $
    3,670,000
    
    
    $
    8,523,000
    
    
    $
    7,348,000
    
    
    $
    495,000
    
    
    $
    20,036,000Sale of Common Stock
    
    
    
    
    
    
    2,761,000
    
    
    
    
    
    
    
    
    
    
    
    2,761,000Net income for the period
    
    
    
    
    
    
    
    
    
    
    817,000
    
    
    
    
    
    
    
    817,000Net change in realized gain on securities
available for sale, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (641,000
    )
    
    
    (641,000
    )Dividends declared on 2000 Series B
preferred stock
    
    
    
    
    
    
    
    
    
    
    (113,000
    )
    
    
    
    
    
    
    (113,000
    )Balance September 30, 2003
    
    $
    3,670,000
    
    
    $
    11,284,000
    
    
    $
    8,052,000
    
    
    $
    (146,000
    )
    
    $
    22,860,000Balance, December 31, 2003
    
    $
    3,670,000
    
    
    $
    11,284,000
    
    
    $
    7,975,000
    
    
    $
    243,000
    
    
    $
    23,172,000Redemption of Preferred Stock
    
    
    (24,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,000
    )Net income for the period
    
    
    
    
    
    
    
    
    
    
    1,324,000
    
    
    
    
    
    
    
    1,324,000Net change in realized gain on securities
available for sale, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    127,000
    
    
    
    127,000Dividends declared on 2000 Series B
preferred stock
    
    
    
    
    
    
    
    
    
    
    (112,000
    )
    
    
    
    
    
    
    (112,000
    )Dividends declared on 87-88 Series A Preferred
Stock & Common Stock
    
    
    
    
    
    
    
    
    
    
    (513,000
    )
    
    
    
    
    
    
    (513,000
    )Balance September 30, 2004
    
    $
    3,646,000
    
    
    $
    11,284,000
    
    
    $
    8,674,000
    
    
    $
    370,000
    
    
    $
    23,974,000
 See accompanying notes to unaudited consolidated financial statements - 4 -




---



##### Table of Contents



FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine monthsended September 30,2004
    
    2003(unaudited)Cash Flows from Operating Activities:Net income
    
    $
    1,324,000
    
    
    $
    817,000Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization of property and equipment
    
    
    719,000
    
    
    
    776,000Amortization of investment securities premium, net
    
    
    239,000
    
    
    
    349,000Investment security gains, net
    
    
    (217,000
    )
    
    
    (54,000
    )Provision for loan losses
    
    
    1,047,000
    
    
    
    1,405,000Loss on sale of OREO and foreclosed assets
    
    
    144,000
    
    
    
    350,000Net change in assets and liabilities:Decrease (increase) in accrued interest receivable
    
    
    (276,000
    )
    
    
    (201,000
    )Decrease (increase) in other assets
    
    
    (260,000
    )
    
    
    (171,000
    )Increase (decrease) in accrued interest payable
    
    
    71,000
    
    
    
    (372,000
    )Increase (decrease) in other liabilities
    
    
    74,000
    
    
    
    250,000Net Cash Provided by Operating Activities
    
    
    2,865,000
    
    
    
    3,149,000Cash Flows from Investing Activities:Proceeds from sale of securities available-for-sale
    
    
    19,056,000
    
    
    
    6,796,000Proceeds from maturities, payments and calls of securities
available-for-sale
    
    
    4,542,000
    
    
    
    26,060,000Purchases of securities available-for-sale
    
    
    (32,261,000
    )
    
    
    (44,084,000
    )Purchases of non-marketable securities
    
    
    (615,000
    )
    
    
    (59,000
    )Net decrease (increase) in loans
    
    
    (10,949,000
    )
    
    
    (11,890,000
    )Disposal (Purchases) of property and equipment
    
    
    (645,000
    )
    
    
    (221,000
    )Proceeds from sale of other real estate owned
    
    
    1,896,000
    
    
    
    3,772,000Proceeds from sale of foreclosed assets
    
    
    518,000
    
    
    
    69,000Net Cash Used in Investing Activities
    
    
    (18,458,000
    )
    
    
    (19,557,000
    )Cash Flows from Financing Activities:Net increase (decrease) in deposits
    
    
    37,798,000
    
    
    
    (15,281,000
    )Net increase in (decrease) in short-term borrowings
    
    
    (19,690,000
    )
    
    
    10,145,000Payments of principal on long-term debt
    
    
    (5,310,000
    )
    
    
    (209,000
    )Redemption of Perpetual Preferred Stock
    
    
    (24,000
    )
    
    
    Proceeds from the issuance of common stock
    
    
    
    
    
    
    2,761,000Dividends paid on 2000 Series B Preferred Stock
    
    
    (112,000
    )
    
    
    (113,000
    )Dividends paid on 87 - 88 Series A Preferred Stock
and Common Stock
    
    
    (513,000
    )
    
    
    Net Cash Provided by (Used in) Financing Activities
    
    
    12,149,000
    
    
    
    (2,697,000
    )Net (Decrease) in Cash and due from banks
    
    
    (3,444,000
    )
    
    
    (19,105,000
    )Cash and due
from banks at Beginning of Period
    
    
    16,304,000
    
    
    
    36,642,000Cash and due from banks at End of Period
    
    $
    12,860,000
    
    
    $
    17,537,000Supplemental Disclosure of Noncash Activities:Net change in unrealized gain (loss) on securities available for sale
    
    $
    127,000
    
    
    $
    (641,000
    )Loans transferred to other real estate owned
    
    $
    1,070,000
    
    
    $
    5,576,000Supplemental Disclosure of Cash Flow Activity:Cash paid for interest expense
    
    $
    5,069,000
    
    
    $
    6,015,000Cash paid for Income taxes
    
    $
    380,000
    
    
    $
    112,000
 See accompanying notes to unaudited consolidated financial statements - 5 -




---



##### Table of Contents



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 and nine month
periods ended September 30, 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. 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/A for the
year ended December 31, 2003. The September 30, 2003 balance sheet has been
restated for the adjustments described in Form 10-KSB/A for the year ended
December 31, 2003. Principles of Consolidation The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Heritage Bank (the Bank). All significant
intercompany accounts and transactions have been eliminated in consolidation. 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. 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. Basic and diluted earnings per common share have been computed based on the
following as of September 30, 2004 and 2003: - 6 -




---



##### Table of Contents



For the three months
    
    For the nine monthsended September 30,
    
    ended September 30,2004
    
    2003
    
    2004
    
    2003Numerator:Net income
    
    $
    328,000
    
    
    $
    137,000
    
    
    $
    1,324,000
    
    
    $
    817,000Less preferred stock dividends
    
    
    40,000
    
    
    
    36,000
    
    
    
    112,000
    
    
    
    113,000Net income applicable to common stock
    
    $
    288,000
    
    
    $
    101,000
    
    
    $
    1,212,000
    
    
    $
    704,000Denominator:Average number of common shares
outstanding used to calculate
basic earnings per common share
    
    
    1,887,000
    
    
    
    1,747,000
    
    
    
    1,887,000
    
    
    
    1,692,000Effect of dilutive convertible
preferred stock
    
    
    11,000
    
    
    
    11,000
    
    
    
    11,000
    
    
    
    11,000Average number of common shares
used to calculate diluted earnings per
common share
    
    
    1,898,000
    
    
    
    1,758,000
    
    
    
    1,898,000
    
    
    
    1,703,000Basic earnings per common share
    
    $
    0.15
    
    
    $
    0.06
    
    
    $
    0.64
    
    
    $
    0.42Diluted earnings per common share
    
    $
    0.15
    
    
    $
    0.06
    
    
    $
    0.64
    
    
    $
    0.41Dividends paid on common stock
    
    $
    0.27
    
    
    $
    0.00
    
    
    $
    0.27
    
    
    $
    0.00
 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. 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 or shareholders equity as a result of this
change. - 7 -




---



##### Table of Contents



Impact of Recently Issued Financial Accounting Pronouncements 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 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. In March 2004, the Financial Accounting Standards Board (FASB) reached
consensus on the guidance provided by Emerging Issues Task Force Issue 03-1
(EITF 03-1), The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments. The guidance is applicable to debt and
equity securities that are within the scope of FASB Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments In
Debt and Equity Securities and certain other investments. EITF 03-1 specifies
that an impairment would be considered other-than-temporary unless (a) the
investor has the ability and intent to hold an investment for a reasonable
period of time sufficient for the recovery of the fair value up to (or beyond)
the cost of the investment and (b) evidence indicating the cost of the
investment is recoverable within a reasonable period of time outweighs evidence
to the contrary. EITF 03-1 cost method investment and disclosure provisions
were effective for reporting periods ending after June 15, 2004. The
measurement and recognition provisions relating to debt and equity securities
have been delayed until the FASB issues additional guidance. The Company
adopted cost method investment and disclosure provisions of EITF 03-1 on June
30, 2004. The adoption did not have a material impact on the consolidated
financial statements, results of operations or liquidity of the Company. - 8 -




---



##### Table of Contents



FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARIES
Financial Summary (unaudited) Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net interest
income (FTE) *
    
    
    $4,257,000
    
    
    $
    4,140,000
    
    
    $
    12,646,000
    
    
    $
    12,094,000Provision for loan losses
    
    
    (644,000
    )
    
    
    (557,000
    )
    
    
    (1,047,000
    )
    
    
    (1,405,000
    )Noninterest income
    
    
    1,029,000
    
    
    
    876,000
    
    
    
    3,027,000
    
    
    
    2,663,000Noninterest expense
    
    
    (4,140,000
    )
    
    
    (4,322,000
    )
    
    
    (12,615,000
    )
    
    
    (12,171,000
    )Provision for income taxes (FTE) *
    
    
    (174,000
    )
    
    
    
    
    
    
    (687,000
    )
    
    
    (364,000
    )Net income
    
    $
    328,000
    
    
    $
    137,000
    
    
    $
    1,324,000
    
    
    $
    817,000Average common shares outstanding
    
    
    1,887,369
    
    
    
    1,747,271
    
    
    
    1,887,369
    
    
    
    1,692,820Diluted average common shares outstanding
    
    
    1,897,869
    
    
    
    1,757,771
    
    
    
    1,897,869
    
    
    
    1,703,320Common shares outstanding at period end
    
    
    1,887,369
    
    
    
    1,887,369
    
    
    
    1,887,369
    
    
    
    1,887,369As Reported:Basic earnings per common share
    
    $
    0.15
    
    
    $
    0.06
    
    
    $
    0.64
    
    
    $
    0.42Diluted earnings per common share
    
    $
    0.15
    
    
    $
    0.06
    
    
    $
    0.64
    
    
    $
    0.41Return on assets (annualized)
    
    
    0.32
    %
    
    
    0.14
    %
    
    
    0.45
    %
    
    
    0.29
    %Return on equity (annualized)
    
    
    5.60
    %
    
    
    2.56
    %
    
    
    7.54
    %
    
    
    5.27
    %Net interest margin
    
    
    4.52
    %
    
    
    4.86
    %
    
    
    4.63
    %
    
    
    4.70
    %Net loan charge-offs (recoveries)
to average loans
    
    
    0.20
    %
    
    
    0.23
    %
    
    
    0.35
    %
    
    
    0.45
    %Efficiency ratio (FTE) *
    
    
    78.32
    %
    
    
    86.16
    %
    
    
    80.49
    %
    
    
    82.48
    %Average Balances:Total assets
    
    $
    402,553,000
    
    
    $
    380,538,000
    
    
    $
    395,962,000
    
    
    $
    376,765,000Earning assets
    
    
    360,901,000
    
    
    
    329,413,000
    
    
    
    354,235,000
    
    
    
    336,309,000Total loans
    
    
    289,532,000
    
    
    
    273,376,000
    
    
    
    286,826,000
    
    
    
    274,934,000Total deposits
    
    
    337,325,000
    
    
    
    304,452,000
    
    
    
    320,931,000
    
    
    
    309,828,000Shareholders equity
    
    
    23,290,000
    
    
    
    22,200,000
    
    
    
    23,461,000
    
    
    
    21,719,000Balances at Period End:Total assets
    
    
    
    
    
    
    
    
    
    $
    412,222,000
    
    
    $
    384,947,000Earning assets
    
    
    
    
    
    
    
    
    
    
    370,664,000
    
    
    
    336,600,000Total loans
    
    
    
    
    
    
    
    
    
    
    294,406,000
    
    
    
    273,577,000Total deposits
    
    
    
    
    
    
    
    
    
    
    341,311,000
    
    
    
    307,844,000Shareholders equity
    
    
    
    
    
    
    
    
    
    
    23,974,000
    
    
    
    22,860,000Financial Ratios at Period End:Allowance for loan losses to loans
    
    
    
    
    
    
    
    
    
    
    0.99
    %
    
    
    0.94
    %Book value per common share
    
    
    
    
    
    
    
    
    
    $
    10.54
    
    
    $
    10.08Equity to assets
    
    
    
    
    
    
    
    
    
    
    5.82
    %
    
    
    5.94
    %Regulatory total capital to risk-weighted assets
    
    
    
    
    
    
    
    
    
    
    10.48
    %
    
    
    10.69
    %Dividends paid per common share
    
    
    
    
    
    
    
    
    
    $
    0.27
    
    
    $
    0.00
 * Presented on a fully tax equivalent (FTE) basis - 9 -




---



##### 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. 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 Following is a summary of the components of fully taxable equivalent (FTE)
net income for the periods indicated: Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net interest income (FTE)
    
    $
    4,257,000
    
    
    $
    4,140,000
    
    
    $
    12,646,000
    
    
    $
    12,094,000Provision for loan losses
    
    
    (644,000
    )
    
    
    (557,000
    )
    
    
    (1,047,000
    )
    
    
    (1,405,000
    )Noninterest income
    
    
    1,029,000
    
    
    
    876,000
    
    
    
    3,027,000
    
    
    
    2,663,000Noninterest expense
    
    
    (4,140,000
    )
    
    
    (4,322,000
    )
    
    
    (12,615,000
    )
    
    
    (12,171,000
    )Provision for income taxes (FTE)
    
    
    (174,000
    )
    
    
    
    
    
    
    (687,000
    )
    
    
    (364,000
    )Net income
    
    $
    328,000
    
    
    $
    137,000
    
    
    $
    1,324,000
    
    
    $
    817,000
 Net income for the third quarter of 2004 was $191,000 (139.4%) more than for
the third quarter of 2003. An increase in fully taxable equivalent net
interest income (up $117,000 or 2.8%), an increase in noninterest income (up
$153,000 or 17.5%) and a decrease in noninterest expense (down $182,000 or
4.2%) more than offset an increase in provision for loan losses (up $87,000 or
15.6%). The increase in net interest income (FTE) was due to an increase in
the average balance of interest-earning assets (up $21.8 million or 6.5%) which
was partially offset by an increase in interest-bearing liabilities (up $16.1
million or 5.3%). There was an 18 basis point decrease in the yield on
interest-earning assets while the interest expense cost remained constant. The
$87,000 (15.6%) increase in provision for loan losses was due to increase in
loan balances, stable loan quality and the maintenance of an adequate allowance
level. -10-




---



##### Table of Contents



The increase in noninterest income from the third quarter of 2003 was
mainly due to an increase in
service charges and customer service fees (up $88,000 or 17.6%) and a gain on
sale of bank property (South Longmont location $187,000 gain). This was
partially offset by a decrease in mortgage referral fees (down $156,000 or
58.0%). The decrease in noninterest expense was mainly due to a decrease in
net loss on sale of Other Real Estate Owned (OREO) and foreclosed assets and
writedown on OREO (down $233,000 or 146.5%). Net income for the nine months ended September 30, 2004 was $507,000 (62.1%)
more than for the same period of 2003. An increase in fully taxable equivalent
net interest income (up $552,000 or 4.6%), an increase in noninterest income
(up $364,000 or 13.7%) and a decrease in provision for loan losses (down
$358,000 or 25.5%) more than offset an increase in noninterest expenses (up
$444,000 or 3.6%). The increase in net interest income (FTE) was due to an
increase in interest-earning assets (up $18.3 million or 5.5%) and an increase
in the average balance of interest-bearing liabilities (up $12.3 million or
4.0%). This was partially offset by a 31 basis point decrease in interest
expense cost compared to a 36 basis point decrease in the yield on
interest-earning assets. The $358,000 (25.5%) 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 was mainly due to an
increase in service charges and customer service fees (up $359,000 or 25.1%)
and a gain on the sale of investment securities ($217,000 in 2004 from $54,000
in 2003). Offsetting these increases in noninterest income was a decrease in
mortgage referral fees (down $465,000 or 53.9%). The increase in noninterest
expense was mainly due to an increase in expenses for other real
estate-Heritage Place, described at Part II  Item 5 of this report, (up
$208,000 or 104% to $408,000). Net Interest Income Following is a summary of the components of net interest income for the periods indicated: Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Interest income
    
    $
    5,942,000
    
    
    $
    5,781,000
    
    
    $
    17,409,000
    
    
    $
    17,453,000Interest expense
    
    
    (1,829,000
    )
    
    
    (1,743,000
    )
    
    
    (5,140,000
    )
    
    
    (5,643,000
    )FTE adjustment
    
    
    144,000
    
    
    
    102,000
    
    
    
    377,000
    
    
    
    284,000Net interest income (FTE)
    
    $
    4,257,000
    
    
    $
    4,140,000
    
    
    $
    12,646,000
    
    
    $
    12,094,000Average earning assets
    
    $
    360,901,000
    
    
    $
    329,413,000
    
    
    $
    354,235,000
    
    
    $
    336,309,000Net interest margin (FTE)
    
    
    4.52
    %
    
    
    4.86
    %
    
    
    4.63
    %
    
    
    4.70
    %
 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
third quarter of 2004 increased $117,000 (2.8%) from the same period in 2003 to
$4.3 million. The increase in interest income (FTE) ($203,000 or 3.5%) was due
to the increase in average balances of interest-earning assets (up $31.5
million or 9.6% to $360.9 million) and an 18 basis point decrease in yield on
interest-earning assets (6.75% from 6.93%). Interest expense increased $86,000
(4.9%) from the same period in 2003 and was due to an increase in
interest-bearing liabilities of $16.1 million (5.3%) to $322.5 million. Net interest income (FTE) during the first nine months of 2004 increased
$552,000 (4.6%) from the same period in 2003 to $12.6 million. The increase in
interest income (FTE) ($49,000 or 0.3%) was due to the increase in average
balances of interest-earning assets (up $17.9 million or 5.3% to $354.2
million) and a 36 basis point decrease in yield on interest-earning assets
(6.76% from 7.12%). Interest expense -11-




---



##### Table of Contents



decreased $503,000 (8.9%) from the same
period in 2003 and was due to a decrease in the interest cost on
interest-bearing liabilities of 31 basis points from 2.48% to 2.17% and
partially offset by an increase in interest-bearing liabilities of $12.3
million (4.0%) to $316.7 million. Interest and Fee Income Interest and fee income (FTE) for the third quarter of 2004 increased $203,000
(3.5%) from the third quarter of 2003. The change in interest-earning assets
was made up of a $13.5 million (4.9%) increase in average loan balances to
$289.5 million, and an $8.6 million (13.8%) increase in average investment
balances. The average yield on the Companys interest-earning assets decreased to 6.75%
for the quarter ended September 30, 2004, from 6.93% for the quarter ended
September 30, 2003. This downward trend in yields was reflective of general
interest rate markets during much of the previous twelve months. Interest and fee income (FTE) for the nine months ended September 30, 2004
increased $552,000 (4.6%) from the same period of 2003. The change in
interest-earning assets was made up of an $11.9 million (4.3%) increase in
average loan balances to $286.8 million, and a $10.7 million (19.1%) increase
in average investment balances. The average balance of federal funds sold
decreased $3.9 million (100%) to $0 in order to fund loans and investments. The average yield on the Companys interest-earning assets decreased to 6.76%
for the nine months ended September 30, 2004, from 7.12% for the same period of
2003. This downward trend in yields was reflective of general interest rate
markets during much of the previous twelve months. Interest Expense Interest expense increased $86,000 (4.9%) to $1,829,000 in the third quarter of
2004 compared to $1743,000 in the quarter ended September 30, 2003. The
average balance of interest-bearing liabilities increased $16.1 million (5.3%)
to $322.5 million in the third quarter of 2004 compared to $306.4 million in
the quarter ended September 30, 2003. The increase in interest-bearing
liabilities was concentrated in time certificates of deposit (up $25.2 million
or 20.8%). In addition, the average balance of noninterest-bearing deposits
increased $3.5 million (7.0%) from the year-ago quarter, and the average
balance of long-term debt decreased $6.4 million (32.6%) to $13.2 million in
the quarter ended September 30, 2004 compared to $19.6 million in the year-ago
quarter. The average rate paid for all categories of interest-bearing
liabilities (2.26%) in the third quarter of 2004 is the same as the average
rate paid for the third quarter of 2003. Interest expense decreased $503,000 (8.9%) to $5.1 million in the nine months
ended September 30, 2004 compared to $5.6 million in the same period of 2003.
The average balance of interest-bearing liabilities increased $12.3 million
(4.0%) to $316.7 million in the nine months ended September 30, 2004 compared
to $304.4 million in the same period of 2003. The increase in interest-bearing
liabilities was concentrated in lower earning short-term borrowings (mostly
overnight) (up $8.6 million or 58.4%) and time certificates of deposit (up $6.2
million or 4.7%). In addition, the average balance of noninterest-bearing
deposits increased $4.0 million (8.3%) from the year-ago quarter, and the
average balance of long-term debt decreased $3.9 million (21.2%) to $14.5
million in the nine months ended September 30, 2004 compared to $18.4 million
in the same period of 2003. The average rate paid for all categories of
interest-bearing liabilities (2.17%) decreased in the nine months ended
September 30, 2004 from the average rate paid in the year-ago nine month period
(2.48%) 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: -12-




---



##### Table of Contents



Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Yield on interest-earning assets
    
    
    6.75
    %
    
    
    6.93
    %
    
    
    6.76
    %
    
    
    7.12
    %Rate paid on interest-bearing
Liabilities
    
    
    2.26
    %
    
    
    2.26
    %
    
    
    2.17
    %
    
    
    2.48
    %Net interest spread
    
    
    4.49
    %
    
    
    4.67
    %
    
    
    4.59
    %
    
    
    4.64
    %Impact of excess earning assets and
noninterest-bearing funds
    
    
    0.23
    %
    
    
    0.20
    
    
    
    0.21
    %
    
    
    0.21
    %Net interest margin
    
    
    4.72
    %
    
    
    4.87
    %
    
    
    4.80
    %
    
    
    4.85
    %
 Net interest margin in the third quarter of 2004 decreased 15 basis points
compared to the third quarter of 2003. Average balances on time deposits
increased during the quarter ended September 30, 2004 by $25.2 million (20.8%)
compared to the same period ended September 30, 2003 and the cost of these
funds decreased 14 basis points to 2.66% from 2.80%. Average balances on loans
increased during the third quarter ended September 30, 2004 by $13.5 million
(4.9%) compared to third quarter ended September 30, 2003 and the yield
decreased 35 basis points to 7.22% from 7.57%. Net interest margin in the nine months ended September 30, 2004 decreased 5
basis points compared to the nine months ended September 30, 2003. Average
balances on short-term borrowings (mostly overnight) increased during the nine
months ended September 30, 2004 by $8.6 million (58.4%) compared to the same
period ended September 30, 2003 and the cost of these funds decreased 51 basis
points to 1.30% from 1.81%. Average balances on loans increased during the nine
months ended September 30, 2004 by $11.9 million (4.3%) compared to nine months
ended September 30, 2003 and the yield decreased 49 basis points to 7.21% from
7.70%. Summary of Average Balances, Yields/Rates and Interest Differential The following table presents, for the periods 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
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. -13-




---



##### Table of Contents



For the three months endedSeptember 30, 2004
    
    September 30, 2003(Dollars in thousands)Interest
    
    Rates
    
    
    
    
    
    Interest
    
    RatesAverage
    
    Income/
    
    Earned/
    
    Average
    
    Income/
    
    Earned/Balance
    
    Expense
    
    Paid
    
    Balance
    
    Expense
    
    PaidAssets:Loans
    
    $
    289,532
    
    
    $
    5,251
    
    
    
    7.22
    %
    
    $
    276,065
    
    
    $
    5,270
    
    
    
    7.57
    %Investment securities  taxable
    
    
    48,488
    
    
    
    469
    
    
    
    3.85
    %
    
    
    48,404
    
    
    
    358
    
    
    
    2.93
    %Investment securities  nontaxable
    
    
    22,785
    
    
    
    364
    
    
    
    6.36
    %
    
    
    14,248
    
    
    
    253
    
    
    
    7.04
    %Federal funds sold and due
from banks (interest-bearing)
    
    
    772
    
    
    
    2
    
    
    
    1.03
    %
    
    
    831
    
    
    
    2
    
    
    
    0.95
    %Allowance for loan loss
    
    
    (2,736
    )
    
    
    
    
    
    
    
    
    
    
    (2,525
    )Total earning assets
    
    
    358,841
    
    
    
    6,086
    
    
    
    6.75
    %
    
    
    337,023
    
    
    
    5,883
    
    
    
    6.93
    %Other assets
    
    
    43,711
    
    
    
    
    
    
    
    
    
    
    
    43,515Total assets
    
    $
    402,552
    
    
    $
    6,086
    
    
    
    
    
    
    $
    380,538
    
    
    $
    5,883Liabilities and shareholders equity:Interest-bearing demand deposits
    
    $
    122,442
    
    
    $
    326
    
    
    
    1.06
    %
    
    $
    124,779
    
    
    $
    312
    
    
    
    0.99
    %Savings deposits
    
    
    15,774
    
    
    
    10
    
    
    
    0.25
    %
    
    
    13,731
    
    
    
    8
    
    
    
    0.23
    %Time deposits
    
    
    146,422
    
    
    
    978
    
    
    
    2.66
    %
    
    
    121,183
    
    
    
    854
    
    
    
    2.80
    %Other short-term borrowed funds
    
    
    15,237
    
    
    
    65
    
    
    
    1.70
    %
    
    
    17,947
    
    
    
    67
    
    
    
    1.48
    %Long-term debt
    
    
    13,218
    
    
    
    175
    
    
    
    5.27
    %
    
    
    19,616
    
    
    
    227
    
    
    
    4.59
    %Subordinated debentures
    
    
    9,485
    
    
    
    275
    
    
    
    11.53
    %
    
    
    9,200
    
    
    
    275
    
    
    
    11.86
    %Total interest-bearing liabilities
    
    $
    322,578
    
    
    $
    1,829
    
    
    
    2.26
    %
    
    $
    306,456
    
    
    $
    1,743
    
    
    
    2.26
    %Noninterest-bearing deposits
    
    
    52,739
    
    
    
    
    
    
    
    
    
    
    
    49,271Other liabilities
    
    
    3,945
    
    
    
    
    
    
    
    
    
    
    
    3,584Shareholders equity
    
    
    23,290
    
    
    
    
    
    
    
    
    
    
    
    21,227Total liabilities
and shareholders equity
    
    $
    402,552
    
    
    
    
    
    
    
    
    
    
    $
    380,538Net interest spread (1)
    
    
    
    
    
    
    
    
    
    
    4.49
    %
    
    
    
    
    
    
    
    
    
    
    4.67
    %Net interest income and interest
margin (2)
    
    
    
    
    
    $
    4,257
    
    
    
    4.72
    %
    
    
    
    
    
    $
    4,140
    
    
    
    4.87
    %
   (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. -14-




---



##### Table of Contents



For the nine months endedSeptember 30, 2004
    
    September 30, 2003(Dollars in thousands)Interest
    
    Rates
    
    
    
    
    
    Interest
    
    RatesAverage
    
    Income/
    
    Earned/
    
    Average
    
    Income/
    
    Earned/Balance
    
    Expense
    
    Paid
    
    Balance
    
    Expense
    
    PaidAssets:Loans
    
    $
    286,826
    
    
    $
    15,482
    
    
    
    7.21
    %
    
    $
    274,934
    
    
    $
    15,832
    
    
    
    7.70
    %Investment securities  taxable
    
    
    47,555
    
    
    
    1,345
    
    
    
    3.78
    %
    
    
    43,430
    
    
    
    1,165
    
    
    
    3.59
    %Investment securities  nontaxable
    
    
    19,326
    
    
    
    953
    
    
    
    6.59
    %
    
    
    12,723
    
    
    
    699
    
    
    
    7.35
    %Federal funds sold and due
from banks (interest-bearing)
    
    
    789
    
    
    
    6
    
    
    
    1.02
    %
    
    
    4,723
    
    
    
    41
    
    
    
    1.16
    %Allowance for loan loss
    
    
    (2,850
    )
    
    
    
    
    
    
    
    
    
    
    (2,513
    )Total earning assets
    
    
    351,646
    
    
    
    17,786
    
    
    
    6.76
    %
    
    
    333,297
    
    
    
    17,737
    
    
    
    7.12
    %Other assets
    
    
    44,315
    
    
    
    
    
    
    
    
    
    
    
    43,468Total assets
    
    $
    395,961
    
    
    $
    17,786
    
    
    
    
    
    
    $
    376,765
    
    
    $
    17,737Liabilities and shareholders equity:Interest-bearing demand deposits
    
    $
    117,967
    
    
    $
    859
    
    
    
    0.97
    %
    
    $
    117,796
    
    
    $
    986
    
    
    
    1.12
    %Savings deposits
    
    
    14,652
    
    
    
    27
    
    
    
    0.25
    %
    
    
    13,837
    
    
    
    42
    
    
    
    0.41
    %Time deposits
    
    
    136,701
    
    
    
    2,649
    
    
    
    2.59
    %
    
    
    130,517
    
    
    
    2,915
    
    
    
    2.99
    %Other short-term borrowed funds
    
    
    23,402
    
    
    
    227
    
    
    
    1.30
    %
    
    
    14,640
    
    
    
    198
    
    
    
    1.81
    %Long-term debt
    
    
    14,534
    
    
    
    554
    
    
    
    5.09
    %
    
    
    18,453
    
    
    
    677
    
    
    
    4.91
    %Subordinated debentures
    
    
    9,485
    
    
    
    824
    
    
    
    11.60
    %
    
    
    9,200
    
    
    
    825
    
    
    
    11.99
    %Total interest-bearing liabilities
    
    $
    316,741
    
    
    $
    5,140
    
    
    
    2.17
    %
    
    $
    304,443
    
    
    $
    5,643
    
    
    
    2.48
    %Noninterest-bearing deposits
    
    
    51,629
    
    
    
    
    
    
    
    
    
    
    
    47,678Other liabilities
    
    
    4,130
    
    
    
    
    
    
    
    
    
    
    
    3,898Shareholders equity
    
    
    23,461
    
    
    
    
    
    
    
    
    
    
    
    20,746Total liabilities
and shareholders equity
    
    $
    395,961
    
    
    
    
    
    
    
    
    
    
    $
    376,765Net interest spread (1)
    
    
    
    
    
    
    
    
    
    
    4.59
    %
    
    
    
    
    
    
    
    
    
    
    4.64
    %Net interest income and interest
margin (2)
    
    
    
    
    
    $
    12,646
    
    
    
    4.80
    %
    
    
    
    
    
    $
    12,094
    
    
    
    4.85
    %
   (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-




---



##### Table of Contents



Three months ended September 30, 2004compared with three monthsended September 30, 2003Volume
    
    Rate
    
    TotalIncrease (decrease) in interest income:Loans
    
    $
    257,000
    
    
    $
    (276,000
    )
    
    $
    (19,000
    )Investments  taxable
    
    
    1,000
    
    
    
    110,000
    
    
    
    111,000Investments  nontaxable
    
    
    152,000
    
    
    
    (41,000
    )
    
    
    111,000Federal funds sold & due from banks
    
    
    
    
    
    
    
    
    
    
    Total earning assets
    
    
    410,000
    
    
    
    (207,000
    )
    
    
    203,000Increase (decrease) in interest expense:Interest-bearing demand deposits
    
    
    (6,000
    )
    
    
    20,000
    
    
    
    14,000Savings deposits
    
    
    1,000
    
    
    
    1,000
    
    
    
    2,000Time deposits
    
    
    178,000
    
    
    
    (54,000
    )
    
    
    124,000Federal funds purchased
    
    
    
    
    
    
    
    
    
    
    Other short term borrowings
    
    
    (11,000
    )
    
    
    9,000
    
    
    
    (2,000
    )Long-term debt
    
    
    (74,000
    )
    
    
    22,000
    
    
    
    (52,000
    )Trust preferred securities/subordinated debentures
    
    
    9,000
    
    
    
    (9,000
    )
    
    
    Total interest-bearing liabilities
    
    
    97,000
    
    
    
    (11,000
    )
    
    
    86,000Increase (decrease) in net interest income
    
    $
    313,000
    
    
    $
    (196,000
    )
    
    $
    117,000
 Nine months ended September 30, 2004compared with nine monthsended September 30, 2003Volume
    
    Rate
    
    TotalIncrease (decrease) in interest income:Loans
    
    $
    685,000
    
    
    $
    (1,035,000
    )
    
    $
    (350,000
    )Investments  taxable
    
    
    111,000
    
    
    
    69,000
    
    
    
    180,000Investments  nontaxable
    
    
    363,000
    
    
    
    (109,000
    )
    
    
    254,000Federal funds sold & due from banks
    
    
    (34,000
    )
    
    
    (1,000
    )
    
    
    (35,000
    )Total earning assets
    
    
    1,125,000
    
    
    
    (1,076,000
    )
    
    
    49,000Increase (decrease) in interest expense:Interest-bearing demand deposits
    
    
    1,000
    
    
    
    (128,000
    )
    
    
    (127,000
    )Savings deposits
    
    
    2,000
    
    
    
    (17,000
    )
    
    
    (15,000
    )Time deposits
    
    
    138,000
    
    
    
    (404,000
    )
    
    
    (266,000
    )Federal funds purchased
    
    
    2,000
    
    
    
    
    
    
    
    2,000Other short term borrowings
    
    
    116,000
    
    
    
    (89,000
    )
    
    
    27,000Long-term debt
    
    
    (144,000
    )
    
    
    21,000
    
    
    
    (123,000
    )Trust preferred securities/subordinated debentures
    
    
    26,000
    
    
    
    (27,000
    )
    
    
    (1,000
    )Total interest-bearing liabilities
    
    
    141,000
    
    
    
    (644,000
    )
    
    
    (503,000
    )Increase (decrease) in net interest income
    
    $
    984,000
    
    
    $
    (432,000
    )
    
    $
    552,000
 -16-




---



##### Table of Contents



Provision for Loan Losses The Company provided $644,000 for loan losses in the third quarter of 2004
versus $557,000 in the third quarter of 2003. During the third quarter of
2004, the Company recorded $576,000 of net loan charge
offs versus $639,000 of net loan charge offs in the third quarter of 2003. The
increase of $87,000 in the provision for loan losses was due to an increase in
loan balances. The ratio of the allowance for loan losses to total loans was
0.99% at September 30, 2004 and 0.94% at September 30, 2003. The Company provided $1,047,000 for loan losses during the nine months ended
September 30, 2004 versus $1,405,000 during the nine months ended September 30,
2003. During the nine months ended September 30, 2004, the Company recorded
$1,002,000 of net loan charge offs versus $1,232,000 of net loan charge-offs in
the nine-month period ended September 30, 2003. Noninterest Income The following table summarizes the components of noninterest income for the periods indicated. Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Service charges on deposit accounts
    
    $
    589,000
    
    
    $
    501,000
    
    
    $
    1,788,000
    
    
    $
    1,429,000Gain on sale of investments
    
    
    10,000
    
    
    
    
    
    
    
    217,000
    
    
    
    54,000Mortgage referral fees
    
    
    113,000
    
    
    
    269,000
    
    
    
    398,000
    
    
    
    863,000Other noninterest income
    
    
    317,000
    
    
    
    106,000
    
    
    
    624,000
    
    
    
    317,000Total noninterest income
    
    $
    1,029,000
    
    
    $
    876,000
    
    
    $
    3,027,000
    
    
    $
    2,663,000
 Noninterest income for the third quarter of 2004 increased $153,000 (17.5%) to
$1,029,000 from $876,000 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 $88,000 (17.6%) to $589,000 but was offset by a decrease in
mortgage referral fees of $156,000 (58.0%) from the third quarter of 2003 to
the third quarter of 2004 due to a slower mortgage market. The increase in
service charge income was mainly due to the introduction of an overdraft
privilege deposit product in January 2004 that has added a new stream of
recurring noninterest income. Noninterest income for the nine months ended September 30, 2004 increased
$364,000 (13.7%) to $3,027,000 from $2,663,000 in the same period in 2003. The
increase in noninterest income from the year-ago period was due to an increase
in service charges on deposit accounts (up $359,000 or 25.1% to $1,788,000) and
an increase in gain on the sale of investment securities (up $163,000 or 301.9%
to $217,000). The increase in service charge income was mainly due to the
introduction of an overdraft privilege deposit product in January 2004 that has
added a new stream of recurring noninterest income. Mortgage referral fees for
the nine months ended September 30, 2004 decreased $465,000 (53.9%) to $398,000
from $863,000 for the nine months ended September 30, 2003 due to a slower
mortgage market. -17-




---



##### Table of Contents



Noninterest Expense The following table summarizes the components of noninterest expense for the periods indicated. Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Salaries and employee benefits
    
    $
    2,383,000
    
    
    $
    2,367,000
    
    
    $
    6,953,000
    
    
    $
    7,031,000Occupancy
    
    
    390,000
    
    
    
    447,000
    
    
    
    1,236,000
    
    
    
    1,225,000Furniture and Equipment
    
    
    205,000
    
    
    
    202,000
    
    
    
    594,000
    
    
    
    642,000Data processing
    
    
    206,000
    
    
    
    211,000
    
    
    
    607,000
    
    
    
    585,000Advertising and marketing
    
    
    123,000
    
    
    
    130,000
    
    
    
    447,000
    
    
    
    380,000Printing and supplies
    
    
    74,000
    
    
    
    44,000
    
    
    
    208,000
    
    
    
    193,000Loan and collection
    
    
    59,000
    
    
    
    128,000
    
    
    
    276,000
    
    
    
    259,000Other real estate- Heritage Place
    
    
    127,000
    
    
    
    109,000
    
    
    
    408,000
    
    
    
    200,000Net loss (gain) on sale of OREO
and other foreclosed assets
    
    
    (74,000
    )
    
    
    159,000
    
    
    
    (40,000
    )
    
    
    279,000Other
    
    
    647,000
    
    
    
    525,000
    
    
    
    1,926,000
    
    
    
    1,377,000Total
    
    $
    4,140,000
    
    
    $
    4,322,000
    
    
    $
    12,615,000
    
    
    $
    12,171,000Average full time equivalent staff
    
    
    155
    
    
    
    150
    
    
    
    153
    
    
    
    149Noninterest expense to revenue (FTE)
    
    
    78.32
    %
    
    
    86.16
    %
    
    
    80.49
    %
    
    
    82.48
    %
 Noninterest expense for the third quarter of 2004 decreased $182,000 (4.2%) to
$4.1 million from $4.3 million in the third quarter of 2003. The decrease in
noninterest expense was mainly due to a $233,000 (146.5%) decrease in Net loss
on sale of Other Real Estate Owned (OREO) and foreclosed assets and writedown
of OREO from $159,000 loss to gain of $74,000. Noninterest expense for the nine months ended September 30, 2004 increased
$444,000 (3.6%) to $12.6 million from $12.2 million in the first nine months of
2003. The increase in noninterest expense was mainly due to a $208,000
(104.0%) increase in the expense for other real estate-Heritage Place to
$408,000 from $200,000. 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. Provision for Income Tax The effective tax rate for the three months ended September 30, 2004 was 8.38%
and reflects a decrease from -291.4% for the three months ended September 30,
2003. The effective tax rate for the nine months ended September 30, 2004 was
18.97% and reflects a decrease from 8.92% for the nine months ended September
30, 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. -18-




---



##### Table of Contents



Classified assets, net of guarantees of the U.S. Government, including its
agencies and its government-sponsored agencies at September 30, 2004, decreased
$1.3 million (8.8%) to $13.5 million from $14.8
million at December 31, 2003. Allowance for loan losses to classified loans was
21.6% as of September 30, 2004 and 19.4% as of December 31, 2003. 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 nine months ended September 30, 2004, if all such loans had been current in
accordance with their original terms, totaled $41,000. Interest income
actually recognized on these loans during the nine months ended September 30,
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 increased $1.5
million (42.0%) to $4.9 million during the first nine months of 2004.
Nonperforming assets net of guarantees represent 1.2% 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. -19-




---



##### Table of Contents



At September 30, 2004
    
    At December 31, 2003(unaudited)(dollars in thousands)Performing nonaccrual loans
    
    $
    462
    
    
    $
    337Nonperforming, nonaccrual loans
    
    
    1,682
    
    
    
    948Total nonaccrual loans
    
    
    2,144
    
    
    
    1,285Loans 90 days past due and still accruing
    
    
    1,999
    
    
    
    19Total nonperforming loans
    
    
    4,143
    
    
    
    1,304Other real estate owned
    
    
    688
    
    
    
    1,543Foreclosed assets
    
    
    85
    
    
    
    614Total nonperforming assets
    
    $
    4,916
    
    
    $
    3,461Nonperforming loans to total loans
    
    
    1.40
    %
    
    
    0.46
    %Allowance for loan losses/nonperforming loans
    
    
    70.43
    %
    
    
    220.25
    %Nonperforming assets to total assets
    
    
    1.19
    %
    
    
    0.87
    %Allowance for loan losses to nonperforming assets
    
    
    59.36
    %
    
    
    82.98
    %
 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 probable 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 impact these changes have had on the loan portfolio as a whole.
This process is explained in detail in the -20-




---



##### Table of Contents



notes to the Companys Consolidated Financial Statements in its Annual Report
on Form 10-KSB/A for the year ended December 31, 2003. Based on the current conditions of the loan portfolio, management believes that
the $2,918,000 allowance for loan losses at September 30, 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 ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Balance, beginning of period
    
    $
    2,849
    
    
    $
    2,649
    
    
    $
    2,872
    
    
    $
    2,394Loan loss provision
    
    
    644
    
    
    
    557
    
    
    
    1,047
    
    
    
    1,405Loans charged off
    
    
    (650
    )
    
    
    (686
    )
    
    
    (1,142
    )
    
    
    (1,375
    )Recoveries of previously
charged-off loans
    
    
    75
    
    
    
    47
    
    
    
    141
    
    
    
    143Net (charge-offs) recoveries
    
    
    (575
    )
    
    
    (639
    )
    
    
    (1,001
    )
    
    
    (1,232
    )Balance, end of period
    
    $
    2,918
    
    
    $
    2,567
    
    
    $
    2,918
    
    
    $
    2,567Allowance for loan losses/loans outstanding
    
    
    
    
    
    
    
    
    
    
    0.99
    %
    
    
    0.94
    %
 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 September 30, 2004. This amount represents an increase of $802,000
(3.5%) from December 31, 2003. The change is the result of net income of
$1,324,000, a $127,000 (52.3%) increase in the net market value of available
for sale securities, the 2000 Series B preferred stock dividend of $112,000 and
the dividend payments to holders of common stock, 1987 Series A preferred stock
and 1988 Series A preferred stock totaling $513,000 as discussed in more detail
on page 23. The following summarizes the regulatory capital ratios for the periods indicated: To Be WellAt September 30,
    
    At
    
    Minimum
    
    Capitalized UnderDecember 31,
    
    Regulatory
    
    Prompt Corrective2004
    
    2003
    
    2003
    
    Requirement
    
    Action ProvisionsTier I Capital (to risk-weighted assets)Consolidated
    
    
    7.8
    %
    
    
    8.1
    %
    
    
    7.8
    %Bank
    
    
    9.5
    %
    
    
    9.9
    %
    
    
    9.5
    %
    
    
    4.0
    %
    
    
    6.0
    %Total Capital (to risk-weighted assets)Consolidated
    
    
    10.5
    %
    
    
    10.9
    %
    
    
    10.6
    %Bank
    
    
    10.4
    %
    
    
    10.7
    %
    
    
    10.4
    %
    
    
    8.0
    %
    
    
    10.0
    %Tier I Leverage (to average assets)Consolidated
    
    
    6.5
    %
    
    
    6.7
    %
    
    
    6.6
    %Bank
    
    
    8.0
    %
    
    
    8.2
    %
    
    
    8.0
    %
    
    
    4.0
    %
    
    
    5.0
    %
 -21-




---



##### Table of Contents



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 $13.3 million to
$62.3 million at September 30, 2004, from $49.0 million at December 31, 2003.
The commitments represent 21.2% and 17.3% of the total loans outstanding at
September 30, 2004 and at December 31, 2003, respectively. 
 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. At September 30, 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 -22-




---



##### Table of Contents



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 September 30, 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, and marketable investment securities available for sale. At September
30, 2004, cash and due from banks, federal funds sold and investment securities
available for sale totaled $84.3 million, representing an increase of $5.4
million or 6.8% from December 31, 2003, and an increase of $5.6 million or 7.1%
from September 30, 2003. The Company generates additional liquidity from its
operating activities. The Companys profitability during the first nine months
of 2004 generated cash flows from operations of $2.9 million compared to $3.1
million during the first nine 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 $23.6 million during the nine months ended September 30, 2004
compared to $32.9 million for the nine months ended September 30, 2003. During
the nine months ended September 30, 2004, the Company invested $32.3 million in
securities and experienced $10.9 million in net loan growth, compared to $44.1
million and $11.9 million used to purchase investments and net loan growth,
respectively, during the first nine months of 2003. These changes in
investment and loan balances contributed to net cash used by investing
activities of $18.5 million during the nine months ended September 30, 2004,
compared to net cash used in investing activities of $19.6 million during the
nine months ended September 30, 2003. Financing activities provided net cash
of $12.1 million during the nine months ended September 30, 2004, compared to
net cash used by financing activities of $2.7 million during the nine months
ended September 30, 2003. Increases in deposit balances accounted for $37.8
million of financing sources of funds during the nine months ended September
30, 2004, compared to deposit balance decreases that accounted for $15.3
million of the funds used for financing activities during the nine months ended
September 30, 2003. Also, the Companys liquidity is dependent on dividends
received from the Bank. Dividends from the Bank are subject to certain
regulatory restrictions. On July 7, 2004, the Company declared a special cash
dividend of $0.27 per share on its common stock and a dividend of $0.40 per
share on its 1987 Series A 8% Non-cumulative Convertible Preferred Stock and
its 1988 Series A 8% Non-cumulative Convertible Non-voting Preferred Stock. The
aggregate dividends of $513,000 were paid on July 22, 2004 to holders of record
at the close of business on July 8, 2004. 
 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 September 30, 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. -23-




---



##### Table of Contents



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. -24-




---



##### Table of Contents



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 and are not expected to have a
material impact on the Bank or Company. 
 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 September 30, 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 $408,020 for the nine
months ended September 30, 2004, largely related to holding the property. Of
this amount, -25-




---



##### Table of Contents



$96,023 was accrued for real estate taxes and $291,674 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.
An application for a new branch was approved by the Federal Reserve and the
CDB. The Bank has started construction on a new branch on this property with an
anticipated opening 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 sold this property at a profit in July 2004. The Bank entered into a non-binding letter of intent in August 2004 to purchase
undeveloped property located in Erie, Colorado. The purchase is contingent upon
the parties entering into an acceptable purchase agreement. The Bank intends to
build an expanded facility to relocate its existing branch to the new site in
2006. In October 2004, the Bank entered into a purchase and sale agreement to acquire
two developed commercial lots on a major traffic arterial located in Longmont,
Colorado for $1,500,000. The Bank intends to build a new branch on this
property in 2006. -26-




---



##### Table of Contents



Item 6  Exhibits 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 -27-




---



##### 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: November 12, 2004
    
    By:
    
    /s/ William A. Mitchell, Jr.William A. Mitchell, Jr.
Chief Executive Officer and President
(Principal Executive Officer)Date: November 12, 2004
    
    By:
    
    /s/ Alice M. VossAlice M. Voss
Chief Financial Officer
(Principal Financial and Accounting Officer)
 -28-




---



##### Table of Contents



INDEX TO EXHIBITS 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