FRONT RANGE CAPITAL CORP - 10-Q Quarterly Report

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

(Exact name of registrant as specified in its charter)


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

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.

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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		$	16,304,000
Investment securities available for sale		71,433,000			61,173,000			62,591,000
Nonmarketable securities		4,050,000			3,410,000			3,434,000
Loans
Real estate-construction		59,862,000			61,108,000			62,879,000
Real estate-commercial		143,205,000			123,122,000			129,482,000
Real estate-residential		52,045,000			51,397,000			52,656,000
Commercial		33,943,000			31,931,000			34,733,000
Consumer		6,560,000			7,249,000			7,056,000

Total loans		295,615,000			274,807,000			286,806,000
Less unearned income		(1,209,000	)		(1,230,000	)		(1,174,000	)

Loans, net of unearned income		294,406,000			273,577,000			285,632,000

Allowance 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			282,760,000
Premises and equipment, net		10,281,000			10,232,000			10,355,000
Cash value of life insurance		8,226,000			7,172,000			7,962,000
Other real estate owned		8,859,000			9,531,000			9,714,000
Foreclosed assets		85,000			49,000			614,000
Accrued interest receivable		1,602,000			1,586,000			1,326,000
Deferred income taxes		1,729,000			1,663,000			1,804,000
Other assets		1,609,000			1,584,000			1,328,000

Total Assets	$	412,222,000		$	384,947,000		$	398,192,000

Liabilities:
Deposits:
Noninterest-bearing demand	$	58,313,000		$	53,548,000		$	53,609,000
Interest-bearing demand		119,997,000			127,455,000			121,904,000
Savings		15,533,000			14,611,000			14,160,000
Time certificates, $100,000 and over		70,269,000			50,990,000			56,403,000
Other time certificates		77,199,000			61,240,000			57,437,000

Total deposits		341,311,000			307,844,000			303,513,000
Short-term funds borrowed		21,385,000			22,645,000			41,075,000
Long-term debt		11,671,000			18,354,000			16,981,000
Trust preferred securities		—			9,200,000			9,200,000
Subordinated debentures		9,485,000			—			—
Accrued interest payable		592,000			510,000			521,000
Other liabilities		3,804,000			3,534,000			3,730,000

Total Liabilities	$	388,248,000		$	362,087,000		$	375,020,000

Shareholders’ 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			3,670,000
Common 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			2,000
Additional paid-in capital, common stock		11,282,000			11,282,000			11,282,000
Retained earnings		8,674,000			8,052,000			7,975,000
Accumulated other comprehensive income (loss), net		370,000			(146,000	)		243,000

Total Shareholders’ Equity		23,974,000			22,860,000			23,172,000

Total Liabilities and Shareholders’ Equity	$	412,222,000		$	384,947,000		$	398,192,000

See accompanying notes to unaudited consolidated financial statements

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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		$	15,807,000
Interest on investment securities available for sale
Taxable		422,000			319,000			1,215,000			1,055,000
Tax exempt		229,000			159,000			600,000			440,000
Dividends		47,000			39,000			130,000			110,000
Interest on federal funds sold		2,000			2,000			6,000			41,000

Total interest income		5,942,000			5,781,000			17,409,000			17,453,000

Interest Expense:
Interest on interest-bearing demand deposits		326,000			312,000			859,000			986,000
Interest on savings		10,000			8,000			27,000			42,000
Interest on time certificates of deposit $100,000 & more		503,000			392,000			1,350,000			1,364,000
Interest on time certificates of deposit under $100,000		475,000			462,000			1,299,000			1,551,000

Total deposit interest expense		1,314,000			1,174,000			3,535,000			3,943,000

Interest on short-term borrowing		65,000			67,000			227,000			198,000
Interest on long-term debt		175,000			227,000			554,000			677,000
Interest on trust preferred securities		—			275,000			—			825,000
Interest on subordinated debt		275,000			—			824,000			—

Total interest expense		1,829,000			1,743,000			5,140,000			5,643,000

Net Interest Income		4,113,000			4,038,000			12,269,000			11,810,000
Provision for loan losses		644,000			557,000			1,047,000			1,405,000

Net Interest Income After Provision for Loan Losses		3,469,000			3,481,000			11,222,000			10,405,000
Noninterest Income:
Service charges and customer service fees		589,000			501,000			1,788,000			1,429,000
Gain on sale of securities available for sale		10,000			—			217,000			54,000
Mortgage referral fees		113,000			269,000			398,000			863,000
Other		317,000			106,000			624,000			317,000

Total Noninterest Income		1,029,000			876,000			3,027,000			2,663,000

Noninterest Expense:
Salaries and employee benefits		2,383,000			2,367,000			6,953,000			7,031,000
Occupancy expense		390,000			447,000			1,236,000			1,225,000
Furniture and equipment		205,000			202,000			594,000			642,000
Data processing		206,000			211,000			607,000			585,000
Marketing		123,000			130,000			447,000			380,000
Printing and supplies		74,000			44,000			208,000			193,000
Loan and collection		59,000			128,000			276,000			259,000
Other real estate — Heritage Place		127,000			109,000			408,000			200,000
Loss (gain) on sale of OREO and other foreclosed assets		(74,000	)		159,000			(40,000	)		279,000
Other		647,000			525,000			1,926,000			1,377,000

Total Noninterest Expense		4,140,000			4,322,000			12,615,000			12,171,000

Income Before Income Taxes		358,000			35,000			1,634,000			897,000
Provision for income taxes (credit)		30,000			(102,000	)		310,000			80,000

Net Income	$	328,000		$	137,000		$	1,324,000		$	817,000

Comprehensive 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		$	176,000

Average Common Shares Outstanding		1,887,369			1,747,271			1,887,369			1,692,820
Diluted Average Common Shares Outstanding		1,897,869			1,757,771			1,897,869			1,703,320
Per Share Data
Basic earnings	$	0.15		$	0.06		$	0.64		$	0.42
Diluted earnings	$	0.15		$	0.06		$	0.64		$	0.41
Dividends paid on common stock	$	0.27		$	0.00		$	0.27		$	0.00

See accompanying notes to unaudited consolidated financial statements

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FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY


									Accumulated
									Other
	Preferred			Common		Retained			Comprehensive
	Stock			Stock		Earnings			Income, Net			Total
	(unaudited)
Balance, December 31, 2002	$	3,670,000		$	8,523,000	$	7,348,000		$	495,000		$	20,036,000
Sale of Common Stock					2,761,000								2,761,000
Net income for the period							817,000						817,000
Net 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	)	$	22,860,000

Balance, December 31, 2003	$	3,670,000		$	11,284,000	$	7,975,000		$	243,000		$	23,172,000
Redemption of Preferred Stock		(24,000	)										(24,000	)
Net income for the period							1,324,000						1,324,000
Net change in realized gain on securities available for sale, net										127,000			127,000
Dividends 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

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FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS


	For the nine months
	ended September 30,
	2004			2003
	(unaudited)
Cash Flows from Operating Activities:
Net income	$	1,324,000		$	817,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment		719,000			776,000
Amortization of investment securities premium, net		239,000			349,000
Investment security gains, net		(217,000	)		(54,000	)
Provision for loan losses		1,047,000			1,405,000
Loss on sale of OREO and foreclosed assets		144,000			350,000
Net 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			250,000

Net Cash Provided by Operating Activities		2,865,000			3,149,000

Cash Flows from Investing Activities:
Proceeds from sale of securities available-for-sale		19,056,000			6,796,000
Proceeds from maturities, payments and calls of securities available-for-sale		4,542,000			26,060,000
Purchases 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			3,772,000
Proceeds from sale of foreclosed assets		518,000			69,000

Net 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	)		10,145,000
Payments 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		—			2,761,000
Dividends 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			36,642,000

Cash and due from banks at End of Period	$	12,860,000		$	17,537,000

Supplemental 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		$	5,576,000
Supplemental Disclosure of Cash Flow Activity:
Cash paid for interest expense	$	5,069,000		$	6,015,000
Cash paid for Income taxes	$	380,000		$	112,000

See accompanying notes to unaudited consolidated financial statements

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Notes to Unaudited Consolidated Financial Statements

Note 1: General Summary of Significant Accounting Policies

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and which, in the opinion of management, are necessary for a fair presentation of the results for the interim period presented. The interim results for the three 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:

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	For the three months				For the nine months
	ended September 30,				ended September 30,
	2004		2003		2004		2003
Numerator:
Net income	$	328,000	$	137,000	$	1,324,000	$	817,000
Less preferred stock dividends		40,000		36,000		112,000		113,000

Net income applicable to common stock	$	288,000	$	101,000	$	1,212,000	$	704,000

Denominator:
Average number of common shares outstanding used to calculate basic earnings per common share		1,887,000		1,747,000		1,887,000		1,692,000

Effect of dilutive convertible preferred stock		11,000		11,000		11,000		11,000
Average number of common shares used to calculate diluted earnings per common share		1,898,000		1,758,000		1,898,000		1,703,000

Basic earnings per common share	$	0.15	$	0.06	$	0.64	$	0.42

Diluted earnings per common share	$	0.15	$	0.06	$	0.64	$	0.41

Dividends 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.

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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.

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FRONT RANGE CAPITAL CORPORATION AND SUBSIDIARIES
Financial Summary

(unaudited)


	Three months ended						Nine months ended
	September 30,						September 30,
	2004			2003			2004			2003
Net interest income (FTE) *		$4,257,000		$	4,140,000		$	12,646,000		$	12,094,000
Provision for loan losses		(644,000	)		(557,000	)		(1,047,000	)		(1,405,000	)
Noninterest income		1,029,000			876,000			3,027,000			2,663,000
Noninterest 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

Average common shares outstanding		1,887,369			1,747,271			1,887,369			1,692,820
Diluted average common shares outstanding		1,897,869			1,757,771			1,897,869			1,703,320
Common shares outstanding at period end		1,887,369			1,887,369			1,887,369			1,887,369
As Reported:
Basic earnings per common share	$	0.15		$	0.06		$	0.64		$	0.42
Diluted earnings per common share	$	0.15		$	0.06		$	0.64		$	0.41
Return 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		$	376,765,000
Earning assets		360,901,000			329,413,000			354,235,000			336,309,000
Total loans		289,532,000			273,376,000			286,826,000			274,934,000
Total deposits		337,325,000			304,452,000			320,931,000			309,828,000
Shareholders’ equity		23,290,000			22,200,000			23,461,000			21,719,000
Balances at Period End:
Total assets							$	412,222,000		$	384,947,000
Earning assets								370,664,000			336,600,000
Total loans								294,406,000			273,577,000
Total deposits								341,311,000			307,844,000
Shareholders’ equity								23,974,000			22,860,000
Financial Ratios at Period End:
Allowance for loan losses to loans								0.99	%		0.94	%
Book value per common share							$	10.54		$	10.08
Equity 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 -

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 ended
	September 30,						September 30,
	2004			2003			2004			2003
Net interest income (FTE)	$	4,257,000		$	4,140,000		$	12,646,000		$	12,094,000
Provision for loan losses		(644,000	)		(557,000	)		(1,047,000	)		(1,405,000	)
Noninterest income		1,029,000			876,000			3,027,000			2,663,000
Noninterest 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-

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 ended
	September 30,						September 30,
	2004			2003			2004			2003
Interest income	$	5,942,000		$	5,781,000		$	17,409,000		$	17,453,000
Interest expense		(1,829,000	)		(1,743,000	)		(5,140,000	)		(5,643,000	)
FTE adjustment		144,000			102,000			377,000			284,000

Net interest income (FTE)	$	4,257,000		$	4,140,000		$	12,646,000		$	12,094,000

Average earning assets	$	360,901,000		$	329,413,000		$	354,235,000		$	336,309,000
Net 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-

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-


	Three months ended						Nine months ended
	September 30,						September 30,
	2004			2003			2004			2003
Yield 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-


	For the three months ended
	September 30, 2004								September 30, 2003
	(Dollars in thousands)
				Interest		Rates						Interest		Rates
	Average			Income/		Earned/			Average			Income/		Earned/
	Balance			Expense		Paid			Balance			Expense		Paid
Assets:
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								43,515

Total assets	$	402,552		$	6,086				$	380,538		$	5,883

Liabilities 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								49,271
Other liabilities		3,945								3,584
Shareholders’ equity		23,290								21,227

Total liabilities and shareholders’ equity	$	402,552							$	380,538

Net 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-


	For the nine months ended
	September 30, 2004								September 30, 2003
	(Dollars in thousands)
				Interest		Rates						Interest		Rates
	Average			Income/		Earned/			Average			Income/		Earned/
	Balance			Expense		Paid			Balance			Expense		Paid
Assets:
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								43,468

Total assets	$	395,961		$	17,786				$	376,765		$	17,737

Liabilities 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								47,678
Other liabilities		4,130								3,898
Shareholders’ equity		23,461								20,746

Total liabilities and shareholders’ equity	$	395,961							$	376,765

Net 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-


	Three months ended September 30, 2004
	compared with three months
	ended September 30, 2003
	Volume			Rate			Total
Increase (decrease) in interest income:
Loans	$	257,000		$	(276,000	)	$	(19,000	)
Investments — taxable		1,000			110,000			111,000
Investments — nontaxable		152,000			(41,000	)		111,000
Federal funds sold & due from banks		—			—			—

Total earning assets		410,000			(207,000	)		203,000

Increase (decrease) in interest expense:
Interest-bearing demand deposits		(6,000	)		20,000			14,000
Savings deposits		1,000			1,000			2,000
Time deposits		178,000			(54,000	)		124,000
Federal 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	)		86,000

Increase (decrease) in net interest income	$	313,000		$	(196,000	)	$	117,000


	Nine months ended September 30, 2004
	compared with nine months
	ended September 30, 2003
	Volume			Rate			Total
Increase (decrease) in interest income:
Loans	$	685,000		$	(1,035,000	)	$	(350,000	)
Investments — taxable		111,000			69,000			180,000
Investments — nontaxable		363,000			(109,000	)		254,000
Federal funds sold & due from banks		(34,000	)		(1,000	)		(35,000	)

Total earning assets		1,125,000			(1,076,000	)		49,000

Increase (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			—			2,000
Other short term borrowings		116,000			(89,000	)		27,000
Long-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-

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 ended
	September 30,				September 30,
	2004		2003		2004		2003
Service charges on deposit accounts	$	589,000	$	501,000	$	1,788,000	$	1,429,000
Gain on sale of investments		10,000		—		217,000		54,000
Mortgage referral fees		113,000		269,000		398,000		863,000
Other noninterest income		317,000		106,000		624,000		317,000

Total 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-

Noninterest Expense

The following table summarizes the components of noninterest expense for the periods indicated.


	Three months ended						Nine months ended
	September 30,						September 30,
	2004			2003			2004			2003
Salaries and employee benefits	$	2,383,000		$	2,367,000		$	6,953,000		$	7,031,000
Occupancy		390,000			447,000			1,236,000			1,225,000
Furniture and Equipment		205,000			202,000			594,000			642,000
Data processing		206,000			211,000			607,000			585,000
Advertising and marketing		123,000			130,000			447,000			380,000
Printing and supplies		74,000			44,000			208,000			193,000
Loan and collection		59,000			128,000			276,000			259,000
Other real estate- Heritage Place		127,000			109,000			408,000			200,000
Net loss (gain) on sale of OREO and other foreclosed assets		(74,000	)		159,000			(40,000	)		279,000
Other		647,000			525,000			1,926,000			1,377,000

Total	$	4,140,000		$	4,322,000		$	12,615,000		$	12,171,000

Average full time equivalent staff		155			150			153			149
Noninterest 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.

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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.

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	At September 30, 2004			At December 31, 2003
	(unaudited)
	(dollars in thousands)
Performing nonaccrual loans	$	462		$	337
Nonperforming, nonaccrual loans		1,682			948

Total nonaccrual loans		2,144			1,285
Loans 90 days past due and still accruing		1,999			19

Total nonperforming loans		4,143			1,304
Other real estate owned		688			1,543
Foreclosed assets		85			614

Total nonperforming assets	$	4,916		$	3,461

Nonperforming 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

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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 ended
	September 30,						September 30,
	2004			2003			2004			2003
Balance, beginning of period	$	2,849		$	2,649		$	2,872		$	2,394
Loan loss provision		644			557			1,047			1,405
Loans charged off		(650	)		(686	)		(1,142	)		(1,375	)
Recoveries of previously charged-off loans		75			47			141			143

Net (charge-offs) recoveries		(575	)		(639	)		(1,001	)		(1,232	)

Balance, end of period	$	2,918		$	2,567		$	2,918		$	2,567

Allowance 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 Well
	At September 30,						At			Minimum			Capitalized Under
							December 31,			Regulatory			Prompt Corrective
	2004			2003			2003			Requirement			Action Provisions
Tier 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	%

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Off-Balance Sheet Item

The Company is a party to credit related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, stand-by letters of credit and commercial letters of credit. The Company has not entered into any contracts for financial derivative instruments such as futures, swaps, options, etc. Loan commitments increased $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

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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.

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PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

Due to the nature of the banking business, the Bank is at times party to various legal actions. All such actions are of a routine nature and arise in the normal course of business of the Bank 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,

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$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.

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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.		Description
3.1*		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 Corporation
4.1*		Form of Indenture by and between Front Range Capital Corporation and Wilmington Trust Company
4.2*		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 restated
4.4*		Trust Agreement between Front Range Capital Corporation, Wilmington Trust Company and the Administrative Trustees named therein
4.5*		Form of Amended and Restated Trust Agreement between Front Range Capital Corporation and Wilmington Trust Company and the Administrative Trustees named therein
4.6*		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 Company
4.8*		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 West
10.3*		Amendment and Restatement of Executive Retirement Plan of Heritage Bank
10.4*		Indexed Salary Continuation Plan of Heritage Bank
10.5*		Flexible Premium Life Insurance Endorsement Method Split Dollar Plan Agreement
31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1		Section 1350 Certification of Chief Executive Officer
32.2		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

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INDEX TO EXHIBITS


Exhibit No.		Description
3.1*		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 Corporation
4.1*		Form of Indenture by and between Front Range Capital Corporation and Wilmington Trust Company
4.2*		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 restated
4.4*		Trust Agreement between Front Range Capital Corporation, Wilmington Trust Company and the Administrative Trustees named therein
4.5*		Form of Amended and Restated Trust Agreement between Front Range Capital Corporation and Wilmington Trust Company and the Administrative Trustees named therein
4.6*		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 Company
4.8*		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 West
10.3*		Amendment and Restatement of Executive Retirement Plan of Heritage Bank
10.4*		Indexed Salary Continuation Plan of Heritage Bank
10.5*		Flexible Premium Life Insurance Endorsement Method Split Dollar Plan Agreement
31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1		Section 1350 Certification of Chief Executive Officer
32.2		Section 1350 Certification of Chief Financial Officer


	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. Voss

		Alice M. Voss Chief Financial Officer (Principal Financial and Accounting Officer)

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	Page
FORWARD-LOOKING STATEMENTS		1

PART I — FINANCIAL INFORMATION		2

Item 1. Unaudited Consolidated Financial Statements		2

Notes to Unaudited Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		10

Item 3. Quantitative and Qualitative Disclosures about Market Risk		22

Item 4. Controls and Procedures		23

PART II — OTHER INFORMATION		25

Item 1 - Legal Proceedings		25

Item 5 - Other Information		25

Item 6 - Exhibits and Reports on Form 8-K		27

SIGNATURES		28
Rule 13a-14(a)/15d-14(a) Certification of CEO
Rule 13a-14(a)/15d-14(a) Certification of CFO
Section 1350 Certification of CEO
Section 1350 Certification of CFO

•		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.

*		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