UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

þ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2004
Commission File Number 33-40028

Front Range Capital Corporation

Registrant’s telephone number, including area code: (303) 926-0300
Securities registered pursuant to Section 12(b) of the Exchange Act: See below

Securities registered pursuant to Section 12(g) of the Act: None

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 periods that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to the Form 10-K. þ

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

The aggregate market value of the voting and non-voting common stock, including common stock and stock convertible into common stock, held by non-affiliates of the Registrant, as of March 20, 2005 was approximately $17,821,958. This computation excludes a total of 577,724 shares which are beneficially owned by the officers and directors of Registrant who may be deemed to be the affiliates of Registrant under applicable rules of the Securities and Exchange Commission.

The number of shares outstanding of Registrant’s classes of common stock, as of March 20, 2005, was 1,887,369 shares of Common Stock, $0.001 par value, which includes 1,849,264 shares of Registrant’s Class A voting Common Stock and 38,105 shares of Registrant’s Class B Non-Voting Common Stock.

The following documents are incorporated herein by reference into the parts of Form 10-K indicated: None.

TABLE OF CONTENTS

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FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 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. Actual results could differ materially from those projected in the forward-looking statements as a result of the risks and uncertainties set forth in this report, and other reports and documents that the Company files with the Securities and Exchange Commission. The information set forth is not a guarantee of future performance, operating results or financial condition. 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. 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:

	•	The strength of the United States and Colorado economies which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Company’s assets.
	•	The economic impact of the war in Iraq.
	•	The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters.
	•	The effects of changes in interest rates (including the effects of changes in the rate of prepayments of the Company’s assets) and the policies of the Board of Governors of the Federal Reserve System.
	•	The ability of the Company to effectively compete with other financial institutions.
	•	The ability of the Company to obtain new customers and to retain existing customers.
	•	Technological changes implemented by the Company and by other parties which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers.
	•	The ability of the Company to develop and maintain secure and reliable electronic systems.
	•	The ability of the Company to retain key executives and employees and the difficulty that the Company may experience in replacing key executives and employees in an effective manner.
	•	Consumer spending and saving habits which may change in a manner that affects the Company’s business adversely.
	•	The costs, effects and outcomes of existing or future litigation.
	•	Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies, the Public Company Accounting Oversight Board and the Financial Accounting Standards Board.
	•	The ability of the Company to manage the risks associated with the foregoing as well as anticipated.

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These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including other factors that could materially affect the Company’s financial results, is included in the Company’s filings with the Securities and Exchange Commission.

PART I

ITEM 1. BUSINESS

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”). The Bank has 13 full-service branches in the Denver-Boulder metropolitan area and plans to open one additional branch in 2006. The Bank also offers investment services through its investment division, Heritage Investments, and mortgage loans through its mortgage division, Heritage Bank Mortgage Division.

Along with its subsidiary business trust, Front Range Capital Trust I (the “Trust”), the Company filed a Registration Statement on Form SB-2 with the Securities and Exchange Commission (the “Commission”) on June 23, 2000, which became effective December 21, 2000, for the sale of up to $15 million of the Trust’s 11% Cumulative Company Obligated Mandatorily Redeemable Preferred Securities (“Trust Preferred Securities”). The Trust Preferred Securities are listed on the American Stock Exchange. The Company’s common stock is not publicly traded or registered with the Commission.

History of Provision of Banking Services

The Company acquired the Bank, then operating under the name Lafayette First Industrial Bank, in March 1985. After the acquisition, the Company converted Lafayette First into a state-chartered commercial bank named Bank VII. In 1990 Robert L. and Claudia A. Beauprez acquired a significant ownership interest in the Company and thereupon instituted significant changes in order to enable it to more effectively serve the needs of local small to medium-sized businesses and individual customers. To reflect these changes, the name of the Bank was changed in 1991 to Lafayette State Bank. Since 1990 the Bank has enjoyed steady growth in deposits, commercial and consumer loans and other assets.

The Bank began its geographic expansion in 1995 with the establishment of branches in Boulder and Louisville. Additional branches have since opened in Erie in 1997; Broomfield, Denver and Louisville (Main Street) in 1998; Longmont in 1999; downtown Boulder, Lafayette (95th Street) and Niwot in 2000; north Denver (38th & York Streets) in 2002 and Firestone in 2004. A second branch in Longmont is anticipated to open in the second half of 2006. This geographic expansion gives the Company a significant presence throughout the diverse and growing economic and population base in the Denver-Boulder metropolitan area. In 1998 the Bank changed its name to Heritage Bank to better reflect its expanding geographic presence.

General Banking Services and Strategies

The Company operates under a community banking philosophy. Experienced officers and staff offer customers, including local residents and small to medium-sized businesses, a variety of traditional loan and deposit products. General business conditions and the downturn in the economy in recent years have impacted the overall economic climate in Colorado, including increased real estate vacancy rates, bankruptcies and loss of jobs. Nevertheless, the Denver-Boulder metropolitan area continues to be a viable market, enjoying the potential for strong overall economic growth such as the growth the area

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experienced during the 1990s and 2000, an expanding, well-educated population and an array of diverse industries. The Company has focused on the following strategies to achieve its objectives:

Emphasizing community banking relationships and a strong customer service culture. The Company enjoys an excellent reputation for its strong service culture. Its officers and staff are dedicated to providing responsive, individualized service to its business and individual customers. Board members, branch presidents, branch managers and officers are encouraged to participate in civic and public service affairs in their communities. As a result of this community interaction, the Company is better able to understand the specific needs of local customers and provide the responsiveness to local concerns expected of a community bank. Banking offices are designed to be conveniently located and to fit in aesthetically with their surroundings. The management team has experienced very little management turnover in recent years, which promotes a continuity of service to the Bank’s customers.

Expanding market share and increasing efficiency through internal growth. The Company has grown significantly through branching activities, having opened five new branches in the past five years and planning to open one more branch in 2006. The Company believes that its current locations provide it with the necessary platform to expand its services within its existing market area and that it has the infrastructure and systems in place to accommodate continued expansion and to absorb many of the overhead costs incurred in the growth of its branch network. The Company will continue to look for appropriate growth opportunities by opening additional branches within its existing markets or new markets.

Enhancing use of technology to provide competitive products and services. Use of advanced technology also allows the Bank to offer its customers the ability to bank through their personal computer from their home or business, giving customers the flexibility of monitoring their loan and deposit account activity and conducting banking transactions 24 hours a day. Telephone access enables customers to receive real-time account balances, deposit status, checks paid, withdrawals made, loan status, loan payments due and other information. In addition, customers can access their accounts at ATM locations worldwide through agreements with other banks and ATM networks.

Maintaining strong asset quality. As a result of its disciplined credit underwriting and loan administration, the Company has maintained good asset quality despite the rapid expansion of its loan portfolio. Total assets grew from $5.6 million at December 31, 1990 to $420.4 million at December 31, 2004. Over this same period, total loans (net of unearned income) increased from $3.7 million to $290.0 million and total deposits have risen from $4.9 million to $344.2 million. Over the past two calendar years, total assets have grown from $387.6 million at December 31, 2002 to $420.4 million at December 31, 2004, total loans increased from $268.5 million to $290.0 million and total deposits rose from $323.1 million to $344.2 million. Despite this growth, the Company’s ratio of nonperforming assets to total assets at December 31, 2004 was 1.6%. The Company intends to continue to maintain sound asset quality and adhere to the policies and practices that contribute to this result.

Lending Activities

The Bank provides a wide range of the usual and customary commercial and consumer banking products and services including commercial, construction, real estate and consumer loans. The Bank does not offer trust services or international banking services. The Bank’s primary market is small- to medium-sized businesses and consumers in Boulder County and the Denver metropolitan area.

The principal economic risks associated with the lending activities of the Bank are the creditworthiness of any proposed borrower, a borrower’s ability to repay loans and the value of collateral securing any given loan. General factors that affect a commercial or consumer borrower’s ability to repay loans include interest, inflation and employment rates, as well as other factors affecting a particular borrower’s assets,

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such as employment, cash flows and other financial obligations. In many cases, these customers are less able to withstand competitive, economic and financial pressures than are larger borrowers. During periods of economic weakness, these businesses and individuals may become more adversely affected than larger entities, and may cause increased levels of non-accrual loans, loan charge-offs, foreclosures and higher provisions for loan losses.

The Bank’s lending activities comprise five principal lending areas: real estate-construction, real estate-commercial, real estate-residential, commercial and consumer. Although the Bank’s business is not seasonal and does not depend upon one or a few major customers, a substantial percentage of the Bank’s loans are secured by real estate. At December 31, 2004, approximately 86.6% of the Bank’s total loans were secured by real estate, compared to 85.4% as of December 31, 2003. As a result, risk of nonpayment or default may not be well-spread across diversified borrowing groups. In addition, a general downturn in the Colorado economy that impairs the value of real estate as collateral can increase loan losses and impair liquidity.

Commercial loans are generally secured by business assets, including equipment and real estate. Other commercial loans may be secured by accounts receivable and inventory. Consumer loans are sometimes unsecured, but also may be secured by personal assets such as vehicles. Generally, an economic downturn, such as the recessionary forces that impacted the national, regional and Colorado economies in recent years, can increase the risk of nonpayment, default and foreclosure of collateral securing loans. Consumer loans are subject to a greater risk of personal bankruptcies during less prosperous economic times.

The Bank’s disciplined credit underwriting and loan administration and attention to maintaining sound asset quality is one of the ways the Bank tries to mitigate the inherent risks of lending. As another mitigating factor, the Bank’s loan policy permits the purchase and sale of loans by participation in order to manage assets and liabilities and diversify risk. For a more complete discussion of the Bank’s lending policies and efforts to mitigate risk, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations -Loan Portfolio.”

Other Activities

In addition to the banking services referred to above, the Company formed the Trust, a special purpose, wholly-owned financing subsidiary Delaware business trust, on June 23, 2000. The Trust was formed for the purpose of issuing 11% Cumulative Trust Preferred Securities (“Trust Preferred Securities”) in a public offering on December 28, 2000 pursuant to a Registration Statement on Form SB-2. The Trust is authorized only to issue the Trust Preferred Securities and to invest the proceeds in 11% Junior Subordinated Debentures of the Company, issued concurrently with the Trust’s issuance of the Trust Preferred Securities. The Trust conducts no other business. In the future, the Company and the Bank may engage in other businesses either directly or indirectly through subsidiaries acquired or formed, subject to regulatory constraints. See “Regulation and Supervision.”

On May 16, 2001, the Board of Directors created Heritage Investments as a separate division of the Bank to diversify the Bank’s business to include offering securities and fixed and variable annuity products to its customers. These products are offered through the Bank’s relationship with Financial Network Investment Corporation., a broker-dealer registered in 50 states, including Colorado, and a member of the NASD and SIPC. Heritage Investments offers a wide variety of investment products, including mutual funds, life insurance, tax-deferred annuities, tax-free municipal bonds, disability insurance, stocks and bonds and long-term care insurance. In addition, Heritage Investments offers investment services including advising on retirement, education, risk management, estates, small business and employee benefits strategies.

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Employees

As of March 20, 2005, the Company employed 166 persons on a full-time equivalent basis and a total of 175 full-time and part-time employees. The Company is not a party to any collective bargaining agreement and has good relations with its employees. The Company provides customary insurance benefits to its employees. None of the Company’s nor the Bank’s officers is employed pursuant to an employment contract.

Competition

The banking business is highly competitive in the Company’s primary markets, which are the Denver-Boulder-Longmont triangle and the north Denver Metropolitan area. Consolidation in the financial services industry has reduced the number of independent banks. The Bank competes with other commercial banks, savings banks, savings and loan associations, credit unions, finance companies, insurance companies, asset-based non-bank lenders and certain other non-financial institutions. Some of the large major commercial banks are able to finance wide-ranging advertising campaigns and allocate their investment assets to regions of high yield and demand. By virtue of their greater total capitalization, such institutions have substantially higher lending limits and financial resources than does the Bank.

The Bank also competes with other non-bank financial markets for funds. Yields on corporate and government debt securities and other commercial paper may be higher than on deposits and therefore affect the ability of commercial banks to attract and hold deposits. Commercial banks also compete for available funds with money market instruments and mutual funds. During past periods of high interest rates, many funds have provided substantial competition to banks for deposits and they may continue to do so in the future. In periods of high stock market growth, mutual funds have become a major source of competition for savings dollars.

In addition, under the Gramm-Leach-Bliley Act, securities firms and insurance companies that elect to become financial holding companies may acquire banks and other financial institutions. These financial holding companies may offer banking, insurance and securities brokerage products which could significantly change the competitive environment in which the Company operates. In addition, other federal legislation has had the effect of easing membership limits on credit unions and increasing the ability of credit unions to compete with the Bank for deposits and loans in the communities the Bank serves.

Nevertheless, the Bank has been able to effectively distinguish itself as a community bank and compete by emphasizing customer service, technology and responsive decision-making by establishing long-term customer relationships and loyalty and by providing products and services designed to meet the specific needs of customers. The Company believes its competitive strengths, including its reputation for developing and continuing banking relationships, responsiveness to customer needs, individualized customer service and maintenance of skilled and resourceful personnel will enable it to continue to successfully compete in the communities it serves.

Regulation and Supervision

Bank holding companies and banks are regulated extensively under both federal and state law. The following information describes some but not all of the applicable statutory and regulatory provisions, and is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable law or regulation may have a material effect on the business of the Company and the Bank, including increasing the cost of doing business, limiting permissible activities or increasing competition.

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          i. Front Range Capital Corporation

As a registered bank holding company under the BHCA, the Company is subject to the supervision, regulation and examination by the Board of Governors of the Federal Reserve System (“Federal Reserve”). The BHCA requires the Company to file reports with the Federal Reserve and to provide additional requested information.

Restrictions on Dividends. Bank holding companies may pay cash dividends on common stock only if prospective earnings retention is consistent with the organization’s expected capital needs, asset quality and financial condition. Payment of cash dividends also should not impose undue pressure on the capital of subsidiary banks or undermine the bank holding company’s ability to serve as a source of strength to its banking subsidiaries.

Holding Company Activities and Financial Modernization. Bank holding companies must receive the approval of the Federal Reserve before they may acquire all or substantially all of the assets of any bank or ownership or control of more than five percent of the voting shares of any bank. With certain limited exceptions, bank holding companies and banks are prohibited from acquiring direct or indirect ownership or control of any voting shares of any company which is not a bank or from engaging in any activities other than those of banking, managing or controlling banks or furnishing services to its subsidiaries. In addition, bank holding companies are restricted in the underwriting and public sale of securities.

An exception to these prohibitions allows the acquisition of companies whose activities the Federal Reserve has found to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the activities that have been determined by regulation to be closely related to banking are making or servicing loans, performing certain data processing services, acting as an investment or financial advisor to certain investment trusts and investment companies, and providing securities brokerage services.

The Gramm-Leach-Bliley Act (“GLB”) eliminated the barriers to affiliations among banks, securities firms, insurance companies and other financial service providers and permits bank holding companies to become financial holding companies and join with securities firms and insurance companies and engage in other activities that are financial in nature without Federal Reserve approval. GLB effectively repealed certain depression-era laws which prohibited the affiliation of banks and those other financial services entities under a single holding company. Under GLB, bank holding companies and other types of financial service entities may elect to become financial holding companies. Financial holding companies are permitted to engage in activities considered financial in nature, and other activities that are determined to be incidental or complementary to financial activities and may engage in a broader range of activities than are otherwise permitted for bank holding companies or banks. As a result of the GLB, financial holding companies may offer a variety of financial services, or services incidental or complementary to financial services, including banking, securities underwriting, merchant banking and insurance. These new financial services may also be engaged in by a “financial subsidiary” of a national or state bank, with the exception of insurance or annuity underwriting, insurance company portfolio investments, real estate investments and development, and merchant banking, all of which must be conducted under the financial holding company.

A bank holding company may become a financial holding company if each of its subsidiary banks is well-capitalized, well-managed, and has at least a satisfactory rating under the Community Reinvestment Act of 1977 (“CRA”). Activities that are “financial in nature” include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; and merchant banking activities. Subsidiary banks of a financial holding company must remain well-

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capitalized and well-managed in order to continue to engage in activities that are financial in nature without regulatory actions or restrictions.

The Company is not currently a financial holding company and has no current intention to become a financial holding company. The GLB Act may change the operating environment applicable to the Company and the Bank in substantial and unpredictable ways. For example, while it might allow the Company to enter into various types of business it was prohibited from before GLB it may also substantially increase competition for financial services, both of which could substantially change the competitive landscape in which the Company and the Bank operate.

Safe and Sound Banking Practices. Bank holding companies are not permitted to engage in practices the Federal Reserve considers to be unsafe and unsound. In some circumstances, for example, a holding company is required to give the Federal Reserve prior notice of any redemption or repurchase of its own equity securities. The payment of dividends may also constitute an unsafe or unsound banking practice, if, for example, the dividend payment is inconsistent with capital adequacy guidelines. The Company could be subject to assessment to restore the capital of the Bank should it become impaired. Civil money penalties may also be imposed in some circumstances.

Anti-Tying Restrictions. Bank holding companies and their affiliates are prohibited from tying the provision of certain services, such as extensions of credit, to other nonbanking services offered by a holding company or its affiliates.

Capital Adequacy Requirements. Bank holding companies are subject to the minimum capital requirements of the Federal Reserve. The Federal Reserve has adopted a system using risk-based capital guidelines to evaluate the capital adequacy of bank holding companies. These regulations apply on a consolidated basis to bank holding companies with assets of $150 million or more. For bank holding companies with less than $150 million in assets, the guidelines apply on a bank-only basis. Since the Company has over $150 million in assets, the guidelines apply on a consolidated basis. The guidelines establish minimum capital standards in relation to assets and off-balance sheet exposures as adjusted for credit risk. In addition, banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions above the minimum supervisory levels. Under the guidelines, specific categories of assets are assigned different risk weights, based generally on their perceived credit risk. These risk weights are multiplied by corresponding asset balances to determine a “risk-weighted” asset base. As a result of these requirements, the growth of the Company’s assets is limited by the amount of its capital. Capital requirements can affect profitability and payment of distributions. In addition, if the Company is unable to increase its assets without violating the capital requirements or is forced to reduce assets, its ability to generate earnings would be impaired. Furthermore, earnings may need to be retained rather than paid as distributions to shareholders.

The guidelines require a minimum total risk-based capital ratio of 8.0%, of which at least 4.0% is required to consist of Tier 1 capital elements. Tier 1 capital generally consists of common equity, minority interests in equity accounts of consolidated subsidiaries and certain perpetual preferred stock (up to 25% of total Tier 1 capital), less intangibles, but does not include unrecognized gains and losses on securities. Tier 2 capital, also known as supplementary capital, includes the allowance for loan losses provided that the allowance does not exceed 1.25% of risk weighted assets; certain perpetual preferred stock and subordinated non-convertible debt and some intermediate perpetual preferred stock. Amounts in excess of these limits may be issued but are not included in the calculation of risk-based capital ratios. As of December 31, 2004, on a consolidated basis, the Company’s ratio of Tier 1 capital to total risk-weighted assets was 7.7% and its ratio of total capital to total risk-weighted assets was 10.5%.

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The Federal Reserve also uses a leverage ratio (Tier 1 capital divided by average total consolidated assets) as an additional tool to evaluate capital adequacy. Certain highly-rated bank holding companies that are not experiencing substantial growth may maintain a minimum leverage ratio of 3.0%, but other bank holding companies are required to maintain a leverage ratio of at least 4.0%. As of December 31, 2004, the Company’s leverage ratio was 6.3%.

Imposition of Liability for Undercapitalized Subsidiaries. Bank regulators are required to take “prompt corrective action” to resolve problems associated with insured depository institutions whose capital declines below certain levels. In the event a depositing institution becomes “undercapitalized,” it must submit a capital restoration plan in which the bank holding company guarantees the subsidiary’s compliance up to a certain specified amount.

Bankruptcy. In the event of a bank holding company’s bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, any deficit under any commitment by the debtor holding company to maintain the capital of an insured depository institution must be cured immediately and will generally have priority over most other unsecured claims.

Securities Laws. The Company’s common stock is not publicly traded, but the Company currently files reports with the Commission under Section 13(a) of the Security Exchange Act of 1934, as amended (the “Exchange Act”), due to the registration of the Subordinated Debt and files annual, quarterly and periodic reports. Copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports are not available on our website at www.heritagebanks.com because they are available free of charge to shareholders by written request to Front Range Capital Corporation, Attn: Alice Voss, 390 Interlocken Crescent, Suite 600, Broomfield, CO 80021. The Company is not required to deliver an annual report to common security holders and does not currently intend to send such an annual report.

Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act was enacted in 2002 to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to securities laws. The Sarbanes-Oxley Act is applicable to all companies with equity securities registered with the Commission or that file reports under the Exchange Act. This Act includes requirements for the composition and activities of audit committees, additional responsibilities regarding financial statements and disclosure of financial and non-financial information for the principal executive and financial officers of companies, new standards for auditors and regulation of auditors and audits and increased disclosure and reporting obligations for reporting companies and their officers and directors. While many of the provisions of the Sarbanes-Oxley Act were immediately effective, other provisions became effective over time. Since the Subordinated Debt is registered with the Commission (although the Company’s common stock is not), the Company is subject to the Sarbanes-Oxley Act.

AMEX. The Subordinated Debt is listed on the American Stock Exchange (“AMEX”). The Company is subject to the listing standards of AMEX, including:

	•	maintaining a majority of independent directors on the Board,
	•	new audit committee requirements, and
	•	publishing and furnishing its annual report to holders of the Subordinated Debt.

          ii. Heritage Bank

The Bank is a Colorado-chartered banking corporation. A member of the Federal Reserve and the FDIC, the Bank is subject to supervision and regulation by the Federal Reserve, the FDIC and the Colorado Division of Banking (the “CDB”). In addition to federal regulations, the CDB may conduct examinations

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of, and requires periodic information about, the financial condition, operations, management and intercompany relationships of the Company and the Bank.

Federal law provides that no state bank or subsidiary of a state bank may engage as principal in any activity not permitted for national banks, unless the state bank complies with applicable capital requirements and the FDIC determines that the activity poses no significant risk to the FDIC’s Bank Insurance Fund. In general, statutory restrictions on the activities of banks are aimed at protecting the safety and soundness of depository institutions.

Restrictions on Transactions with Affiliates and Insiders. The Federal Reserve Act limits transactions between the Bank and the Company and its nonbanking affiliates and also requires certain levels of collateral for loans to affiliated parties. In addition, certain transactions between the Bank and its affiliates must be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with nonaffiliated persons.

Restrictions contained in the Federal Reserve Act and Regulation O promulgated under that Act imposing an aggregate limitation on all loans to directors, executive officers, principal shareholders and their related interests (“Insiders”), apply to all insured institutions, their subsidiaries and holding companies. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions.

Restrictions on Distribution of Subsidiary Bank Dividends and Assets. Certain statutory and regulatory requirements such as capital adequacy requirements serve to limit the amount of dividends that may be paid by a bank. For example, a bank cannot pay a dividend if, after paying the dividend, the bank will be undercapitalized. The Federal Reserve may declare a dividend payment to be unsafe and unsound even though the bank would continue to meet its capital requirements after the dividend. Approval by the Federal Reserve is required if the total of all dividends declared by a state bank exceeds the total of its net profits for the year combined with its retained net profits of the preceding two years.

Examinations. The Federal Reserve and the CDB periodically examine and evaluate the Bank. The Federal Reserve may revalue the assets of the Bank and require that it establish specific reserves to compensate for the difference between the Federal Reserve-determined value and the book value of such assets.

Capital Adequacy Requirements. A state-chartered bank is subject to capital adequacy requirements similar to the capital adequacy requirements of a bank holding company, including the requirement of a total risk-based capital ratio of 8.0%, (4.0% of which is consisting of Tier 1 capital elements). To be categorized as “well capitalized” under prompt corrective action regulations, Tier 1 capital to risk-based assets must be 6%, total capital to risk-based assets must be 10%, and the leverage ratio must be 4%. At December 31, 2004, the Bank’s Tier 1 capital to risk-weighted assets ratio was 9.4%, total capital to risk-weighted assets ratio was 10.5% and its leverage ratio was 7.7%.

Corrective Measures for Capital Deficiencies. The federal banking regulators are required to take “prompt corrective action” with respect to capital-deficient institutions. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) established five tiers of capital adequacy: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” In addition to requiring undercapitalized institutions to submit a capital restoration plan, agency regulations contain broad restrictions on certain activities of undercapitalized institutions including asset growth, acquisitions, branch establishment and expansion into new lines of business. With certain exceptions, an insured depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to control persons if the institution would be undercapitalized after any such distribution or payment.

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As an institution’s capital decreases, the Federal Reserve’s enforcement powers become more severe. A significantly undercapitalized institution is subject to mandated capital-raising activities, restrictions on interest rates paid and transactions with affiliates, removal of management and other restrictions. Critically undercapitalized institutions are subject to appointment of a receiver or conservator. In the event an institution is deemed significantly undercapitalized, it may be required to sell stock, merge, be acquired, restrict transactions with affiliates, restrict interest rates paid on deposits, divest a subsidiary or dismiss officers and directors. If the institution is a bank holding company, it may be prohibited from making capital distributions without Federal Reserve approval and may have to divest a subsidiary. A critically undercapitalized institution is generally prohibited from making payments on subordinated debt and may not, without FDIC approval, enter into a material transaction other than in the ordinary course of business, engage in any covered transaction or pay excessive compensation or bonuses. Banks with risk-based capital and leverage ratios below the required minimums may also be subject to certain administrative actions, including the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing in the event the institution has no tangible capital. No sanctions apply to “well” or “adequately” capitalized institutions. The Bank currently is classified as “well capitalized”.

Deposit Insurance Assessments. The Bank’s deposit accounts are insured up to a maximum of $100,000 per depositor by the FDIC. The FDIC issues regulations and generally supervises the operations of its insured banks. This supervision and regulation is intended primarily for the protection of depositors, not shareholders. The Bank must pay assessments to the FDIC for federal deposit insurance protection. The FDIC has adopted a risk-based assessment system whereby FDIC-insured depository institutions pay insurance premiums at rates based on their risk classification. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to the regulators.

Enforcement Powers. The FDIC and the other federal banking agencies have broad enforcement powers, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties and appoint a conservator or receiver if any one or more of a number of circumstances exist, including, without limitation, the fact that the banking institution is undercapitalized and has no reasonable prospect of becoming adequately capitalized; fails to become adequately capitalized when required to do so; fails to submit a timely and acceptable capital restoration plan; or materially fails to implement an accepted capital restoration plan. The Federal Reserve and the CDB also have broad enforcement powers over the Bank, including the power to impose orders, remove officers and directors, impose fines and appoint supervisors and conservators.

Community Reinvestment Act. The CRA and the corresponding regulations are intended to encourage banks to help meet the credit needs of their service area, including low and moderate income neighborhoods, consistent with the safe and sound operations of the banks. These regulations also provide for regulatory assessment of a bank’s record in meeting the needs of its service area when considering applications to establish branches, merger applications and applications to acquire the assets and assume the liabilities of another bank. Federal banking agencies are required to make public a rating of a bank’s performance under the CRA. In the case of a bank holding company, the CRA performance record of the banks involved in the transaction are reviewed in connection with the filing of an application to acquire ownership or control of shares or assets of a bank or to merge with any other bank holding company. An unsatisfactory record can substantially delay or block the transaction.

Privacy. Under the GLB, financial institutions are required to disclose their policies for collecting and protecting confidential information. Customers are able to prevent financial institutions from sharing personal financial information with non-affiliated third parties, exempting third parties that market the institution’s own products and services. In addition, financial institutions are prohibited from disclosing

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consumer account numbers to any nonaffiliated third parties for use in telemarketing, direct mail marketing or electronic mail marketing to consumers.

USA PATRIOT Act. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (“USA PATRIOT”) Act of 2001 was enacted in 2001. The potential impact of the Act on financial institutions is significant and wide ranging. In general, the USA PATRIOT Act prohibits specified financial transactions and account relationships and requires enhanced due diligence and “know your customer” standards for financial institutions dealing with foreign financial institutions and foreign customers. In addition, the Secretary of the Treasury is authorized to adopt rules increasing the cooperation and information sharing between financial institutions, regulators, and law enforcement authorities regarding individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering. Financial institutions complying with these regulations will be not be deemed to have violated the privacy provisions of the GLB discussed above.

Consumer Laws and Regulations. In addition, the Bank is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks, such as the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, and the Fair Housing Act.

          iii. Instability and Regulatory Structure

Various legislation and proposals to overhaul the bank regulatory system and limit the investments that a depository institution may make with insured funds, is from time to time introduced in Congress. Such legislation may change banking statutes and the environment in which the Company and the Bank operate. The ultimate effect that such potential legislation, if enacted, or implementing regulations, would have upon the Company’s or the Bank’s financial condition or results of operations cannot be predicted.

          iv. Effect on Economic Environment

The policies of regulatory authorities, including the monetary policy of the Federal Reserve, have a significant effect on the operating results of bank holding companies and their subsidiaries. Among the means available to the Federal Reserve to affect the money supply are open market operations in U.S. government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid for deposits.

ITEM 2. PROPERTIES

The Company conducts business at 13 full-service branch locations, including branches in Boulder, Longmont, Lafayette, Louisville, Broomfield, Denver, Erie, Niwot and Firestone, Colorado. The Company owns six of the facilities that house Bank branches and leases the remaining facilities under various terms. In the opinion of management, each of the properties owned by the Company is adequately covered by insurance. The following table sets forth certain information regarding the facilities:

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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 $6,371,000. 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 completed. 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 December 31, 2004, the Bank had capitalized total costs of $9,953,000 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 Balance Sheet as presented in this report. In addition, the Bank has incurred related expenses of $532,000 for the year ended December 31, 2004, largely related to holding the property. Of this amount, $128,000 was accrued for real estate taxes and $379,000 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 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 dated March 7, 2005, 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

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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.

In March 2005 the Bank entered into a contract to purchase and paid a non-refundable earnest money deposit of $10,000 to acquire approximately one acre of undeveloped property in Erie, Colorado. The cost of the property is $2.00 per square foot. The total cost is estimated to be $88,000 and will be calculated after approval of the site development plan by the Town of Erie and determination of the size of the site pad. The Bank intends to relocate its existing branch to the new site sometime in the second half of 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 has paid deposits of $110,000 of which $55,000 is refundable until favorable completion of the due diligence process. The Bank intends to build a new branch on this property with an anticipated opening date in the second half of 2006.

ITEM 3. LEGAL PROCEEDINGS

The Company and the Bank are periodically party to or otherwise involved in legal proceedings arising in the normal course of business, such as claims to enforce liens, claims involving the making and servicing of real property loans, and other issues incident to the banking business. Management does not believe that there is any pending or threatened proceeding which, if determined adversely, would have a material effect on the Company’s or the Bank’s business, results of operations or financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of the shareholders during the fourth quarter of 2004.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Common Stock of the Company

There is no established public trading market for the common stock of the Company. 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 $514,000 were paid on July 22, 2004 to holders of record at the close of business on July 8, 2004. This special dividend was the first dividend to be declared on the Company’s common stock. As of March 20, 2005, the common stock, including preferred stock convertible into common stock on a one-to-one basis, was held by 168 holders of record.

Subordinated Debentures and Trust Preferred Securities

In December 2000, the Trust issued 1,000,000 11% Cumulative Trust Preferred Securities (“Trust Preferred Securities”) to the public for $8.00 per share in an aggregate amount of $8,000,000. The Trust Preferred Securities were issued through an underwriting syndicate whose representative was Howe Barnes Investments, Inc. (the “Underwriters”). The Company paid underwriting fees of $.40 per Trust Preferred Security or an aggregate of $400,000. The Trust Preferred Securities were offered and sold to the Underwriters pursuant to a Registration Statement on Form SB-2 in December 2000. In January 2001, the Underwriters exercised their over-allotment option to acquire an additional 150,000 Trust

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Preferred Securities for cash in an aggregate amount of $1,200,000, bringing the aggregate amount of Trust Preferred Securities issued to 1,150,000 and an aggregate amount of proceeds to the Trust of $9,200,000. The aggregate amount of underwriting fees equaled $460,000.

The Trust Preferred Securities are publicly traded and listed on the American Stock Exchange under the trading symbol “FNG.Pr.” The Trust Preferred Securities began trading December 28, 2000 at a price of $8.00 per Trust Preferred Security. The high and low per share closing price of the Trust Preferred Securities for each quarter of 2004 and 2003 as reported by AMEX were as follows:

Quarterly cash distributions are paid as described in the Trust Preferred Securities documents. The Trust Preferred Securities are held in street name by the Depository Trust Company or its nominee, Cede & Co.

Concurrently with the issuance of the Trust Preferred Securities, the Trust issued 35,625 common securities of the Trust to the Company for $8.00 per common security or an aggregate amount of $285,000. The common securities were issued for 11% Junior Subordinated Debentures, described below, in reliance on the registration exemption provided by Section 4(2) of the Securities Act.

Junior Subordinated Debentures

Concurrently with the issuance of the Trust Preferred Securities by the Trust, the Trust invested the proceeds from the issuance of the Subordinated Debt in 11% Junior Subordinated Debentures issued by the Company in the aggregate principal amount of $9,485,000 (“the “Debentures”). The Debentures were registered concurrently with the Trust Preferred Securities pursuant to the Registration Statement. After deducting approximately $400,000 in expenses and the underwriting fee, the Company used the proceeds from the sale of the Debentures to the Trust to repay a revolving line of credit with a balance of $2.4 million and a promissory note in the principal amount of $100,000. In addition, approximately $5.9 million was invested in the Bank in order to finance the opening of new branches, to improve technology and services, to support the Bank’s continued growth and to increase the Bank’s capital to attain or maintain certain levels of capitalization set forth in applicable federal banking regulations.

Preferred Stock

The Company has outstanding 5,000 shares of 1987 Series A 8% noncumulative convertible preferred stock and 5,500 shares of 1988 Series A 8% noncumulative convertible nonvoting preferred stock. Each share is convertible into one share of common stock.

The Company also has outstanding 3,567 shares of 2000 Series B Preferred Stock. Owners are entitled to receive cumulative cash dividends equal to the prime rate multiplied by the purchase price paid of $1,000 per share. Dividends are payable quarterly. The Company redeemed 24 shares on July 1, 2004 and 26 shares on October 1, 2004 at a cost of $1,000 per share or $50,000 in the aggregate.

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Recent Sales of Unregistered Securities

On August 28, 2003, the Company issued 184,120 shares of its Class A Voting Common Stock and 38,105 shares of its Class B Non-Voting Common Stock to one accredited investor. The price was $13.50 per share for aggregate proceeds of $3,000,037.50. The Company received net proceeds of $2,761,105 after issuance costs of $238,710. The Wallach Company, a division of McDonald Investments, served as placement agent for this offering and was paid $180,000 as compensation for its role. The common stock was sold in reliance on the exemptions from registration found in Section 4(2) of the Securities Act and Regulation D promulgated thereunder to accredited investors. The proceeds from the offering were used to increase capital to maintain a “well-capitalized” status under federal banking regulations and support continued growth and other corporate purposes.

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data is derived from the Company’s consolidated financial statements. This data should be read in connection with the Company’s financial statements and the related notes incorporated at Item 8 of this report.

FRONT RANGE CAPITAL CORPORATION
Financial Summary
(in thousands, except per share amounts)

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FTE = Fully Taxable Equivalent

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company’s discussion and analysis of its financial condition and results of operations is intended to provide a better understanding of the significant changes and trends relating to the Company’s financial condition, results of operations, liquidity and interest rate sensitivity. The following discussion should be read in connection with the Company’s audited consolidated financial statements and the related notes incorporated at Item 8 of this report.

Average balances, including 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. Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental tax rate of 37%.

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 of America. 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. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable

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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. The Company’s policy related to the estimate on the allowance for loan losses, can be found in Note 1 to the Company’s audited consolidated financial statements incorporated at Item 8 of this report.

Net Income

Following is a summary of the Company’s net income for the past three years (dollars in thousands, except per share amounts):

Components of Net Income

The Company achieved earnings of $1.1 million in 2004, representing a 36.5% increase from earnings of $776,000 in 2003. Net interest income on a fully tax-equivalent basis for 2004 increased $522,000 (3.2%) compared to 2003. Higher average balances of interest-earning assets increased interest income on a fully tax-equivalent basis by $1.5 million in 2004, while changes in interest rates reduced interest income on a fully tax-equivalent basis by $1.2 million. The loan loss provision was decreased by $189,000 (8.5%), in 2004 but was offset by noninterest expense increasing $219,000 (1.3%) in 2004.

Earnings in 2003 decreased $529,000 or 40.5% from 2002. Net interest income (FTE) grew $1.3 million (8.9%) in 2003. Higher average balances of interest-earning assets increased interest income by $2.4 million that was partially offset by changes in interest rates that reduced interest income by $2.0 million in 2003. The loan loss provision was increased by $1.0 million in 2003 from 2002, and noninterest income increased $737,000 (25.5%) while noninterest expense increased $1.9 million (12.8%).

The Company’s return on average total assets was 0.26% in 2004, compared to 0.20% and 0.39% in 2003 and 2002, respectively. Return on average equity in 2004 was 4.49%, compared to 3.67% in 2003 and 7.04% percent in 2002.

Net Interest Income

The Company’s primary source of revenue is net interest income, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Net interest income (FTE) increased $522,000 (3.2%) from 2003 to $16.9 million in 2004. Net interest income (FTE) increased $1.3 million (8.9%) from 2002 to 2003.

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Following is a summary of the Company’s net interest income for the past three years (dollars in thousands):

Components of Net Interest Income

Interest income (FTE) increased $316,000 (1.3%) from 2003 to 2004, the net effect of higher average balances partially offset by a decrease in average yield. The total yield on interest-earning assets decreased from 7.04% in 2003 to 6.75% in 2004. The average yield on loans decreased 42 basis points to 7.21% during 2004. The decrease in average yield on interest-earning assets reduced interest income (FTE) by $1.0 million, while a $19.5 million (5.8%) increase in average balances of interest-earning assets increased interest income (FTE) by $1.3 million during 2004.

Interest expense decreased $206,000 (2.8%) in 2004 from $7.3 million in 2003, principally due to lower interest rates. The average rate paid on interest-bearing liabilities was 2.22% in 2004, 16 basis points or 6.7% lower than in 2003. The most pronounced declines included rates paid on Certificates of Deposit which decreased from 2.9% to 2.62%. The decrease in average rate paid on interest-bearing liabilities decreased interest expense by $776,000 and changes in the mix of average balances of interest-bearing liabilities increased interest expense by $570,000 in 2004 including an overall increase of $13.4 million (4.4%) in the average balance of interest-bearing liabilities.

Interest income (FTE) increased $345,000 (1.5%) from 2002 to 2003, the net effect of higher average balances partially offset by a decrease in interest rates. Average yields on loans decreased 47 basis points to 7.63% in 2003 from 8.1% in 2002. Overall, the yield on the Company’s interest-earning assets decreased from 7.74% in 2002 to 7.04% in 2003. During 2003, the average balance of loans increased $16.0 million while the average balance of investments increased $19.6 million. The decrease in average yield on interest-earning assets decreased interest income (FTE) by $2.0 million, while a net increase of $34.9 million (11.9%) in average balances of interest-earning assets increased interest income (FTE) $2.4 million during 2003.

Interest expense decreased $989,000 (12.0%) in 2003 partially due to a 65 basis point decrease in the average rate paid on interest-bearing liabilities from 3.03% to 2.38%. The rate paid on federal funds purchased fell 72 basis points to 1.23% in 2003. The average rate paid on savings deposits also fell from 0.70% to 0.37%. Partially offsetting these decreases was a $33.2 million (12.2%) increase in average interest-bearing liabilities from 2002 to 2003.

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Net Interest Margin

Following is a summary of the Company’s net interest margin for the past three years:

Components of Net Interest Margin

The Company’s aggressive reaction to declining market rates throughout 2002, 2003 and 2004 and its delayed increase in rates paid on interest-bearing deposits during the second half of 2004 has allowed it to maintain a relatively stable net interest margin. While the Company was able to reduce the average rate paid on interest-bearing liabilities at approximately the same rate or faster than the average yield on interest-earning assets, and thus maintain its net interest spread, the positive impact of all other net noninterest-bearing funds on net interest margin was reduced due to the lower market rates of interest at which they could be invested.

Summary of Average Balances, Yields/Rates and Interest Differential

The following tables present, for the past three years, 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 (dollars in thousands):

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Summary of Changes in Interest Income and Expense due to Changes in Average Asset and Liability Balances and Yields Earned and Rates Paid

The following table sets forth a summary of the changes in the Company’s interest income and interest expense from changes in average asset and liability balances (volume) and changes in average interest rates for the past three years. The rate/volume variance has been included in the rate variance. Amounts are calculated on a fully taxable equivalent basis (dollars in thousands):

Provision for Loan Losses

In 2004, the Company provided $2.0 million for loan loss provision compared to $2.2 million in 2003. Net loan charge-offs decreased $392,000 (22.3%) to $1.4 million during 2004. Net charge-offs of commercial loans and construction real estate loans decreased $31,000 (4.6%) and $569,000 (93.9%), respectively in 2004, while net charge-offs of residential real estate loans and consumer loans increased $105,000 (24.6%) and $107,000 (109.2%), respectively. The 2004 net charge-offs represented 0.47% of average loans outstanding versus 0.64% in 2003. Nonperforming loans were 1.51% of total loans at December 31, 2004 versus 0.46% at December 31, 2003. The ratio of allowance for loan losses to nonperforming loans was 80.93% at the end of 2004 versus 220.2% at the end of 2003.

In 2003, the Company provided $2.2 million for loan loss provision compared to $1.2 million in 2002. Net loan charge-offs increased $768,000 (77.7%) to $1.8 million during 2003. Net charge-offs of commercial loans and construction real estate loans increased $218,000 (47.6%) and $284,000 (88.2%), respectively in 2003, while net charge-offs of residential real estate loans and consumer loans increased $427,000 (100%) and $12,000 (14.0%), respectively. The 2003 net charge-offs represented 0.64% of average loans outstanding versus 0.38% in 2002. Nonperforming loans were 0.45% of total loans at December 31, 2003 versus 1.40% at December 31, 2002. The ratio of allowance for loan losses to nonperforming loans was 220.2% at the end of 2003 versus 63.45% at the end of 2002.

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Noninterest Income

The following table summarizes the Company’s noninterest income for the past three years (dollars in thousands):

Components of Noninterest Income

Noninterest income decreased $7,000 (0.2%) to $3.6 million in 2004. Service charges on deposit accounts increased $415,000 (21.8%) but was offset by mortgage referral fees decreasing $494,000 (50.0%), due to a general decline in the housing and refinance market.

Noninterest income increased $737,000 (25.5%) to $3.6 million in 2003. The increase was mainly due to mortgage referral fees increasing $278,000 (39.2%), as a result of low long-term interest rates fueling the refinance market.

Securities Transactions

During 2004, the Company realized gains (net) of $248,000 on the sale of securities with market values of $21.6 million. Offsetting this gain, the Company determined they had an “other-than-temporary impairment” on a corporate equity security and recognized a loss of $280,000 on $1,000,000 par value. Also, during 2004 the Company received proceeds from maturities of securities totaling $2.0 million, purchased $49.2 million worth of securities and received $6.4 million in paydowns on collateralized mortgage obligations and other securities.

During 2003, the Company realized gains of $54,000 on the sale of securities with market values of $6.8 million. Also, during 2003 the Company received proceeds from maturities of securities totaling $15.8 million, purchased $48.4 million worth of securities and received $13.6 million in paydowns on collateralized mortgage obligations and other securities.

Noninterest Expense

Salaries and Benefits. Salary and benefit expenses increased $211,000 (2.3%) to $9.4 million in 2004 compared to 2003. Base salaries increased $494,000 (7.8%) to $6.7 million in 2004. The increase in base salaries was mainly due to raises given and the staffing of the new Firestone branch. These results are consistent with the Bank’s strategy of paying competitive salaries and maintaining appropriate staffing levels. Incentive and commission-related expenses decreased $345,000 (38.7%) to $547,000 in 2004 which relates to the decrease in mortgage referral fees. Benefits expense, including retirement, medical and workers’ compensation insurance and taxes, increased $97,000 (5.3%) to $1.9 million during 2004.

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Salary and benefit expenses increased $1.2 million (15.4%) to $9.2 million in 2003 compared to 2002. Base salaries increased $1.2 million (22.8%) to $6.6 million in 2003. The increase in base salaries was mainly due to the Bank expanding its administrative staff in order to better handle the growth in assets, branch locations and employees that the Bank has experienced in the last few years. These results are consistent with the Bank’s strategy of paying competitive salaries and maintaining appropriate staffing levels. Incentive and commission-related expenses increased $168,000 (23.3%) to $893,000 in 2003. Benefits expense, including retirement, medical and workers’ compensation insurance and taxes, increased $408,000 (28.4%) to $1.8 million during 2003.

Other Noninterest Expenses. The following table summarizes the Company’s other noninterest expense for the past three years (dollars in thousands):

Components of Other Noninterest Expense

Other noninterest expenses increased $8,000 (0.1%) from $7,478,000 in 2003 to $7,486,000 in 2004. Professional fees increased $319,000 and net other real estate owned expenses decreased $524,000 from 2003 to 2004.

Other noninterest expenses increased $882,000 (13.4%) to $7.5 million in 2003 from $6.6 million in 2002. Writedown of other real estate owned (OREO) amounted to $361,000, loss on sale of OREO attributed $100,000 and other expenses related to OREO increased $203,000 in 2003. These three items accounted for 75.3% of the increase in noninterest expenses in 2003.

Provision for Taxes

The effective tax rate on income was (4.2%), (14.8%), and 17.7% in 2004, 2003 and 2002, respectively. The effective tax rate was lower than the federal statutory tax rate due to tax-exempt income and non- taxable non-qualified employee retirement plan income. Tax-free income of $912,000, $665,000 and $546,000, respectively, in these years helped to reduce the effective tax rate.

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Financial Ratios

The following table shows the Company’s key financial ratios for the past three years:

Loans

The Company concentrates its lending activities in five principal lending areas: real estate-construction, real estate-commercial, real estate-residential, commercial and consumer. At December 31, 2004, these five categories accounted for approximately 20.4%, 49.0%, 17.3%, 11.1% and 2.2% of the Company’s loan portfolio, respectively, as compared to 21.9%, 45.1%, 18.4%, 12.1% and 2.5%, at December 31, 2003. The shift in the percentages was primarily due to construction loan demand decreasing and an increase in commercial real estate demand. The interest rates charged for the loans made by the Company vary with the degree of risk, the size and maturity of the loans, the borrower’s relationship with the Company and prevailing money market rates indicative of the Company’s cost of funds.

The majority of loans are direct loans made to individuals and small to medium-sized businesses. The Company utilizes local promotional activities and personal contact with customers to compete with other lenders. Loans are made to borrowers whose applications include a sound purpose, a viable repayment source and a repayment plan established at inception. Loans are generally backed by a secondary source of repayment and are often secured by real estate collateral.

At December 31, 2004 loans totaled $290.0 million and reflected a 1.5% ($4.4 million) increase over total loans at the end of 2003. Real estate-commercial loans showed an increase in 2004 (9.9%) whereas the other categories showed decreases. The average loan-to-deposit ratio in 2004 was 88.4% compared to 89.9% in 2003.

At December 31, 2003 loans totaled $285.6 million and reflected a 6.4% ($17.1 million) increase over total loans at the end of 2002. Demand for real estate-construction loans and real estate-commercial loans was strong throughout 2003. Demand for consumer loans and multi-family real estate loans was weak throughout 2003. Loan growth was weaker in 2003 but picked up in the last quarter as the economy started to slowly improve. The average loan-to-deposit ratio in 2003 was 89.9% compared to 96.9% in 2002.

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Loan Portfolio Composite

The following table shows the Company’s loan balances for the past three years:

Nonperforming Assets

Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is generally discontinued either when reasonable doubt exists as to the full, timely collection of interest or principal or when a loan becomes contractually past due by 90 days or more with respect to interest or principal. When loans are 90 days past due, but in management’s judgment are well secured and in the process of collection, they may not be classified as nonaccrual. When a loan is placed on nonaccrual status, all interest previously accrued but not collected 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. The reclassification of loans as nonaccrual does not necessarily reflect management’s judgment as to whether they are collectible.

Interest income on nonaccrual loans which would have been recognized during the year ended December 31, 2004, if all such loans had been current in accordance with their original terms, totaled $104,000. No interest income was actually recognized on these loans in 2004.

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 other real estate owned (“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.

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The following tables show the amount of the Bank’s nonperforming assets net of government guarantees as of the dates indicated:

During 2004, nonperforming assets increased $3.1 million (88.6%) to a total of $6.5 million. During 2004 nonperforming loans increased $3.1 million (236.7%) to $4.4 million, other real estate owned (OREO) increased $588,000 to $2.1 million and foreclosed assets decreased $609,000. The ratio of nonperforming loans to total loans at December 31, 2004 was 1.5% versus 0.5% at the end of 2003. Classifications of nonperforming loans as a percent of the total at the end of 2004 were as follows: secured by real estate construction, 73.6%; real estate commercial, 7.8%; real estate residential, 3.0%; and commercial loans, 15.6%

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During 2003, nonperforming assets decreased $433,000 (11.2%) to a total of $3.4 million. During 2003 nonperforming loans decreased $2.5 million (65.4%) to $1.3 million and other real estate owned (OREO) increased $1.5 million to $1.5 million. The ratio of nonperforming loans to total loans at December 31, 2003 was 0.5% versus 1.4% at the end of 2002. Classifications of nonperforming loans as a percent of the total at the end of 2003 were as follows: secured by real estate construction, 34.8%; real estate residential, 33.6%; commercial loans, 30.3%; and consumer loans, 1.3%.

Allowance for Loan Losses

Credit risk is probable in the business of lending. As a result, the Company maintains an allowance for loan losses to absorb losses which could occur in the Company’s loan portfolio. The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Management has established an allowance for loan losses which it believes is adequate for probable losses in its loan portfolio. Based on an evaluation of the loan portfolio, management presents a review of the allowance for loan losses to the Board of Directors, indicating any change in the allowance since the last review and any recommendations for adjustments to the allowance. In making its evaluation, management considers factors such as the Company’s historical loan loss experience, the amount of nonperforming loans and related collateral, volume, growth and composition of the loan portfolio, current economic conditions that may affect the borrower’s ability to pay and the value of collateral, the evaluation of the loan portfolio through the Company’s internal loan review process and other relevant factors. Charge-offs occur when management deems that loans are uncollectible in whole or in part.

The Company follows a loan review program whereby each loan is graded and assigned a risk grade. The Company subsequently regrades each loan if necessary when new information becomes available. The grading procedure is based on six classifications, ranging from Grade 1, representing no significant risk, up to Grade 6, representing an anticipated 100% loss. Grading guidelines can be influenced by many factors, including the quality of the collateral and evaluation of key financial information of the borrower.

The Company maintains a classified loan list, which includes Grade 3 through Grade 6 loans for the purpose of monitoring its loan portfolio and measuring its risk. Classified loans require more frequent monitoring than non-classified loans. Loans graded 1 and 2 are not included on the classified loan list. Grade 3 loans are designated as “specially mentioned.” While “specially mentioned” loans do not have all the characteristics of “substandard” or “doubtful” loans, they include sufficient weakness to warrant special attention. Loans graded as Grade 4 “substandard” loans are characterized by the borrower’s likely inability to meet present payment terms, increased operating losses or reduced cash flows. Grade 5 “doubtful” loans are similar to substandard loans but have deficient collateral. Grade 6 “loss” loans are loans in the process of being charged-off.

Historically, the Company used that grading process to determine the specific allowance for loan losses for classified loans. However, in 2001 the Company revised its loan loss allocation methodology in order to bring its reserve practices more in line with the regulatory guidance in the Federal Financial Institutions Examination Council (FFIEC) Interagency Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation dated July 2, 2001 (the “Policy Statement”). The Policy Statement encourages specific reserves for “impaired loans” as set forth in FAS 114 and reasonable loss estimates for the remainder of the portfolio in accordance with FAS 5.

Under the revised methodology, the allowance for loan losses for classified loans is based on specific reserves that are determined by estimating loss exposure on Grade 3-6 loans. Loss estimates are typically determined by comparing loan balances with collateral valuations, adjusted for factors such as holding costs and selling expenses. The allowance for loan losses for non-classified loans are determined by a

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formula-based reserve allocation broken down by product line and based on the perceived risk inherent in a given product type. For example, consumer loans are allocated a 1.55% allowance, real estate loans are allocated an allowance between 0.40% and 1.25% and commercial loans are allocated an allowance of 1.25%.

The allowance for loan losses to total loans at December 31, 2004 was 1.23% versus 1.01% at the end of 2003. At December 31, 2002, the allowance for loan losses to total loans was 0.89%.

Based on the current conditions of the loan portfolio, management believes that the $3.6 million allowance for loan losses at December 31, 2004 is adequate to absorb probable losses inherent in the Company’s loan portfolio. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio.

The following table summarizes, for the years indicated, the activity in the allowance for loan losses:

The following tables summarize the allocation of the allowance for loan losses between loan types at December 31, 2004, 2003, and 2002:

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Other Real Estate Owned

The December 31, 2004 balance of other real estate owned (OREO) was $10.3 million versus $9.7 million at December 31, 2003, of which $8.2 million reflected the Company’s ownership of Heritage Place in both 2004 and 2003. Heritage Place is discussed under Item 2 (Properties) of this report. The Company disposed of properties with a value of $1.9 million in 2004. OREO properties consist of a mixture of land, single family residences, and commercial buildings.

Deposits

Deposits at December 31, 2004 were up $40.7 million (13.4%) from the 2003 year-end balances to $344.2 million. The Bank had $5.0 million in State of Colorado funds in time deposits at both December 31, 2004, and December 31, 2003. The process of getting State of Colorado funds is to place a bid for funds at the rate the State determines and then to be awarded the funds by the State. The State awards the funds based on its liquidity needs and the amount of the bid by the institution. Demand noninterest-bearing deposits increased $7.2 million (13.4%) in 2004 to $60.8 million. Time deposits of $100,000 and over increased $19.1 million (33.9%) from 2003 to $75.5 million at December 31, 2004. Time deposits under $100,000 increased by $10.5 million (18.2%) from December 31, 2003 to $67.9 million at December 31, 2004. Demand interest-bearing deposits increased $2.5 million (2.0%) in 2004 to $124.4 million.

Deposits at December 31, 2003 were down $19.6 million (6.1%) from the 2002 year-end balances to $303.5 million. The Bank had $5.0 million in State of Colorado funds in time deposits at December 31, 2003, down from $10.8 million at December 31, 2002. Demand noninterest- bearing deposits increased $4.2 million (8.6%) in 2003 to $53.6 million. Time deposits of $100,000 and over decreased $13.9 million (19.8%) from 2002 to $56.4 million at December 31, 2003. Time deposits under $100,000 decreased by $16.7 million (22.5%) from December 31, 2002 to $57.4 million at December 31, 2003. Demand interest-bearing deposits increased $6.7 million (5.8%) in 2003 to $121.9 million.

Long-Term Debt

During 2004, the Company repaid $5.5 million of long-term debt. In 2003, the Company made principal payments of $1.6 million on long-term debt obligations. See Note 8 to the consolidated financial statements incorporated at Item 8 of this report.

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Equity

See Note 12 and Note 14 in the financial statements incorporated at Item 8 of this report for a discussion of shareholder’s equity and regulatory capital, respectively. Management believes that the Company’s capital is adequate to support anticipated growth, meet the preferred dividend requirements of the Company’s preferred stock and meet the future risk-based capital requirements of the Company.

Market Risk Management

The Company’s asset liability management policy sets the necessary guidelines for managing the volume and mix of assets and other funding sources. In addition, the Company has established a system for monitoring its net interest rate sensitivity position.

Interest rate risk is managed by ALCO, the Bank’s Asset Liability Committee, which is comprised of the Bank’s senior officers and two directors, in accordance with policies approved by the Company’s Board of Directors. The ALCO formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the ALCO considers the impact on earnings, capital levels and general economic conditions.

Interest rate risk management involves the maintenance of an appropriate balance between interest sensitive assets and interest sensitive liabilities to reduce interest rate risk exposure while also providing liquidity to satisfy the cash flow requirements of operations and to meet customers’ fluctuating demands for funds, in terms of loan requests and deposit withdrawals.

Interest-earning assets and interest-bearing liabilities are those which have yields or rates which are subject to change within a future time period due to maturity of the instrument or changes in the rate environment. “GAP” refers to the difference between interest-earning assets and interest-bearing liabilities repricing within given time frames. As a result, major fluctuations in net interest income and net earnings could occur due to imbalances between the amounts of interest-earning assets and interest-bearing liabilities, as well as different repricing characteristics. GAP management seeks to protect earnings by maintaining an appropriate balance between interest-earning assets and interest-bearing liabilities in order to minimize fluctuations in the net interest margin and net earnings in periods of volatile interest rates.

The Company uses a net interest income simulation model to estimate near-term risk due to changes in interest rates. The model, which is updated quarterly, incorporates substantially all assets and liabilities together with forecasted changes in the balance sheet and assumptions that reflect the current interest rate environment. Balance sheet changes are based on expected prepayments of loans and securities. ALCO uses the model to simulate the effect of immediate and sustained parallel shifts in the yield curve of 100 and 200 basis points. The results from the simulation are reviewed by ALCO quarterly and are used to guide ALCO’s asset liability strategy. ALCO guidelines approved by the Company’s Board of Directors generally limit the estimated change in net interest margin over the succeeding 12 months. In the event the change exceeds 25 basis points of the forecasted net interest margin given a 200 basis points change in interest rates, the Board will increase its scrutiny and may change its strategy if necessary. At December 31, 2004, the estimated effect of an immediate 200 basis point increase in rate was a decrease in forecasted net interest margin for 12 months of 33 basis points, which would result in a decrease in net interest income of $1.2 million. The estimated effect of an immediate 200 basis point decrease in rate was an increase in forecasted net interest margin for 12 months of 2 basis points, which would result in an increase in net interest income of $93,000.

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The following table summarizes the Company’s interest rate sensitivity analysis at December 31, 2004: