UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

[x]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2002

                                       OR

[  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

     For the transition period from __________________ to __________________

                         Commission file number: 0-21231

                              MATRIX BANCORP, INC.
             (Exact name of registrant as specified in its charter)

                Colorado                                    84-1233716
     (State or other jurisdiction of                    (I.R.S. Employer
      incorporation or organization)                    Identification No.)

       700 17th Street, Suite 2100
             Denver, Colorado                                 80202
 (Address of principal executive offices)                   (Zip Code)

       Registrant's telephone number, including area code: (303) 595-9898

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

           Securities registered pursuant to Section 12(g) of the Act:

                    Common Stock, par value $.0001 per share
                         Preferred Share Purchase Rights
                                (Title of class)

     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 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 this Form 10-K or any amendment to this
Form 10-K. [X]

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

     As of March 12, 2003,  6,491,043  shares of common stock were  outstanding.
The  aggregate  market  value of  common  stock  held by  non-affiliates  of the
registrant,  based  on the  closing  sales  price of such  stock  on the  NASDAQ
National  Market  on March 12,  2003,  was  $17,631,513.  For  purposes  of this
computation,  all executive officers, directors and 10% beneficial owners of the
registrant are deemed to be affiliates.  Such determination should not be deemed
an admission that such executive  officers,  directors and 10% beneficial owners
are affiliates.

DOCUMENTS INCORPORATED BY REFERENCE:

      Portions  of the  Company's  definitive  proxy  statement  for the  Annual
Meeting of  Shareholders  to be held May 16, 2003 are  incorporated by reference
into Part III of this Form 10-K.


<PAGE>


<TABLE>
<CAPTION>

                                                        TABLE OF CONTENTS                                            Page
    <S>           <C>                                                                                                <C>


                                     PART I

    Item 1.       Business..............................................................................................3
    Item 2.       Properties...........................................................................................26
    Item 3.       Legal Proceedings....................................................................................27
    Item 4.       Submission of Matters to a Vote of Security Holders..................................................29

                                                             PART II

    Item 5.       Market for Registrant's Common Equity and Related Stockholder Matters................................29
    Item 6.       Selected Financial Data..............................................................................30
    Item 7.       Management's Discussion and Analysis of Financial Condition and Results of Operations................32
    Item 7A.      Quantitative and Qualitative Disclosures about Market Risk...........................................58
    Item 8.       Financial Statements and Supplementary Data..........................................................58
    Item 9.       Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................58

                                    PART III

    Item 10.      Directors and Executive Officers of the Registrant...................................................59
    Item 11.      Executive Compensation...............................................................................59
    Item 12.      Security Ownership of Certain Beneficial Owners and Management.......................................59
    Item 13.      Certain Relationships and Related Transactions.......................................................59
    Item 14.      Controls and Procedures..............................................................................59

                                                             PART IV

    Item 15.      Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................59

</TABLE>


<PAGE>


                                     PART I

Item 1.  Business

Matrix Bancorp, Inc.

     General.  Matrix Bancorp, Inc.  (occasionally referred to in this document,
on a consolidated  basis, as "us," "we," the "Company" or similar  terms),  is a
unitary  thrift  holding  company  that,  through our  subsidiaries,  focuses on
traditional banking,  mortgage banking,  trust and clearing activities,  lending
activities and other  fee-based  services.  Our traditional  banking  activities
include originating and servicing residential, commercial and consumer loans and
providing a broad range of depository services.  Our mortgage banking activities
consist of purchasing and selling  residential  mortgage  loans and  residential
mortgage  servicing  rights;  offering  brokerage,   consulting  and  analytical
services to financial services companies and financial  institutions;  servicing
residential   mortgage   portfolios  for  investors;   originating   residential
mortgages;  and providing real estate management and disposition  services.  Our
trust and clearing  activities focus primarily on offering  specialized  custody
and clearing  services to banks,  trust companies,  broker-dealers,  third party
administrators  and investment  professionals,  as well as the administration of
self-directed  individual  retirement  accounts,  qualified business  retirement
plans and custodial and directed trust accounts.  Our other  fee-based  services
and lending activities include providing  outsourced business services,  such as
budgeting,  governmental  reporting,  accounts  payable,  payroll,  facility and
safety management and comprehensive  insurance  programs to charter schools.  We
also offer  financing  to charter  schools for the  purchase of school sites and
equipment.

     Matrix Bancorp was  incorporated  in Colorado in June 1993 and was formerly
called "Matrix Capital  Corporation." The trading symbol for our common stock on
The Nasdaq National Market is "MTXC."

Sale of Wholesale Production Platform

      On February 28, 2003,  Matrix Capital Bank and Matrix  Financial  Services
Corporation  entered into a Purchase and  Assumption  Agreement  (the  "Purchase
Agreement") to sell  substantially all of Matrix  Financial's  assets associated
with its wholesale mortgage origination platform (the "Platform"). The purchaser
(the  "Buyer") is a newly formed  corporation  whose  principals  are  long-time
participants  in the  mortgage  banking  industry.  The Company  intends for the
foreseeable future to retain Matrix  Financial's  servicing platform and operate
it in the ordinary  course of business.  Included in the sale are the  wholesale
production offices, the back office personnel that process the loan originations
and a significant portion of the corporate  operations and personnel.  After the
sale, our remaining  operations will primarily consist of our mortgage servicing
platform and a limited amount of corporate personnel and operations.

      The  following  discussion  is a summary of the terms of the  contemplated
purchase and sale of the Platform and is not intended to be complete. For a more
complete  description  of the terms of the  Purchase  Agreement,  the  reader is
invited to review the Purchase  Agreement,  which is filed as an exhibit to this
Annual Report on Form 10-K.

      The Buyer is not yet licensed to engage in any mortgage banking activities
under state or federal law. It is  anticipated  that it will take  approximately
six months for the Buyer to obtain the necessary licensing.  Accordingly, Matrix
Financial,  Matrix Bank and the Buyer desired to structure the purchase and sale
in a manner that transferred  substantially  all the economic risks and benefits
of the operation of the Platform during the Transition Period (defined below) to
the Buyer,  while at the same time  having  Matrix  Financial  and  Matrix  Bank
maintain  continuous  effective  control over the operations of the Platform for
regulatory  purposes.   The  Purchase  Agreement,   therefore,   contemplates  a
two-staged  closing.  The first closing (the "Initial Closing Date") occurred on
the date the Purchase  Agreement  was signed and is the  effective  date for the
sale of the fixed assets,  and the final or second  closing (the "Final  Closing
Date") will occur six months  following the Initial  Closing Date. The period of
operation  of the  Platform in between the  Initial  Closing  Date and the Final
Closing Date is referred to as the "Transition Period."

      As Matrix  Financial will maintain  effective  control at all times during
the  Transition  Period,  Matrix  Financial  will  continue  to be an  operating
subsidiary  of Matrix  Bank.  The  Platform  will be  operated,  for  accounting
purposes, during the Transition Period as a division of Matrix Financial.

      On the Initial Closing Date, the Buyer purchased  substantially all of the
tangible personal property and intangible property associated with the Platform.
The Buyer additionally will take the transfer and assignment of certain contract
rights,  real property leases and equipment leases from Matrix Financial as soon
as the necessary consents have been obtained.

                                       3
<PAGE>

      The parties  intend for the Final  Closing Date to occur within six months
after the  Initial  Closing  Date.  At that time,  the Buyer will  purchase  any
tangible  and  intangible  personal  property of the  Platform  that is acquired
during the  Transition  Period in the  ordinary  course of business or otherwise
inadvertently  not  purchased  on the Initial  Closing  Date (the  "Subsequently
Acquired  Assets"),   as  well  as  Matrix  Financial's  loan  files,   pipeline
applications and sales  commitments.  Due to the fact that Matrix Financial will
maintain  effective  control  of the  operation,  the  effective  sale  date for
accounting purposes will be the Final Closing Date.

     The purchase price is determined as follows:

      o     The Asset  Payment  Amount (as defined in the  Agreement),  which is
            approximately   $3.3   million  in  payment  for  the  tangible  and
            intangible  assets of the Platform as of the Initial  Closing  Date;
            plus
      o     The  Subsequently  Acquired Assets Payment Amount (as defined in the
            Agreement),  which is the book  value of the  Subsequently  Acquired
            Assets as of the Final Closing Date; plus
      o     The  Production  Premium  (as  defined in the  Agreement),  which is
            generally 20 basis points  times the original  principal  balance of
            all loans  originated  during the 12 months  following  the  Initial
            Closing  Date  at  the  Matrix  Financial  loan  production  offices
            purchased  by Buyer.  The  Production  Premium is  "floored" at $4.9
            million and is "capped" at $9.1 million plus;
      o     The Aggregate  Locked Loan  Profitability  Amount (as defined in the
            Agreement),  which pays Matrix Financial one-half of the profit over
            a specified threshold amount (the threshold being generally 30 basis
            points) on loans that fund after the Initial Closing Date which have
            resulted  from its locked  pipeline as of the Initial  Closing Date;
            plus or minus
      o     The  Transition  Period Gain or Loss (as defined in the  Agreement).
            The Transition  Period Gain or Loss is a mechanism that provides for
            an  approximation  of the accounting  for the  transaction as if the
            entire sale and transfer had occurred on the Initial  Closing  Date.
            For example, if the Platform generates a loss during the first month
            of the six-month  Transition  Period,  the Buyer is then required to
            fund  such  loss  by  paying  the  loss  into  an  escrow   account.
            Conversely,  if the  Platform  generates  a profit  during the first
            month of the six-month  Transition Period,  then Matrix Financial is
            required to pay such profit into an escrow account.

     On the Initial Closing Date, the Buyer and Matrix Financial  established an
escrow  account (the  "Escrow")  with an Escrow Agent to act as a repository for
the escrow amounts  described  above and certain other payments  contemplated by
the Purchase  Agreement.  On the Initial  Closing Date, the Buyer deposited into
the Escrow $3.5 million as an advance  against the  Production  Premium and paid
directly to Matrix Financial one-half of the Asset Payment Amount.

     On the  Final  Closing  Date,  the  Buyer  will pay  Matrix  Financial  the
remaining one-half of the Asset Payment Amount and will pay Matrix Financial the
book value of the Subsequently Acquired Assets.

     The  Production  Premium  will be paid  over the 12  months  following  the
Initial Closing Date and the Aggregate Locked Loan Profitability  Amount will be
paid over the 2 months following the Initial Closing Date. The Company estimates
that the aggregate sales price for the Platform will be between $8.0 million and
$13.0 million.

     During the six-month  Transition  Period,  Matrix Financial will lease-back
from the Buyer the tangible and intangible  assets that have been transferred to
Buyer, including any contract rights, real property leases and equipment leases.

     The operations of the Platform during the six-month  Transition Period will
be governed by the terms of an Operating Plan,  which is  incorporated  into the
Purchase Agreement. The Operating Plan requires Matrix Financial to, among other
things, continue to operate the Platform substantially in the manner in which it
currently  operates and in conformity with its current  policies and procedures.
Any changes to the  Operating  Plan must be approved in advance by an  Executive
Committee  consisting of the following three  individuals:  (a) the President of
Matrix Bank, (b) the President of Matrix Financial,  and (c) another  individual
selected by the Board of Directors of Matrix  Financial.  By  establishing  this
structure,  the  Company  believes it will be able to  maintain  for  regulatory
purposes  continuous  effective  control over the Platform  during the six-month
Transition Period.

     Currently,  Matrix Bank provides a warehouse line for  substantially all of
the loans  originated by the Platform.  As of December 31, 2002,  the balance of
the warehouse line was $458.9 million.  During the six-month  Transition Period,
it is contemplated that Matrix Bank will continue to provide a warehouse line to
the Platform  under  similar terms that existed prior to the sale. At the end of
the  transition  period,  the Buyer  will be  required  to utilize  third  party
financings to fund new  originations  and the warehouse line will be required to
be paid-off within 60 days after the completion of the Transition Period. Once

                                       4
<PAGE>

the warehouse  line is paid-off,  Matrix Bank will have a significant  amount of
liquidity to re-invest. It is anticipated that the liquidity will be re-invested
in bulk loan portfolios of adjustable rate loans,  guaranteed  portions of Small
Business  Administration  ("SBA") loans or mortgaged-backed  securities.  To the
extent that we are unable to re-invest the liquidity in a timely manner, the net
interest  income  earned  at  Matrix  Bank  will be  reduced  by the  amount  of
un-invested funds.  During the period that the liquidity is un-invested,  Matrix
Bank will use the  liquidity to pay down  borrowings  from the Federal Home Loan
Bank ("FHLB") or brokered certificates of deposit.

     For a period of two years from the Initial  Closing  Date,  Matrix Bank has
agreed  that  neither  Matrix  Bank nor any of its  affiliates  will  engage in,
directly  or  indirectly,   the  single-family   retail  or  wholesale  mortgage
origination  business in those states in which the acquired division operates or
is located as of the Initial Closing Date. However,  this non-compete  provision
does not prohibit Matrix Bank or their affiliates from engaging in such business
in order to comply with applicable law, rule, regulation,  directive,  agreement
or order from the Office of Thrift  Supervision  ("OTS") or other party where it
is necessary to resolve regulatory or supervisory  concerns.  Additionally,  the
non-compete  provision  does not apply in the event of a change  in  control  of
Matrix Bank or the Company.

     The Purchase Agreement requires Matrix Bank to guarantee Matrix Financial's
obligations under the Purchase Agreement if certain events occur, such as Matrix
Financial's  bankruptcy,  failure to  maintain a minimum  net worth,  or loss of
voting control of Matrix Financial.

The Subsidiaries

      Our  core  business   operations  are  conducted   through  the  operating
subsidiaries and an investment in a settlement and clearing operation  described
below.

     Matrix  Capital  Bank.  With offices in New Mexico,  Arizona and  Colorado,
Matrix Bank serves its local  communities by providing a broad range of personal
and business  depository  services,  offering  residential  loans and  providing
consumer  and   commercial   real  estate  loans,   including   Small   Business
Administration  loans.  In 2002,  Matrix Bank  relocated  its domicile  from Las
Cruces,  New Mexico to  Denver,  Colorado  where it offers  all of its  existing
banking  services in the Denver market.  In connection  with the  relocation,  a
subsidiary of Matrix Bank,  Matrix Tower  Holdings,  LLC,  purchased a high rise
building  in downtown  Denver,  Colorado in June 2002,  named  Matrix  Financial
Center.  In addition to Matrix Bank, the Company and several of its subsidiaries
relocated  their  offices to Matrix  Financial  Center  during 2002.  Additional
relocations will be finalized in 2003.

     Matrix Bank holds the noninterest-bearing custodial escrow deposits related
to the residential mortgage loan portfolio serviced by Matrix Financial Services
Corporation, the interest-bearing money market accounts administered by Sterling
Trust Company and the deposits  resulting from transactions in which Matrix Bank
acts as the clearing bank for clients of Matrix Settlement & Clearance Services,
L.L.C.,  an  equity  method  investment.   These  deposits,  as  well  as  other
traditional  deposits,  are  used  primarily  to fund our  mortgage  origination
activity,  as well as bulk  purchases of  residential  mortgage loan  portfolios
throughout  the United States,  a substantial  portion of which are serviced for
Matrix Bank by Matrix  Financial  following their  purchase.  As of December 31,
2002, Matrix Bank had total assets of $1.6 billion.

     Matrix  Bank  and  several  of  our  other  subsidiaries  have  significant
experience in purchasing and originating  mortgage loans,  have familiarity with
real estate  markets  throughout  the United States and have  traditionally  had
access to relatively low-cost deposits.  We believe that the resulting knowledge
and activities  permit Matrix Bank to manage its funding and capital position in
a way that enhances its performance.

     Matrix Financial  Services  Corporation.  Matrix Financial,  which became a
wholly owned subsidiary of Matrix Bank in August 2000, originates mortgage loans
through its wholesale loan  origination  network,  acquires  mortgage  servicing
rights on a  nationwide  basis  through  purchases in the  secondary  market and
services the loans  underlying  the purchased  mortgage  servicing  rights and a
portion of our originated mortgage servicing rights.

     As of December 31, 2002,  Matrix  Financial  serviced over 75,000  borrower
accounts  representing  $5.3  billion in  principal  balances,  excluding  $26.6
million  in  subservicing  for  companies  that are  unaffiliated  with us. As a
servicer of mortgage loans,  Matrix Financial generally is required to establish
custodial  escrow  accounts  for  the  deposit  of  borrowers'  payments.  These
custodial  accounts are  maintained  at Matrix Bank.  At December 31, 2002,  the
custodial  escrow  accounts  related to our  servicing  portfolio  maintained at
Matrix Bank were $151.8 million.

                                       5
<PAGE>

     During  2002,  Matrix  Financial  originated  $3.7  billion in  residential
mortgage  loans  primarily  through its regional  wholesale  production  offices
located in Atlanta, Dallas, Denver, Houston, Jacksonville,  Phoenix, Sacramento,
Santa Ana and St. Louis.  The mortgage loans  originated by Matrix Financial are
typically sold in the secondary market.

     Matrix Capital Markets,  Inc. Matrix Capital Markets provides brokerage and
consulting  services to financial  institutions and financial services companies
in the mortgage banking industry. These services include:

      o     the brokering, acquisition and analysis of loans;
      o     the brokering and analysis of  residential  mortgage loan  servicing
            rights;
      o     corporate and mortgage loan servicing  portfolio  valuations,  which
            includes the "mark-to-market"  valuation and analysis required under
            Statements  of Financial  Accounting  Standards No. 133 and No. 140;
            and
      o     to  a  lesser  extent,   consultation  and  brokerage   services  in
            connection  with  mergers  and   acquisitions  of  mortgage  banking
            entities.

     Matrix Capital  Markets' volume of brokerage  activity and the expertise of
its analytics  department give us access to a wide array of information relating
to the mortgage banking industry,  including emerging market trends,  prevailing
market prices,  pending  regulatory  changes and changes in levels of supply and
demand.  Consequently,  we are often able to identify  certain types of mortgage
loans and, to a lesser extent,  mortgage loan servicing portfolios that are well
suited to our particular  servicing platform,  investment  objectives and unique
corporate structure.

     First Matrix Investment Services Corp. First Matrix,  which became a wholly
owned  subsidiary of Matrix Capital  Markets in October 2001, is registered with
the National  Association of Securities  Dealers  ("NASD") as a fully  disclosed
broker-dealer,  with its headquarters in Denver,  Colorado and branch offices in
Fort Worth, Texas and Memphis,  Tennessee. First Matrix offers brokerage service
related  to  a  wide  range  of  investment  options  for  both  individual  and
institutional investors,  including stocks, bonds, mutual funds and fixed income
and debt securities,  as well as providing  investment banking services focusing
on fixed income products.  The Fort Worth office focuses  primarily on long-term
investing and  retirement  planning for  individuals.  The Denver office assists
primarily financial  institutions in managing their investment  portfolios.  The
Memphis office focuses on the acquisition, brokering and sale of SBA loan pools.
The SBA loans and  securities  are acquired by Matrix Bank through the brokerage
activities of First Matrix.

     Matrix  Asset  Management  Corporation.  Matrix Asset  Management  provides
nationwide  real  estate  management  and  disposition  services  on  foreclosed
properties owned by financial services companies and financial institutions.  In
addition  to  the  unaffiliated   clients   currently  served  by  Matrix  Asset
Management,  Matrix  Financial  utilizes  Matrix Asset  Management to handle the
disposition  of foreclosed  real estate for which it is responsible as servicer.
As of December  31,  2002,  Matrix  Asset  Management  had  approximately  2,071
foreclosed properties under its management.

     Matrix Asset Management also provides limited collateral valuation opinions
to  clients  that are  interested  in  assessing  the  value  of the  collateral
underlying  mortgage  loans, as well as to clients such as Matrix Bank and other
third party mortgage loan buyers evaluating potential bulk purchases of mortgage
loans.

      Sterling Trust Company. Sterling Trust,  headquartered in Waco, Texas, was
incorporated  in 1984 as a Texas  non-bank  trust  company  specializing  in the
administration  of  self-directed  individual  retirement  accounts,   qualified
business  retirement  plans and custodial  and directed  trust  accounts.  As of
December 31, 2002,  Sterling Trust administered  approximately  34,300 accounts,
with assets under  administration of over $2.0 billion. As of December 31, 2002,
approximately  $141.3  million  of the $2.0  billion  represented  money  market
deposits held at Matrix Bank.

     ABS School  Services,  L.L.C.  ABS School Services  (sometimes  referred to
hereafter  collectively  with its  subsidiaries  as "ABS")  provides  outsourced
business  services to charter  schools.  Charter schools are public schools that
are an alternative to traditional  public schools.  As of December 31, 2002, ABS
provided its services to approximately 142 schools. The primary services offered
include fund accounting,  cash management,  budgeting,  governmental  reporting,
payroll and accounts payable.  ABS also offers  administrative and instructional
leadership  and consults  with schools and offers  assistance  in the  following
areas:  facility and safety management,  technology,  policy development,  grant
administration and comprehensive  insurance  programs.  Additionally,  ABS has a
financing  division,  which offers financing to charter schools for the purchase
of school sites and equipment.

     Matrix  Settlement  &  Clearance  Services,   L.L.C.  Matrix  Settlement  &
Clearance  Services  is a joint  venture in which we own a 45% equity  interest.
Matrix  Settlement & Clearance  Services provides  automated  clearing of mutual
funds utilizing the National  Securities  Clearing  Corporation's  Fund/SERV and

                                       6
<PAGE>

Defined Contribution Clearance & Settlement platform for banks, trust companies,
third party administrators and registered investment advisors. Effective January
2, 2002, Matrix Settlement & Clearance  Services' wholly owned subsidiary,  MSCS
Financial  Services,  LLC, began operations as a NASD registered  broker-dealer.
For the year ended December 31, 2002, Matrix Settlement & Clearance Services had
$7.7 million of revenues and net income of approximately $475,000.

     As of December 31,  2002,  Matrix  Settlement  & Clearance  Services had 86
clients under contract.  These clients administer approximately $13.8 billion in
funds that would be eligible for inclusion in the automated clearing environment
of the National Securities Clearing  Corporation.  Matrix Settlement & Clearance
Services has developed relationships with several Matrix Bancorp subsidiaries to
assist in the  performance  of services for its customers.  For example,  Matrix
Bank, as the National  Securities  Clearing  Corporation  member,  serves as the
settlement bank for Fund/SERV  transactions  and provides  banking  services for
certain Matrix  Settlement & Clearance  Services  customers.  This  relationship
helps  generate  low-cost  deposits  for Matrix  Bank.  As of December 31, 2002,
Matrix Settlement & Clearance Services' clients had $60.9 million of deposits at
Matrix  Bank.  In  addition,  many of Matrix  Settlement  & Clearance  Services'
clients  require trust  services.  As of December 31, 2002,  Matrix Bank held in
custody  $5.8  billion of assets for  clients of Matrix  Settlement  & Clearance
Services.

Lending Activities

     Purchase and Sale of Bulk Loan Portfolios. In addition to our mortgage loan
origination  and  servicing-related   activities,   which  are  discussed  under
"Residential  Mortgage Loan  Origination" and "Mortgage  Servicing  Activities,"
respectively, we traditionally make bulk purchases of residential mortgage loans
in the  secondary  market  through  Matrix Bank.  We believe that our  structure
provides  advantages  over our competitors in the purchase of bulk mortgage loan
packages. In particular:

      o     Matrix Capital Markets,  through its networking  within the mortgage
            banking  and  financial  services  industries,   is  able  to  refer
            companies  that are interested in selling  mortgage loan  portfolios
            directly to Matrix Bank.  This direct contact  reduces the number of
            portfolios   that  must  be  purchased   through   competitive   bid
            situations,   thereby   reducing  the  cost   associated   with  the
            acquisition of bulk residential mortgage loan portfolios; and
      o     Matrix  Bank's  subsidiary,  Matrix  Financial,  provides  servicing
            advantages  that a  typical  "stand-alone"  community  bank does not
            possess.  Matrix  Financial acts as a subservicer  for a majority of
            Matrix Bank's  mortgage loan  portfolio.  Because  Matrix  Financial
            services loans throughout the entire United States,  Matrix Bank can
            acquire various types of loans secured by property located in any of
            the fifty states.

     Substantially  all of the  residential  mortgage  loans  that  Matrix  Bank
acquires  are  classified  as held  for  sale.  This  accounting  classification
requires Matrix Bank to carry the loans at the lower of aggregate cost or market
value. The purchased loan portfolios typically include both fixed and adjustable
rate  mortgage  loans.  Although  Matrix Bank reviews many loan  portfolios  for
prospective  acquisition,  it focuses on  acquiring  first lien  priority  loans
secured  primarily by  one-to-four  single-family  residential  properties  with
unpaid principal  balances of less than $500,000.  To the extent that adjustable
rate loans are available,  Matrix Bank generally  targets  adjustable over fixed
rate portfolios.  Due to the accounting treatment required,  we believe that the
focus on adjustable rate products is generally  expected to reduce the effect of
changing interest rates on the portfolio's market value.

     Matrix Bank purchases  mortgage loan  portfolios  from various  sellers who
have  either  originated  the  loans or  acquired  the loan  portfolios  in bulk
purchases.  Matrix Bank  considers  several  factors prior to a purchase.  Among
other factors, Matrix Bank considers the product type, the current loan balance,
the current  interest rate  environment,  the  seasoning of the mortgage  loans,
payment histories,  geographic location of the underlying collateral, price, the
current  liquidity of Matrix Bank and the product mix in its  existing  mortgage
loan portfolio.

     In some cases,  the mortgage loan  portfolios that Matrix Bank acquires are
purchased at yields that exceed  market.  Some of the loans in these  portfolios
are considered  performing  loans that have had payment  problems in the past or
have had document  deficiencies.  These types of  portfolios  afford Matrix Bank
with an  opportunity  to resell the loans at a higher  price if the  discount to
market on these portfolios  accurately  reflects the additional risks associated
with purchasing these types of loans. Loan document  deficiencies are identified
in the due diligence process and, to the extent  practical,  are cured by Matrix
Bank prior to reselling the loans. Matrix Bank also analyzes the payment history
on each  mortgage  loan  portfolio.  Many  prior  problems  may be a  result  of
inefficient  servicing or may be attributable to several servicing  transfers of

                                       7
<PAGE>

the loans over a short period of time.  Because many  considerations  may impact
pricing or yield,  Matrix Bank prices each loan  package  based on the  specific
underlying loan characteristics.

     In the  past,  Matrix  Bank has  purchased  nonperforming  Federal  Housing
Administration  ("FHA") and  Veteran's  Administration  ("VA")  loans from third
party sellers. The Department of Housing and Urban Development ("HUD") generally
guarantees the majority of principal and interest on these nonperforming  loans.
These loans are at fixed rates and have a  relatively  short  average life since
the loans are typically  liquidated through the foreclosure and subsequent claim
process with HUD. As of December 31,  2002,  Matrix Bank owned $26.0  million of
these loans.

     Matrix Bank performs due diligence on each mortgage loan  portfolio that it
desires to purchase on a bulk basis.  These  procedures  consist of  analyzing a
representative  sample of the mortgage  loans in the portfolio and are typically
performed by Matrix Bank  employees,  but  occasionally  are outsourced to third
party  contractors.   The  underwriter  takes  into  account  many  factors  and
statistics in analyzing the sample of mortgage  loans in the subject  portfolio,
including:  the general  economic  conditions in the geographic area or areas in
which the  underlying  residential  properties  are located;  the  loan-to-value
ratios on the underlying loans; and the payment  histories of the borrowers.  In
addition,  the underwriter  attempts to verify that each sample loan conforms to
the standards for loan documentation set by Fannie Mae and Freddie Mac. In cases
where  a  significant   portion  of  the  sample  loans  contain   nonconforming
documentation,  Matrix Bank assesses the additional  risk involved in purchasing
the loans.  This process helps Matrix Bank  determine  whether the mortgage loan
portfolio  meets its  investment  criteria and, if it does, the range of pricing
that is appropriate.

     Matrix Bank  continually  monitors the  secondary  market for purchases and
sales  of  mortgage  loan  portfolios  and  typically  undertakes  a  sale  of a
particular loan portfolio in an attempt to "match" an anticipated  bulk purchase
of a particular  mortgage loan portfolio or to generate  current period earnings
and cash flow.  To the extent that Matrix Bank is  unsuccessful  in matching its
purchases  and sales of mortgage  loans,  Matrix  Bank may have excess  capital,
resulting in less leverage and higher capital ratios.

     During the year ended December 31, 2002, we made bulk purchases of mortgage
loans of  approximately  $565.7  million  and made bulk  sales of  approximately
$166.6 million for a net gain on sale of bulk mortgage loans of $3.6 million.

      Residential Mortgage Loan Origination.  We originate  residential mortgage
loans on a  wholesale  basis  through  Matrix  Financial  and on a retail  basis
through both Matrix  Financial and Matrix Bank.  Matrix  Financial  originated a
total of $3.7 billion in residential  mortgage loans for the year ended December
31, 2002. See "Item 1. Business--Sale of Wholesale Production Platform."

     Wholesale Originations.  Matrix Financial's primary source of mortgage loan
originations  is its  wholesale  division,  which  historically  has  originated
mortgage loans through approved independent mortgage loan brokers. These brokers
qualify  to  participate  in  Matrix   Financial's   program  through  a  formal
application  process  that  includes  an  analysis  of  the  broker's  financial
condition  and sample loan files,  as well as the broker's  reputation,  general
lending expertise and references.  As of December 31, 2002, Matrix Financial had
approved  relationships  with  approximately  1,400 mortgage loan brokers.  From
Matrix Financial's offices in Atlanta,  Dallas, Denver,  Houston,  Jacksonville,
Phoenix,  Sacramento, Santa Ana and St. Louis, the sales staff solicits mortgage
loan brokers throughout the Southeastern, Western, Midwestern and Rocky Mountain
areas of the United  States for  mortgage  loans  that meet  Matrix  Financial's
criteria.

     Mortgage loan brokers act as  intermediaries  between  borrowers and Matrix
Financial  in  arranging  mortgage  loans.  Matrix  Financial,  as  an  approved
seller/servicer  for Fannie Mae,  Freddie  Mac,  Ginnie Mae and a  multitude  of
private investors, provides these brokers access to the secondary market for the
sale of mortgage  loans that they  otherwise  cannot access  because they do not
meet the applicable  seller/servicer  net worth  requirements.  Matrix Financial
attracts and  maintains  relationships  with mortgage loan brokers by offering a
variety of services and products.

     To  supplement  our  product  offerings  made  through our  wholesale  loan
origination  network,  we have also  historically  offered a program tailored to
borrowers  who are  unable  or  unwilling  to  obtain  mortgage  financing  from
conventional  mortgage sources. The borrowers who need this type of loan product
often have impaired or  unsubstantiated  credit  histories  and/or  unverifiable
income  and  require or seek a high  degree of  personalized  service  and swift
response to their loan applications.  As a result, these borrowers generally are
not adverse to paying  higher  interest  rates for this loan  product  type,  as
compared to the interest rates charged by conventional  lending sources. We have
established  classifications  with  respect  to the  credit  profiles  of  these
borrowers. The classifications range from Alternative A through D depending upon
a number of factors,  including the  borrower's  credit  history and  employment
status. During 2002, Matrix Financial originated $177.6 million of Alternative A

                                       8
<PAGE>

through D credit residential  mortgage loans, the majority of which were sold to
unaffiliated  third party investors on a nonrecourse  basis. All originations of
Alternative A through lesser  quality  credit loans are  originated  under third
party  investor   guidelines  and  are  generally  sold  monthly  in  bulk  loan
portfolios.  This method of sale generally provides better execution as compared
to selling individual loans.

      Following the Final Closing Date, we will not originate  mortgage loans on
a wholesale basis. In addition,  we have agreed with the Buyer not to compete in
certain respects. See "Item 1. Business--Sale of Wholesale Production Platform."

     Retail Originations.  Matrix Bank originates  residential loans on a retail
basis  through its  branches in Las  Cruces,  New Mexico and Sun City,  Arizona.
Matrix  Bank's  lending  office  in  Denver,   Colorado,  which  relocated  from
Evergreen, Colorado in 2002, primarily originates residential construction loans
and commercial loans in the local market place.  Matrix Bank attempts to convert
the construction  loans funded through the Denver office into permanent mortgage
loans.  The retail loans  originated  by Matrix Bank consist of a broad range of
residential  loans,  at both  fixed and  adjustable  rates,  consumer  loans and
commercial real estate loans.

     We have agreed with the Buyer not to compete in certain respects. We do not
believe, however, that this stipulation will substantially impact the ability of
Matrix Bank to  effectively  serve its local markets or customers.  See "Item 1.
Business--Sale of Wholesale Production Platform."

     Matrix  Financial has also developed a retention center that focuses on the
solicitation  of  our  servicing   portfolio  and  third-party  owned  servicing
portfolios  for  refinancing  opportunities.  The  goal  is  to  identify  those
borrowers  which are likely to  refinance  and have them  refinance  with Matrix
Financial.  If the  refinanced  loan replaces a loan that  comprises part of our
servicing  portfolio,  we have effectively  preserved a portion of our servicing
portfolio and the periodic servicing fees resulting  therefrom,  as the borrower
would have been likely to refinance with an unaffiliated  lender if not with us,
which would result in a loss of the servicing income that results from servicing
the  loan.  Included  in the  sale of the  Platform  are the  operations  of the
retention  center.  During the  Transition  Period,  and after the Final Closing
Date,  the Buyer has agreed to solicit our  customers for the refinance of their
mortgage  loans.  It is  contemplated  that we will sell the mortgage loans on a
servicing  released basis and pay the Buyer an agreed upon fee to originate such
loan. See "Item 1. Business--Sale of Wholesale Production Platform."

     Quality Control.  We have a loan quality control process designed to ensure
sound lending  practices and compliance with Fannie Mae, Freddie Mac, Ginnie Mae
and applicable  private investor  guidelines.  Prior to funding any wholesale or
retail  loan,  we  perform a verbal or written  verification  of  employment  as
required  by  investor  programs  and  utilize a  detailed  checklist  to ensure
accuracy of documentation. In addition, on a monthly basis, we select 10% of all
closed  loans for a detailed  audit  conducted  by our own  personnel or a third
party  service  provider.  The quality  control  process  entails  performing  a
complete  underwriting review and independent  re-verification of all employment
information,  tax  returns,  source of down  payment  funds,  bank  accounts and
credit.  Furthermore,  10% of the  audited  loans are chosen for an  independent
field review and standard factual credit report. All discovered  deficiencies in
these  audits are  reported to our senior  management  to  determine  trends and
additional  training needs. We then address and cure all resolvable  issues.  We
also  perform  a quality  control  audit on all early  payment  defaults,  first
payment defaults and 60-day delinquent loans, the findings of which are reported
to the appropriate investor and/or senior management.

     Sale of Originated Loans. We generally sell the residential  mortgage loans
that we originate.  Under ongoing programs  established with Fannie Mae, Freddie
Mac and Ginnie Mae, conforming  conventional and government loans may be sold on
a cash basis or pooled by us and exchanged for  securities  guaranteed by Fannie
Mae,  Freddie Mac or Ginnie Mae.  We then sell these  securities  to national or
regional  broker-dealers.  Mortgage  loans sold to Fannie  Mae,  Freddie  Mac or
Ginnie Mae are sold on a nonrecourse basis, except for standard  representations
and warranties,  so that  foreclosure  losses are generally borne by Fannie Mae,
Freddie Mac or Ginnie Mae and not by us.

     We also sell nonconforming and conforming  residential  mortgage loans on a
nonrecourse basis to other secondary market investors.  Nonconforming  loans are
typically  first  lien  mortgage  loans  that do not meet  all of the  agencies'
underwriting  guidelines,  and are  originated  instead for other  institutional
investors with whom we have previously  negotiated purchase  commitments and for
which we occasionally pay a fee.

     We  sell   residential   mortgage   loans   on  a   servicing-retained   or
servicing-released  basis. Certain purchasers of mortgage loans require that the
loan be  sold to them  servicing-released.  We  sell  nonconforming  loans  on a

                                       9
<PAGE>

servicing-released  basis and may sell conforming loans on a  servicing-retained
or    servicing-released    basis.    See    "Item   1.    Mortgage    Servicing
Activities--Residential Mortgage Loan Servicing."

     In connection with our residential mortgage loan originations and sales, we
make  customary  representations  and  warranties.  Our experience has been that
giving  such  representations  and  warranties  have not  resulted  in  material
repurchases.  However, there can be no assurance that we will not be required to
make a significant repurchase in the future or that losses will not occur in the
future due to the representations and warranties made.

     The sale of  mortgage  loans may  generate a gain or loss for us.  Gains or
losses  result  primarily  from  two  factors.  First,  we may  make a loan to a
borrower  at a rate  resulting  in a price that is higher or lower than we would
receive if we had immediately sold the loan in the secondary market. These price
differences occur primarily as a result of competitive pricing conditions in the
primary loan origination market. Second, gains or losses may result from changes
in interest  rates that  consequently  change the market  value of the  mortgage
loans.  The change in the market value of the mortgage loans may occur after the
price  commitment is given to the borrower and before the time that the mortgage
loan is sold to the investor.  Net gains and losses on originated loans sold are
recorded in loan origination income.

     In order to hedge  against  the  interest  rate risk  resulting  from these
timing differences, we historically have committed to sell all closed originated
mortgage  loans held for sale and a portion of the  mortgage  loans that are not
yet  closed  but for which the  interest  rate has been  established,  sometimes
referred to in this document as "pipeline  loans." We adjust our net  commitment
position daily either by entering into new commitments to sell or by buying back
commitments to sell depending upon our projection of the portion of the pipeline
loans that we expect to close.  These projections are based on numerous factors,
including changes in interest rates and general economic trends. The accuracy of
the underlying  assumptions  bears directly upon the effectiveness of our use of
forward  commitments  and  subsequent  profitability.  The market value of loans
committed  for  sale is  determined  based  on the  related  forward  loan  sale
commitments.  See "Item 7.  Management's  Discussion  and  Analysis of Financial
Condition and Results of Operations--Risk  Sensitive Assets and Liabilities" for
information  on our  adoption of Statement  of  Financial  Accounting  Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities.

     Commercial and Other  Lending.  We have sought to diversify and enhance the
yield of our loan portfolio by originating  commercial  and, to a lesser extent,
consumer  loans  and by  offering  a  full  range  of  lending  products  to our
customers. The Company offers a variety of commercial loan products,  including:
single-family construction loans; commercial real estate loans; business and SBA
loans;  and  financing  to charter  schools for the  purchase of real estate and
equipment.  Matrix Bank's loan production office in Denver, Colorado principally
originates  single-family  construction and commercial real estate loans. Matrix
Bank's  office in Las  Cruces,  New Mexico  also  originates  a portion of these
loans. ABS performs underwriting and funding of financings for charter schools.

     Matrix Bank's small business  lending  division,  headquartered  in Denver,
Colorado,  offers the following  loan products:  SBA 7a loans;  first trust deed
loans senior to SBA 504  debentures;  first trust deed companion loans senior to
SBA 7a loans;  and Business and Industry  Guaranteed  Loans offered  through the
United  States  Department  of  Agriculture.  Matrix Bank has again been awarded
preferred lender status by the SBA in the Colorado market area, and is expecting
first quarter  expansion of that  designation  into New Mexico,  Utah,  Arizona,
Oregon and Idaho.  Matrix Bank has the further  potential  of  expansion  of the
designation  into  Washington and Texas.  Preferred  lender status allows Matrix
Bank to approve SBA guaranteed loan  applications  without prior review from the
SBA,  thereby   accelerating  the  approval  process  for  small  business  loan
applications.  Preferred  lenders also are granted  unilateral  servicing powers
over the term of those loans.  During 2002, Matrix Bank originated $16.2 million
in SBA loans.

     Matrix Bank  generally  limits its commercial  lending to  income-producing
real   estate   properties.   The   repayment   of   loans   collateralized   by
income-producing properties depends upon the successful operation of the related
real estate property and also on the credit and net worth of the borrower. Thus,
repayment is subject to the  profitable  operation of the  borrower's  business,
conditions in the real estate market,  interest rate levels and overall economic
conditions.  Loans on  income-producing  properties must generally meet internal
underwriting guidelines that include: a limit on the loan-to-value ratio of 75%;
a review of the borrower with regard to management talent, integrity, experience
and available financial resources;  and, in most instances, a personal guarantee
from the borrower.

     Matrix  Bank  originates   loans  to  builders  for  the   construction  of
single-family  properties,  and to a  lesser  extent,  for the  acquisition  and
development of improved  residential  lots.  Matrix Bank  generally  makes these
loans on commitment  terms that last from nine to eighteen  months and typically
adjust  with  the  prime  rate of  interest.  In  many  cases,  the  residential

                                       10
<PAGE>

properties have been pre-sold to the homeowner.  It is generally considered that
construction  lending  involves a higher level of risk than  secured  lending on
existing  properties  because the  properties  securing  construction  loans are
usually more speculative and more difficult to evaluate and monitor.

     Matrix Bank originates loans on multi-family  residential  properties.  The
properties  generally are in the Denver  metropolitan area and are on properties
of between 10 to 50 units. In 2002, Matrix Bank originated  approximately  $41.4
million of multi-family loans.

     In  addition  to  origination,  Matrix  Bank  also buys  participations  in
commercial  real  estate  loans  primarily  from banks  located in the  Colorado
market.  The loans that we acquire through  participations are underwritten with
the same diligence and standards as though we were originating them directly.

     ABS offers  financing  to charter  schools  located  primarily  in Arizona,
Colorado,  Missouri,  Florida and Texas for the purchase of real estate, modular
space and equipment.  The offered  financing is generally  fully  amortizing and
completed on a tax-exempt basis. On occasion, we also provide cash flow loans to
charter schools.  As of December 31, 2002, we had a total of $47.3 million loans
outstanding to charter schools. Charter school financing involves inherent risks
such as:

      o     the loan-to-value  ratio for real estate transactions can be as high
            as 90% and for  furniture,  fixtures and equipment and modular space
            it is 100%;
      o     there are no personal guarantees; and
      o     cash flow to service  the  financing  is derived  from the  school's
            student count. If the school's student count  decreases,  or is less
            than projected,  the school's ability to make scheduled  payments on
            the financing may be impaired.

     In addition,  Matrix Bank offers a variety of lending  products to meet the
specific needs of its customers. These products include fully amortizing secured
installment loans,  manufactured housing financing,  credit card programs,  home
equity  loans,  business  loans and share  loans.  In  addition  to the  secured
consumer  loans,  Matrix Bank extends  unsecured  loans,  on a limited basis, to
qualified  borrowers based on their financial  statements and  creditworthiness.
Matrix Bank  originates  the  majority of its  consumer  lending  within the Las
Cruces, New Mexico market area.

Mortgage Servicing Activities

     Residential  Mortgage Loan Servicing.  We conduct our residential  mortgage
loan servicing  activities  exclusively  through Matrix Financial  including the
residential   mortgage  loan  servicing  that  Matrix   Financial   provides  as
subservicer for Matrix Bank's servicing portfolio.  At December 31, 2002, Matrix
Financial serviced approximately $5.3 billion of mortgage loans, excluding $26.6
million subserviced for companies that are not affiliated with us.

     Servicing  mortgage loans involves a contractual right to receive a fee for
processing and administering loan payments.  This processing involves collecting
monthly mortgage payments on behalf of investors, reporting information to those
investors on a monthly basis and maintaining  custodial  escrow accounts for the
payment of principal and interest to investors and property  taxes and insurance
premiums on behalf of  borrowers.  These  payments are held in custodial  escrow
accounts at Matrix  Bank.  Matrix Bank  invests  this money in  interest-earning
assets with returns that  historically  have been greater than could be realized
by Matrix Financial using the custodial escrow deposits as compensating balances
to reduce the effective borrowing cost on its warehouse credit facilities.

     As compensation  for its mortgage  servicing  activities,  Matrix Financial
receives  servicing  fees,  plus  any late  charges  collected  from  delinquent
borrowers and other fees  incidental to the services  provided.  In the event of
default by the borrower,  Matrix Financial  receives no servicing fees until the
default  is  cured.   At  December   31,   2002,   Matrix   Financial's   annual
weighted-average servicing fee, including ancillary fees, was 0.48%.

     Servicing is provided on mortgage loans on a recourse or nonrecourse basis.
Our policy is to accept only a limited number of servicing  assets on a recourse
basis. As of December 31, 2002, on the basis of outstanding  principal balances,
approximately  1.15% of our owned mortgage servicing contracts involved recourse
servicing.  To the extent that  servicing  is done on a recourse  basis,  we are
exposed to credit  risk with  respect to the  underlying  loan in the event of a
repurchase.  Additionally,  many of our nonrecourse mortgage servicing contracts
owned require us to advance all or part of the  scheduled  payments to the owner
of the mortgage loan in the event of a default by the  borrower.  Many owners of
mortgage loans also require the servicer to advance  insurance  premiums and tax
payments on schedule even though  sufficient  escrow funds may not be available.

                                       11
<PAGE>

Therefore,  we must bear the funding costs associated with making such advances.
If the  delinquent  loan does not become  current,  these advances are typically
recovered at the time of the foreclosure sale.  Foreclosure expenses,  which may
include legal fees or property maintenance, are generally not fully reimbursable
by  Fannie  Mae,  Freddie  Mac or Ginnie  Mae,  for which  agencies  we  provide
significant amounts of mortgage loan servicing.  As of December 31, 2002, we had
advanced  approximately  $11.7  million  in  funds  on  behalf  of  third  party
investors.  A foreclosure  reserve is estimated and included in the consolidated
financial  statements.  For the VA loans sold and  serviced  for the Ginnie Mae,
which are sold on a nonrecourse  basis, the VA loan guarantees may not cover the
entire  principal  balance and, in that case, the Company is responsible for the
losses which exceed the VA's guarantee.

     Mortgage servicing rights represent a contractual right to service, and not
a  beneficial  ownership  interest in,  underlying  mortgage  loans.  Failure to
service the loans in accordance with contract or other  applicable  requirements
may lead to the  termination  of the mortgage  servicing  rights and the loss of
future  servicing  fees. To date,  there have been no  terminations  of mortgage
servicing  rights by any mortgage loan owners  because of our failure to service
the loans in accordance with our obligations.

     In order to track information on our servicing portfolio,  Matrix Financial
utilizes a data processing system provided by Alltel Information Services,  Inc.
Because Alltel is one of the largest  mortgage  banking  service  bureaus in the
United States,  we believe that this system gives Matrix  Financial  capacity to
support expansion of our residential mortgage loan servicing portfolio.

     The  following   table  sets  forth  certain   information   regarding  the
composition of our mortgage servicing portfolio, excluding loans subserviced for
others, as of the dates indicated:
<TABLE>
<CAPTION>

                                                                                As of December 31,
                                                                 ---------------------------------------------------
                                                                     2002              2001              2000
                                                                 --------------    --------------   ----------------
                                                                                  (In thousands)
<S>                                                                <C>              <C>                 <C>

FHA insured/VA guaranteed residential........................      $ 2,128,363      $ 2,187,686         $1,608,115
Conventional loans...........................................        3,053,368        3,272,109          3,764,586
Other loans..................................................          151,896          196,570            145,262
                                                                 ---------------   --------------    ---------------

     Total mortgage servicing portfolio......................      $ 5,333,627      $ 5,656,365         $5,517,963
                                                                 ===============   ==============    ===============

Fixed rate loans.............................................      $ 4,688,672      $ 5,009,501         $4,346,813
Adjustable rate loans........................................          644,955          646,864          1,171,150
                                                                 ---------------   --------------    ---------------
     Total mortgage servicing portfolio......................      $ 5,333,627      $ 5,656,365         $5,517,963
                                                                 ===============   ==============    ===============
</TABLE>

     The following table shows the delinquency statistics for the mortgage loans
serviced by Matrix Financial,  excluding loans subserviced for others, as of the
dates presented.  Delinquencies and foreclosures for the mortgage loans serviced
by us generally  exceed the national  average due to high rates of delinquencies
and  foreclosures  on certain bulk loan and bulk  servicing  portfolios  that we
acquired at a discount.
<TABLE>
<CAPTION>

                                                              As of December 31,
                        -----------------------------------------------------------------------------------------------
                                     2002                           2001                             2000
                        ------------------------------ -------------------------------- -------------------------------

                           Number       Percentage        Number         Percentage        Number        Percentage
                             of        of Servicing         of          of Servicing         of         of Servicing
                           Loans         Portfolio        Loans          Portfolio         Loans          Portfolio
                        ------------- ---------------- -------------  ----------------- -------------  ----------------
<S>                          <C>               <C>          <C>                 <C>          <C>                <C>

Loans delinquent for:
   30-59 days..........      4,276             5.65%        4,610               5.35%        5,214              5.64%
   60-89 days..........      1,021             1.35           932               1.08           992              1.07
   90 days and over....        647             0.86           616               0.72           530              0.58
                        ------------- --------------   -------------  ---------------   -------------  --------------
   Total delinquencies.      5,944             7.86%        6,158               7.15%        6,736              7.29%
                        ============= ==============   =============  ===============   =============  ==============
   Foreclosures........        540             0.71%          757               0.88%        1,027              1.11%
                        ============= ==============   =============  ===============   =============  ==============
</TABLE>

     The following table sets forth certain information regarding the number and
aggregate  principal balance of the mortgage loans serviced by Matrix Financial,
including both fixed and adjustable rate loans,  excluding loans subserviced for
others, at various interest rates:

                                       12
<PAGE>

<TABLE>
<CAPTION>



                                                                As of December 31,
                    -----------------------------------------------------------------------------------------------------------
                                   2002                                 2001                               2000
                    ----------------------------------- -------------------------------------------- --------------------------
                                           Percentage                          Percentage                          Percentage
                    --------- ----------- ------------  --------- ----------- ---------------------- ------------ -------------
                     Number    Aggregate  of Aggregate   Number    Aggregate  of Aggregate  Number    Aggregate   of Aggregate
                       of      Principal   Principal       of      Principal    Principal     of      Principal    Principal
       Rate           Loans    Balance      Balance       Loans    Balance       Balance     Loans     Balance      Balance
       ----         --------- ----------- ------------  --------- ----------- ---------------------- ------------ -------------
                                                             (Dollars in thousands)
<S>                    <C>      <C>           <C>          <C>    <C>             <C>         <C>     <C>            <C>

Less than 7.00%....    23,345   2,196,944      41.19%      16,024 $ 1,443,862      25.53 %     6,317  $   474,596      8.60 %
 7.00%--7.99%......    19,043   1,634,054      30.64       23,815   1,895,797      33.52      18,424    1,335,738     24.21
 8.00%--8.99%......    13,424     724,053      13.57       19,002   1,144,290      20.23      27,691    1,801,131     32.64
 9.00%--9.99%......     8,755     349,308       6.55       12,122     542,621       9.59      19,369    1,002,226     18.16
10.00% and over....    11,080     429,268       8.05       15,192     629,795      11.13      20,603      904,272     16.39
                    ---------- ---------- -----------   ----------  --------- -----------   ---------   --------- ----------
  Total............    75,647   5,333,627     100.00%      86,155 $ 5,656,365     100.00 %    92,404  $ 5,517,963    100.00 %
                    ========== ========== ===========   ==========  ========= ===========   =========   ========= ==========
</TABLE>

     Loan   administration  fees  decrease  as  the  principal  balance  on  the
outstanding  loan  decreases and as the  remaining  time to maturity of the loan
shortens.  The  following  table sets forth  certain  information  regarding the
remaining  contractual  maturity  of  the  mortgage  loans  serviced  by  Matrix
Financial,  excluding loans  subserviced for others,  as of the dates shown. The
changes in the remaining  maturities as a percentage of unpaid principal between
2002,  2001 and 2000,  as reflected  below,  are the result of  acquisitions  of
mortgage servicing rights completed during 2001 and 2000.
<TABLE>
<CAPTION>

                                                                  As of December 31,
                  ------------------------------------------------------------------------------------------------------------------
                                   2002                                   2001                                  2000
                  ---------------------------------- --------------------------------------- ---------------------------------------
                                           Percentage                              Percentage                             Percentage
              Number  Percentage  Unpaid    Unpaid    Number  Percentage  Unpaid    Unpaid    Number Percentage  Unpaid    Unpaid
                of    of Number  Principal Principal   of     of Number  Principal Principal   of    of Number  Principal Principal
Maturity       Loans   of Loans   Amount    Amount    Loans   of Loans   Amount     Amount    Loans  of Loans     Amount    Amount
--------      ------- -------- ----------  --------- ------  ---------  --------- ---------- ------ ----------- --------- ----------
                                                                (Dollars in thousands)
<S>           <C>      <C>     <C>         <C>       <C>      <C>     <C>         <C>       <C>     <C>      <C>         <C>

 1--5 years.. 11,647   15.40 % $  188,463    3.53%   11,539   13.39%   $  169,794   3.00%   19,489   21.09%  $  321,196    5.82%
 6--10 years.  8,954   11.84      271,438    5.09    14,711   17.08       442,458   7.82    15,891   17.20      411,152    7.45
11--15 years. 10,728   14.18      662,439   12.42    12,101   14.05       729,162  12.89    14,981   16.21      779,922   14.13
16--20 years. 12,914   17.07    1,042,962   19.56    18,013   20.91     1,428,794  25.26    27,779   30.06    2,505,728   45.41
21--25 years.  1,588    2.10      134,967    2.53     2,219    2.58       246,835   4.36     4,522    4.90      444,679    8.06
More than 25
 years        29,816   39.41    3,033,358   56.87    27,572   32.00     2,639,322  46.66     9,742   10.54    1,055,286   19.13
              ------- -------- ----------  --------- ------  -------   ---------- -------   ------  -------  ----------  -------
  Total.....  75,647  100.00 % $5,333,627  100.00%   86,155  100.00%   $5,656,365 100.00%   92,404  100.00%  $5,517,963  100.00%
              ======= ======== ==========  ========= ======  =======   ========== =======   ======  =======  ==========  =======
</TABLE>

Our  servicing   activity  is   diversified   throughout   all  50  states  with
concentrations at December 31, 2002 in California,  Texas,  Missouri and Arizona
of  approximately  15%,  14%,  15% and 10%,  respectively,  based  on  aggregate
outstanding unpaid principal balances of the mortgage loans serviced.

     Acquisition of Servicing Rights. Historically, our strategy with respect to
mortgage servicing was to focus on acquiring  servicing for which the underlying
mortgage  loans tended to be more  seasoned and to have higher  interest  rates,
lower  principal  balances  and  higher  custodial  escrow  balances  than newly
originated  mortgage loans.  We believed this strategy  allowed us to reduce our
prepayment risk,  while allowing us to capture  relatively high custodial escrow
balances in relation to the  outstanding  principal  balance.  During periods of
declining  interest  rates,  prepayments of mortgage  loans usually  increase as
homeowners seek to refinance at lower interest rates, resulting in a decrease in
the value of the servicing portfolio.  Mortgage loans with higher interest rates
and/or higher principal  balances are more likely to result in prepayments since
the cost savings to the borrower from  refinancing  can be  significant.  During
2002,  existing low interest rates continued to decrease throughout the year. We
did not purchase  any  servicing  in 2002 due to the  interest  rates  prevalent
during the year, the lack of the servicing  products available and a decision to
retain a portion of our originated servicing.

     The following  table shows  quarterly and annual  average  prepayment  rate
experience on the mortgage loans serviced by Matrix  Financial,  excluding loans
subserviced by and for others:

                              For the Years Ended December 31,
                    -----------------------------------------------------
                      2002(1)(4)         2001(2)(4)        2000(3)(4)
                    ----------------   ----------------  ----------------
Quarter ended:
   December 31....        31.03%             24.67%            12.50%
   September 30...        23.30              25.13             12.70
   June 30........        19.00              24.63             12.70
   March 31.......        21.60              17.13             10.50
                    ----------------   ----------------  ----------------
Annual average....        23.73%             22.89%            12.10%
                    ================   ================  ================

                                       13
<PAGE>

 __________

(1)  These prepayment rates exclude prepayment experience for mortgage servicing
     rights  subserviced  for us by  others  of $26.6  million,  $600,000,  $5.8
     million and $34.6 million for the quarters ended December 31, September 30,
     June 30, and March 31, 2002, respectively.
(2)  These prepayment rates exclude prepayment experience for mortgage servicing
     rights  subserviced  for us by others of $889.0  million,  $581.8  million,
     $306.9  million  and $1.1  billion  for the  quarters  ended  December  31,
     September 30, June 30, and March 31, 2001, respectively.
(3)  These prepayment rates exclude prepayment experience for mortgage servicing
     rights subserviced for us by others of $447 million, $0, $16 million and $0
     for the quarters  ended  December 31,  September  30, June 30 and March 31,
     2000, respectively.
(4)  These  prepayment  rates do not include  prepayments  that resulted from us
     targeting our own servicing portfolio for refinance opportunities.

     Historically,  we  acquired  substantially  all of our  mortgage  servicing
rights in the secondary market. The industry expertise of Matrix Capital Markets
and Matrix Financial allows us to capitalize upon  inefficiencies in this market
when acquiring mortgage servicing rights.  Prior to acquiring mortgage servicing
rights, we analyze a wide range of characteristics of each portfolio  considered
for  purchase.  This  analysis  includes  projecting  revenues  and expenses and
reviewing  geographic  distribution,  interest rate distribution,  loan-to-value
ratios,   outstanding   balances,   delinquency   history  and  other  pertinent
statistics.  Due diligence is performed  either by our employees or a designated
independent contractor on a representative sample of the mortgages involved. The
purchase  price is based on the present value of the expected  future cash flow,
calculated by using a discount  rate,  loan  prepayment,  default rate and other
assumptions  that we consider to be appropriate  to reflect the risk  associated
with the  investment.  In 2000,  we began to  retain a portion  of the  mortgage
servicing  rights generated from the origination  platform.  Throughout 2000 and
for the majority of 2001, we generally  retained the servicing on the loans sold
to Ginnie Mae. In the fourth  quarter of 2001,  we began to retain the servicing
on loans sold to Fannie Mae and Freddie Mac and sold our newly originated Ginnie
Mae servicing. In April through August of 2002, we retained all of the servicing
originated  on Fannie Mae and Ginnie Mae loans.  Beginning in September of 2002,
we entered into an assignment of trade contract with a national  mortgage banker
to sell  the  majority  of our  originated  servicing.  The  decision  on  which
servicing  to  retain  or sell is  based  on  factors  including  interest  rate
environment,  secondary market pricing for the servicing, our capital levels and
liquidity.  As of  December  31,  2002,  in terms of  unpaid  principal  amount,
approximately  $2.3 billion of the  underlying  mortgage  loans in our servicing
portfolio  were  from  loans  originated  and sold by  Matrix  Financial.  It is
anticipated  that after the sale of the  Platform  we will  continue to sell the
majority  of our newly  originated  servicing.  See "Item 1.  Business--Sale  of
Wholesale  Production  Platform."  Any  significant  additions to our  servicing
portfolio will be done through  acquisitions  and likely will be portfolios with
characteristics of more seasoning, lower balances and higher escrows. Any future
acquisitions  will be based on  availability  of desired  product,  our  capital
levels,  our current  investment in mortgage  servicing assets and the prevalent
interest rate environment.

     Sales of Servicing  Rights.  We  periodically  sell our purchased  mortgage
servicing  portfolios  and  generally  sell a portion of the mortgage  servicing
rights on new loans that we originate,  as mentioned above. These sales generate
cash at the time of sale but reduce  future cash flow and  servicing fee income.
We sold  mortgage  servicing  rights  on  loans  that we  originated  having  an
aggregate  principal  amount of $681 million  during the year ended December 31,
2002.  Periodically,  we may also sell purchased  mortgage  servicing  rights to
restructure our portfolio or generate  revenues.  Purchased  mortgage  servicing
rights  were sold  during  the year  ended  December  31,  2002 for net gains of
approximately $675,000.

     We  anticipate  that we will sell the majority of our  originated  mortgage
servicing rights on new loans that we originate.  See "Item 1. Business--Sale of
Wholesale  Production  Platform." We also may sell purchased  mortgage servicing
rights.  We intend to base decisions  regarding future mortgage  servicing sales
upon our cash requirements,  purchasing  opportunities,  capital needs, earnings
and the market price for mortgage servicing rights. During a quarter in which we
sell  purchased  mortgage  servicing  rights,  reported  income  will tend to be
greater than if we had not made the sale during that  quarter.  Prices  obtained
for mortgage servicing rights vary depending on servicing fee rates, anticipated
prepayment rates, average loan balances,  remaining time to maturity,  servicing
costs,  custodial  escrow balances,  delinquency and foreclosure  experience and
purchasers' required rates of return.

     In the ordinary course of selling  mortgage  servicing  rights,  consistent
with  industry  standards,  we make certain  representations  and  warranties to
purchasers of mortgage  servicing  rights.  If a borrower defaults and there has
been a breach  of  representations  or  warranties  and we have no  third  party
recourse,  we may  become  liable  for the  unpaid  principal  and  interest  on
defaulted  loans.  In such a case, we may be required to repurchase the mortgage
loan and bear any subsequent  loss on the loan. In connection with any purchases
of mortgage  servicing  rights that we make, we also are exposed to liability to
the extent that an  originator  or seller of the  mortgage  servicing  rights is
unable to honor its  representations and warranties.  Historically,  we have not
incurred material losses due to breaches of  representations  and warranties and
we  do  not   anticipate  any  future   material   losses  due  to  breaches  of
representations and warranties;  however, there can be no assurance that we will
not experience such losses.

                                       14
<PAGE>

     Hedging of Servicing Rights. Our investment in mortgage servicing rights is
exposed to  potential  impairment  in certain  interest  rate  environments.  As
previously discussed,  the prepayment of mortgage loans increases during periods
of declining  interest rates as homeowners seek to refinance their loan to lower
interest rates. If the level of prepayment on segments of our mortgage servicing
portfolio  reaches a level  higher than we projected  for an extended  period of
time, the associated basis in the mortgage servicing rights may be impaired.  To
mitigate this risk of impairment due to declining interest rates, we initiated a
hedging strategy during 1997 that used a program of exchange-traded  futures and
options.  Through  December 31, 2000,  our hedging  program  qualified for hedge
accounting treatment based on a high degree of statistical  correlation and then
current  accounting  guidance.  With the  required  adoption  of the SFAS 133 on
January 1, 2001,  we did not attempt to qualify for hedge  accounting  treatment
due to the  requirements  in the  standard  that are  necessary to do so. In the
fourth  quarter 2002, we elected to reinstate our hedging  program to mitigate a
portion of our investment in mortgage servicing rights from further  impairment.
This program is identical to the program  instituted  in 1997.  The decision was
based on the historically low interest rates, the continued  weakening  economy,
the geopolitical environment and the impairment that we incurred to-date. During
the fourth quarter 2002, we hedged  approximately  $400 million of our servicing
portfolio,  or 7.5%.  As of  December  31,  2002,  we removed the hedge and then
reinstated  it  on  January  2,  2003,   increasing   our  hedge   portfolio  to
approximately  $600  million.  Although  we believe our  hedging  program  would
qualify for hedge accounting, we did not attempt to qualify for hedge accounting
treatment due to the  requirements in SFAS 133 that were necessary to do so. The
decision to increase or decrease our hedging  coverage  will be based on several
factors,  including  those  discussed  above,  as well as the composition of our
current servicing portfolio.

     During 2002,  based on a valuation  model which  incorporates,  among other
things,  prepayment  speeds,  we  recorded a  provision  for  impairment  on our
mortgage servicing rights totaling  approximately $14.2 million.  Our impairment
reserve as of December  31, 2002 was $14.4  million.  The Company is required to
record its investment in mortgage  servicing rights at the lower of cost or fair
value.  The fair value of mortgage  servicing  rights is determined based on the
discounted  future servicing income  stratified based on one or more predominant
risk  characteristics  of the  underlying  loans.  The  Company  stratifies  its
mortgage   servicing  rights  by  product  type  and  investor  to  reflect  the
predominant  risks. To determine the fair value of its  investment,  the Company
uses a valuation  model that  calculates the present value of discounted  future
cash flows.  Due to the drop in interest rates,  both the actual and anticipated
prepayment  speeds used in the valuation model increased  causing the fair value
of the  servicing  to decrease  below the  carrying  basis which  resulted in an
impairment.  The  majority of the  impairment  related to the  servicing  rights
retained  by the  Company  on its  originations  over  the  last  year.  Further
decreases  in interest  rates,  or increases in  anticipated  future  prepayment
speeds, may cause additional impairment charges in future years.

Brokerage, Consulting and Outsourcing Services

     Brokerage Services.  Matrix Capital Markets operates as one of the nation's
leading full-service mortgage servicing and mortgage loan brokers. It is capable
of analyzing,  packaging,  marketing and closing transactions involving mortgage
servicing and loan portfolios and selected  merger and acquisition  transactions
for mortgage banking  entities.  Matrix Capital Markets promotes its services to
all  types  and  sizes  of  market  participants,   thereby  developing  diverse
relationships.

     Mortgage  servicing rights are sold either on a bulk basis or a flow basis.
In a bulk  sale,  the  seller  identifies,  packages  and sells a  portfolio  of
mortgage  servicing rights to a buyer in a single  transaction.  In a flow sale,
the  seller  agrees  to sell to a  specified  buyer  from  time  to  time,  at a
predetermined price, the mortgage servicing rights originated by the seller that
meet certain criteria.  Matrix Capital Markets is capable of helping both buyers
and sellers with respect to bulk and flow sales of mortgage servicing rights.

     We  believe  that the  client  relationships  developed  by Matrix  Capital
Markets through its national network of contacts with commercial banks, mortgage
companies,  savings  associations and other institutional  investors represent a
significant competitive advantage and form the basis for Matrix Capital Market's
national market  presence.  These contacts also enable Matrix Capital Markets to
identify  prospective clients for our other subsidiaries and make referrals when
appropriate. See "Consulting and Analytic Services" below.

      Most  institutions  that own  mortgage  servicing  rights  have found that
careful  management of these assets is necessary due to their  susceptibility to
interest  rate  cycles,  changing  prepayment  patterns  of  mortgage  loans and
fluctuating  earnings  rates  achieved on  custodial  escrow  balances.  Because
companies must capitalize  originated  mortgage servicing rights,  management of
mortgage  servicing  assets  has become  even more  critical.  These  management

                                       15
<PAGE>

efforts,  combined  with  interest  rate  sensitivity  of assets  and the growth
strategies of market participants,  create constantly changing supply and demand
and, therefore,  constantly fluctuating price levels in the secondary market for
mortgage servicing rights.

      The sale and transfer of mortgage servicing rights occurs in a market that
is inefficient  and often requires an  intermediary to match buyers and sellers.
Prices are unpublished and closely guarded by market  participants,  unlike most
other  major  financial  secondary  markets.  This lack of  pricing  information
complicates an already  difficult process of  differentiating  between servicing
product  types,  evaluating  regional,  economic  and  socioeconomic  trends and
predicting  the  impact  of  interest  rate  movements.  Due to its  significant
contacts,  reputation and market penetration,  Matrix Capital Markets has access
to information on the availability of mortgage servicing portfolios, which helps
it bring interested buyers and sellers together.  Due to the consolidation  that
has taken place in the mortgage  banking  industry,  as well as the low interest
rate environment experienced in 2002 which depressed the value of servicing, the
overall  market,  including the number of buyers and sellers of  servicing,  has
decreased.  As a result,  we have  experienced  an overall  decrease in both the
portfolios brokered and the corresponding  revenue. In the current market, we do
not anticipate this trend to reverse.

     In addition,  Matrix Capital Markets provides  brokerage services to buyers
and sellers of all types of loan products.  Matrix Capital Markets provides loan
brokerage  services  to  both  servicing  brokerage  clients  and  non-servicing
brokerage clients.

     First Matrix  Investment  Services is  registered  with the NASD as a fully
disclosed  broker-dealer,  headquartered  in  Denver,  Colorado.  First  Matrix,
incorporated  in Texas in 1984,  conducts  a wide  range of  general  securities
business, including fixed income brokerage, retail brokerage, investment banking
and structured  finance  services.  First Matrix clears all of its  transactions
through  First  Southwest  Company based in Dallas,  Texas on a fully  disclosed
basis.

     Fixed  Income  Trading.  First Matrix has  traditionally  focused its fixed
income  business  primarily  on  financial  institutions  in the Rocky  Mountain
Region.  First Matrix brokers U.S.  government treasury  obligations,  agencies,
municipal bonds and corporate debt. The majority of its fixed income business is
of an institutional  nature,  and its clients include banks,  savings and loans,
insurance  companies,  mutual funds,  money  managers and hedge funds.  With the
addition of its SBA group in Memphis,  First Matrix has  diversified  its client
base and its  product  mix.  In its first full year of SBA  brokerage  activity,
First Matrix was ranked third in SBA guaranteed loan pool securitizations.

     First Matrix,  acting as agent for Matrix Bank,  purchases  the  guaranteed
portion of SBA 7A loans from bank and non-bank lenders around the country. These
loans are assembled and later pooled into SBA securities which are sold into the
secondary  market.  These  pools  are  subsequently  sold to  institutional  and
sophisticated  investors.  This  trading  strategy  enables  Matrix Bank to earn
attractive  yields on high credit  quality  assets with reduced  exposure to the
traditional risks associated with investing in any fixed income asset.

     Retail Brokerage. Retail brokerage services have and will continue to be an
integral part of the First Matrix service platform. The First Matrix focus is to
attract  experienced  investment  professionals with established  relationships,
looking to provide their clients with the safety and expanded  services provided
by a  broker-dealer  connected  to a  well-capitalized,  regional  bank  holding
company.  Our brokers  have  long-standing  relationships  with a broad range of
retail and small business clients.

     Although  First Matrix'  product mix will focus on fee-based  products,  it
will continue to offer traditional  fixed income and equity investment  services
to its retail client base.

     Investment  Banking /  Structured  Finance.  Historically,  the Company has
relied on other financial  institutions  and the brokerage  community to provide
liquidity  for many of its assets and the assets of its  subsidiaries.  In doing
so, the Company and its subsidiaries has paid  considerable  fees and has relied
on third parties to provide  liquidity in assets that individuals in the Company
know  intimately  and  in  many  cases  understand  better  than  the  brokerage
community.

     First Matrix has hired a small number of  professionals  who understand the
Company's  business lines and have  structured its assets at other firms.  These
underwriting  activities  have  focused  to-date on SBA  products,  real  estate
collateral and chartered  school loans  originated  through the holding company.
All underwriting has been done on a best efforts basis.

     Consulting and Analytic Services.  Matrix Capital Markets continues to make
significant  commitments  to  its  analytics  department,  which  has  developed
expertise  in  helping  companies  implement  and track  their  "mark-to-market"
valuations  and  analyses.  Matrix  Capital  Markets has  enhanced  its existing
valuation  models and has created a software  program that can be  customized to

                                       16
<PAGE>

fit its  customers'  many  different  needs and unique  situations in performing
valuations  and  analyses.   In  addition,   Matrix  Capital   Markets  has  the
infrastructure  and  management  information  system  capabilities  necessary to
undertake  the  complex  analyses  required by SFAS 140.  Many of the  companies
affected by the  implementation  of SFAS 140 have  outsourced this function to a
third party rather than dedicate the resources  necessary to develop systems for
and perform their own SFAS 140 valuations.

     Because SFAS 140 requires that mortgage  servicing  portfolios be valued at
the lower of cost or market value,  active  management  of servicing  assets has
become a critical  component to holders of mortgage servicing rights. Due to the
risk of  impairment  of  mortgage  servicing  rights as a result  of  constantly
changing  interest  rates  and  prepayment  speeds  on the  underlying  mortgage
portfolio,  risk management of mortgage  servicing rights by holders of mortgage
servicing  rights  portfolios,  which  typically  takes the form of hedging  the
portfolio,  has become more prevalent.  The SFAS 140  "mark-to-market"  analyses
done by Matrix Capital Markets help clients assess which of their  portfolios of
mortgage  servicing  rights are most  susceptible  to impairment due to interest
rate and prepayment risk.

     We believe that the services offered by the analytics  department of Matrix
Capital  Markets  provide us with a  competitive  advantage  in  attracting  and
retaining clients because we are able to offer financial  services companies and
financial institutions a more complete package of services than our competitors.
In addition,  Matrix Capital Markets is able to refer clients to Matrix Bank for
bulk loan acquisitions and to Matrix Asset Management for real estate management
and disposition  services.  The full range of services offered by Matrix Capital
Markets and its affiliates  further  strengthens  Matrix Capital Market's client
relationships.

     Real Estate  Management and Disposition  Services.  Matrix Asset Management
provides  real  estate   management  and  disposition   services  on  foreclosed
properties  owned by financial  services  companies and  financial  institutions
across the United  States.  In addition to the  unaffiliated  clients  currently
served by Matrix  Asset  Management,  many of which are also  clients  of Matrix
Capital Markets,  Matrix  Financial uses Matrix Asset Management  exclusively in
handling the  disposition of foreclosed real estate for which it is responsible.
Having  Matrix  Asset  Management,  rather than Matrix  Financial,  provide this
service  transforms  the  disposition  process into a revenue  generator for us,
since Matrix  Asset  Management  typically  collects a referral fee based on the
value of the foreclosed  real estate from the real estate broker involved in the
sale transaction.  Because Matrix Asset Management  typically collects a portion
of its fee from the real  estate  broker,  Matrix  Asset  Management  is able to
provide this disposition service on an outsourced basis at a reduced cost to the
mortgage loan servicer. Matrix Asset Management is able to pass a portion of the
cost of the  disposition  on to the real estate broker  because of the volume it
generates.

      In addition, Matrix Asset Management provides limited collateral valuation
opinions to clients who are  interested in assessing the value of the underlying
collateral on nonperforming mortgage loans, as well as to clients such as Matrix
Bank and other third party mortgage loan  originators  and buyers  interested in
evaluating potential bulk purchases of mortgage loans.

     School Services.  In addition to providing  financing to charter schools as
mentioned  in  "Lending  Activities--Commercial  and  Other  Lending,"  ABS also
provides a wide  variety of  outsourced  business  and  consulting  services  to
charter schools. The most basic services offered by ABS include fund accounting,
cash  management,  budgeting,  governmental  reporting  and payroll and accounts
payable  processing.  Additionally,  ABS  consults  with and offers  programs to
charter schools in the following areas:

        o    facility and safety management;
        o    technology;
        o    policy development;
        o    grant administration; and
        o    comprehensive insurance coverage.

ABS also provides  administrative  and instructional  leadership to some charter
schools  by placing  administrators  on-site  at the  charter  schools to take a
hands-on   approach  and  work  with  the  schools  with  regard  to  curriculum
development, special education and personnel management.

     The  business  services  provided  by ABS  are  integral  to the  financing
division,  as these  services  allow ABS to use their  knowledge of the school's
financial  condition  and  the  capability  of the  schools'  operators  to make
informed decisions in the underwriting of charter school financing. The services
also give ABS a significant advantage in the servicing and ongoing monitoring of

                                       17
<PAGE>

the schools,  which we believe is imperative to the  collection  process and the
overall success of our financing efforts.

     ABS has begun to expand its  services to include more  operational  control
over  individual  charter  schools,  which  consists of active  oversight of the
day-to-day operations of the charter, including the selection of curriculum. The
expansion  of the  services  applies to both  independent  charter  schools  and
charter schools managed by ABS.

Self-Directed Trust, Custody and Clearing Activities

     Self-Directed  Trust and Custody Services.  The Company's trust and custody
activities are provided through Sterling Trust and Matrix Bank.

     Sterling  Trust   provides   administrative   services  for   self-directed
individual retirement accounts, qualified business retirement plans and personal
custodial  accounts,  as well as corporate escrow and paying agent services.  In
addition,  Sterling Trust offers  specialized  custody and clearing  services to
investment  professionals.  These services are marketed on a nationwide basis to
the  financial  services  industry,   specifically  broker-dealers,   registered
representatives,  financial planners and advisors, tax professionals,  insurance
agents and investment product sponsors.  The advantage offered by Sterling Trust
is the ability to hold a wide array of publicly traded  investments,  as well as
nonstandard assets and private placement offerings.

     Sterling Trust does not offer financial planning or advising services,  nor
does it recommend, sell or solicit any investments.  Sterling Trust acts only as
a directed  custodian and is not affiliated with any  investment.  It has always
been  Sterling  Trust's  mission to keep this  independence  to ensure that high
quality services are offered without any conflicting  interests.  Sterling Trust
executes no investment  transaction  without the direction of the account holder
or the account holder's authorized representative.

     During 2002, Matrix Bank, through its Denver,  Colorado location,  expanded
the variety and depth of its trust services, primarily by partnering with Matrix
Settlement & Clearance  Services in providing  trust and  custodial  services to
over 50 nationally  recognized third party  administrators,  broker-dealers  and
banks.  Trust and custodial services range from accepting  qualified  retirement
plan contributions,  facilitating the trading and settlement of plan securities,
making  distributions to individual plan participants,  to withholding state and
federal taxes and producing annual tax forms.

     These  services  are  marketed  in  conjunction  with Matrix  Settlement  &
Clearance  Services on a  nationwide-basis  to the financial  services industry,
specifically, broker-dealers, registered representatives, financial planners and
advisors,  tax professionals,  insurance agents and investment product sponsors.
The advantage  offered by Matrix Bank's trust  department is the ability to hold
and report on a wide array of publicly traded  investments.  Matrix Bank's trust
department acts only as a direct trustee and does not offer  financial  planning
or advising.

     At December 31, 2002,  Sterling Trust had 34,300 accounts with assets under
administration of over $2.0 billion, and the trust department of Matrix Bank had
10,800 accounts with assets under administration of over $5.8 billion.

     Clearing  Services.  Matrix  Settlement  &  Clearance  Services,  our joint
venture,  provides  automated  clearing of mutual funds  utilizing  the National
Securities Clearing Corporation's Fund/SERV and Defined Contribution Clearance &
Settlement platform for banks, trust companies,  third party  administrators and
registered investment advisors. In performing services for its customers, Matrix
Settlement  &  Clearance  Services  generates  low-cost  deposits  and trust and
custodial  fees for the Company.  As of December 31, 2002,  Matrix  Settlement &
Clearance   Services  had  86  clients   under   contract   with  those  clients
administering  approximately  $13.8  billion in funds that would be eligible for
inclusion in the  automated  clearing  environment  of the  National  Securities
Clearing Corporation.

     MSCS  Financial  Services,   LLC,  a  wholly  owned  subsidiary  of  Matrix
Settlement  & Clearance  Services,  began  operations  January 2, 2002 as a NASD
registered broker-dealer.

     Through our wholly owned  subsidiary,  Matrix  Advisory  Services,  LLC, we
continue  to  develop  and  plan  to  offer  an  Internet-based  private  wealth
management  service  through the  utilization  of proprietary  asset  allocation
models in 2003 as a complementary business to the clearing operation.  The model
was  developed  and will be supported by a  nationally  recognized  research and
investment firm. The advantage that our service will offer is a turnkey approach
with the automation of the mutual fund clearing.

                                       18
<PAGE>

Competition

      We compete for the acquisition of mortgage  servicing rights and bulk loan
portfolios  mainly with mortgage  companies,  savings  associations,  commercial
banks  and other  institutional  investors.  We  believe  that we have  competed
successfully  for the  acquisition  of mortgage  servicing  rights and bulk loan
portfolios  by  relying  on the  advantages  provided  by our  unique  corporate
structure and the secondary market expertise of our employees.

      We believe that Matrix Bank's most direct  competition  for deposits comes
from  local  financial   institutions.   Customers  distinguish  between  market
participants  based  primarily on price and, to a lesser extent,  the quality of
customer  service and name  recognition.  Matrix Bank's cost of funds fluctuates
with general market interest rates.  During certain interest rate  environments,
we expect  additional  significant  competition  for deposits from corporate and
governmental debt securities,  as well as from money market mutual funds. Matrix
Bank  competes  for  conventional  deposits by  emphasizing  quality of service,
extensive product lines and competitive pricing.

      For mortgage loan and mortgage servicing rights, brokerage and consulting,
we compete mainly with other mortgage banking  consulting firms and national and
regional investment banking companies. We believe that the customers distinguish
between market participants based primarily on customer service.  Matrix Capital
Markets competes for its brokerage and consulting activities by:

      o     recruiting qualified and experienced sales people;
      o     developing innovative sales techniques;
      o     offering superior analytical services;
      o     providing  financing  opportunities  to its  customers  through  its
            affiliation with Matrix Bank; and
      o     seeking to provide a higher  level of service  than is  furnished by
            its competitors.

      In  originating  mortgage  loans,  Matrix  Financial  and Matrix Bank have
historically  competed mainly with other mortgage companies,  finance companies,
savings  associations and commercial banks.  Customers  distinguish among market
participants  based  primarily on price and, to a lesser extent,  the quality of
customer service and name recognition.  After the sale of the Platform,  we have
agreed  with the Buyer not to compete in certain  respects.  We do not  believe,
however,  that this stipulation will impact  substantially the ability of Matrix
Bank to  effectively  serve  its  local  markets  or  customers.  See  "Item  1.
Business--Sale of Wholesale Production Platform."

      Sterling Trust faces  considerable  competition in all of the services and
products that it offers,  mainly from other  self-directed  trust  companies and
broker-dealers. Sterling Trust also faces competition from other trust companies
and trust divisions of financial institutions.  Sterling Trust's niche has been,
and will continue to be,  providing high quality  customer service and servicing
nonstandard retirement products. In an effort to increase market share, Sterling
Trust will endeavor to provide superior service, offer technologically  advanced
solutions,  expand  its  marketing  efforts,  provide  competitive  pricing  and
continue to diversify its product mix.

      Matrix Asset  Management  competes against other companies that specialize
in providing  real estate  management  and  disposition  services on  foreclosed
property.  Additionally,  clients or potential clients that opt to perform these
services in-house diminish Matrix Asset Management's market.

      ABS competes with other outsourcing  companies and Educational  Management
Organizations, as well as schools that prefer to perform the services offered by
ABS in-house.

Employees

      At December 31, 2002, the Company had 902  employees.  We believe that our
relations  with  our  employees  are  good.  The  Company  is not  party  to any
collective bargaining agreement.  We anticipate that the Buyer of the production
platform will hire  approximately  346 of our  employees,  thereby  reducing our
employee count to approximately 556 as of the Final Closing Date. See "Item 1.
Business--Sale of Wholesale Production Platform."

                                       19
<PAGE>

Regulation and Supervision

      Set  forth  below  is a brief  description  of  various  laws,  regulatory
authorities and associated regulations affecting our operations. The description
of laws and  regulations  contained  in this  document  does not  purport  to be
complete and is qualified  in its entirety by reference to  applicable  laws and
regulations.

     Any change in applicable laws,  regulations or regulatory policies may have
a material effect on our business, operations and prospects.

     Matrix  Bancorp.  We are a unitary  savings and loan holding company within
the  meaning  of the Home  Owners'  Loan Act.  As such,  we are  subject  to OTS
regulation,  examination,  supervision and reporting requirements.  In addition,
the OTS has  enforcement  authority  over us and  our  savings  association  and
non-savings association subsidiaries. Among other things, this authority permits
the OTS to restrict or prohibit  activities  that are determined to be a serious
risk to the financial safety,  soundness or stability of our subsidiary  savings
institution,  Matrix Bank. In addition, Matrix Bank must notify the OTS at least
30 days before making any capital distribution to us.

      As a unitary  savings and loan holding  company that has been in existence
prior to May 4, 1999, we generally are not restricted  under existing laws as to
the types of business  activities  in which we may engage,  provided that Matrix
Bank  continues to be a "qualified  thrift  lender"  under the Home Owners' Loan
Act.  To  maintain  its status as a qualified  thrift  lender,  Matrix Bank must
maintain a minimum  percentage  of its assets in  qualified  thrift  investments
unless the Office of Thrift Supervision grants an exception to this requirement.
In general,  qualified thrift  investments  include certain types of residential
mortgage loans and mortgage-backed  securities. If we acquire control of another
savings association as a separate subsidiary, we would become a multiple savings
and loan holding company.  Multiple savings and loan holding  companies may only
engage in those activities permissible for a financial holding company under the
Bank  Holding  Company Act of 1956,  as amended.  Generally,  financial  holding
companies  may  only  engage  in  activities  such  as  banking,  insurance  and
securities  activities,  as well as merchant  banking  activities  under certain
circumstances.  In  addition,  if Matrix Bank fails to maintain  its status as a
qualified thrift lender,  within one year of Matrix Bank's failure,  we would be
required  to convert  Matrix  Bank to a national  bank and to register as a bank
holding company under the Bank Holding Company Act of 1956, as amended.

      The Change in Bank  Control  Act,  as  amended,  provides  that no person,
acting  directly or  indirectly or thorough or in concert with one or more other
persons,  may  acquire  control  of a savings  association  unless the Office of
Thrift Supervision has been given 60 days prior written notice. The Home Owners'
Loan Act provides that no company may acquire  control of a savings  association
without the prior approval of the Office of Thrift Supervision. Any company that
acquires  such  control  becomes a savings and loan holding  company  subject to
registration,  examination  and regulation by the Office of Thrift  Supervision.
Pursuant  to  federal  regulations,  control  of a  savings  association  (which
includes its holding  company) is conclusively  deemed to have been acquired by,
among  other  things,  the  acquisition  of more than 25% of any class of voting
stock of the association or the ability to control the election of a majority of
the  directors of the  association.  Moreover,  control is presumed to have been
acquired,  subject to  rebuttal,  upon the  acquisition  of more than 10% of any
class of  voting  stock,  but less  than 25% of any  class of stock of a savings
association,  where certain enumerated "control factors" are also present in the
acquisition.  The Office of Thrift  Supervision  may prohibit an  acquisition of
control if it would result in a monopoly or  substantially  lessen  competition,
the financial  condition of the acquiring  person might jeopardize the financial
stability of the association, or the competence,  experience or integrity of the
acquiring  person  indicates  that  it  would  not  be in  the  interest  of the
depositors or the public to permit the acquisition of control by such person.

      Gramm-Leach-Bliley. The Gramm-Leach-Bliley Act of 1999 (otherwise known as
the "Financial  Services  Modernization  Act") eliminated many federal and state
law barriers to affiliations among banks,  securities firms, insurance companies
and other  financial  service  providers.  The law revised and expanded the Bank
Holding Company Act framework to permit a holding company structure to engage in
a full range of financial  activities through a new entity known as a "Financial
Holding Company." "Financial  activities" is broadly defined to include not only
banking,  insurance and  securities  activities,  but also merchant  banking and
additional  activities that the Federal Reserve Board, in consultation  with the
Secretary of the Treasury,  determined to be financial in nature,  incidental to
such  financial  activities,  or  complementary  activities  that do not  pose a
substantial  risk to the safety and soundness of depository  institutions or the
financial system generally.

                                       20
<PAGE>


      The Financial  Services  Modernization  Act prohibits  unitary savings and
loan holding  companies  formed after May 4, 1999 from engaging in  nonfinancial
activities. We are a grandfathered unitary savings and loan holding company. The
Financial  Services  Modernization  Act has not had a material adverse effect on
our operations. However, the Financial Services Modernization Act permits banks,
securities  firms and  insurance  companies to  affiliate.  This has continued a
trend in the financial  services  industry  toward  further  consolidation.  The
Financial  Services  Modernization  Act could result in an increasing  amount of
competition  from  larger  institutions  and other types of  companies  offering
financial  products,  many  of  which  may  have  substantially  more  financial
resources.  In addition,  the Financial  Services  Modernization Act may have an
anti-takeover  effect  because  it may tend to limit  our  attractiveness  as an
acquisition  candidate to other savings and loan holding companies and financial
holding companies.

       The USA  Patriot Act was signed  into law on October  26,  2001.  The USA
Patriot Act gives the federal government new powers to address terrorist threats
through enhanced  domestic  security  measures,  expanded  surveillance  powers,
increased information sharing and broadened anti-money laundering  requirements.
The USA Patriot Act also  requires  the  federal  banking  agencies to take into
consideration  the effectiveness of controls designed to combat money laundering
activities  in  determining  whether  to  approve a merger or other  acquisition
application of a member  institution.  Accordingly,  if we engage in a merger or
other  acquisition,  our controls  designed to combat money  laundering would be
considered as part of the  application  process.  We do not believe that the USA
Patriot Act will have a material impact on our operations.

     Federal  Savings  Bank  Operations.  Matrix  Bank is subject  to  extensive
regulation,  examination and supervision by the Office of Thrift Supervision, as
its primary federal regulator,  and potentially by the Federal Deposit Insurance
Corporation, which insures its deposits up to applicable limits. Such regulation
and supervision:

      o     establishes a comprehensive  framework of activities in which Matrix
            Bank can engage;
      o     limits the types and amounts of investments  permissible  for Matrix
            Bank;
      o     limits  the  ability  of Matrix  Bank to extend  credit to any given
            borrower;
      o     significantly  limits  the  transactions  in which  Matrix  Bank may
            engage with its affiliates;
      o     requires  Matrix  Bank to meet a qualified  thrift  lender test that
            requires  Matrix  Bank to invest in  qualified  thrift  investments,
            which  include  primarily  residential  mortgage  loans and  related
            investments;
      o     places limitations on capital  distributions by savings associations
            such as Matrix Bank, including cash dividends;
      o     imposes  assessments to the Office of Thrift Supervision to fund its
            operations;
      o     establishes a continuing and affirmative obligation, consistent with
            Matrix  Bank's  safe and sound  operation,  to help meet the  credit
            needs  of  its   community,   including  low  and  moderate   income
            neighborhoods;
      o     requires  Matrix  Bank  to  maintain   certain   noninterest-bearing
            reserves against its transaction accounts;
      o     establishes  various capital categories  resulting in various levels
            of regulatory  scrutiny  applied to the institutions in a particular
            category; and
      o     establishes standards for safety and soundness.

      Matrix Bank must submit annual  financial  reports  audited by independent
auditors to federal  regulators.  Auditors  must  receive  examination  reports,
supervisory  agreements  and reports of  enforcement  actions.  In addition,  an
attestation by the auditor  regarding the  statements of management  relating to
the internal controls must be submitted to the Office of Thrift Supervision. The
audit  committees of such  institutions  must include members with experience in
banking or financial  management,  must have access to outside  counsel and must
not include  representatives  of large  customers.  The regulatory  structure is
designed primarily for the protection of the insurance fund and depositors.  The
regulatory structure also gives the regulatory  authorities extensive discretion
in connection with their supervisory and enforcement  activities.  Any change in
these  regulations,  whether by the Office of Thrift  Supervision,  the  Federal
Deposit  Insurance  Corporation  or  Congress,  could have a material  impact on
Matrix Bank and its operations.

      Transactions with Affiliates.  Under current federal law, Sections 23A and
23B  of  the  Federal  Reserve  Act  govern   transactions   between  depository
institutions  and their  affiliates.  These  provisions  are made  applicable to
savings  associations,  such as Matrix Bank,  by the Home Owners' Loan Act. In a
holding  company  context,  in general,  the parent holding company of a savings
association  and any companies that are controlled by the parent holding company
are  affiliates  of the  savings  association.  However,  the  Office  of Thrift
Supervision has the discretion to treat subsidiaries of savings  associations as
affiliates on a case-by-case  basis.  Section 23A limits the extent to which the
savings association or its subsidiaries may engage in certain  transactions with
its affiliates.  These transactions  include,  among other things, the making of
loans or other  extensions  of credit to an affiliate and the purchase of assets
from an affiliate. Generally, these transactions between the savings association
and any one  affiliate  cannot exceed 10% of the savings  association's  capital

                                       21
<PAGE>

stock and surplus,  and these transactions  between the savings  institution and
all of its  affiliates  cannot,  in the  aggregate,  exceed  20% of the  savings
institution's  capital stock and surplus.  Section 23A also establishes specific
collateral  requirements for loans or extensions of credit to an affiliate,  and
for  guarantees  or  acceptances  on  letters  of credit  issued on behalf of an
affiliate. Applicable regulations prohibit a savings association from lending to
any affiliate  engaged in activities not  permissible for a bank holding company
or  acquire  the  securities  of most  affiliates.  Section  23B  requires  that
transactions  covered  by  Section  23A and a  broad  list  of  other  specified
transactions be on terms and under  circumstances  substantially the same, or no
less  favorable  to the  savings  association  or  its  subsidiary,  as  similar
transactions   with   non-affiliates.   In  addition  to  the   restrictions  on
transactions  with  affiliates  that Sections 23A and 23B of the Federal Reserve
Act impose on depository  institutions,  the regulations of the Office of Thrift
Supervision  also generally  prohibit a savings  association  from purchasing or
investing  in  securities  issued  by  an  affiliate.  Matrix  Bank  engages  in
transactions  with its  affiliates,  which  are  structured  with the  intent of
complying  with these rules.  Sections 23A and 23B have been codified into a new
regulation  issued by the Federal Reserve Board which becomes effective on April
1, 2003. The regulation is not expected to materially impact Matrix Bank.

      Insurance  of Accounts and  Regulation  by the Federal  Deposit  Insurance
Corporation.  Matrix Bank is a member of the Savings Association Insurance Fund,
which is administered by the Federal Deposit Insurance Corporation. The deposits
of Matrix Bank are insured up to $100,000 per  depositor by the Federal  Deposit
Insurance Corporation.  This insurance is backed by the full faith and credit of
the United States. As insurer, the Federal Deposit Insurance Corporation imposes
deposit insurance  assessments and is authorized to conduct  examinations of and
to require  reporting by institutions  insured by the Federal Deposit  Insurance
Corporation.    It   also   may   prohibit   any   Federal   Deposit   Insurance
Corporation-insured  institution  from  engaging  in any  activity  the  Federal
Deposit  Insurance  Corporation  determines  by  regulation  or  order to pose a
serious risk to the Federal Deposit Insurance  Corporation.  The Federal Deposit
Insurance  Corporation  also may initiate  enforcement  actions  against savings
associations  and may terminate the deposit  insurance if it determines that the
institution has engaged or is engaging in unsafe or unsound practices,  or is in
an unsafe or unsound condition.

      The Federal Deposit Insurance Corporation's deposit insurance premiums are
assessed  through  a  risk-based  system  under  which  all  insured  depository
institutions  are placed  into one of nine  categories  and  assessed  insurance
premiums based upon their level of capital and supervisory evaluation. Under the
system,  institutions  classified as well  capitalized,  as defined  below,  and
considered  healthy pay the lowest premium while institutions that are less than
adequately  capitalized,   as  defined  below,  and  considered  of  substantial
supervisory concern pay the highest premium.  Risk classification of all insured
depository institutions is made by the Federal Deposit Insurance Corporation for
each semi-annual assessment period.

      The  Federal  Deposit  Insurance  Corporation  is  authorized  to increase
assessment  rates,  on a semi-annual  basis,  if it determines  that the reserve
ratio of the Savings Association Insurance Fund will be less than the designated
reserve  ratio of 1.25% of the  Savings  Association  Insurance  Fund's  insured
deposits. In setting these increased assessments,  the Federal Deposit Insurance
Corporation  must seek to restore the reserve ratio to that  designated  reserve
level,  or such higher  reserve  ratio as  established  by the  Federal  Deposit
Insurance Corporation. The Federal Deposit Insurance Corporation may also impose
special  assessments  on Savings  Association  Insurance  Fund  members to repay
amounts  borrowed from the United States Treasury or for any other reason deemed
necessary by the Federal Deposit Insurance Corporation.

      Since January 1, 1997, the premium  schedule for insured  institutions  in
the Bank  Insurance Fund and the Savings  Association  Insurance Fund has ranged
from 0 to 27 basis points. However,  Savings Association Insurance Fund and Bank
Insurance Fund insured institutions are required to pay a Financing  Corporation
or "FICO"  assessment,  in order to fund the interest on bonds issued to resolve
thrift failures in the 1980s.  For the quarter ended December 31, 2002, the FICO
assessment for both Savings  Association  Insurance Fund and Bank Insurance Fund
insured  institutions  was  equal to 1.70% for each  $100 in  domestic  deposits
maintained at the  institution.  These  assessment,  which will be revised based
upon the level of Savings  Association  Insurance  Fund and Bank  Insurance Fund
deposits, will continue until the bonds mature in the year 2017.

      Brokered  Deposits.   Under  the  Federal  Deposit  Insurance  Corporation
regulations governing brokered deposits, well capitalized associations,  such as
Matrix Bank, are not subject to brokered deposit  limitations,  while adequately
capitalized associations are subject to certain brokered deposit limitations and
undercapitalized  associations may not accept brokered deposits. At December 31,
2002, Matrix Bank had $327.3 million of brokered  deposits.  In the event Matrix
Bank is not permitted to accept brokered  deposits in the future,  it would have
to find replacement  sources of funding.  It is possible that such alternatives,
if available, would result in a higher cost of funds.

                                       22
<PAGE>

     Matrix Bank's  Capital  Ratios.  Federal law requires,  among other things,
that federal bank regulatory  authorities take "prompt  corrective  action" with
respect to savings  institutions that do not meet minimum capital  requirements.
For these  purposes,  the law establishes  five  categories:  well  capitalized,
adequately  capitalized,  undercapitalized,  significantly  undercapitalized and
critically undercapitalized.

      The Office of Thrift Supervision has adopted  regulations to implement the
prompt corrective action legislation. An institution is deemed to be:

      o     "well capitalized" if it has a total risk-based capital ratio of 10%
            or greater and a leverage ratio of 5% or greater;
      o     "adequately  capitalized" if it has a total risk-based capital ratio
            of 8% or greater, a Tier I risk-based capital ratio of 4% or greater
            and generally a leverage ratio of 4% or greater;
      o     "undercapitalized"  if it has a total  risk-based  capital  ratio of
            less than 8%, a Tier I risk-based  capital ratio of less than 4%, or
            generally a leverage ratio of less than 4%;
      o     "significantly  undercapitalized"  if  it  has  a  total  risk-based
            capital ratio of less than 6%, a Tier I risk-based  capital ratio of
            less than 3%, or a leverage ratio of less than 3%; and
      o     "critically  undercapitalized"  if it has a ratio of tangible equity
            (as defined in the  regulations) to total assets that is equal to or
            less than 2%.

      As of December 31, 2002, Matrix Bank was a "well capitalized" institution.

      "Undercapitalized"   institutions   must   adhere   to   growth,   capital
distribution  and  dividend and other  limitations  and are required to submit a
capital  restoration plan with the Office of Thrift  Supervision  within 45 days
after an  association  receives  notice of such  undercapitalization.  A savings
institution's  compliance  with its capital  restoration  plan is required to be
guaranteed by any company that controls the "undercapitalized" institution in an
amount equal to the lesser of 5% of total assets when deemed  "undercapitalized"
or the amount necessary to achieve the status of "adequately capitalized." If an
"undercapitalized" savings institution fails to submit an acceptable plan, it is
treated   as   if  it  is   "significantly   undercapitalized."   "Significantly
undercapitalized"  institutions  must  comply  with one or more of a  number  of
additional restrictions,  including an order by the Office of Thrift Supervision
to sell sufficient voting stock to become "adequately capitalized," requirements
to reduce total assets and cease receipt of deposits from correspondent banks or
dismiss  directors  or  officers,  and  restriction  on  interest  rates paid on
deposits,  compensation of executive  officers and capital  distributions to the
parent holding company. "Critically  undercapitalized"  institutions must comply
with  additional  sanctions,  including,  subject  to a  narrow  exception,  the
appointment of a receiver or  conservator  within 270 days after it obtains this
status.

     The following table indicates Matrix Bank's regulatory capital ratios:
<TABLE>
<CAPTION>

                                                                                                   As of
                                                                                             December 31, 2002
                                                                                   ------------------------------------
                                                                                         Core            Risk-Based
                                                                                        Capital           Capital
                                                                                   ------------------ -----------------
                                                                                          (Dollars in thousands)
    <S>                                                                                  <C>          <C>

    Shareholder's equity/GAAP capital.............................................       100,716      $    100,716
    Disallowed assets.............................................................         6,341             6,341
    Unrealized gain on available for sale securities..............................           (26)              (26)
    Additional capital items:
         General valuation allowances.............................................             -             6,083
            Residual interests                                                                 -               (65)
                                                                                   ------------------ -----------------
    Regulatory capital as reported to the Office of Thrift Supervision............        94,349           100,367
    Minimum capital requirement as reported to the Office of Thrift Supervision...        64,602            69,680
                                                                                   ------------------ -----------------
    Regulatory capital--excess.....................................................        29,747            30,687
                                                                                   ================== =================
    Capital ratios................................................................          5.84             11.52
    Well capitalized requirement..................................................          5.00             10.00
</TABLE>

      Federal Home Loan Bank System. Matrix Bank is a member of the Federal Home
Loan Bank  ("FHLB")  system,  which  consists  of 12  regional  FHLBs.  The FHLB
provides  a central  credit  facility  primarily  for  member  associations  and
administers the home financing credit function of savings associations. The FHLB

                                       23
<PAGE>

advances  must be  secured  by  specified  types of  collateral  and may only be
obtained for the purpose of providing funds for residential housing finance. The
FHLB funds its  operations  primarily  from  proceeds  derived  from the sale of
consolidated  obligations  of the FHLB system.  Matrix Bank,  as a member of the
FHLB system,  must acquire and hold shares of capital stock in its regional FHLB
in an amount equal to the greater of 1% of the aggregate principal amount of its
unpaid  residential  mortgage loans and similar  obligations at the beginning of
each year, 0.3% of total assets, or 5% of its advances  ("borrowings")  from the
FHLB. Prior to relocating its domicile,  Matrix Bank was a member of the FHLB of
Dallas. Effective March 25, 2002, Matrix Bank is a member of the FHLB of Topeka.
Matrix Bank was in compliance with the requirement  discussed with an investment
in FHLB of Dallas and Topeka stock at December 31, 2002 totaling $30.4 million.

      Federal Reserve System. The Federal Reserve Board regulations  require all
depository  institutions to maintain  noninterest-earning  reserves at specified
levels against their  transaction  accounts  (primarily NOW and regular checking
accounts).  At December 31, 2002, Matrix Bank was in compliance with the Federal
Reserve Board's reserve requirements. Savings associations, such as Matrix Bank,
are authorized to borrow from the Federal  Reserve Bank  "discount  window," but
the Federal  Reserve Board  regulations  require  institutions  to exhaust other
reasonable  alternative  sources of funds,  including  FHLB  borrowings,  before
borrowing from the Federal Reserve Bank.

      Mortgage Banking Operations. Our mortgage banking operations are conducted
through Matrix Financial.  The rules and regulations  applicable to our mortgage
banking operations establish  underwriting  guidelines that, among other things,
include  anti-discrimination  provisions,  require  provisions for  inspections,
appraisals  and credit  reports on  prospective  borrowers  and fix maximum loan
amounts.  Moreover,  we  are  required  annually  to  submit  audited  financial
statements  to the  HUD,  Fannie  Mae,  Freddie  Mac and  Ginnie  Mae,  and each
regulatory  entity  maintains its own financial  guidelines for  determining net
worth  and  eligibility  requirements.   Our  operations  are  also  subject  to
examination  by the HUD,  Fannie Mae,  Freddie Mac and Ginnie Mae at any time to
assure  compliance  with the applicable  regulations,  policies and  procedures.
Mortgage loan origination activities are subject to, among other laws, the Equal
Credit  Opportunity  Act, the Federal  Truth-in-Lending  Act and the Real Estate
Settlement  Procedures Act of 1974, and the regulations  promulgated under these
laws that prohibit  discrimination  and require the  disclosure of certain basic
information  to  mortgagors   concerning  credit  terms  and  settlement  costs.
Moreover, the Office of Thrift Supervision, as primary regulatory authority over
Matrix Bank (the parent of Matrix  Financial),  examines  our  mortgage  banking
operations as well.

      Regulation of Sterling  Trust Company.  Sterling Trust provides  custodial
services and directed,  non-discretionary  trustee services.  Sterling Trust was
chartered under the laws of the State of Texas,  and as a Texas trust company is
subject to supervision,  regulation and  examination by the Texas  Department of
Banking. Under applicable law, a Texas trust company, such as Sterling Trust, is
subject to virtually  all  provisions  of the Texas  Banking Act as if the trust
company were a state chartered bank. The activities of a Texas trust company are
limited  by  applicable  law  generally  to  acting  as  a  trustee,   executor,
administrator,  guardian or agent for the  performance of any lawful act, and to
lend and accumulate money when authorized  under applicable law. In addition,  a
Texas trust company with capital of $1 million or more,  such as Sterling Trust,
has the power to:

      o     purchase,  sell,  discount and negotiate notes,  drafts,  checks and
            other evidences of indebtedness;
      o     purchase and sell securities;
      o     issue subordinated debentures and promissory notes; and
      o     exercise powers  incidental to the enumerated  powers of Texas trust
            companies as set forth in the Texas Banking Act.

      A Texas trust company,  such as Sterling  Trust,  is generally  prohibited
from  accepting  demand or time  deposits if not insured by the Federal  Deposit
Insurance Corporation.

      Limitation on Capital  Distributions.  The Texas Finance Code  prohibits a
Texas trust company from reducing its outstanding  capital and certified surplus
through  redemption  or other  capital  distribution  without the prior  written
approval of the Texas Banking Commissioner. Moreover, Sterling Trust anticipates
that it will not pay cash dividends during 2003.

      Investments.  A Texas trust company is generally  obligated to maintain an
amount equal to 40% of its capital and surplus in  investments  that are readily
marketable  and that can be converted  into cash within four  business  days. So
long as it complies with those requirements,  a Texas trust company generally is
permitted to invest its corporate assets in any investment  otherwise  permitted
by law.  Generally,  a Texas trust company  cannot invest an amount in excess of
15% of its capital and certified surplus in the securities of a single issuer.

                                       24
<PAGE>

     Branching.  The  Texas  Finance  Code  permits  a Texas  trust  company  to
establish  and maintain  branch  offices at any location  within the state if it
first obtains written approval of the Texas Banking Commissioner.

     Transactions  with Related  Parties.  The Texas Finance Code  prohibits the
sale or lease of an asset of a Texas trust company,  or the purchase or lease of
an asset by a Texas trust company,  where the  transaction  involves an officer,
director, principal shareholder or affiliate, unless the transaction is approved
by a disinterested majority of the board of directors or the written approval of
the Texas Banking  Commissioner is first obtained.  In no event,  however, may a
Texas trust company  lease real property in a transaction  involving an officer,
director,  principal  shareholder or affiliate without the prior approval of the
Texas Banking Commissioner.

     Enforcement.  Under  applicable  provisions of the Texas Finance Code,  the
Texas Banking  Commissioner has the power to issue enforcement actions against a
Texas  trust  company or any  officer,  employee  or  director  of a Texas trust
company. In addition, in certain  circumstances,  the Texas Banking Commissioner
may remove a present or former  officer,  director  or employee of a Texas trust
company  from office or  employment,  and may  prohibit a  shareholder  or other
persons  participating  in the  affairs  of a  Texas  trust  company  from  such
participation.  The Texas Banking Commissioner has the authority to assess civil
penalties of up to $500 per day against a Texas trust company (penalties against
individuals  may be higher) for  violations  of a cease and  desist,  removal or
prohibition order. The Texas Banking Commissioner may also refer violations of a
cease and desist order to the attorney general for enforcement by injunction.

      The Texas  Banking  Commissioner  may  pursue an order of  supervision  or
conservatorship if:

      o     The Texas  Banking  Commissioner  determines  that the  Texas  trust
            company is in a hazardous  condition  and that the  continuation  of
            business would be hazardous to the public or to the  shareholders or
            creditors of the Texas trust company,
      o     The Texas  Banking  Commissioner  determines  that the  Texas  trust
            company has exceeded its powers,
      o     The Texas trust company has violated the law, or
      o     The Texas trust  company  gives written  consent to  supervision  or
            conservatorship.

      The Texas  Banking  Commissioner  also has the  authority  to  pursue  the
appointment of an independent receiver for a Texas trust company.

      Capital  Requirements.  Applicable  law  generally  requires a Texas trust
company to have and maintain minimum  restricted capital of at least $1 million.
Sterling Trust was in compliance with the requirement at December 31, 2002.

      A Texas trust company may not have at anytime  outstanding  liabilities in
an amount that  exceeds five times its capital  stock and  surplus,  except that
with the approval of the Texas Banking  Commissioner,  a Texas trust company may
have  outstanding  liabilities  in an amount  that does not exceed ten times its
capital stock and surplus. The Texas Banking Commissioner may require additional
capital of a Texas trust company if the Texas Banking Commissioner determines it
necessary  to protect the safety and  soundness  of such  company.  If the Texas
Banking  Commissioner  were to do so, or in the event  Sterling  Trust  fails to
maintain  capital of at least $1 million,  there is no assurance  that  Sterling
Trust would be able to restore its capital or meet such additional requirements.
In either case, the Texas Banking  Commissioner could pursue various enforcement
actions,  such as  appointing  either a  conservator  or a receiver for Sterling
Trust.  Currently,  however,  Sterling  Trust is in compliance  with all capital
requirements under Texas law.

      Regulation  of  First  Matrix  Investment   Services  Corp.  First  Matrix
Investment  Services  Corp.  is a registered  broker-dealer  subsidiary  that is
subject to the  Securities  and Exchange  Commission's  net capital  rule,  Rule
15c3-1,  promulgated under the Securities  Exchange Act of 1934. The net capital
rule is designed to measure the general  financial  condition and liquidity of a
broker-dealer.  Net  capital  generally  is the net  worth of a broker or dealer
(assets minus  liabilities),  less deductions for certain types of assets.  If a
firm fails to maintain the required net capital, it may be subject to suspension
or revocation of  registration  by the  Securities  and Exchange  Commission and
suspension  or expulsion by the NASD,  and could  ultimately  lead to the firm's
liquidation.  The net capital rule also limits the ability of  broker-dealers to
transfer large amounts of capital to parent companies and other  affiliates.  At
December 31, 2002, First Matrix was in compliance with these  requirements  with
net  capital of  $285,000,  which was  $247,000  in excess of its  required  net
capital of $38,000.

      The foregoing is an attempt to summarize some of the relevant laws,  rules
and regulations governing unitary savings and loan holding companies and savings
institutions  but does not  purport to be a complete  summary of all  applicable
laws, rules and regulations governing such financial institutions.

                                       25
<PAGE>

Item 2.  Properties

      We believe that all of our present facilities are adequate for our current
needs and that additional  space is available for future expansion on acceptable
terms.  The following table sets forth certain  information  concerning the real
estate that we own or lease:
<TABLE>
<CAPTION>
                                                                                                                   Monthly Rent
                                                                                                                    or Mortgage
      Location             Square Feet/Acres               Owned/Leased                      Occupant                 Payment
----------------------     -------------------   ---------------------------------- ----------------------------  ----------------
<S>                           <C>                <C>                                <C>                               <C>

Denver, CO...........(1)           182,623       Owned                              Matrix Bancorp and various             N/A
                                                                                    of its subsidiaries (1)
Denver, CO...........                8,007       Leased through April 30, 2003      Matrix Bancorp and Matrix         $ 14,413
                                                                                    Asset Management
Phoenix, AZ..........(5)            62,771       Leased through February 28, 2007   Matrix Financial, Matrix          $ 64,278
                                                                                    Bank, ABS and Matrix
                                                                                    Bancorp
Memphis, TN..........                3,305       Leased month to month              First Matrix and Matrix           $  5,619
                                                                                    Capital Markets
Las Cruces, NM.......                1,800       Owned                              Matrix Bank                            N/A
Las Cruces, NM.......(2)            30,000       Owned                              Matrix Bank                            N/A
Sun City, AZ.........                3,000       Owned                              Matrix Bank                            N/A
Atlanta, GA..........(4)             4,129       Leased through August 31, 2003     Matrix Financial                  $  7,167
Chicago, IL..........                1,658       Leased through April 30, 2003      Matrix Financial                  $  2,895
Clayton, MO..........                6,718       Leased through June 30, 2003       Matrix Financial                  $ 14,275
Dallas, TX...........(4)             6,205       Subleased through May 31, 2004     Matrix Financial                  $ 11,376
Houston, TX..........(4)             4,011       Leased through October 31, 2003    Matrix Financial                  $  5,682
Jacksonville, FL.....(4)             5,250       Leased through December 31, 2005   Matrix Financial                  $  7,438
Phoenix, AZ..........(4)             5,500       Leased through June 30, 2005       Matrix Financial                  $  8,938
Phoenix, AZ..........               17,241       Leased through August 31, 2007     Matrix Financial                  $  8,365
Sacramento, CA.......(4)             4,202       Leased through December 31, 2003   Matrix Financial                  $  7,774
Santa Ana, CA........(4)             8,851       Leased through August 31, 2003     Matrix Financial                  $ 14,037
Waco, TX.............               11,294       Leased through June 30, 2006       Sterling Trust                    $ 13,553
Waco, TX.............(3)               928       Leased through June 30, 2003       Sterling Trust                    $  1,021
Fort Worth, TX.......                1,148       Leased through November 30, 2004   First Matrix                      $  1,579
Cottonwood, AZ.......                1,879       Owned                              ABS                                    N/A
Deerfield Beach, FL..                  500       Leased month to month              ABS                                $   863
Flagstaff, AZ........           10,000 and       Owned                              ABS                                    N/A
                               1.107 Acres
Gilbert, AZ..........           1.98 Acres       Owned                              ABS                                    N/A
Gilbert, AZ..........               10,456       Owned                              ABS                                    N/A
Glendale, AZ.........         12.892 Acres       Owned                              ABS                                    N/A
Houston, TX..........               71,437       Owned                              ABS                                    N/A
Mesa, AZ.............                 7616       Owned                              ABS                                    N/A
Phoenix, AZ..........                9,150       Owned                              ABS                                    N/A
Phoenix, AZ..........              5 Acres       Owned                              ABS                                    N/A
Phoenix, AZ..........          6.729 Acres       Owned                              ABS                                    N/A
Phoenix, AZ..........               22,920       Owned                              ABS                                    N/A
Phoenix, AZ..........               10,000       Owned                              ABS                                    N/A
Phoenix, AZ..........                7,200       Owned                              ABS                                    N/A
Phoenix, AZ..........               10,000       Owned                              ABS                                    N/A
Port Charlotte, FL...               10,200       Owned                              ABS                                    N/A
St. Louis, MO........                6,144       Leased through June 30, 2012       ABS                               $ 12,500
St. Louis, MO........                5,500       Owned                              ABS                                    N/A
St. Louis, MO........               42,000       Owned                              ABS                                    N/A
Snow Flake, AZ.......                2,850       Owned                              ABS                                    N/A
__________
<FN>
(1)  Of this 182,623 square feet, approximately 58,167 square feet are leased to
     the Company and certain of its  subsidiaries.  Approximately  4,432  square
     feet of this leased  property  will be assigned to the Buyer of the sale of
     the  production   platform.   See  "Item  1.  Business--Sale  of  Wholesale
     Production Platform." Substantially all of the remaining space is rented to
     unaffiliated third parties at market prices.
(2)  Of this 30,000 square feet,  approximately  10,100 square feet serve as the
     branch for Matrix Bank.  Substantially all of the remaining space is rented
     to unaffiliated third parties at market prices.
(3)  Management  is  reviewing  options  concerning  renewal of the lease at its
     expiration.
(4)  These properties will be assigned to the Buyer of the production  platform.
     See "Item 1. Business--Sale of Wholesale Production Platform."
(5)  Of this  62,771  square  feet,  approximately  26,950  square  feet will be
     subleased  to  the  Buyer  of  the  production   platform.   See  "Item  1.
     Business--Sale of Wholesale Production Platform."
</FN>
</TABLE>

                                       26

<PAGE>

Item 3.  Legal Proceedings

      General.  We are from time to time party to various litigation matters, in
most cases,  involving  ordinary and routine claims  incidental to our business.
With respect to all pending litigation matters, our ultimate legal and financial
responsibility,  if any,  cannot be  estimated  with  certainty.  Therefore,  no
accrual for loss has been made as of December  31,  2002.  However,  the outcome
with respect to one or more of these matters,  if adverse,  is reasonably likely
to have a  material,  adverse  impact on the  consolidated  financial  position,
results of operations or cash flows of the Company.

      Matrix  Bancorp.  In early 1999, the Company and Matrix Bank instituted an
arbitration action with the American Arbitration Association in Phoenix, Arizona
against Fidelity National Financial, Inc. The arbitration action arose out of an
alleged  breach by  Fidelity  of a Merger  Termination  Agreement  entered  into
between the Company and Fidelity in  connection  with the  termination  of their
proposed  merger.  The  arbitration  panel  has  ruled  that the  entire  Merger
Termination  Agreement was  unenforceable.  The Company and Matrix Bank filed an
appeal of the arbitration panel's decision in federal district court in Phoenix,
Arizona,  which has been denied.  In October 2001,  Fidelity  initiated a second
arbitration to determine the validity of a release given in connection  with the
Merger  Termination  Agreement.  Matrix Bancorp contested that the releases were
valid and, in the alternative,  made a counterclaim  against Fidelity  demanding
restitutional  damages  for the value of the  releases  if they were  determined
valid.  The arbitration  panel has held the releases to be valid and enforceable
and has denied the Company's claim for restitutional damages. Fidelity has filed
a motion with the arbitration  panel  requesting that it be awarded its attorney
fees, and the panel has awarded  Fidelity  approximately  $500,000.  The Company
anticipates an appeal of the findings of the arbitration panel.

      Matrix Bancorp, The Vintage Group, Inc., Vintage Delaware Holdings,  Inc.,
Matrix Bank, and Guy A. Gibson,  currently a director of Matrix Bancorp, Richard
V. Schmitz,  currently  Co-Chief  Executive Officer and Chairman of the Board of
Matrix Bancorp, and D. Mark Spencer, currently the President, Co-Chief Executive
Officer  and a director  of Matrix  Bancorp,  have been named  defendants  in an
action filed in November 2000 styled Roderick Adderley, et al. v. Guy A. Gibson,
et al. pending in the District Court of Tarrant County, Texas, seeking to impose
joint  and  several  liability  on these  defendants  for the  judgment  against
Sterling Trust in Roderick Adderley, et al. v. Advance Financial Services, Inc.,
et al.  ("Adderley I") See "Sterling  Trust" below. The plaintiffs have asserted
various  theories of liability,  including  control person theories of liability
under the Texas  Securities Act and fraudulent  transfer  theories of liability.
The  defendants  believe they have  adequate  defenses and intend to  vigorously
defend  this  action.  The parties  have agreed to abate the action  pending the
outcome of Adderley I. See  "Sterling  Trust." The ultimate  legal and financial
liability  of the  Company,  if any, in this  matter  cannot be  estimated  with
certainty at this time.

      Matrix Bank. A former  customer of Matrix Bank is a debtor in a Chapter 11
proceeding under the Bankruptcy Code styled In re Apponline.com, Inc. and Island
Mortgage  Network,  Inc.  pending in the United States  Bankruptcy Court for the
Eastern  District of New York. Prior to the bankruptcy  filing,  Matrix Bank had
provided the customer, Island Mortgage Network, Inc., with a purchase/repurchase
facility  under which  Matrix Bank  purchased  residential  mortgage  loans from
Island  Mortgage,  with  Island  Mortgage  having  the  right or  obligation  to
repurchase such mortgage loans within a specified period of time.  Several other
financial  institutions had provided Island Mortgage with warehouse financing or
additional  purchase/repurchase  facilities. The total value of the loans Matrix
Bank  purchased  from  Island  Mortgage  that are subject to the  bankruptcy  is
approximately  $12.5  million  in  original  principal  amount  (the  "Purchased
Loans"). The principals of Island Mortgage were indicted for fraud in connection
with financial improprieties committed by Island Mortgage.

      Various third parties have instituted lawsuits,  adversary  proceedings or
competing  bankruptcy claims against Matrix Bank claiming an equitable  interest
in approximately  eighteen of the Purchased Loans (approximately $2.3 million in
original  principal  amount).  These third  parties  consist  primarily of title
companies,  closing attorneys and other closing agents that provided  settlement
funds in  connection  with the funding of a borrower's  mortgage  loan,  in many
cases,  we believe in violation of various  "good funds" laws,  which  typically
require  a  closing  agent  to  wait  for  receipt  of  "good  funds"  prior  to
disbursement of settlement  funds on the origination of a loan.  After providing
settlement  funds,  these closing  agents  discovered  that Island  Mortgage had
either provided company checks with  insufficient  funds or had  inappropriately
placed a stop payment on the checks.  To date, Matrix Bank has reached tentative
agreements  with  several  claimants to settle  claims  asserted  against  loans
purchased from Island Mortgage upon terms satisfactory to Matrix Bank.

      Additionally,  certain parties in the chain of title to property  securing
approximately  $2.7 million of loans,  including sellers and prior lien holders,
are seeking to void or rescind their  transactions on the theory that they never
received  consideration.  Matrix Bank has reached tentative agreements to settle
several claims arising from these loans and has been engaged in discussions with
several  additional  claimants to resolve as many of these claims as possible on
terms satisfactory to Matrix Bank, the trustee and the Bankruptcy Court.

                                       27
<PAGE>

      The trustee for Island  Mortgage  recently  completed his "due  diligence"
review of the loans Matrix Bank purchased  from Island  Mortgage at issue in the
bankruptcy and confirmed that Matrix Bank's interests are "perfected" in all but
17 of the loans.  The trustee  filed three  adversary  actions  seeking to avoid
Matrix  Bank's  interests in those 17 loans.  Matrix Bank  believes that it will
prevail  in  demonstrating  to the  Bankruptcy  Court  that  Matrix  Bank is the
rightful owner of each of the 17 loans subject to the adversary actions filed by
the trustee  and that the  interests  of Matrix  Bank are  superior to any claim
possessed by the trustee with respect to those loans.

      The trustee also initiated an adversary action against Matrix Bank seeking
to recover as an avoidable  preference  $6.1  million  Island  Mortgage  paid to
Matrix Bank. Matrix Bank believes that it will  successfully  demonstrate to the
Bankruptcy Court that the $6.1 million the trustee seeks to recover was purchase
money  belonging to Matrix Bank  returned by Island  Mortgage for loans that did
not close and were not sold to Matrix Bank.

      Matrix Bank  believes it has adequate  defenses and intends to  vigorously
defend the actions discussed in the previous five paragraphs. The ultimate legal
and financial  liability of the Company,  if any, in any of these matters cannot
be estimated with certainty at this time.

      Additionally,  Matrix Bank has  initiated an adversary  claim  against the
State Bank of Long Island ("State Bank"). State Bank was the depository bank for
Island  Mortgage,  and Matrix Bank believes that State Bank bears  liability for
any loss sustained by Matrix Bank as a result of the fraud perpetrated by Island
Mortgage.  Matrix Bank also believes that any loss it may sustain as a result of
its dealings  with Island  Mortgage are insured.  Matrix Bank cannot  accurately
assess at this time whether and to what extent it will receive compensation from
any source for any loss it may incur as a result of its relationship with Island
Mortgage.

      Matrix  Financial.  Matrix  Financial  has been  named a  defendant  in an
arbitration claim pending before the American Arbitration Association in Denver,
Colorado.  The  claim was filed on May 22,  2002 by a former  employee,  who was
terminated in early 2002. The claimant  claims that he was not  terminated  "for
cause," as specified in his employment  agreement and has made claims for, among
other things,  breach of good faith and fair dealing,  breach of his  employment
agreement,  back pay and other economic loss, violation of the Colorado wage act
and attorneys'  fees and costs.  Matrix  Financial  believes it has  meritorious
defenses to this claim and intends to defend the matter vigorously.

      Sterling  Trust.  Sterling  Trust has been named a defendant  in an action
filed July 1999 styled Roderick Adderley, et al. v. Advanced Financial Services,
Inc.,  et al.  that was tried in Tarrant  County,  Texas  district  court in the
spring of 2000.  The jury  returned  a verdict  adverse to  Sterling  Trust with
respect to two of 12  theories of  liability  posed by the  plaintiffs,  and the
court has  signed a judgment  for  certain  of the  plaintiffs  in the amount of
approximately $6.4 million.  Sterling Trust has filed an appeal of this judgment
and  believes  it has  meritorious  points of appeal.  It intends to  vigorously
prosecute  the appeal of this  action.  The ultimate  resolution  of this appeal
could  result in a loss of up to $6.4 million  plus  post-judgment  interest and
additional attorneys' fees. The ultimate legal and financial liability,  if any,
of Sterling Trust cannot be estimated with certainty at this time.

      Sterling  Trust was named a defendant  in several  putative  class  action
lawsuits instituted in November 2000 by one law firm in Pennsylvania. The styles
of such  lawsuits  are as  follows:  Douglas  Wheeler,  et al.  v.  Pacific  Air
Transport, et al.; Paul C. Jared, et al. v. South Mountain Resort and Spa, Inc.,
et al.; Lawrence Rehrig, et al. v. Caffe Diva, et al.; Merrill B. Christman,  et
al.  v.  Millennium  2100,  Inc.,  et al.;  David M.  Veneziale,  et al.  v. Sun
Broadcasting Systems,  Inc., et al.; and Don Glazer, et al. v. Technical Support
Servs.,  Inc., et al. All of such lawsuits were  originally  filed in the United
States  District Court for the Western  District of  Pennsylvania.  On April 26,
2001, the District Court for the Western  District of Pennsylvania  ordered that
all of such cases be  transferred  to the United States  District  Court for the
Western  District of Texas so that  Sterling  Trust could  properly  present its
motion to compel  arbitration.  Sterling Trust filed separate  motions to compel
arbitration  in  these  actions,  all of  which  were  granted.  Each of the six
plaintiffs  timely  filed  arbitration  demands  with the  American  Arbitration
Association.  The  demands  seek  damages  and allege  Sterling  Trust  breached
fiduciary   duties  and  was  negligent  in   administrating   each   claimant's
self-directed  individual  retirement  account  holding a nine-month  promissory
note.  Sterling Trust believes it has meritorious  defenses and is defending the
matters vigorously.

      Sterling  Trust has been named a  defendant  in an action  filed in August
2002 styled Charles W. and Wanda Davis v. Lionel Sanchez,  et al. that was filed
in the Second Judicial District Court in the County of Bernalillo,  State of New
Mexico.  The plaintiffs have claims they were defrauded in connection with their
investment of  approximately  $200,000 through their  self-directed  IRA held by
Sterling Trust.  Sterling Trust has filed a motion to compel  arbitration  based

                                       28
<PAGE>

upon the account  agreements  entered  into by the  plaintiffs.  Sterling  Trust
believes  it has  meritorious  defenses  to the claims and intends to defend the
matter vigorously.

      Sterling  Trust has been named a defendant in an action filed in July 2001
in  Department  68,  Superior  Court  for the  County  of San  Diego,  State  of
California  styled  Robert  Heyenga,  et al.  v.  Brian  D.  Gibbs,  et al.  The
plaintiffs have alleged  various  theories of liability  against  Sterling Trust
relating to their  investments of an  indeterminable  amount in Legend Financial
Group, Inc. through their  self-directed  IRAs held by Sterling Trust.  Sterling
Trust believes it has  meritorious  defenses to the claims and intends to defend
the matter vigorously.

      Sterling Trust has been named in an arbitration  action filed in July 2002
styled David M. Albert,  William H. Craven,  Charles  Savall & Leonid Shapiro v.
Sterling  Trust  Company that is pending  before the Judicial  Arbiter  Group of
Denver,  Colorado.  The  plaintiffs  have  alleged  breach of  contract  against
Sterling  Trust  relating  to their  investments  of  approximately  $850,000 in
Advisors Capital  Investments  through their self-directed IRAs held by Sterling
Trust. In January 2003, this action was settled and the matter has been closed.

      Sterling  Trust has been named a defendant  in an action filed in December
2001 styled  Heraclio A. Munoz, et al. v. Sterling Trust Company that is pending
in Superior Court of the State of California.  The complaint  seeks class action
status,  requests  unspecified damages and alleges negligent  misrepresentation,
breach of fiduciary duty and breach of written  contract on the part of Sterling
Trust. On December 10, 2002, the court denied Sterling  Trust's motion to compel
arbitration.  Sterling  Trust  believes  it  has  meritorious  defenses  and  is
defending the matter vigorously.

      In addition,  Sterling Trust has been the subject of numerous lawsuits and
arbitration  proceedings in which customers and, in some cases,  persons who are
not  customers  allege  various  theories of  liability  against the Company for
losses suffered by these  claimants in connection with their failed  investments
in  several  enterprises.  To  the  extent  that  Sterling  Trust  has  had  any
relationship with any of such claimants, it has been solely as custodian of such
claimants  self-directed  IRAs  pursuant to  contracts  that specify the limited
nature of Sterling  Trust's  obligations.  We believe Sterling Trust has in each
case acted in accordance  with its  obligations  under the  contracts  and/or as
otherwise  imposed by law. We further believe that the ultimate  outcome of each
of these cases will not be material to the consolidated  financial  position and
results of operations  of Company;  but,  there can be no assurances  that there
will not be an  adverse  outcome  in any one or more of these  cases or that any
such adverse outcome will not have a material adverse effect on the consolidated
financial position and results of operations of the Company.

      ABS School Services.  ABS has been named a defendant in an action filed in
the  Superior  Court of  Arizona,  Maricopa  County  on June 3, 2002 by a former
employee.  The former  employee  claims that she is  entitled  to  approximately
$450,000  in  commissions  owed  to  her  at  the  time  of  termination  of her
employment. She has also made claims under the Arizona wage act and for an award
of her attorneys'  fees. ABS believes it has meritorious  defenses to this claim
and intends to defend the matter vigorously.

Item 4.  Submission of Matters to a Vote of Security Holders

      No matters were submitted to a vote of security  holders during the fourth
quarter of the fiscal year ended December 31, 2002.


                                     PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

      Our common  stock,  $0.0001  par value,  is traded on The Nasdaq  National
Market under the symbol "MTXC." The following  table sets forth the high and low
sales prices for our common stock on The Nasdaq  National Market for the periods
indicated.

                                                        Market Price
                                                 ---------------------------
        Quarter Ended:                               High            Low
                                                 ------------   ------------
             December 31, 2002.................  $     9.920    $     7.400
             September 30, 2002................       11.690          9.500
             June 30, 2002.....................       13.500         10.800
             March 31, 2002 ...................       11.750         10.100

             December 31, 2001.................  $    11.400    $     9.960
             September 30, 2001................       11.420          9.810
             June 30, 2001 ....................       11.750          8.600
             March 31, 2001....................        9.375          6.938

                                       29
<PAGE>

      On March 12,  2003,  the closing  price of our common  stock was $8.02 per
share. Also, as of that date, the approximate number of holders of record of our
common  stock was 41. This number  does not include  beneficial  owners who hold
their shares in a depository trust in "street" name.

      In May 2000,  we  announced  the  adoption  of a Common  Stock  Repurchase
Program  under which we were  authorized  to  repurchase up to $3 million of our
common stock. In June 2002, the Board of Directors of the Company authorized the
repurchase  of up to an additional  $2.5 million of common  stock,  bringing the
total  authorization  to-date  under the  repurchase  program to $5.5 million of
common stock.  Under the program,  we have repurchased a total of 389,560 shares
through  December 31, 2002,  for a total purchase  price of  approximately  $3.2
million. No executive officer or director  participated in this repurchase.  Our
ability to  repurchase  stock is further  limited due to various  provisions  in
Matrix  Bancorp's debt  instruments,  the most  restrictive of which is our bank
stock loan. Under the bank stock loan, Matrix Bancorp is allowed to make certain
restricted  payments,  which  includes  repurchases  of stock  and  payments  of
dividends  to  shareholders,  in an amount of up to $3  million  plus 25% of the
Company's cumulative  consolidated net income for fiscal quarters beginning with
the quarter  ending March 31, 2001.  Although we have no present plans to do so,
we may seek in the future  authorization  from the Board of  Directors of Matrix
Bancorp to  repurchase  additional  shares of our Common  Stock under the Common
Stock Repurchase Program.  Any such additional  authorization will be consistent
with the restrictions and limitations under our debt covenants,  including those
of the bank stock loan described above.

      We have not paid any  dividends  on our equity  for the last three  fiscal
years.  Any  future  determination  as to  dividend  policy  will be made at the
discretion  of the Board of Directors of the Company and will depend on a number
of factors,  including  our future  earnings,  capital  requirements,  financial
condition and future prospects and such other factors the Board of Directors may
deem relevant. Our ability to pay dividends is restricted by the same provisions
that  restrict  our  ability  to  repurchase  our  stock,  as  described  in the
immediately preceding paragraph. Additionally, Matrix Bancorp is prohibited from
paying  dividends  on its common stock if the  scheduled  payments on our junior
subordinated  debentures and trust preferred  securities have not been made. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity  and Capital Resources" and Note 10 to the consolidated
financial  statements  included  elsewhere in this  document.  In addition,  the
ability of Sterling Trust and Matrix Bank to pay dividends to Matrix Bancorp may
be   restricted   due  to  certain   regulatory   requirements.   See  "Item  1.
Business--Regulation and Supervision."

 Item 6.  Selected Financial Data

            SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
                             OF MATRIX BANCORP, INC.

     The  following   selected   consolidated   financial   data  and  operating
information  of  Matrix  Bancorp,  Inc.  and  subsidiaries  should  be  read  in
conjunction  with the  consolidated  financial  statements and notes thereto and
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations," each of which is included elsewhere in this document.

                                       30

<PAGE>

<TABLE>
<CAPTION>

                                                                                 As of and for the
                                                                              Year Ended December 31,
                                               ----------------------------------------------------------------------------------
                                                  2002             2001              2000             1999              1998
                                               ------------    -------------     -------------    --------------     ------------
                                                               (Dollars in thousands, except per share data)
<S>                                          <C>             <C>               <C>              <C>                <C>

Statement of Operations Data
Net interest income before provision for
  loan and valuation losses................  $      49,199   $       40,510    $      29,785    $        29,463    $      24,190
Provision for loan and valuation losses....          2,821            2,980            4,235              3,180            4,607
                                               ------------    -------------     ------------     --------------     ------------
Net interest income after provision for
  loan and valuation losses................         46,378           37,530           25,550             26,283           19,583
                                               ------------    -------------     ------------     --------------     ------------
Noninterest income:
  Loan administration......................         32,243           30,113           23,850             23,686           17,411
  Brokerage................................          8,105            4,815            8,119              6,156            7,054
    Trust services.........................          5,345            4,036            4,923              4,840            4,169
    Real estate disposition services.......          4,153            2,572            3,677              3,659            2,036
  Gain on sale of loans and securities.....            521            1,475              982              3,247            3,108
  Gain on sale of mortgage servicing rights            675              167            2,634                363              803
  Loan origination.........................         35,829           34,933            7,587              6,218            5,677
  School services..........................          4,616            5,427            4,240              2,813               46
  Other....................................          5,923            7,618            2,780              9,378            6,441
                                               ------------    -------------     ------------     --------------     ------------
    Total noninterest income...............         97,410           91,156           58,792             60,360           46,745
Noninterest expense........................        152,057          115,899           77,841             69,586           52,939
                                               ------------    -------------     ------------     --------------     ------------
(Loss) income before income taxes(8).......        (8,269)           12,787            6,501             17,057           13,389
Income tax (benefit) expense...............        (4,317)            4,275            2,243              6,278            4,876
                                               ------------    -------------     ------------     --------------     ------------
Net (loss) income..........................  $     (3,952)   $        8,512    $       4,258    $        10,779    $       8,513
                                               ============    =============     ============     ==============     ============
Net (loss)income per share assuming
dilution(1) ...............................  $      (0.61)   $         1.30    $        0.63    $          1.58             1.24
Weighted average common shares assuming
dilution...................................      6,462,272        6,560,454        6,748,857          6,833,546        6,881,890

Balance Sheet Data
Total assets...............................  $   1,701,597   $    1,646,940    $   1,418,773    $     1,283,746    $   1,012,155
Securities.................................         29,073            6,963           66,616                 --               --
Total loans, net...........................      1,393,817        1,340,700        1,095,045          1,103,515          848,448
Mortgage servicing rights, net.............         63,200           78,712           71,529             63,479           57,662
Deposits(2)................................        933,957          866,235          602,669            562,194          490,516
Custodial escrow balances..................        151,790          129,665           77,647             94,206           96,824
Federal Home Loan Bank borrowings..........        385,785          303,361          519,433            405,000          168,000
Borrowed money.............................        125,903          222,032          124,503            142,101          178,789
Total shareholders' equity.................         66,936           71,312           64,023             60,497           49,354

Operating Ratios and Other Selected Data
Return on average assets(3)................         (0.24)%            0.54%            0.32%              1.02%            1.02%
Return on average equity(3)................         (5.57)            12.82             6.79              19.79            18.92
Average equity to average assets(3)........           4.35             4.18             4.75               5.16             5.41
Net interest margin(3)(4)..................           3.53             2.87             2.51               3.25             3.37
Operating efficiency ratio(5)..............          87.23            71.12            76.76              59.21            59.74
Total amount of loans purchased............  $   1,127,632   $       97,486    $     204,922    $       701,952    $     678,150
Balance of owned servicing portfolio (end
of period).................................      5,333,627        5,656,365        5,517,963          5,889,715        5,357,729
Trust assets under administration (end of
period) ...................................      7,876,329        6,017,085        3,847,038          2,545,060        2,089,562
Wholesale loan origination volume..........      3,720,868        3,612,477          512,541            443,363          574,963

Ratios of Earnings to Fixed Charges(6)
Including interest on deposits.............          0.84x            1.19x            1.09x              1.38x            1.36x
Excluding interest on deposits.............          0.71x            1.40x            1.15x              1.75x            1.64x

Loan Performance Ratios and Data
Allowance for loan and valuation losses....  $       9,343   $        9,338    $       8,581    $         6,354    $       3,710
Nonperforming loans(7) ....................         30,818           37,251           28,516             25,641           13,209
Nonperforming loans/total loans(7) ........           2.20%            2.76%            2.54%              2.31%            1.55%
Nonperforming assets/total assets(7) ......           2.30             2.77             2.20               2.06             1.40
Net loan charge-offs/average loans(3) .....           0.25             0.17             0.18               0.06             0.38
Allowance for loan and valuation losses/
    total loans ...........................           0.67             0.69             0.76               0.57             0.44
Allowance for loan and valuation losses/
   nonperforming loans ....................          30.32            25.07            30.09              24.78            28.09
__________
<FN>
(1)   Net (loss)  income  per common  share  assuming  dilution  is based on the
      weighted  average number of common shares  outstanding  during each period
      and  the  dilutive   effect,   if  any,  of  stock  options  and  warrants
      outstanding. There are no other dilutive securities.
(2)   Beginning in February 1998, Matrix Bank began accepting brokered deposits.
      At December 31, 2002,  2001,  2000 and 1999, the total balance of brokered
      deposits was $327.3  million,  $303.0  million,  $203.6 million and $221.5
      million, respectively.
(3)   Calculations  are based on average  daily  balances  where  available  and
      monthly averages otherwise.
(4)   Net interest  margin has been  calculated by dividing net interest  income
      before  loan and  valuation  loss  provision  by average  interest-earning
      assets.
(5)   The operating efficiency ratio has been calculated by dividing noninterest
      expense, excluding amortization of mortgage servicing rights, by operating
      income.  Operating income is equal to net interest income before provision
      for loan and valuation losses plus noninterest income.
(6)   For  purposes  of  calculating  the ratio of  earnings  to fixed  charges,
      earnings  consist of income  before taxes plus  interest and rent expense.
      Fixed charges consist of interest and rent expense.
(7)   See  "Management's  Discussion  and  Analysis of Financial  Condition  and
      Results  of  Operations--Asset  and  Liability   Management--Nonperforming
      Assets" for a discussion of the level of nonperforming loans.
(8)   Income before  income taxes for the year ended  December 31, 2001 is shown
      net of a $360,000 cumulative effect of a change in accounting principle.
</FN>
</TABLE>
                                       31
<PAGE>


Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

     You should read the following  management's  discussion and analysis of the
financial  condition and results of operations in conjunction with the preceding
"Selected Consolidated Financial and Operating Information."  Additionally,  our
consolidated  financial  statements and the notes thereto, as well as other data
included in this document,  should be read and analyzed in combination  with the
analysis below.

General

     Matrix  Bancorp was formed in June 1993 when the founding  shareholders  of
Matrix Financial and United Financial,  now known as Matrix Capital Markets, two
of our subsidiaries, exchanged all of their outstanding capital stock for shares
of our stock in a series of  transactions  that  were  each  accounted  for as a
pooling of interests.  In September  1993, we acquired Dona Ana Savings and Loan
Association,  FSB,  which was  subsequently  renamed  Matrix  Capital Bank.  The
acquisition was accounted for using the purchase method of accounting. We formed
Matrix Asset  Management,  formerly  United Special  Services,  in June 1995 and
United  Capital  Markets in December  1996.  In February  1997,  we acquired The
Vintage  Group  (whose  primary  subsidiary  is Sterling  Trust) in a pooling of
interests  and,  accordingly,  no goodwill  was  recorded  and our  consolidated
financial  statements  for the prior  periods were  restated.  Additionally,  we
acquired ABS in March 1999. The acquisition was accounted for using the purchase
method of  accounting.  We entered into our joint venture,  Matrix  Settlement &
Clearance  Services,  in September of 1999. On August 1, 2000, we sold the stock
of United Capital  Markets to one of the officers of that company.  On August 1,
2000,  Matrix  Financial,  our mortgage banking  operation,  became an operating
subsidiary of Matrix Bank. On October 31, 2001, First Matrix,  our broker-dealer
operation, became an operating subsidiary of Matrix Capital Markets.

     The principal components of our revenues consist of:

      o     net interest  income recorded by Matrix Bank,  Matrix  Financial and
            ABS School Services;
      o     loan origination fees generated by Matrix Financial and, to a lesser
            extent, Matrix Bank;
      o     brokerage and consulting  fees  generated by Matrix Capital  Markets
            and First Matrix;
      o     disposition services fees generated by Matrix Asset Management;
      o     gains on sales of  mortgage  loans  and  mortgage  servicing  rights
            generated by Matrix Bank and Matrix Financial;
      o     loan administration fees generated by Matrix Financial;
      o     trust service fees generated by Sterling Trust; and
      o     school service fees generated by ABS.

     Our results of operations  are  influenced by changes in interest rates and
the  effect  of these  changes  on our  interest  margins,  the  volume  of loan
originations,  mortgage  loan  prepayments  and the value of mortgage  servicing
portfolios. Our fee-based businesses are effected to a lesser extent by interest
rates and more by competition and general market conditions.

Sale of Wholesale Production Platform

In February  2003, we entered into an agreement to sell our  wholesale  mortgage
origination  platform  at  Matrix  Financial.  See  "Item 1.  Business--Sale  of
Wholesale  Production  Platform."  As of the  Initial  Sale Date and  during the
Transition  Period,  due to our  continuing  involvement,  we will  continue  to
account  for the  operations  of the  Platform.  The  effective  sale  date  for
accounting  purposes  will be the Final  Sale Date  which is  anticipated  to be
approximately  six months after the Initial Closing Date. We were concerned that
over an  extended  period of time we would find it  difficult  to compete in the
highly  competitive  industry  that  generally  operates  on high volume and low
margins.  Based  on the  size  of our  wholesale  production  platform,  we were
required to commit a significant percentage of our capital to a line of business
that is fairly cyclical and the earnings were difficult for us to estimate.  The
decision to sell the platform will allow us to reduce our operational  risks and
costs  associated  with the  origination  platform.  We intend to  reinvest  the
liquidity that will be created from the sale into predominately  adjustable rate
loans, SBA loans and potentially  mortgage-backed securities. To the extent that
we are not able to reinvest the liquidity in a timely manner, we will experience
a decrease in our net interest income.  Initially, the liquidity will be used to
pay down borrowings from the FHLB or brokered certificates of deposit.

Comparison of Results of Operations for Fiscal Years 2002 and 2001

     Net Income  (Loss).  A net loss of $(4.0)  million for the fiscal year 2002
was recognized,  a $12.5 million  decrease to the net income of $8.5 million for
fiscal year 2001.  On a basic and diluted per share basis,  net loss was $(0.61)

                                       32
<PAGE>

for the fiscal year 2002 as  compared  to net income of $1.30 per diluted  share
for fiscal year 2001. The decreases in net income, earnings per share and return
on average equity were caused primarily by $14.2 million, net pre-tax,  non-cash
impairment  charges  against  the value of the  mortgage  servicing  rights  and
related  advances,  $1.0  million  write-off  of goodwill  balances at ABS and a
$700,000 loss on subleasing  of office  space.  For a further  discussion of the
goodwill write-off, see "--Recent Accounting  Pronouncements" regarding SFAS No.
142, "Goodwill and Other Intangible Assets."

      Net Interest  Income.  Net interest  income before  provision for loan and
valuation losses increased $8.7 million to $49.2 million for fiscal year 2002 as
compared  to $40.5  million  for  fiscal  year  2001.  Our net  interest  margin
increased 66 basis points  (equivalent to 0.0066 percentage points) to 3.53% for
the year ended  December  31,  2002 from 2.87% for the year ended  December  31,
2001,  and interest rate spread  increased to 3.19% for the year ended  December
31, 2002 from 2.32% for the year ended  December 31,  2001.  The increase in net
interest income before  provision for loan valuation losses was primarily due to
a 184 basis  point  decrease  in the cost of our  interest-bearing  liabilities,
driven by decreases in interest  rates,  which have  significantly  impacted the
rates paid by Matrix Bank for FHLB borrowings and  certificates of deposit.  The
cost of FHLB  borrowings  decreased 173 basis points to 2.89% for the year ended
December 31, 2002 as compared to 4.62% for the year ended December 31, 2001. The
cost of  certificates  of deposit  decreased  233 basis points to 3.65 % for the
year ended  December  31, 2002 as compared to 5.98% for the year ended  December
31, 2001. The interest rate on short-term borrowings fluctuates with the federal
funds  rate,  which  remain  at  40-year  lows.  The  decrease  in our  cost  of
interest-bearing  liabilities  was  partially  offset by a decrease in the yield
earned on our average loan  portfolio  to 6.65% for the year ended  December 31,
2002 as compared to 7.62% for the year ended December 31, 2001. The increase was
also due to a $64.0 million increase in our average noninterest-bearing deposits
between the two  comparable  years,  offset by a slight  decrease in our average
interest-earning assets to $1.40 billion for the year ended December 31, 2002 as
compared to $1.41  billion for the year ended  December 31, 2001.  For a tabular
presentation  of the changes in net interest  income due to changes in volume of
interest-earning  assets and changes in interest rates, see "Analysis of Changes
in Net Interest Income Due to Changes in Interest Rates and Volumes."

      Provision  for Loan  and  Valuation  Losses.  The  provision  for loan and
valuation  losses decreased  $200,000,  or 5.3%, to $2.8 million for fiscal year
2002 as  compared  to $3.0  million  for fiscal  year 2001.  This  decrease  was
attributable  to lower  levels of  reserves  recorded  at Matrix Bank and Matrix
Financial due to  improvements in nonaccrual  loans,  offset by higher levels of
reserves  recorded at ABS due to higher loan losses versus levels in 2001. For a
discussion of the  components  of the allowance for loan losses,  see "Asset and
Liability  Management--Analysis of Allowance for Loan and Valuation Losses." For
a discussion on the allowance as it relates to nonperforming  assets, see "Asset
and Liability Management--Nonperforming Assets."

     Loan  Administration.  Loan  administration  income represents service fees
earned  from  servicing  loans  for  various  investors,  which  are  based on a
contractual  percentage of the outstanding  principal balance plus late fees and
other  ancillary  charges,  as well as gains on sales of repurchased  FHA and VA
loans.  Loan  administration  fees  increased  $2.1 million to $32.2 million for
fiscal year 2002 as compared to $30.1 million for fiscal year 2001. The increase
includes  gains on sale of  previously  repurchased  FHA and VA  loans  from our
mortgage servicing rights portfolio of $5.0 for the year ended December 31, 2002
as compared to $1.8 million for the year ended December 31, 2001.  Gains on sale
of previously  repurchased FHA and VA loans relate to delinquent loans which are
purchased out of loan pools of which Matrix  Financial acts as servicer and then
re-sells  into the  secondary  market.  Loan service  fees are also  affected by
factors  that  include  the  size of our  residential  mortgage  loan  servicing
portfolio,  the  servicing  spread,  the timing of payment  collections  and the
amount of  ancillary  fees  received.  Our  mortgage  loan  servicing  portfolio
increased slightly to an average balance of $5.7 billion for fiscal year 2002 as
compared to an average balance of $5.5 billion for fiscal year 2001. There was a
decrease in the average  service fee (including  all ancillary  income) to 0.48%
for the year ended  December  31,  2002 as  compared to 0.51% for the year ended
December 31, 2001,  excluding  the gain noted above,  and fiscal 2001 excludes a
$550,000 transition adjustment,  as well as $275,000 of subservicing income from
a portfolio sold in 2001 not transferred until 2002. The decrease in the service
fees was due to Matrix  Financial's  decision  in the third  quarter  of 2002 to
begin to sell the majority of its newly originated servicing under an assignment
of trade  contract.  In the near  term,  Matrix  Financial  anticipates  it will
continue to sell the majority of its newly  originated  servicing.  As a result,
Matrix  Financial  anticipates  loan  administration  fees  to  decrease  as its
servicing  portfolio   decreases  through  normal  prepayments.   See  "Item  1.
Business--Sale of Wholesale Production Platform."

     Loan Origination.  Loan origination income includes all mortgage loan fees,
secondary  marketing  activity on new loan  originations  and servicing  release
premiums on new originations  sold, net of origination  costs.  Loan origination
income  increased  slightly to $35.8 million for fiscal year 2002 as compared to
$35.3 million for fiscal year 2001. The consistency in loan  origination  income
resulted from a combination of an increase in our wholesale  origination to $3.8
billion for the year ended December 31, 2002 as compared to $3.6 billion for the
year ended  December 31, 2001; an increase in sales of our wholesale  production

                                       33
<PAGE>

to $3.9 billion for the year ended December 31, 2002 as compared to $3.2 billion
for the year ended December 31, 2001; offset by the effects of a decrease in net
income  spread to 63.1  basis  points for the year ended  December  31,  2002 as
compared to 71.9 basis points for the year ended December 31, 2001. The decrease
in the  net  income  spread  is a  result  of the  ineffectiveness  in the  loan
origination  hedging program  primarily during the year ended December 31, 2002.
The Company closed fewer loans than anticipated,  and thus had committed to sell
more loans than originated.  The Company  therefore  incurred costs on the extra
hedge coverage.  The higher than anticipated hedge ineffectiveness was primarily
due to the level of  refinancing  on which it is more  difficult  to predict the
probability of closure.  Included in prior year income was $1.2 million from the
gain on sale of guaranteed  portions of newly  originated or purchased SBA loans
as compared to $300,000 in the  current  year.  See "Item 1.  Business--Sale  of
Wholesale Production Platform."

     Brokerage Fees.  Brokerage fees represent  income earned from brokerage and
consulting  services performed  pertaining to mortgage servicing rights, as well
as brokerage income earned from whole loan  activities,  retail and fixed income
activities,  and SBA trading fees.  Brokerage fees  increased  $3.3 million,  or
68.3%,  to $8.1  million for fiscal  year 2002 as  compared to $4.8  million for
fiscal year 2001.  This increase was the result of strong  performance  in whole
loan  brokerage  activities,  where fees  increased to $5.9 million for the year
ended  December 31, 2002 as compared to $1.9 million for the year ended December
31, 2001, as well as revenues generated as a result of the focus by First Matrix
on the  acquisition,  pooling  and  selling  of SBA loans and  securities  where
revenue  increased  to $1.7  million  for the year ended  December  31,  2002 as
compared to $100,000 for the year ended  December 31, 2001 when the SBA activity
began.

     Trust  Services.  Trust service fees increased $1.3 million,  or 32.4%,  to
$5.3  million for fiscal  year 2002 as compared to $4.0  million for fiscal year
2001. During 2002, the trust department at Matrix Bank began its operations. The
increase is due to an increase in total trust accounts under  administration  at
Sterling  Trust and Matrix Bank of 45,097  accounts  at  December  31, 2002 from
41,329  accounts  at  December  31,  2001  and  total  fiduciary   assets  under
administration  which  increased  to $7.9 billion at December 31, 2002 from $6.0
billion at December 31, 2001. Much of the growth was driven by business referred
to us by Matrix Settlement & Clearance Services.

     Real  Estate  Disposition   Services.   Real  estate  disposition  services
represents fees earned by Matrix Asset Management for real estate management and
disposition  services  provided on  foreclosed  properties  owned by third party
financial services companies and financial institutions. Real estate disposition
service income increased $1.6 million,  or 61.5%,  between the fiscal years 2002
and 2001 to $4.2 million.  The increase was due to the increase in the number of
properties closed during the year, which increased 58.1%, to 2,283 from 1,444 in
2001.  Additionally,  the increase is due to new clients obtained as a result of
prior marketing efforts.  Properties under management were 2,071 at December 31,
2002 as compared to 1,146 at December 31, 2001.

     Gain on Sale of Loans and Securities.  Gain on sale of loans and securities
decreased  $1.0  million to  $500,000  for fiscal  year 2002 as compared to $1.5
million for fiscal year 2001.  Gains on sale can  fluctuate  significantly  from
year to year based on a variety of factors,  such as the current  interest  rate
environment,  the supply and mix of loan or securities  portfolios  available in
the market, and as market conditions dictate,  the particular loan portfolios we
elect to sell.

     Gain  on Sale  of  Mortgage  Servicing  Rights.  Gain  on sale of  mortgage
servicing  rights increased  $500,000 to approximately  $700,000 for fiscal year
2002 as compared  to  $200,000  for fiscal  year 2001.  The  increased  gain was
despite a decrease  in terms of  aggregate  outstanding  principal  balances  of
mortgage loans  underlying  such mortgage  servicing  rights which we sold being
$681.0 million in purchased mortgage servicing rights during fiscal year 2002 as
compared  to $1.7  billion  during  fiscal  year  2001.  Gains  from the sale of
mortgage servicing rights can fluctuate significantly from year to year based on
the market value of our servicing portfolio, the particular servicing portfolios
we elect to sell and the availability of similar  portfolios in the market.  Due
to our  position  in and  knowledge  of the  market,  and as  market  conditions
dictate,  we  anticipate  selling  additional  servicing  rights to decrease our
overall investment.

     School Services.  School services income  represents fees earned by ABS for
outsourced  business  and  consulting  services  provided  primarily  to charter
schools.  School services income decreased  $800,000,  or 14.9%, to $4.6 million
for fiscal  year 2002 as compared  to $5.4  million  for fiscal year 2001.  This
decrease was  primarily due to a decrease in the rates paid by our core business
service  clients,  which stood at 142 schools at December 31,  2002.  During the
first six  months of 2002,  in an effort to  increase  our  client  base and fee
income on a national  basis,  ABS incurred  significant  costs for personnel and
marketing  efforts.  Ultimately,  ABS was not able to attract  the amount of new
contracts that it had targeted for the new school year,  which begins in July of
each  year.  As a result of the lower than  projected  revenue,  management  has
elected  to focus  on  expense  reductions  and  client  retention  rather  than
significant  expansion.  We do not anticipate a significant  increase in revenue

                                       34
<PAGE>

for the coming  year.  See  "Management's  Discussion  and Analysis of Financial
Condition  and Results of  Operations-Comparison  of Results of  Operations  for
Fiscal  Years 2002 and  2001-Noninterest  Expense"  for  discussion  of goodwill
write-off.

     Other  Income.  Other income  decreased  $1.7  million,  or 22.3%,  to $5.9
million for fiscal  year 2002 as compared to $7.6  million for fiscal year 2001.
The 2001 fiscal year income included $3.4 million pre-tax gain on sale of assets
generated due to the  condemnation of real estate held by Matrix Bank in Denver,
Colorado,  which was going to be used for relocation of Matrix Bank's  domicile.
The City and County of Denver  condenmed the property in October 2001. A similar
gain was not present in 2002.  Other income  typcially  includes service and ATM
fees, rental income,  structured  finance trading  activities,  along with other
miscellaneous items.

     Noninterest Expense. Noninterest expense increased $36.2 million, or 31.2%,
to $152.1  million for fiscal year 2002 as compared to $115.9 million for fiscal
year 2001.  This  increase was  primarily  due to inclusion of the $14.2 million
non-cash  impariment charge on mortgage servicing rights as compared to $181,000
in 2001, a $1.0  million  charge to  write-off  the  goodwill  balance at ABS, a
$700,000  loss on  subleasing  office space  associated  with the move to Matrix
Financial  Center and $1.0 million  incremental  reserves  against  other assets
during the year ended  December 31, 2002. In addition,  the Company  experienced
increases  in   compensation   and  benefits   expense  and  other  general  and
administrative  expense due to increases to support  growth and volume at Matrix
Bank,  Matrix Financial and First Matrix.  The following table details the major
components of noninterest expense for the periods indicated:
<TABLE>
<CAPTION>

                                                                                                    Year Ended
                                                                                                  December 31,
                                                                                          -------------------------------
                                                                                               2002             2001
                                                                                          ---------------  --------------
                                                                                                 (In thousands)
     <S>                                                                                      <C>             <C>

     Compensation and employee benefits                                                       $ 59,484        $ 52,573
     Amortization of mortgage servicing rights ..........................................       24,176          21,862
     Occupancy and equipment.............................................................        7,862           6,525
        Postage and communication........................................................        4,580           4,063
     Professional fees...................................................................        3,175           2,883
     Data processing.....................................................................        3,140           2,907
        Impairment of mortgage servicing rights..........................................       14,219             181
     Other general and administrative....................................................       35,421          24,905
                                                                                          ---------------  --------------
          Total..........................................................................     $152,057        $115,899
                                                                                          ===============  ==============
</TABLE>

     Compensation  and employee  benefits  increased $6.9 million,  or 13.1%, to
$59.5  million for fiscal year 2002 as compared to $52.6 million for fiscal year
2001.  This increase was primarily the result of increases in personnel costs at
Matrix Bank, Matrix Financial, First Matrix and ABS. The increased costs are due
to a  combination  of increased  personnel  and the  inclusion of a full year of
salary and benefits  costs for  employees  added during 2001.  The increase also
reflects  increased  costs  of  medical  benefits  of 55.7%  for the year  ended
December 31, 2002 at these and the Company's other subsidiaries. The Company had
an overall  decrease of 58 employees,  or 6.0%, to 902 employees at December 31,
2002 as compared to 960 employees at December 31, 2001.  This decrease  occurred
primarily in the fourth quarter of 2002.

     Amortization of mortgage servicing rights increased $2.3 million, or 10.6%,
to $24.2  million for fiscal  year 2002 as compared to $21.9  million for fiscal
year 2001.  Amortization of mortgage  servicing  rights  fluctuates based on the
size of our mortgage  servicing  portfolio and the prepayment rates  experienced
with  respect to the  underlying  mortgage  loan  portfolio.  In response to the
continued low interest rates prevalent in the market,  prepayment  speeds on our
servicing  portfolio increased to an average of 23.7% during fiscal year 2002 as
compared  to 22.9%  during  fiscal  year 2001,  and the  average  balance of our
mortgage servicing rights increased to $81.0 million for the 2002 fiscal year as
compared to $73.4 million for the 2001 fiscal year. However,  the fourth quarter
of 2002  experienced  a much  higher  prepayment  speed of 31.0%  than  what was
experienced in the first three quarters of 2002.

     Impairment  of  mortgage  servicing  rights,  which is a  non-cash  charge,
increased to $14.2  million for the year ended  December 31, 2002 as compared to
$181,000 for the year ended  December 31,  2001.  With regard to the  impairment
charge,  the Company is required to record its investment in mortgage  servicing
rights at the lower of cost or fair value. The fair value of mortgage  servicing
rights is determined based on the discounted  future servicing income stratified
based on one or more predominant risk  characteristics  of the underlying loans.
The  Company  stratifies  its  mortgage  servicing  rights by  product  type and
investor to reflect the  predominant  risks.  To determine the fair value of its
investment, the Company uses a valuation model that calculates the present value
of future cash flows.  Due to the drop in  interest  rates,  both the actual and
anticipated  prepayment speeds used in the valuation model increased causing the
fair value of the servicing to decrease  below the carrying basis which resulted
in an impairment. The majority of the impairment related to the servicing rights

                                       35
<PAGE>

retained  by the  Company  on its  originations  over  the  last  year.  Further
decreases  in interest  rates,  or increases in  anticipated  future  prepayment
speeds, may cause additional impairment charges in future periods.

     The  remainder  of  noninterest  expense,   which  includes  occupancy  and
equipment expense,  postage and communication  expense,  professional fees, data
processing costs and other expenses, increased $12.9 million, or 31.2%, to $54.2
million for fiscal year 2002 as compared to $41.3  million for fiscal year 2001.
The increase is primarily  related to the charges and reserves  noted above,  as
well as increases in  foreclosure  expenses at Matrix  Financial,  miscellaneous
operation  expenses  associated  with  additional  volume at Matrix Bank,  First
Matrix and Matrix Asset Management,  and incremental  reserves and write-offs of
receivables primarily at ABS.

     Income Taxes.  Income taxes  decreased  $8.8 million to a benefit of $(4.3)
million for fiscal  year 2002 as compared to expense of $4.3  million for fiscal
year 2001.  Our effective tax benefit was 52.2% for fiscal year 2002 as compared
to an  effective  tax rate of 32.5% for fiscal year 2001 due to the pre-tax loss
in 2002. The effective tax rates are affected by the level of tax-exempt  income
at ABS in proportion to the level of net income (loss).

Comparison of Results of Operations for Fiscal Years 2001 and 2000

      Net Income; Return on Average Equity. Net income increased $4.2 million to
$8.5  million for fiscal  year 2001 as compared to $4.3  million for fiscal year
2000.  On a per share basis,  net income was $1.30 per diluted  share for fiscal
year 2001 and $0.63 for fiscal year 2000.  Return on average equity increased to
12.8% for  fiscal  year 2001 as  compared  to 6.8% for  fiscal  year  2000.  The
increases in net income,  earnings  per share and return on average  equity were
caused  primarily by an increase in net interest income after provision for loan
and valuation  losses and large  increases in loan  origination  income and loan
administration  fees  generated  at Matrix  Financial,  offset by  increases  in
compensation  and employee benefit costs and increased  amortization  expense on
mortgage servicing rights.

      Net Interest  Income.  Net interest  income before  provision for loan and
valuation  losses  increased $10.7 million to $40.5 million for fiscal year 2001
as compared  to $29.8  million for fiscal  year 2000.  Our net  interest  income
before  provision  for  loan  and  valuation  losses  increased  due to the $229
million,  or 19%,  increase in our  interest-earning  assets.  Additionally,  an
element of the increase was our net interest margin  increasing to 2.87% for the
year ended  December  31, 2001 as compared to 2.51% for the year ended  December
31, 2000. Although the yield on our  interest-earning  assets decreased to 7.46%
for the year ended  December 31, 2001 from 8.22% for the year ended December 31,
2000,  that  decrease  was  more  than  offset  by the  decrease  in our cost of
interest-bearing  liabilities which for the same periods decreased to 5.15% from
6.15%. Both the decrease in the yield on our interest-earning assets and cost of
interest-bearing liabilities is a direct result of the interest rate environment
prevalent  in 2001,  which saw  significant  interest  rate cuts by the  Federal
Reserve.  Also,  attributing  to the  increase  in the  margin  was the  overall
increase in average noninterest-bearing deposits to $205 million at December 31,
2001 as  compared to $141  million at December  31,  2000.  The  increase in the
noninterest-bearing  deposits  is due to a  combination  of an  increase  in our
custodial  deposits  and  deposits  generated  from  our  investment  in  Matrix
Settlement & Clearance  Services.  For a tabular  presentation of the changes in
net  interest  income due to changes  in volume of  interest-earning  assets and
changes in interest rates, see "--Analysis of Changes in Net Interest Income Due
to Changes in Interest Rates and Volumes."

     Provision  for  Loan  and  Valuation  Losses.  The  provision  for loan and
valuation losses decreased $1.2 million, or 30%, to $3.0 million for fiscal year
2001 as  compared  to $4.2  million  for fiscal  year 2000.  This  decrease  was
primarily attributable to year 2000 including a significant charge-off at ABS of
a loan to a school client which closed, as well as a high year 2000 provision at
ABS and Matrix Bank versus levels in 2001. For a discussion of the components of
the allowance for loan losses,  see "--Asset and Liability  Management--Analysis
of Allowance for Loan and  Valuation  Losses." For a discussion on the allowance
as  it  relates  to   nonperforming   assets,   see   "--Asset   and   Liability
Management--Nonperforming Assets."

     Loan  Administration.  Loan  administration  income represents service fees
earned  from  servicing  loans  for  various  investors,  which  are  based on a
contractual  percentage of the outstanding  principal balance plus late fees and
other ancillary charges, as well as activity in Ginnie Mae servicing portfolios.
Loan administration fees increased $6.3 million to $30.1 million for fiscal year
2001 as compared to $23.8 million for fiscal year 2000. Loan administration fees
are affected by factors that include the size of our  residential  mortgage loan
servicing portfolio, the servicing spread, the timing of payment collections and
the amount of ancillary  fees received.  Our mortgage loan  servicing  portfolio
increased slightly to an average balance of $5.5 billion for fiscal year 2001 as
compared to an average  balance of $5.4  billion  for fiscal year 2000,  despite
significant  increases in prepayment  rates due to the  declining  interest rate
environment in the latter part of 2001. The increase in loan administration fees
was  primarily  driven by increased  revenue  generated  from the  purchasing of

                                       36
<PAGE>

delinquent  government  loans out of our Ginnie Mae servicing and the subsequent
sale of those loans. The revenue  generated from this activity was approximately
$1.8 million.  There were also increases in our ancillary fees. The remainder of
the increase is attributed to a slightly higher average  servicing balance and a
higher  balance of  government  servicing  which tends to have higher  servicing
fees.

     Brokerage Fees.  Brokerage fees represent  income earned from brokerage and
consulting services performed pertaining to mortgage servicing rights. Brokerage
fees  continued  with 2000 trends and decreased  $3.3  million,  or 41%, to $4.8
million for fiscal  year 2001 as compared to $8.1  million for fiscal year 2000.
This  decrease  was the  result of a  decrease  in the  balance  of  residential
mortgage servicing portfolios brokered by Matrix Capital Markets, which in terms
of aggregate unpaid principal balances on the underlying loans,  decreased $12.5
billion,  or 34%,  to $23.9  billion  for fiscal  year 2001 as compared to $36.4
billion for fiscal year 2000. As previously discussed, the decrease noted is due
to the  consolidation  that has taken place in the  mortgage  banking  industry.
Additionally,  there was a decrease in whole loan  revenue,  again due to market
conditions.  The  overall  market,  including  the number of buyers and  sellers
servicing,  has  decreased,  and as a result,  we have  experienced  an  overall
decrease in both the portfolios  brokered and the corresponding  revenue. In any
event,  brokerage  fees vary from  quarter to quarter as the timing of servicing
sales is dependent upon the seller's need to recognize a sale or to receive cash
flows.

     Trust  Services.  Trust service fees  decreased  $900,000,  or 18%, to $4.0
million for fiscal  year 2001 as compared to $4.9  million for fiscal year 2000.
The  decrease  in  revenue  is  despite  the  fact  that  trust  accounts  under
administration  at Sterling Trust  increased to 41,329  accounts at December 31,
2001 from 39,220 accounts at December 31, 2000 and total fiduciary  assets under
administration  increased to $6.0 billion at December 31, 2001 from $3.8 billion
at December  31, 2000.  The growth in accounts  and assets under  administration
occurred in third party administrator accounts,  which increased 147% in 2001 to
3,554 accounts,  which are generally  priced at lower fees based on the level of
administration  required and generate  revenues based on number of  transactions
within accounts versus level of assets.

     Real  Estate  Disposition   Services.   Real  estate  disposition  services
represents fees earned by Matrix Asset Management for real estate management and
disposition  services  provided on  foreclosed  properties  owned by third party
financial services companies and financial institutions. Real estate disposition
service income decreased $1.1 million, or 30%, between the fiscal years 2001 and
2000 to $2.6  million.  The  decrease  was due to the  decrease in the number of
properties  closed during the year,  which  decreased 23%, from 1,872 in 2000 to
1,444 in 2001.

     Gain on Sale of Loans and Securities.  Gain on sale of loans and securities
increased  $500,000  to $1.5  million  for fiscal  year 2001 as compared to $1.0
million for fiscal year 2000. Loan sales of approximately  $76.1 million in 2001
were  completed  under  standard  purchase and sale  agreements,  with  standard
representations  and warranties and without  recourse.  Sales of securities were
approximately  $59.6 million in 2001 and pertained to loans that the Company had
purchased and swapped for  securities.  The gains from both types of these sales
represent  cash gains.  Gains on sale can fluctuate  significantly  from year to
year  based  on a  variety  of  factors,  such  as  the  current  interest  rate
environment,  the supply and mix of loan or securities  portfolios  available in
the  market,  the type of loan or  securities  portfolios  we  purchase  and the
particular loan portfolios we elect to sell.

     Gain  on Sale  of  Mortgage  Servicing  Rights.  Gain  on sale of  mortgage
servicing  rights  decreased $2.5 million to  approximately  $200,000 for fiscal
year  2001 as  compared  to $2.7  million  for  fiscal  year  2000.  In terms of
aggregate  outstanding  principal  balances of mortgage  loans  underlying  such
mortgage  servicing rights, we sold $1.7 billion in purchased mortgage servicing
rights  during  fiscal year 2001 as compared to $1.1 billion  during fiscal year
2000.   Gains  from  the  sale  of  mortgage   servicing  rights  can  fluctuate
significantly  from  year to year  based on the  market  value of our  servicing
portfolio,  the  particular  servicing  portfolios  we  elect  to  sell  and the
availability  of similar  portfolios  in the market.  Due to our position in and
knowledge of the market, we expect to, at times,  pursue  opportunistic sales of
mortgage  servicing rights.  The 2000-year sale was undertaken to take advantage
of aggressive  pricing in the marketplace  while the market was not as favorable
of 2001 with the low interest rate environment prevalent throughout the year.

     Loan Origination.  Loan origination income includes all mortgage loan fees,
secondary  marketing  activity on new loan originations for both residential and
SBA loans,  and servicing  release  premiums on servicing  sold and  capitalized
servicing on new originations  sold, net of origination  costs. Loan origination
income  increased $27.7 million,  or 365%, to $35.3 million for fiscal year 2001
as compared to $7.6  million for fiscal  year 2000.  The  increase is  primarily
attributable to an increase in wholesale residential mortgage loan production at
Matrix  Financial by $3.1 billion,  or 602%, to $3.6 billion  during fiscal year
2001 as compared to $512.5  million  during  fiscal year 2000.  The increases in
volume were due to our 2000 initiatives to increase  origination platform and by
the declining interest rate environment of 2001.

                                       37
<PAGE>

     School Services.  School services income  represents fees earned by ABS for
outsourced business and consulting services provided to schools. School services
income  increased $1.2 million,  or 28%, to $5.4 million for fiscal year 2001 as
compared to $4.2 million for fiscal year 2000.  This  increase was primarily due
to an increase in new school customers during 2001.

     Other  Income.  Other  income  increased  $4.8  million to $7.6 million for
fiscal year 2001 as compared to $2.8 million for fiscal year 2000.  The increase
in other income was primarily due to $3.4 million pre-tax gain on sale of assets
generated due to the  condemnation of real estate held by Matrix Bank in Denver,
Colorado,  which was going to be used for relocation of Matrix Bank's  domicile.
The City and County of Denver condenmed the property in October 2001.

     Noninterest Expense. Noninterest expense increased $38.1 million, or 48.9%,
to $115.9  million for fiscal year 2001 as compared to $77.8  million for fiscal
year 2000.  This  increase  was  primarily  due to  increased  compensation  and
benefits  expense,  increased  amortization  of  mortgage  servicing  rights and
increased  other  general and  administrative  expense,  offset by a decrease in
professional   fees.  The  following  table  details  the  major  components  of
noninterest expense for the periods indicated:
<TABLE>
<CAPTION>
                                                                                                    Year Ended
                                                                                                    December 31,
                                                                                          -------------------------------
                                                                                               2001             2000
                                                                                          ---------------  --------------
                                                                                                 (In thousands)
     <S>                                                                                        <C>             <C>

     Compensation and employee benefits                                                         $ 52,573        $  34,245
     Amortization of mortgage servicing rights ..........................................         21,862            9,851
     Occupancy and equipment.............................................................          6,525            4,785
        Postage and communication........................................................          4,063            2,812
     Professional fees...................................................................          2,883            4,687
     Data processing.....................................................................          2,907            2,413
     Other general and administrative....................................................         25,086           19,048
                                                                                          ---------------  --------------
          Total..........................................................................      $ 115,899        $  77,841
                                                                                          ===============  ==============
</TABLE>

     Compensation  and employee  benefits  increased  $18.3 million,  or 54%, to
$52.6  million for fiscal year 2001 as compared to $34.2 million for fiscal year
2000.  This  increase was primarily  the result of increased  salary  expense at
Matrix  Financial,  and to a lesser  extent,  at ABS,  Matrix Bancorp and Matrix
Bank. Matrix  Financial's  salary expense increased related to its initiative to
develop its production  platform and $15.9 million of the total company increase
in compensation and employee benefits is attributable to Matrix Financial.  This
initiative  involved opening two new production  offices,  acquiring a servicing
and  production  platform and hiring  additional  administrative  and production
staff in late 2000  which  operated  all of 2001.  The  Company  had an  overall
increase of 225  employees,  or 31%, to 960  employees  at December  31, 2001 as
compared to 735 employees at December 31, 2000.

     Amortization of mortgage servicing rights increased $12.0 million, or 122%,
to $21.9  million for fiscal  year 2001 as  compared to $9.9  million for fiscal
year 2000.  Amortization of mortgage  servicing  rights  fluctuates based on the
size of our mortgage  servicing  portfolio and the prepayment rates  experienced
with respect to the underlying mortgage loan portfolio. In response to the lower
interest  rates  prevalent  in the market,  prepayment  speeds on our  servicing
portfolio  increased to an average of 22.9% during  fiscal year 2001 as compared
to 12.1% during fiscal year 2000.

     The  remainder  of  noninterest  expense,   which  includes  occupancy  and
equipment expense,  postage and communication  expense,  professional fees, data
processing  costs and other expenses,  increased $7.7 million,  or 23%, to $41.5
million for fiscal year 2001 as compared to $33.8  million for fiscal year 2000.
The $6.0  million  increase  in other  general  and  administrative  expense was
primarily  attributable to increases in foreclosure and REO expenses,  increases
in  travel  and  entertainment  costs,  and  in  other  miscellaneous   expenses
associated  with the  increased  number of  employees,  and increases in outside
services,  consulting and temporary  help, as well as a $984,000 charge recorded
related to the relocation of Matrix Bank's domicile  primarily for severence and
contract benefits to be paid to certain of Matrix Bank's employees.  For further
discussion  of  these  charges,  see  Note  2  to  the  consolidated   financial
statements.  This was offset by a $1.8  million  decrease in  professional  fees
related  mainly to high  amounts in 2000 for  litigation  at Sterling  Trust and
legal expenses  associated with the Harbor settlement which were not incurred in
2001.  For a discussion  of the Harbor  items,  see Note 20 to the  consolidated
financial statements.

     Provision for Income Taxes.  Our provision for income taxes  increased $2.1
million to $4.3  million for fiscal  year 2001 as  compared to $2.2  million for
fiscal year 2000.  The increase in pre-tax income was enhanced by a reduction in
our  effective tax rate to 32.5% for fiscal year 2001 from 34.5% for fiscal year
2000.  The decrease in the effective tax rate was the result of our  origination
of tax-exempt financing at ABS.

                                       38
<PAGE>

Average Balance Sheet

     The  following  table  sets  forth  for  the  periods  and as of the  dates
indicated, information regarding our average balances of assets and liabilities,
as well as the dollar amounts of interest  income from  interest-earning  assets
and interest expense on interest-bearing liabilities and the resultant yields or
costs.  Ratio,  yield and rate  information  is based on average daily  balances
where available;  otherwise, average monthly balances have been used. Nonaccrual
loans are  included in the  calculation  of average  balances  for loans for the
periods indicated.

<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                           ---------------------------------------------------------------------------------------
                                                     2002                          2001                         2000
                                           -------------------------    ---------------------------  ---------------------------
                                           Average           Average     Average           Average   Average            Average
                                           Balance   Interest Rate      Balance   Interest  Rate      Balance  Interest  Rate
                                           --------- ---------------    ------------------ --------  ---------------------------
                                                                          (Dollars in thousands)
<S>                                     <C>         <C>       <C>       <C>        <C>         <C>    <C>        <C>       <C>

Assets
Interest-earning assets:
  Loans receivable .....................$1,333,390  $ 88,611   6.65 %   1,338,613  102,058     7.62%  1,086,041   90,591    8.34 %
    Securities..........................    11,003       594   5.40        17,667    1,335     7.56      45,253    3,374    7.46
  Interest-earning deposits.............    24,285       337   1.39        33,746    1,008     2.99      28,831    1,508    5.23
  FHLB stock............................    26,393       936   3.55        23,281      996     4.28      24,199    1,913    7.91
                                           --------- ---------------    ------------------ --------  ---------------------------
    Total interest-earning assets....... 1,395,071    90,478   6.49  %  1,413,307  105,397     7.46%  1,184,324   97,386    8.22 %

Noninterest-earning assets:
  Cash..................................    42,393                         24,196                        16,305
  Allowance for loan and valuation          (9,445)                        (9,038)                       (7,302)
losses..................................
  Premises and equipment................    22,454                         17,838                        10,318
  Other assets..........................   178,450                        142,914                       116,602
                                           ---------                     ----------                    ----------
    Total noninterest-earning assets....   233,852                        175,910                       135,923
                                           ---------                     ----------                    ----------
    Total assets........................$1,628,923                     $1,589,217                     1,320,247
                                           =========                     ==========                    ==========

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
  Passbook accounts.....................$    5,998       117   1.95  % $    3,467      108     3.12%      2,981      102    3.42 %
  Money market and NOW accounts.........   302,479     4,254   1.41       239,941    5,220     2.18     156,649    3,671    2.34
("NOW") accounts........................
  Certificates of deposit...............   469,226    17,125   3.65       493,954   29,544     5.98     361,084   22,502    6.23
  FHLB borrowings.......................   328,057     9,478   2.89       347,807   16,071     4.62     430,331   27,242    6.33
  Borrowed money and guaranteed
preferred beneficial                       143,843    10,304   7.16       176,980   13,944     7.88     147,377   14,084    9.56
      interests.........................
                                           ---------  ---------------    ------------------ -------------------------------------
    Total interest-bearing liabilities.. 1,249,603    41,278   3.30  %  1,262,149   64,887     5.14%  1,098,422   67,601    6.15 %
                                           ---------  ---------------    ------------------ -------------------------------------

Noninterest-bearing liabilities:
  Demand deposits (including custodial     268,957                        204,923                       140,615
escrow balances)........................
  Other liabilities.....................    39,459                         55,764                        18,505
                                           ---------                     ----------                   ----------
      Total noninterest-bearing            308,416                        260,687                       159,120
liabilities.............................
  Shareholders' equity..................    70,904                         66,381                        62,705
                                           ---------                    ----------                   ----------
    Total liabilities and shareholders' $1,628,923                     $1,589,217                     1,320,247
equity..................................
                                           =========                     ==========                   ==========
Net interest income before provision
for loan and                                        $ 49,200                        40,510                        29,785
    valuation losses....................            ========                       ========                     =========
Interest rate spread....................                       3.19 %                          2.32%                       2.07 %
                                                              =======                       ========                     ========
Net interest margin.....................                       3.53 %                          2.87%                       2.51 %
                                                              =======                       ========                     ========
Ratio of average interest-earning
    assets to average                                         111.64%                        111.98%                     107.82 %
    interest-bearing liabilities........                      =======                       ========                     ========

</TABLE>

Analysis of Changes in Net Interest  Income Due to Changes in Interest Rates and
Volumes

     The  following  table  presents  the dollar  amount of changes in  interest
income and interest expense for major components of interest-earning  assets and
interest-bearing  liabilities. It distinguishes between the increase or decrease
related to changes in balances and changes in interest rates.  For each category
of  interest-earning  assets and  interest-bearing  liabilities,  information is
provided on changes attributable to:

      o     changes in volume,  in other words,  changes in volume multiplied by
            old rate; and
      o     changes in rate, in other words,  changes in rate  multiplied by old
            volume.

 For purposes of this table, changes attributable to both rate and volume, which
 cannot be segregated,  have been allocated proportionately to the change due to
 volume and the change due to rate.

                                       39
<PAGE>

<TABLE>
<CAPTION>

                                          Year Ended December 31, 2002 vs. 2001   Year Ended December 31, 2001 vs. 2000
                                          Increase (Decrease) Due to Change in    Increase (Decrease) Due to Change in
                                         --------------------------------------------------------------------------------
                                          Volume          Rate          Total      Volume         Rate          Total
                                         ------------  ------------  ------------------------  ------------  ------------
                                                                         (In thousands)
<S>                                       <C>          <C>           <C>         <C>           <C>           <C>

Interest-earning assets:
  Loans receivable......................  $    (398)   $  (13,049)   $  (13,447) $  19,781     $ (8,314)     $  11,467
    Securities..........................       (422)         (319)         (741)    (2,085)                     (2,039)
                                                                                                   46
  Interest-earning deposits.............       (231)         (440)         (671)       225         (725)          (500)
  FHLB stock............................        123          (183)          (60)       (70)        (847)          (917)
                                            ---------    ----------    ----------  ---------     ---------     ---------
    Total interest-earning assets.......       (928)      (13,991)      (14,919)    17,851       (9,840)         8,011
                                            ---------    ----------    ----------  ---------     ---------     ---------
Interest-bearing liabilities:
  Passbook accounts.....................         59           (50)            9         16          (10)             6
  Money market and NOW accounts.........      1,152        (2,118)         (966)     1,822         (273)         1,549
  Certificates of deposit...............     (1,414)      (11,005)      (12,419)     7,984         (942)         7,042
  FHLB borrowings.......................       (868)       (5,725)       (6,593)    (4,637)      (6,534)
                                                                                                               (11,171)
  Borrowed money and guaranteed
      preferred beneficial interest.....     (2,448)       (1,192)       (3,640)     2,563       (2,703)          (140)
                                            ---------    ----------    ----------  ---------     ---------     ---------
    Total interest-bearing liabilities..     (3,519)      (20,090)      (23,609)     7,748       (10,462)       (2,714)
                                            ---------    ----------    ----------  ---------     ---------     ---------
Change in net interest income before
provision for loan and valuation losses..  $  2,591     $   6,099     $   8,690  $  10,103      $ 10,725      $    622
                                            =========    ==========    ==========  =========     =========     =========
</TABLE>

Asset and Liability Management

     General.  A  significant  portion of our revenues and net income is derived
from  net   interest   income  and,   accordingly,   we  strive  to  manage  our
interest-earning  assets and  interest-bearing  liabilities  to generate what we
believe to be an appropriate  contribution  from net interest income.  Asset and
liability  management  seeks to control the volatility of our performance due to
changes in  interest  rates.  We  constantly  attempt to achieve an  appropriate
relationship  between rate sensitive assets and rate sensitive  liabilities.  We
have responded to interest rate volatility by developing and implementing  asset
and liability management  strategies designed to increase noninterest income and
improve  the  match  between   interest-earning   assets  and   interest-bearing
liabilities. These strategies include:

      o     Utilizing  mortgage  servicing  rights  as a source  of  noninterest
            income and as a  countermeasure  against the decline in the value of
            mortgage loans during a rising interest rate environment.  Increases
            in interest  rates tend to increase the value of mortgage  servicing
            rights because of the resulting  decrease in prepayment rates on the
            underlying loans;
      o     Focusing on noninterest-bearing custodial escrow balances related to
            our mortgage servicing rights;
      o     Increasing  focus on lines of business  that are less  interest rate
            sensitive,  such  as  brokerage  activities,   consulting  services,
            self-directed  trust  services,  clearing  operations,  real  estate
            disposition and school business services;
      o     Originating  and  purchasing  adjustable  rate mortgages and selling
            newly originated  fixed rate residential  mortgages in the secondary
            market;
      o     Increasing emphasis on the origination of construction, multi-family
            and commercial real estate lending,  including SBA loans, which tend
            to have higher  interest  rates with  shorter loan  maturities  than
            residential mortgage loans and generally are at adjustable rates;
      o     Acquisition and sales of guaranteed portions of SBA loans, which are
            generally at adjustable rates;
      o     Extending  the  maturity  of  our  interest-bearing  liabilities  by
            borrowing term advances from the FHLB;
      o     Increasing retail deposits, which are less susceptible to changes in
            interest rates than other funding sources;
      o     Historically,  maintaining a wholesale loan  origination  operation.
            Wholesale  originations  provide a form of hedge against the balance
            of  mortgage  servicing  rights.  In  a  decreasing   interest  rate
            environment,  the value of the servicing portfolio tends to decrease
            due to increased  prepayments of the underlying  loans.  During this
            same environment, however, the volume of loan originations generally
            increases.  Due to the declining  investment  in mortgage  servicing
            rights and the increased  operation and  financial  risk  associated
            with the wholesale operations, we have elected to sell the wholesale
            production  platform.   See  "Item  1.  Business-Sale  of  Wholesale
            Production Platform";
      o     Pursuing  institutional  alliances or depository  relationships that
            provide  fee-based  income  or  generate  liabilities  that are less
            expensive or less interest rate  sensitive  than retail  deposits or
            borrowings  from  third  party  institutions  to fund our  investing
            activities;
      o     Using Matrix Bank as the settlement bank for settlement and clearing
            services offered by Sterling Trust and Matrix Settlement & Clearance
            Services to generate low-cost deposits;
      o     Hedging  segments of our  servicing  portfolio  and selling  forward
            commitments on our loan pipeline; and
      o     Expanding  our trust  activities  to provide  custodial  services to
            Matrix  Settlement  & Clearance  Services'  clients to increase  fee
            income and low cost deposits.

Many of the strategies outlined were successfully  initiated during 2002. Matrix
Bank is positively  gapped,  which means that its assets will  re-price  quicker
than its liabilities as interest rates fluctuate. As a result, if interest rates

                                       40
<PAGE>


increase,  the rising  interest  rates should have a positive  impact on the net
interest income.  However,  if interest rates remain static or decrease further,
we should  experience some compression in our net interest income as many of our
interest-bearing and noninterest-bearing  liabilities cannot re-price any lower.
Due to the 40-year low interest  rate  environment,  our  investment in mortgage
servicing rights was very unprofitable in 2002, including the provision of $14.2
million to increase our impairment  reserve. In 2003, we will continue to manage
interest rate risk under similar strategies.

     Lending Activities. Our major interest-earning asset is our loan portfolio.
Consequently,  a significant part of our asset and liability management involves
monitoring the  composition of our loan portfolio,  including the  corresponding
maturities. The following table sets forth the composition of our loan portfolio
by loan type as of the dates indicated. The amounts in the table below are shown
net of discounts and other deductions.
<TABLE>
<CAPTION>

                                                                    As of December 31,
                         ----------------------------------------------------------------------------------------------------------
                                 2002                    2001                2000                 1999                  1998
                          --------------------   -------------------- -------------------   -------------------  ------------------
                           Amount     Percent      Amount    Percent   Amount    Percent     Amount    Percent    Amount    Percent
                          ---------- ---------   ----------  -------- --------- ---------   --------- ---------  -------- ---------
                                                                                     (Dollars in thousands)
<S>                       <C>         <C>      <C>          <C>      <C>          <C>      <C>          <C>      <C>        <C>

Residential............   $1,001,892   71.88%  $1,055,284    78.71%  $  903,955    81.00%  $  954,424    86.49%  $732,512    86.34%
Multi-family, commercial
   real estate and           313,237   22.47      192,225    14.34      123,491    11.07       78,046     7.07     52,689     6.21
   commercial..........
School Financing.......       49,560    3.56       61,969     4.62       51,909     4.65       31,748     2.88     24,429     2.88
Construction ..........       34,160    2.45       35,158     2.62       36,768     3.29       36,056     3.26     27,648     3.26
Consumer...............        4,311    0.31        5,403     0.40        8,479     0.76        9,595     0.87     14,880     1.75
     Total loans.......    1,403,160  100.67    1,350,038   100.70    1,124,602   100.77    1,109,869   100.57    852,158   100.44
Less allowance for loan        9,343    0.67        9,338     0.70        8,581     0.77        6,354     0.57      3,710     0.44
  and valuation losses.   ---------- ---------   ----------  -------- --------- ---------   --------- ---------  -------- ---------
Loans receivable, net..   $1,393,817  100.00%  $1,340,700   100.00%  $1,116,021   100.00%  $1,103,515   100.00%  $848,448   100.00%
                          ========== =========   ==========  ======== ========= =========   ========= =========  ======== =========
</TABLE>

     The  following  table  presents the  aggregate  maturities of loans in each
major  category of our loan  portfolio as of December 31,  2002,  excluding  the
allowance for loan losses.  Loans held for sale are  classified as maturing over
five years.  Actual maturities may differ from the contractual  maturities shown
below as a result of renewals and prepayments or the timing of loan sales.
<TABLE>
<CAPTION>

                                                                               As of December 31, 2002
                                                                ------------------------------------------------------
                                                                 Less than      One to      Over Five
                                                                 One Year     Five Years       Years        Total
                                                                ------------- ------------  ------------ -------------
                                                                                   (In thousands)
      <S>                                                       <C>           <C>           <C>          <C>

      Residential.............................................. $   519,719   $  429,471    $   52,703   $ 1,001,893
      Multi-family, commercial real estate and commercial......     174,839       30,080       108,318       313,237
      School financing.........................................       9,912       39,648            --        49,560
      Construction.............................................      34,160           --            --        34,160
      Consumer.................................................       1,230        1,182         1,898         4,310
                                                                ------------- ------------  ------------ -------------
           Total loans ........................................ $   739,860   $  500,381    $  162,919   $ 1,403,160
                                                                ============= ============  ============ =============
</TABLE>

      Included  in the balance of  residential  loans are  approximately  $406.7
million of loans  originated by Matrix  Financial that are committed for sale at
December  31, 2002.  Although the majority of the loans are fixed rate,  we have
very little  interest risk  associated with the loans because they are committed
for sale.

      Loans held for sale,  excluding the  allowance for loan losses,  which are
primarily  contractually  due in less than one to five years,  are split between
fixed and adjustable rates as follows:
<TABLE>
<CAPTION>

                                                                              As of December 31, 2002
                                                                -----------------------------------------------------
                                                                 Less than      One to      Over Five
                                                                 One Year     Five Years       Years       Total
                                                                ------------- ------------  ------------ ------------
                                                                                  (In thousands)
      <S>                                                       <C>           <C>                   <C>   <C>

      Fixed ................................................... $   440,029   $  105,822            --    $  545,851
      Adjustable...............................................     208,123      359,851            --       567,974
                                                                ------------- ------------  ------------ ------------
           Total loans ........................................ $   648,152   $  465,673            --    $1,113,825
                                                                ============= ============  ============ ============
</TABLE>

      Loans held for investment,  excluding the allowance for loan losses, which
are  contractually  due in one or  more  years,  are  split  between  fixed  and
adjustable rates as follows:

                                       41
<PAGE>

<TABLE>
<CAPTION>


                                                                              As of December 31, 2002
                                                                -----------------------------------------------------
                                                                 Less than      One to      Over Five
                                                                 One Year     Five Years      Years        Total
                                                                ------------- ------------  ------------ ------------
                                                                                  (In thousands)
      <S>                                                       <C>           <C>            <C>          <C>

      Fixed ................................................... $     7,151   $    9,902     $  16,520    $  33,573
      Adjustable...............................................      84,557       24,806       146,399      255,762
                                                                ------------- ------------  ------------ ------------
           Total loans ........................................ $    91,708   $   34,708     $ 162,919    $ 289,335
                                                                ============= ============  ============ ============
</TABLE>

      Nonperforming  Assets.  As part of  asset  and  liability  management,  we
monitor  nonperforming  assets on a monthly basis.  Nonperforming assets consist
primarily of nonaccrual  loans and foreclosed  real estate.  Loans are placed on
nonaccrual  when full  payment of principal or interest is in doubt or when they
are past due 90 days as to either principal or interest.  Foreclosed real estate
arises  primarily  through  foreclosure on mortgage  loans owned.  The following
table sets forth our nonperforming assets as of the dates indicated:
<TABLE>
<CAPTION>

                                                                              As of December 31,
                                                   --------------------------------------------------------------------------
                                                       2002           2001           2000           1999           1998
                                                    -----------    -----------    -----------    -----------    -----------
                                                                            (Dollars in thousands)
<S>                                                   <C>            <C>            <C>            <C>            <C>

Nonaccrual residential mortgage loans............     $15,123        $19,039        $22,592        $20,185        $ 8,208
Nonaccrual commercial real estate, commercial
loans and school financing ......................      15,649         18,172          5,792          5,301          4,349
Nonaccrual consumer loans........................          46             40            132            155            652
                                                    -----------    -----------    -----------    -----------    -----------
     Total nonperforming loans...................      30,818         37,251         28,516         25,641         13,209
Foreclosed real estate...........................       8,343          8,355          2,646            800            916
                                                    -----------    -----------    -----------    -----------    -----------
     Total nonperforming assets..................     $39,161        $45,606        $31,162        $26,441        $14,125
                                                    ===========    ===========    ===========    ===========    ===========
Total nonperforming loans to total loans.........        2.20  %        2.76%          2.54%          2.31%          1.55%
Total nonperforming assets to total assets.......        2.30  %        2.77%          2.20%          2.06%          1.40%
Ratio of allowance for loan and valuation losses
    to total nonperforming loans.................       30.32  %       25.07%         30.09%         24.78%         28.09%
Interest on nonperforming loans not
    included in interest income..................     $   916        $ 1,773        $ 1,016         $  979        $   524
</TABLE>

     We accrue  for  interest  on  government-sponsored  loans  such as  Federal
Housing  Administration  insured and Veteran's  Administration  guaranteed loans
which are past due 90 or more days,  as the  majority  of the  interest on these
loans is insured by the  federal  government.  The  aggregate  unpaid  principal
balance  of  government-sponsored  accruing  loans that were past due 90 or more
days was $34.8  million,  $55.2 million and $101.1 million of December 31, 2002,
2001 and 2000, respectively.

     Nonaccrual  residential  mortgage loans as a percentage of total loans were
1.1% at December 31, 2002, 1.4% at December 31, 2001, 2.1% at December 31, 2000,
1.8% at December 1999 and 1.0% at December 31, 1998. The nonaccrual  residential
mortgage  loans have  improved at December  31, 2002 as compared to December 30,
2001. The improvement is due to maturity and  improvement in certain  portfolios
acquired  in 2000 and 1999 on which the  recourse  option we had was  eliminated
with the  bankruptcy  of the  seller/servicer.  The  balance  of these  loans in
nonaccrual  at December 31, 2002 totals $2.2 million as compared to $4.9 million
at December 31, 2001.  Associated with these nonaccrual  loans, we have recorded
$845,000 of discounts.

     The decrease in nonaccrual commercial loans and school financing in 2002 is
primarily  attributable  to the decreased  amount of commercial  real estate and
construction  loans in nonaccrual  status,  which decreased $2.9 million to $2.2
million at December 31, 2002.  This decrease was offset by increased  amounts of
SBA originated and purchased  loans in nonaccrual  status,  which increased $1.2
million to $9.3 million at December 31, 2002. It should be noted,  however, that
approximately  $6.7  million of the  interest  and  principal  of these loans is
guaranteed,  and as such,  our credit risk is minimized  despite the increase in
the balances. With regard to our school financing, a majority of our origination
of tax-exempt  financing for charter  schools is for the purchase of real estate
and equipment.  We have noted that many of our charter schools have  encountered
enrollment  and/or state funding delays with their  start-up,  which has delayed
their funding and caused the school's loans to us to become delinquent.  We have
historically,  however, been able to work with many of the schools on their cash
flow issues and eventually  removed them from the delinquent lists. Not included
in the 2002 balance was $1.0 million of delinquent school financing and $450,000
of  foreclosed  real estate that was sold to a third  party with  recourse.  The
losses related to the delinquencies  and foreclosures  would be recorded as part
of noninterest expense. As of December 31, 2002, no recording of a liability was
considered necessary.

                                       42
<PAGE>

      The prior delinquency and anticipated future  delinquencies are taken into
consideration in the pricing of the loans acquired.  We generally  purchase such
loans at discounts and, in limited  instances,  receive recourse from the seller
to further reduce our risk of loss associated with the loans' nonaccrual status.
At December 31, 2002,  $12.6 million,  or 40.9%,  of the  nonaccrual  loans were
loans that were  residential  loans purchased in bulk loan portfolios and remain
classified  as "held for sale."  Total loans held for sale at December 31, 2002,
were $1.1 billion, of which $17.0 million, or 1.5%, were in nonaccrual status.

     Analysis of Allowance for Loan and Valuation  Losses.  The following  table
sets forth information regarding changes in our allowance for loan and valuation
losses for the periods  indicated.  The table  includes the  allowance  for both
loans held for investment and loans held for sale.
<TABLE>
<CAPTION>

                                                                As of and for the Year Ended December 31,
                                                ----------------------------------------------------------------------------
                                                    2002            2001              2000           1999          1998
                                                --------------  --------------    -------------   ------------  ------------
                                                                          (Dollars in thousands)
<S>                                               <C>             <C>              <C>             <C>            <C>

Balance at beginning of year..................    $    9,338      $    8,581       $    6,354         $3,710         1,756
Charge-offs:
     Real estate - mortgage...................         1,239             872              434             98         1,922
     Real estate - construction ..............            --              31              320             --            --
     Commercial loans and school financing....         1,482             746              819             --            --
     Consumer.................................           276             659              476            509           789
                                                  ------------    ------------     ------------    -----------    ----------
          Total charge-offs...................         2,997           2,308            2,049            607         2,711
Recoveries:
     Real estate - mortgage...................            97               4                1              2             2
     Commercial loans and school financing....            17              --               --             --            --
     Consumer.................................            67              81               40             69            56
                                                  ------------    ------------     ------------    -----------    ----------
          Total recoveries....................           181              85               41             71            58
                                                  ------------    ------------     ------------    -----------    ----------
Net charge-offs...............................         2,816           2,223            2,008            536         2,653
Provision for loan losses charged to
   operations.................................         2,821           2,980            4,235          3,180         4,607
                                                  ------------    ------------     ------------    -----------    ----------
Balance at end of year........................    $    9,343      $    9,338       $    8,581      $   6,354      $  3,710
                                                  ============    ============     ============    ===========    ==========
Ratio of net charge-offs to average loans.....          0.21  %         0.17  %          0.18%          0.06%         0.38%
                                                  ============    ============     ============    ===========    ==========
Average loans outstanding during the year.....    $1,333,390      $1,338,613       $1,086,041      $ 877,117      $692,443
                                                  ============    ============     ============    ===========    ==========
</TABLE>

     The allowance  for loan and  valuation  losses is analyzed by management as
discussed below and is increased by the provision for loan and valuation losses,
which is  charged  to  operations,  as  necessary.  The  allowance  for loan and
valuation losses is calculated, in part, based on historical loss experience. In
addition, management takes into consideration other factors, such as:

         o        qualitative evaluations of individual classified assets;
         o        geographic and other portfolio concentrations;
         o        new products or markets;
         o        evaluations of the changes in the historical loss experience
                  component; and
         o        projections of this component into the current and future
                  periods based on current knowledge and conditions.

     These loss factors range from 0.10% for FHA/VA loans guaranteed by the HUD,
to 8.00% for credit card loans.  The loss factors are applied to the outstanding
principal  balance  of  loans  in  their  respective  categories.  Loans  in the
commercial  and school  finance  portfolios  are assigned  loss factors based on
items similar to those listed,  plus  additional  individual  loan review on all
significant  loans,  including SBA loans, which result in loans being classified
as watch, substandard or doubtful.

     The Company  considers a loan impaired when,  based on current  information
and  events,  it is  probable  that it will be unable to collect all amounts due
according to the contractual terms of the loan. Accordingly,  potential impaired
loans of the Company include only  commercial  loans,  real estate  construction
loans,  commercial real estate mortgage loans and school  financing.  Impairment
allowances are considered by the Company in determining the overall  adequacy of
the allowance for loan losses.

                                       43
<PAGE>

     After an allowance has been established for the loan portfolio,  management
establishes a portion of the  allowance for loan losses,  which is attributed to
factors that cannot be associated  with a specific loan or loan  portfolio.  The
Company  evaluates its residential  loans  collectively due to their homogeneous
nature. These factors include:

         o        general economic conditions;
         o        recognition of specific regional geographic concerns;
         o        loan type and the assessed risk inherent in each loan
                  category; and
         o        trends in the portfolio and portfolio growth trends.

     Substandard and doubtful loans of homogeneous  loan portfolios are assigned
loss factors of 5.00% to 50.00%. The loss factors are applied to the outstanding
principal balances of loans in their respective categories.

     The total for all  categories as described  above  determines our allowance
for loan and  valuation  losses.  Loan losses are charged  against the allowance
when the probability of collection is considered remote.

     The  following  table shows  information  regarding  the  components of our
allowance for loan and valuation losses as of the dates indicated:
<TABLE>
<CAPTION>

                                                                          As of December 31,
                         ---------------------------------------------------------------------------------------------------------
                                2002                   2001              2000                   1999                 1998
                         --------------------- ------------------- -------------------  -------------------  ---------------------
                                   Percentage           Percentage          Percentage           Percentage             Percentage
                                    of Loans             of Loans            of Loans             of Loans               of Loans
                                     in each             in each             in each              in each                in each
                                    Category            Category            Category              Category               Category
                                      to                  to                   to                   to                     to
                                     Total               Total                Total                Total                  Total
                          Amount     Loans     Amount    Loans     Amount      Loans     Amount     Loans     Amount       Loans
                         -------- ----------- --------- --------  --------- ----------- --------- ---------  ---------   ---------
                                                                        (Dollars in thousands)
<S>                        <C>        <C>       <C>        <C>       <C>        <C>       <C>       <C>        <C>         <C>

Residential..............  $3,199      71.40%   $3,918      78.30%   $4,133      80.39%   $3,591     86.00%    $2,295       85.96%
Multi-family, commercial
real estate and commercial  2,768      22.32     2,400      14.15     1,684      11.28       835      7.02        564        6.18
School financing.........   2,810       3.53     2,527       4.56     2,329       4.31     1,320      2.86        275        2.87
Construction.............     542       2.44       445       2.59       302       3.27       286      3.25        207        3.24
Consumer.................      24       0.31        48       0.40       133       0.75       322      0.87        369        1.75
                           -------    -------   -------    -------   -------    -------   ------   -------    -------      -------
                           $9,343     100.00%   $9,338     100.00%   $8,581     100.00%   $6,354    100.00%    $3,710      100.00%
                           =======    =======   =======    =======   =======    =======   ======   ========   =======      =======
</TABLE>

      The ratio of the allowance  for loan and  valuation  losses to total loans
was 0.67% at December  31, 2002,  0.69% at December 31. 2001;  0.76% at December
31,  2000;  0.57% at December 31,  1999;  and 0.44% at December  31,  1998.  The
allowance for loan and valuation  losses is reduced by loans charged off, net of
recoveries. The balance of the allowance for loan and valuation losses allocated
to residential  has decreased,  due to the decrease in these loans in nonaccrual
status,   while  the  balance  of  loan  and  valuation   losses   allocated  to
multi-family,   commercial  real  estate,   commercial,   school  financing  and
construction  loans has increased  mainly due to the increased  outstanding loan
principal balances in these loan categories.  As noted in 2001, we had increased
our  origination of non 1- to 4-family  loans,  which are perceived to be higher
risk and also are a  contributor  to the overall  increase in the balance of the
allowance in prior year. As of December 31, 2002, we believe that the allowance,
when  taken as a whole,  is  adequate  to  absorb  losses  in the  current  loan
portfolio.

      Risk  Sensitive  Assets  and  Liabilities.  As  discussed  in  "Asset  and
Liability  Management--General"  a  significant  portion of our  operations  and
ultimate success is partially  dependent upon our ability to manage our interest
rate risk. Interest rate risk can be defined as the exposure of our net interest
income to adverse  movements in interest rates.  Although we manage other risks,
such as credit, operational and liquidity risk in the normal course of business,
we  consider  interest  rate risk to be a  significant  market  risk which could
potentially  have the largest  material  effect on our  financial  condition and
results of operations. The majority of our market risk related to interest rates
exists within the operations of Matrix Bank. However,  Matrix Financial also has
interest rate risk related to its primary asset,  mortgage servicing rights, and
also related to its loan origination volumes, as well as the net interest income
earned on its  originated  loans  that are  funded  through  warehouse  lines of
credit.  With the  majority of Matrix  Financial's  operations  being  funded by
Matrix  Bank,  this is a smaller  risk to the Company as compared to when Matrix
Financial's   operations  were  funded   entirely  by   unaffiliated   financial
institutions. The susceptibility to movements in interest rates affects the cash
flows generated from the mortgage  servicing  rights which are recorded in other
income versus interest income. In a decreasing  interest rate  environment,  the
underlying  servicing  portfolio  tends to prepay  faster which  reduces  future
servicing income; while in an increasing interest rate environment,  prepayments
tend to decrease,  which  increases  expected  future  servicing  income.  As it
relates to Matrix Financial's  lending activities,  Matrix Financial  originates
residential mortgage loans, which are generally pre-sold.  However,  between the
time  that the loan is  originated  and sold to the  ultimate  investor,  Matrix
Financial  earns  interest  income.  The loans  are  funded  through  the use of

                                       44
<PAGE>

warehouse  credit  facilities or borrowings  from Matrix Bank, both of which are
generally priced based on short-term interest rates. Therefore, the net interest
income that is earned by Matrix  Financial is generally  dependent on the spread
between  long-term  mortgage rates and  short-term  interest  rates.  Aside from
Matrix  Financial's  investment  in servicing  rights,  the majority of the risk
associated with interest rate movements relates more to the overhead  associated
with our origination platform.  As discussed,  a significant portion of the loan
origination  is directly  related to the  interest  rate  environment.  Overhead
significantly  increased  in 2001 and  continued  in 2002 to support  the higher
levels  of  originations.   As  a  result,  when  interest  rates  increase  and
originations  decrease,  there is a risk that we will not be able to manage  our
overhead  proportionally to the overall decrease in loan origination income. Due
to this risk and other risk previously discussed, in early 2003, we have elected
to sell the  wholesale  origination  platform.  See "Item 1.  Business--Sale  of
Wholesale Production Platform."

      We currently do not maintain a trading portfolio.  As a result, we are not
exposed to market risk as it relates to trading activities.  The majority of our
residential  loan  portfolio  is held  for sale  which  requires  us to  perform
quarterly  market  valuations of the  portfolio in order to properly  record the
portfolio at the lower of aggregate  cost or market.  Therefore,  we continually
monitor the  interest  rates of our loan  portfolio  as  compared  to  prevalent
interest rates in the market.

      Interest rate risk management at Matrix Bank is the  responsibility of the
Asset and Liability Committee, which reports to the board of directors of Matrix
Bank. The Asset and Liability  Committee  establishes  policies that monitor and
coordinate  our  sources,  uses and  pricing of funds.  The Asset and  Liability
Committee is also involved in  formulating  our budget and strategic  plan as it
relates  to  investment  objectives.  We have  engaged a third  party to provide
consulting services that assists us with our asset/liability management. We meet
with this  consulting  firm quarterly to review the results of our interest rate
risk analysis and to discuss strategies. We have recently purchased the software
to be able to  internally  model  our  interest  rate  risk.  The  software  was
developed by the third party  consultant  mentioned  above.  We will continue to
engage this  consulting  firm on a quarterly  basis to  supplement  our internal
modeling.  Part of the modeling is done to comply with the  requirements  of the
Office of Thrift Supervision.

      We continue to attempt to reduce the volatility in net interest  income by
managing the  relationship  of interest rate  sensitive  assets to interest rate
sensitive liabilities. To accomplish this, we focus on acquiring adjustable rate
residential  mortgages and have increased our efforts  regarding the origination
of residential  construction loans,  multi-family loans,  commercial real estate
loans,  SBA loans and limited  consumer  lending,  which re-price or mature more
quickly than fixed rate  residential real estate loans. In the fourth quarter of
2001, we began a strategy of purchasing  with the intent to sell the  guaranteed
portion of SBA loans.  Again,  the loans generally adjust with prime and present
very little interest rate risk. The other significant asset that we invest in is
residential mortgage servicing rights. The value and cash flows from residential
mortgage servicing rights respond  counter-cyclically to the value of fixed rate
mortgages.  When interest  rates  increase and the value of fixed rate mortgages
decrease,  in turn  decreasing  net interest  income,  the value of the mortgage
servicing  rights  increase.  In a decreasing  interest  rate  environment,  the
inverse  occurs.  It is important to note,  however,  that an equal  increase or
decrease in interest  rates will not affect the value of our mortgage  servicing
rights  portfolio  equally.  A  decrease  in  interest  rates  causes a  greater
reduction in the value of the  portfolio as compared to the increase in value in
the portfolio from an equal increase in interest rates.  The scenario  discussed
of decreasing interest rates is exactly what happened in 2002. The interest rate
environment in 2002 was historically low. In response to the low interest rates,
we experienced significant runoff in our servicing portfolio, as well as a $14.2
million  decrease  in the fair value of our  investment  in  mortgage  servicing
rights.  Due to the  volatility  of the value of mortgage  servicing,  we do not
anticipate  increasing  our  investment in 2003. To the contrary,  we expect our
overall   investment  in  2003  to  decrease  through  normal  runoff.   Another
significant  strategy  that  we  focus  on in  managing  interest  rate  risk is
identifying   lines  of  business  that  generate   noninterest  rate  sensitive
liabilities.  Examples of this strategy are the investment in mortgage servicing
rights,  which generate no cost escrow deposits;  Sterling  Trust's  operations,
which  administer  deposits with  relatively  low costs;  and our  investment in
Matrix  Settlement & Clearance  Services that uses,  or its clients use,  Matrix
Bank as the clearing bank and trustee, which creates low-cost deposits.

      In the  ordinary  course of  business,  we make  commitments  to originate
residential  mortgage  loans and hold  originated  loans  until  delivery  to an
investor.  Inherent  in this  business  are risks  associated  with  changes  in
interest  rates and the  resulting  change in the market  value of the  pipeline
loans.  We  mitigate  this risk  through  the use of  mandatory  and best effort
forward  commitments to sell loans and  securities.  As of December 31, 2002, we
had $917.1 million in pipeline and funded loans,  offset with mandatory  forward
commitments  of $500.3  million and best effort  forward  commitments  of $128.2
million. The market value of loans committed for sale is determined based on the
related  forward  loan sale  commitments.  Effective  January 1, 2001,  with the
adoption of SFAS 133, we were required to treat  substantially all mortgage loan
commitments  and loan sale  commitments  (both  mandatory  and best  effort)  as
derivatives and record the fair value of those  derivatives on the balance sheet
and any  subsequent  changes  in the fair  value of  those  derivatives  through

                                       45
<PAGE>

current  earnings.  As the changes in fair value of the loan commitments and the
loan sale  commitments are generally  expected to offset one another,  we do not
anticipate any material  impact to our future  earnings from pipeline loans as a
result of the  adoption of SFAS 133.  See "Item 1.  Business--Sale  of Wholesale
Production Platform."

      Ownership of mortgage  servicing  rights exposes us to impairment of their
value in certain  interest rate  environments.  The incidence of prepayment of a
mortgage  loan  increases  during  periods of  declining  interest  rates as the
homeowner  seeks to refinance the loan to a lower interest rate. If the level of
prepayment  on segments of our  mortgage  servicing  portfolio  achieves a level
higher than we projected for an extended  period of time,  then an impairment in
the associated  basis in the mortgage  servicing  rights may occur.  To mitigate
this risk of impairment due to declining  interest rates, we initiated a hedging
program on a portion of our investment. In addition, in September 2002, we began
to sell  substantially  all of our newly  originated  servicing  rights with the
intent of reducing our overall investment in mortgage servicing rights.

       With regards to our interest-sensitive  liabilities during 2002, in order
to take advantage of the  historically  low interest rates,  Matrix Bank entered
into short  option  agreements  and other  longer  term  advances (2 to 5 years)
totaling $10.0 million, adding to short option agreements entered into primarily
in 2001 for a total of $146.0  million,  which have interest  rates ranging from
2.69% to 5.63%.  It is anticipated  that our interest margin will benefit in the
long term from locking in these interest rates.

      The following tables represent,  in tabular form,  contractual balances of
our on balance sheet financial  instruments in dollars at the expected  maturity
dates, as well as the fair value of those on balance sheet financial instruments
for the  periods  ended  December  31,  2002 and  2001.  The  expected  maturity
categories take into consideration historical and anticipated prepayment speeds,
as well as actual  amortization of principal and do not take into  consideration
the  reinvestment of cash. Our assets and liabilities  that do not have a stated
maturity date, such as interest-earning  deposits,  FHLB stock and certain other
deposits,  are  considered  to be long term in nature  and are  reported  in the
thereafter  column.  We are very active in the secondary market as it relates to
the purchase and sale of mortgage loans. We use a five-year maturity  assumption
for all of Matrix Bank's held for sale loans and school financing,  and we use a
one-year maturity  assumption for Matrix  Financial's  originated loans held for
sale. We also treat the FHLB and revolving borrowings as long term in nature, as
the continued availability of these amounts is anticipated  indefinitely.  Third
party servicers service a portion of our loan portfolio;  as a result, a portion
of the information presented is based on the best available information.

      For the most part, the carrying amounts of interest-earning deposits, FHLB
stock,  FHLB  borrowings  and  borrowed  money  approximate  those  assets'  and
liabilities'  fair values.  The fair values of the loan portfolios held for sale
and held for  investment  are  based on  quoted  market  prices  or  outstanding
commitments  from  investors.  If quoted market prices are not  available,  fair
values are based on quoted market prices of similar loans sold in securitization
transactions, adjusted for differences in loan characteristics.  The fair values
of demand  deposits are, by definition,  equal to the amount payable upon demand
at the  reporting  date.  The fair  value of time  deposits  are based  upon the
discounted  value of contractual  cash flows,  which is estimated using interest
rates  currently  being  offered on  certificates  to a schedule  of  aggregated
expected periodic maturities on time deposits.

     Mortgage  servicing  rights are not  included in the tabular  presentation,
because the  investment  does not directly  affect  interest  income.  As noted,
however,  earnings from mortgage servicing rights directly correlate with market
risk as it relates to interest rate  fluctuations.  In the past, we attempted to
mitigate  a portion  of this risk by the type of  mortgage  servicing  rights we
acquire.  The loans  underlying  the servicing  rights  acquired tend to be more
seasoned and have lower principal  balances.  Management  believes that the more
seasoned,  lower balance  servicing  portfolios  carry less prepayment risk than
less seasoned,  higher balance mortgage  servicing,  because the cost savings of
refinancing a lower balance loan tend to be less than for a higher  balance loan
with a  comparable  interest  rate.  We also  believe  that if a loan  has  been
outstanding for a period of time and has been through several declining interest
rate cycles  without  refinancing,  the risk of prepayment in the future is less
than a newly originated  loan.  However,  due to the lack of seasoned  servicing
available and the expansion of our  origination  platform,  we began to retain a
portion of our originated  servicing in 2001 and continued  through August 2002.
In August 2002,  the Company began to sell the majority of its newly  originated
servicing under an assignment of trade contract and anticipates  doing so in the
near-term.  This  strategy was  implemented  to reduce our future  investment in
mortgage servicing rights. The prepayment  percentages which we have experienced
over the past three years have been lower than experienced in the industry, as a
whole.  The prepayment  speeds for the years ended  December 31, 2002,  2001 and
2000 were 23.7%, 22.9%, and 12.1%, respectively. In the tables below, prepayment
speeds  of 20% and 19% for 2002 and 2001,  respectively,  were used for all loan
types to  project  expected  cash  flows.  These  assumptions  are  based on our
historical  prepayment  speeds,  as well as our knowledge and  experience in the
market.

                                       46
<PAGE>

     The Company's financial instruments for the period ended December 31, 2002:
<TABLE>
<CAPTION>

                                           Expected Maturity Date - Fiscal Year Ended December 31,
                                    ----------------------------------------------------------------------
                                                                                               There-after                 Fair
                                      2003        2004        2005        2006        2007                   Total         Value
                                    ----------  ----------- ----------- ----------- ---------- ----------- ------------ -----------
                                                                         (Dollars in thousands)
<S>                                 <C>          <C>         <C>         <C>         <C>       <C>         <C>           <C>

Interest-earning assets:
   Available for sale:
      Fixed-rate securities........ $    572     $     --    $     --    $     --    $    --   $      --   $      572    $      572
          Average interest rate....     6.50  %        -- %        -- %        -- %       -- %        -- %       6.50  %
      Adjustable-rate securities... $ 28,501     $     --    $     --    $           $    --   $      --   $   28,501    $   28,501
          Average interest rate....     5.67  %        -- %        -- %        -- %       -- %        -- %       5.67  %

   Held for sale (1)(2)(8):
      Fixed-rate residential loans. $300,828     $ 16,597    $ 16,597    $ 16,597   $ 15,598   $      --   $  367,217    $  369,306
          Average interest rate....     6.31  %      8.33 %      8.33 %      8.33 %     8.33 %        -- %       6.68  %
      Adjustable-rate residential
          loans.................... $213,739     $ 90,256    $ 90,256    $ 90,256   $ 90,257   $      --   $  574,764    $  577,237
          Average interest rate....     6.07  %      5.90 %      5.90 %      5.90 %     5.90 %        -- %       5.97  %
      Fixed-rate commercial and
          other loans.............. $ 13,739     $ 35,611    $     --    $     --   $     --   $      --   $   49,350    $   49,455
          Average interest rate....     8.31  %     10.00 %        -- %        -- %       -- %        -- %       9.94  %
      Adjustable-rate commercial
          and other loans.......... $116,595     $     --    $     --    $     --   $     --   $      --   $  116,595    $  116,843
          Average interest rate....     4.71  %        -- %        -- %        -- %       -- %        -- %       4.71  %

   Held for investment(2):
      Fixed-rate residential loans. $  1,102     $    871    $    688    $    543   $    427   $   1,512   $    5,143    $    5,190
          Average interest rate(3).     7.40  %      7.40 %      7.40 %      7.40 %     7.40 %      7.40 %       7.40  %
      Adjustable-rate residential
          loans(4)................. $ 12,318     $  9,658    $  7,560    $  5,906   $  4,606   $  15,063   $   55,111    $   55,593
          Average interest rate(3).     6.08  %      6.08 %      6.08 %      6.08 %     6.08 %      6.08 %       6.08  %
      Fixed-rate consumer loans.... $  1,396     $  1,002    $    704    $     --   $     --   $      --   $    3,102    $    3,302
          Average interest rate(3).     6.53  %      6.53 %      6.53 %        -- %       -- %        -- %       6.53  %
      Adjustable-rate consumer
          loans(4)................. $    273     $    208    $    158    $    119   $     88   $     112   $      958    $    1,020
          Average interest rate(3).     9.83  %      9.83 %      9.83 %      9.83 %     9.83 %      9.83 %       9.83  %
      Fixed-rate other loans(5).... $  8,365     $  6,225    $  4,577    $  3,314   $  2,352   $      --   $   24,833    $   25,180
          Average interest rate(3).     7.82  %      7.82 %      7.82 %      7.82 %     7.82 %        -- %       7.82  %
      Adjustable-rate other
          loans(4)(5).............. $ 54,879     $ 41,624    $ 31,355    $ 23,426   $ 17,324   $  28,136   $  196,744    $  199,799
          Average interest rate(3).     6.60  %      6.60 %      6.60 %      6.60 %     6.60 %      6.60 %       6.60  %

   Federal funds sold.............. $  2,000     $     --    $     --    $     --   $     --   $      --   $    2,000    $    2,000
          Average interest rate....     1.17  %        -- %        -- %        -- %       -- %        -- %       1.17  %
   Interest-earning deposits....... $     --     $     --    $     --    $     --   $     --   $   1,687   $    1,687    $    1,687
          Average interest rate....       --  %        -- %        -- %        -- %       -- %      0.79 %       0.79  %
   FHLB stock...................... $     --     $     --    $     --    $     --   $     --   $  30,379   $   30,379    $   30,379
          Average interest rate....       --  %        -- %        -- %        -- %       -- %      2.78 %       2.78  %

     Total interest-earning assets. $754,307     $202,052    $151,895    $140,161   $131,652   $  76,889   $1,456,956    $1,466,064
                                     =========   ==========  ==========  ==========  =========   =========  ===========   =========

Interest-bearing liabilities:
   Passbook accounts...............$      --     $     --    $     --    $     --   $     --   $   5,514   $    5,514    $    5,514
          Average interest rate....       --  %        -- %        -- %        -- %       -- %      1.95 %       1.95  %
   NOW accounts(6).................$      --     $     --    $     --    $     --   $     --   $  49,176   $   49,176    $   49,176
          Average interest rate....       --  %        -- %        -- %        -- %       -- %      1.22 %       1.22  %
   Money market accounts...........$      --     $     --    $     --    $     --   $     --   $ 334,508   $  334,508    $  334,508
          Average interest rate....       --  %        -- %        -- %        -- %       -- %      1.22 %       1.22  %
   Certificates of deposit over
          $100,000.................$   9,208     $  3,857    $  3,113    $    420   $  1,171   $      --   $   17,769    $   18,083
          Average interest rate....     3.38  %      4.13 %      4.77 %      5.04 %     4.76 %        -- %       3.92  %
  Brokered certificates of deposit.$ 293,112     $     --    $ 20,253    $ 13,970   $     --   $      --   $  327,335    $  327,832
     Average interest rate.........     1.87  %        -- %      4.47 %      4.12 %       -- %        -- %       2.13  %
   Other certificates of deposit...$  50,533     $ 18,508    $ 12,710    $  6,632   $ 14,983   $      --   $  103,366    $  105,408
          Average interest rate....     3.18  %      4.18 %      5.72 %      5.20 %     4.66 %        -- %       4.02  %
   FHLB borrowings(7)..............$      --     $     --    $     --    $     --   $     --   $ 385,785   $  385,785    $  400,418
          Average interest rate....       --  %        -- %        -- %        -- %       -- %      2.64 %       2.64  %
   Revolving borrowings............$  11,270     $ 12,567    $ 17,774    $     --   $     --   $     747   $   42,328    $   42,328
          Average interest rate....     2.89  %        -- %        -- %        -- %       -- %      4.37 %       3.98  %
   Term borrowings.................$   1,457     $ 17,618    $     --    $     --   $     --   $  64,500   $   83,575    $   84,521
          Average interest rate....     4.06  %      8.42 %        -- %        -- %       -- %      9.33 %       9.04  %

     Total interest-bearing
          liabilities..............$ 365,580     $ 52,550    $ 53,820    $ 21,022   $ 16,154   $ 840,230   $1,349,356    $1,367,788
                                     =========   ==========  ==========  ==========  =========   =========  ===========   =========

<FN>
__________

(1)    Loans held for sale are assumed to mature within one year.
(2)    Balances are stated net of discounts and other deductions.
(3)    For the  fixed-rate  loans held for  investment,  we  computed a weighted
       average  interest  rate  and a  weighted  average  maturity  for the loan
       portfolio and then applied a prepayment  assumption of 20% in determining
       the cash flows. The same approach was used for the adjustable-rate loans,
       which are generally fully indexed loans.
(4)    The  adjustable-rate  loans generally are indexed to the 1-year treasury.
       However,  included in the balance are loans indexed to 11th district cost
       of funds, prime and 3-, 5- and 7-year treasury.
(5)    Other consists of multi-family,  commercial real estate, commercial, land
       and construction loans.
(6)    Excludes noninterest-bearing demand deposits of approximately $96.3
       million.
(7)    See "--Short-term Borrowings" for additional discussion on the term of
       the FHLB borrowings.
(8)    The value of the hedging instruments used with our loan portfolio are
       included in the balance of the loans for purposes of fair value
       disclosure. See discussion regarding FAS 133 for additional information.
</FN>
</TABLE>

                                       47
<PAGE>

      The  Company's  financial  instruments  for the period ended  December 31,
2001:
<TABLE>
<CAPTION>

                                           Expected Maturity Date - Fiscal Year Ended December 31,
                                    ----------------------------------------------------------------------
                                                                                               There-after                 Fair
                                      2002        2003        2004        2005        2006                   Total        Value
                                    ----------  ----------- ----------- ----------- ---------- ----------- ------------ ------------
                                                                        (Dollars in thousands)
<S>                                 <C>          <C>         <C>         <C>        <C>          <C>       <C>          <C>

Interest-earning assets:
   Available for sale:
      Fixed-rate securities........ $    584     $     --    $     --    $     --   $     --     $    --   $      584   $      584
          Average interest rate....     6.50  %        -- %        -- %        -- %       -- %        -- %       6.50 %
      Adjustable-rate securities... $  6,379     $     --    $     --    $     --   $     --     $    --   $    6,379   $    6,379
          Average interest rate....     6.95  %        -- %        -- %        -- %       -- %        -- %       6.95 %

   Held for sale (1)(2)(8):
      Fixed-rate residential loans. $534,200     $ 29,010    $ 29,010    $ 29,010   $ 29,011     $    --   $  650,241   $  653,247
          Average interest rate....     7.20  %      8.51 %      8.51 %      8.51 %     8.51 %        -- %       7.43 %
      Adjustable-rate residential   $101,771     $ 72,335    $ 72,335    $ 72,336   $ 72,365     $    --   $  391,142   $  391,504
loans
          Average interest rate....     7.50  %      7.50 %      7.50 %      7.50 %     7.50 %        -- %       7.50 %
      Fixed-rate commercial and     $ 14,610     $ 51,071    $     --    $     --   $     --     $   795   $   66,476   $   66,478
other loans........................
          Average interest rate....     9.22  %     10.08 %        -- %        -- %       -- %      9.07 %      10.38 %
      Adjustable-rate commercial
and other                           $ 40,787     $     10    $     45    $     41   $     92     $   705   $   41,680   $   41,702
          loans....................
          Average interest rate....     5.64  %      8.89 %      8.89 %      8.89 %     8.89 %      8.89 %       5.71 %

   Held for investment(2):
      Fixed-rate residential loans. $    856     $    686    $    550    $    440   $    353     $ 1,331   $    4,216   $    4,228
          Average interest rate(3).     8.20  %      8.20 %      8.20 %      8.20 %     8.20 %      8.20 %       8.20 %
      Adjustable-rate residential   $    466     $    371    $    296    $    234   $    186     $   653   $    2,206   $    2,211
loans(4)...........................
          Average interest rate(3).     7.18  %      7.18 %      7.18 %      7.18 %     7.18 %      7.18 %       7.18 %
      Fixed-rate consumer loans.... $  1,869     $  1,403    $  1,038    $     --   $     --     $    --   $    4,310   $    4,325
          Average interest rate(3).    10.43  %     10.43 %     10.43 %        -- %       -- %        -- %      10.43 %
      Adjustable-rate consumer      $    261     $    201    $    153    $    115   $     87     $   109   $      926   $      928
loans(4)...........................
          Average interest rate(3).     7.45  %      7.45 %      7.45 %      7.45 %     7.45 %      7.45 %       7.45 %
      Fixed-rate other loans(5).... $ 10,263     $  7,789    $  5,471    $  4,068   $  2,973     $    --   $   30,564   $   30,656
          Average interest rate(3).     8.92  %      8.92 %      8.92 %      8.92 %     8.92 %        -- %       8.92 %
      Adjustable-rate other         $ 50,290     $ 37,878    $ 18,356    $ 13,984   $ 10,557     $17,874   $  148,939   $  149,313
loans(4)(5)........................
          Average interest rate(3).     7.42  %      7.42 %      7.42 %      7.42 %     7.42 %      7.42 %       7.42 %

   Federal funds sold.............. $    400     $     --    $     --    $     --   $     --     $    --   $      400   $      400
          Average interest rate....     1.81  %        -- %        -- %        -- %       -- %        -- %       1.81 %
   Interest-earning deposits....... $     --     $     --    $     --    $     --   $     --     $31,559   $   31,559   $   31,559
          Average interest rate....       --  %        -- %        -- %        -- %       -- %      1.47 %       1.47 %
   FHLB stock...................... $     --     $     --    $     --    $     --   $     --     $18,181   $   18,181   $   18,181
          Average interest rate....       --  %        -- %        -- %        -- %       -- %      3.00 %       3.00 %

     Total interest-earning assets. $766,222     $200,754    $127,254    $120,228   $115,624     $71,207   $1,401,289   $1,410,145
                                    =========   ==========  ==========  ==========  =========  ==========  ===========  ===========

Interest-bearing liabilities:
   Passbook accounts............... $     --     $     --    $     --    $     --   $     --     $ 4,291   $    4,291   $    4,291
accounts...........................
          Average interest rate....       --  %        -- %        -- %        -- %       -- %      4.47 %       4.47 %
   NOW accounts(6)................. $     --     $     --    $     --    $     --   $     --     $40,046   $   40,046   $   40,046
          Average interest rate....       --  %        -- %        -- %        -- %       -- %      2.57 %       2.57 %
   Money market accounts........... $     --     $     --    $     --    $     --   $     --     249,234   $  249,234   $  249,234
          Average interest rate....       --  %        -- %        -- %        -- %       -- %      2.11 %       2.11 %
   Certificates of deposit over     $ 16,674     $  2,545    $  1,960    $    711   $    520    $     --   $   22,410   $   22,797
$100,000...........................
          Average interest rate....     5.13  %      5.61 %      4.76 %      6.92 %     5.06 %        -- %       5.20 %
  Brokered certificates of deposit. $351,271     $     --    $     --    $ 10,000   $     --    $     --   $  361,271   $  362,079
     Average interest rate.........     4.13  %        -- %        -- %      4.85 %       -- %        -- %       4.15 %
   Other certificates of deposit... $ 82,281     $ 12,719    $ 11,788    $  8,230   $  6,828    $     --   $  121,846   $  123,631
          Average interest rate....     5.32  %      5.10 %      4.80 %      6.66 %     5.18 %        -- %       5.33 %
   FHLB borrowings(7).............. $     --     $     --    $     --    $     --   $     --    $303,361   $  303,361   $  309,931
          Average interest rate....       --  %        -- %        -- %        -- %       -- %      2.94 %       2.94 %
   Revolving borrowings............ $     --     $     --    $     --    $     --   $     --    $143,415   $  143,415   $  143,415
          Average interest rate....       --  %        -- %        -- %        -- %       -- %      3.68 %       3.68 %
   Term borrowings................. $  1,478     $  7,184    $ 10,455    $     --   $     --    $ 59,500   $   78,617   $   78,617
          Average interest rate....     8.00  %      8.23 %     11.50 %        -- %       -- %      9.76 %       9.82 %

     Total interest-bearing         $451,704     $ 22,448    $ 24,203    $ 18,941   $  7,348    $799,847   $1,324,491   $1,334,041
liabilities........................
                                    =========   ==========  ==========  ==========  =========  ==========  ===========  ===========
__________
<FN>
(1)    Loans held for sale are assumed to mature  within one year.
(2)    Balances are stated net of discounts and other deductions.
(3)    For the  fixed-rate  loans held for  investment,  we  computed a weighted
       average  interest  rate  and a  weighted  average  maturity  for the loan
       portfolio and then applied a prepayment  assumption of 19% in determining
       the cash flows. The same approach was used for the adjustable-rate loans,
       which are generally fully indexed loans.
(4)    The  adjustable-rate  loans generally are indexed to the 1-year treasury.
       However,  included in the balance are loans indexed to 11th district cost
       of funds, prime and 3-, 5- and 7-year treasury.
(5)    Other consists of multi-family,  commercial real estate, commercial, land
       and construction loans.
(6)    Excludes noninterest-bearing demand deposits of approximately $67.1
       million.
(7)    See "--Short-term Borrowings" for additional discussion on the term of
       the FHLB borrowings.
(8)    The value of the hedging instruments used with our loan portfolio are
       included in the balance of the loans for purposes of fair value
       disclosure. See discussion regarding FAS 133 for additional information.
</FN>
</TABLE>
                                       48
<PAGE>

     Short-term Borrowings. A primary function of asset and liability management
is to ensure adequate  liquidity.  In addition to cash and cash equivalents,  we
rely heavily on short-term borrowing capabilities for liquidity and as a funding
vehicle.  The primary sources for short-term  borrowings are the FHLB for Matrix
Bank, Matrix Bank and unaffiliated  financial institutions for Matrix Financial,
an unaffiliated  financial institution for Matrix Capital Markets, and at Matrix
Bancorp,  the  revolving  portion of the bank stock  loan.  See  "Liquidity  and
Capital Resources."

     The  following  table  sets forth a summary  of our  short-term  borrowings
during 2002, 2001 and 2000 and as of the end of each such period:
<TABLE>
<CAPTION>

                                                                  Average
                                                   Amount         Amount         Maximum        Weighted        Weighted
                                                Outstanding    Outstanding     Outstanding      Average         Average
                                                    at          During the       at any         Interest        Interest
                                                 Year-End        Year(1)        Month-End     Rate During        Rate at
                                                                                                the Year        Year-End
                                               -------------- ---------------- -------------- -------------- ---------------
                                                                           (Dollars in thousands)
<S>                                             <C>            <C>             <C>                    <C>             <C>
At or for the year ended December 31, 2002:
      FHLB borrowings(2)....................... $     385,785  $     328,057   $     446,923           2.89%           2.64%
      Revolving lines of credit................        10,000         15,820          30,850           3.45            2.79
      School financing.........................        32,328         41,293          50,252           4.77            4.37
At or for the year ended December 31, 2001:
      FHLB borrowings(3).......................       303,361        347,807         478,921           4.62            2.94
      Revolving lines of credit................        95,450         58,673          95,450           4.54            2.51
      School financing.........................        44,965         46,160          60,100           6.02            4.65
At or for the year ended December 31, 2000:
      FHLB borrowings(4).......................       519,433        430,331         526,450           6.33            6.29
      Revolving lines of credit................        21,956         40,701          52,750           8.23            7.63
      Repurchase agreements....................           385          3,240           6,906          10.70            8.75
      School financing.........................        44,308         30,262          44,308           8.18            8.56
__________
<FN>
(1)   Calculations  are based on daily  averages  where  available  and  monthly
      averages otherwise.
(2)   A total of $146.0 million of the FHLB  borrowings  outstanding at December
      31, 2002 were borrowed under short option advance agreement with the FHLB.
      The interest  rates on the short  option  advance  borrowings  ranged from
      2.69% to 5.63% at December 31, 2002 and their  possible  call dates varied
      from December  2002 to November  2006.  Additionally,  $1.3 million of the
      FHLB  borrowings  outstanding  at December  31,  2002 are  fixed-term/rate
      advances,  which  were  borrowed  from the FHLB to offset  specific  loans
      originated by Matrix Bank. The principal  amount of these  fixed-term/rate
      advances  adjust monthly based on an amortization  schedule.  The interest
      rate on the fixed-term/rate advances was 5.84%, and their maturity date is
      June 2, 2014.

                                       49
<PAGE>

(3)   A total of $136.0 million of the FHLB  borrowings  outstanding at December
      31, 2001 were  borrowed  under short option  advance  agreements  with the
      FHLB.  The interest rates on the short option  advance  borrowings  ranged
      from 2.69% to 5.63% at  December  31, 2001 and their  possible  call dates
      varied from  February 20, 2002 to November 13,  2006.  Additionally,  $1.4
      million  of the FHLB  borrowings  outstanding  at  December  31,  2001 are
      fixed-term/rate  advances,  which  were  borrowed  from the FHLB to offset
      specific loans  originated by Matrix Bank.  The principal  amount of these
      fixed-term/rate advances adjust monthly based on an amortization schedule.
      The interest  rate on the  fixed-term/rate  advances was 5.84%,  and their
      maturity date is June 2, 2014.
(4)   A total of $26.0 million of the FHLB  borrowings  outstanding  at December
      31, 2000 were borrowed  under a short option  advance  agreement  with the
      FHLB. These short option advance  borrowings have a term of ten years, but
      are callable by the FHLB beginning  after a six-month or one-year  lockout
      period depending on the particular short option advance  borrowing.  After
      the expiration of the lockout period,  the short option advance borrowings
      are callable at  three-month  intervals.  If the FHLB  exercises  its call
      option on a short option advance borrowing,  the FHLB is required to offer
      replacement  funding to us at a market rate of interest for the  remaining
      term of the short option  advance  borrowing.  The  interest  rates on the
      short option advance borrowings ranged from 5.40% to 5.63% at December 31,
      2000 and their  possible call dates varied from February 20, 2001 to March
      26, 2001.  Under the terms of the short option advance  agreement,  we are
      not  permitted  to prepay or  otherwise  retire a  callable  short  option
      advance  borrowing  prior to the final maturity date.  Additionally,  $1.4
      million  of the FHLB  borrowings  outstanding  at  December  31,  2000 are
      fixed-term/rate  advances,  which  were  borrowed  from the FHLB to offset
      specific loans  originated by Matrix Bank.  The principal  amount of these
      fixed-term/rate advances adjust monthly based on an amortization schedule.
      The principal  amount of these  fixed-term/rate  advances  adjust  monthly
      based   on  an   amortization   schedule.   The   interest   rate  on  the
      fixed-term/rate  advances  was 5.84% and  their  maturity  date is June 2,
      2014.  Matrix  Bank  also  had  short-term,   fixed-term/rate   borrowings
      outstanding  at  December  31,  2000  from  the  FHLB.  These  short-term,
      fixed-term/rate  borrowings  totaled $150.0  million,  with interest rates
      ranging from 6.00% to 6.23% and maturity dates ranging from March 27, 2001
      through June 26, 2001.
</FN>
</TABLE>

Liquidity and Capital Resources

     Liquidity is our ability to generate funds to support asset growth, satisfy
disbursement  needs,  maintain reserve  requirements and otherwise operate on an
ongoing  basis.  To date,  our  principal  source of funding  for our  investing
activities has been:

       o      secured senior debt provided by unaffiliated financial
              institutions;
       o      the issuance of preferred securities through Matrix Bancorp
              Capital Trust I in 1999, Matrix Bancorp Capital Trust II, III and
              IV in 2001 and Matrix Bancorp Capital Trust V in 2002;
       o      the issuance of 11.5% senior notes in September 1997;
       o      a bank stock loan; and
       o      our initial public offering.

     As of December 31, 2002,  Matrix Bancorp had $81.5 million in  indebtedness
outstanding.   The  borrowed  funds  have  been  used  historically  as  capital
injections to Matrix Bank, Matrix Financial, Matrix Capital Markets and ABS.

      On March 31, 2002,  Matrix Bancorp  amended its bank stock loan agreement.
The amended bank stock loan  agreement has two  components,  an $8,215,000  term
loan and a revolving line of credit of $12.0  million.  As of December 31, 2002,
the balance of the term loan was $7.5  million and the balance of the  revolving
line of credit was $0. The amended bank stock loan  requires  Matrix  Bancorp to
maintain total shareholders' equity of $60.0 million. Matrix Bank is required to
maintain classified assets of less than 3% of total assets and must also earn in
excess of $7.5 million over the previous four  quarters.  The covenants  must be
met  quarterly.  As of December 31, 2002, we did not meet two of the  covenants.
Due to the classification on  noninterest-earning  assets, our classified assets
slightly exceeded 3%. In addition, due to the impairment on our servicing rights
over the  previous  two  quarters,  Matrix  Bank's  earnings did not exceed $7.5
million. Subsequent to year-end, management obtained waivers for both covenants.
The term loan has a maturity date of December 31, 2004.  The  revolving  line of
credit is annually  renewed and currently has a maturity date of March 31, 2003.
We are in the process of renewing the revolving  line of credit.  As part of the
annual renewal  process,  we anticipate that the two covenants  maintained above
will be  amended to address to our  satisfaction,  prospectively,  the  covenant
levels  that we did not meet at  December  31,  2002.  However,  there can be no
assurances  that the bank stock loan will be renewed or that,  if  renewed,  the
issues mentioned above will be resolved to our satisfaction.

     On July 30, 1999,  Matrix  Bancorp  Capital Trust I ("Trust I"), a Delaware
business trust formed by Matrix Bancorp,  completed the sale of $27.5 million of
10%  preferred  securities.  Trust I also  issued  common  securities  to Matrix
Bancorp and used the net proceeds from the offering to purchase $28.6 million in
principal  amount of 10% junior  subordinated  debentures of Matrix  Bancorp due
September 30, 2029.  The junior  subordinated  debentures are the sole assets of
Trust I and are  eliminated,  along with the  related  statement  of  operations
effects, in the consolidated financial statements.

     The  preferred  securities  accrue and pay  distributions  quarterly  at an
annual  rate  of 10% of the  stated  liquidation  amount  of $25  per  preferred
security. We have fully and unconditionally guaranteed all of the obligations of

                                       50
<PAGE>

Trust I under the  preferred  securities.  The  guarantee  covers the  quarterly
distributions  and  payments  on  liquidation  or  redemption  of the  preferred
securities, but only to the extent of funds held by Trust I.

     The preferred  securities are  mandatorily  redeemable upon the maturity of
the junior subordinated debentures or upon earlier redemption as provided in the
indenture.  We have the right to redeem the junior subordinated  debentures,  in
whole or in part on or after September 30, 2004, at a redemption price specified
in the indenture plus any accrued but unpaid  interest to the  redemption  date.
See Note 10 to the consolidated  financial statements included elsewhere in this
document.  Under the indenture,  we are prohibited from paying  dividends on our
common  stock if the  scheduled  payments  on our  junior  debentures  and trust
preferred securities have not been made.

     On March 28, 2001, Matrix Bancorp Capital Trust II ("Trust II"), a Delaware
business  trust formed by the Company,  completed  the sale of $12.0  million of
10.18%  preferred  securities.  Trust II also issued  common  securities  to the
Company and used the net process from the offering to purchase  $12.4 million in
principal  amount of 10.18%  junior  subordinated  debentures of the Company due
June 8, 2031. The junior subordinated debentures are the sole assets of Trust II
and are eliminated,  along with the related statement of operations  effects, in
the consolidated financial statements.

     The preferred  securities accrue and pay distributions  semi-annually at an
annual rate of 10.18% of the stated  liquidation  amount of $1,000 per preferred
security.  The  Company  has fully  and  unconditionally  guaranteed  all of the
obligations of Trust II under the preferred securities. The guarantee covers the
quarterly  distributions  and  payments  on  liquidation  or  redemption  of the
preferred securities, but only to the extent of funds held by Trust II.

     The preferred  securities are  mandatorily  redeemable upon the maturity of
the junior subordinated debentures or upon earlier redemption as provided in the
indentures.  The  Company  has the  right  to  redeem  the  junior  subordinated
debentures, in whole or in part, on or after June 8, 2011, at a redemption price
specified  in  the  indenture  plus  any  accrued  but  unpaid  interest  to the
redemption date.

     On July 16,  2001,  Matrix  Bancorp  Capital  Trust III  ("Trust  III"),  a
Delaware  business  trust  formed by the  Company,  completed  the sale of $15.0
million of 10.25% preferred securities.  Trust III also issued common securities
to the  Company  and used the net process  from the  offering to purchase  $15.5
million in principal  amount of 10.25%  junior  subordinated  debentures  of the
Company  due July 25,  2031.  The junior  subordinated  debentures  are the sole
assets of Trust III and are  eliminated,  along with the  related  statement  of
operations effects, in the consolidated financial statements.

     The preferred  securities accrue and pay distributions  semi-annually at an
annual rate of 10.25% of the stated  liquidation  amount of $1,000 per preferred
security.  The  Company  has fully  and  unconditionally  guaranteed  all of the
obligations of Trust III under the preferred  securities.  The guarantee  covers
the quarterly  distributions  and payments on  liquidation  or redemption of the
preferred securities, but only to the extent of funds held by Trust III.

     The preferred  securities are  mandatorily  redeemable upon the maturity of
the junior subordinated debentures or upon earlier redemption as provided in the
indentures.  The  Company  has the  right  to  redeem  the  junior  subordinated
debentures,  in whole or in part,  on or after July 25,  2006,  at a  redemption
price  specified in the  indenture  plus any accrued but unpaid  interest to the
redemption date.

     On November 28,  2001,  Matrix  Bancorp  Capital  Trust IV ("Trust  IV"), a
Delaware  business  trust  formed  by the  Company,  completed  the sale of $5.0
million of floating  rate of the  six-month  LIBOR plus 3.75%  (5.14% for period
ended  December  31, 2002)  preferred  securities.  Trust IV also issued  common
securities to the Company and used the net process from the offering to purchase
$5.2 million in principal  amount of floating rate of the  six-month  LIBOR plus
3.75% junior  subordinated  debentures of the Company due December 8, 2031.  The
junior  subordinated  debentures  are  the  sole  assets  of  Trust  IV and  are
eliminated,  along with the related  statement  of  operations  effects,  in the
consolidated financial statements.

     The preferred  securities accrue and pay  distributions  semi-annually at a
floating  annual rate as  described  above of the stated  liquidation  amount of
$1,000  per  preferred  security.  The  Company  has fully  and  unconditionally
guaranteed all of the  obligations of Trust III under the preferred  securities.
The guarantee covers the quarterly  distributions and payments on liquidation or
redemption of the preferred securities,  but only to the extent of funds held by
Trust IV.

     The preferred  securities are  mandatorily  redeemable upon the maturity of
the junior subordinated debentures or upon earlier redemption as provided in the
indentures.  The  Company  has the  right  to  redeem  the  junior  subordinated
debentures,  in whole or in part, on or after  December 8, 2006, at a redemption
price  specified in the  indenture  plus any accrued but unpaid  interest to the
redemption date.

                                       51
<PAGE>

     On July 25, 2002,  Matrix  Bancorp  Capital Trust V ("Trust V"), a Delaware
business  trust  formed by the  Company,  completed  the sale of $5.0 million of
floating  rate of the  six-month  LIBOR plus  3.625%  (5.015%  for period  ended
December 31, 2002) preferred  securities.  Trust V also issued common securities
to the  Company  and used the net process  from the  offering  to purchase  $5.2
million in principal  amount of floating rate of the six-month LIBOR plus 3.625%
junior  subordinated  debentures  of the Company due July 25,  2032.  The junior
subordinated  debentures  are the sole  assets  of Trust IV and are  eliminated,
along with the related  statement of  operations  effects,  in the  consolidated
financial statements.

     The preferred  securities accrue and pay  distributions  semi-annually at a
floating  annual rate as  described  above of the stated  liquidation  amount of
$1,000  per  preferred  security.  The  Company  has fully  and  unconditionally
guaranteed all of the  obligations of Trust III under the preferred  securities.
The guarantee covers the quarterly  distributions and payments on liquidation or
redemption of the preferred securities,  but only to the extent of funds held by
Trust V.

     The preferred  securities are  mandatorily  redeemable upon the maturity of
the junior subordinated debentures or upon earlier redemption as provided in the
indentures.  The  Company  has the  right  to  redeem  the  junior  subordinated
debentures,  in whole or in part,  on or after July 25,  2007,  at a  redemption
price  specified in the  indenture  plus any accrued but unpaid  interest to the
redemption date.

     Capitalized  expenses associated with all of the trust preferred securities
offerings of approximately $2.4 million are included in other assets at December
31, 2002 and are being amortized on a  straight-line  basis over the life of the
junior subordinated debentures.

     On September  29, 1997,  we completed a registered  debt  offering of $20.0
million in senior notes due 2004,  raising net proceeds of  approximately  $19.1
million. Interest on the senior notes of 11.5% is payable semi-annually on March
31 and  September 30 of each year,  commenced on March 31, 1998,  with a balloon
payment for the entire principal balance due in September 2004. The 11.5% senior
notes require us to:

       o      maintain consolidated tangible equity capital of not less than $35
              million; and
       o      meet the requirements necessary such that Matrix Bank will not be
              classified as other than "well capitalized" as defined by
              applicable regulatory guidelines.

Additionally,  the 11.5% senior notes contain other covenants  regarding certain
restricted payments, incurrence of indebtedness and issuance of preferred stock,
liens, merger, consolidation or sale of assets and transactions with affiliates.
As of December 31, 2002,  due to  repurchases  made by the Company of the senior
notes, there remained $9.5 million of the debt issue outstanding.

      We have in place a warehouse line of credit  provided to Matrix  Financial
by an unaffiliated  financial  institution.  As of December 2, 2002, the line of
credit was amended  and  terminated  February  28,  2003.  It  aggregates  $50.0
million,  of which $40.0  million was  available  at December  31,  2002.  As of
February 28, 2003,  the line was renewed under similar terms and  conditions for
the period of time from February 28, 2003 through the Final  Closing  Date.  See
"Item 1. Business--Sale of Wholesale Production Platform."

      Matrix  Bancorp has  guaranteed,  with 50%  recourse to our joint  venture
partner,  the  indebtedness  of Matrix  Settlement & Clearance  Services to U.S.
Bank,  N.A., in an amount of no greater than $3.0 million.  The guaranty relates
to a $3.0  million  line of credit  which is  utilized  by Matrix  Settlement  &
Clearance  Services in situations  where its clients do not wire funds to settle
trades.  The line is used very  infrequently  and Matrix  Settlement & Clearance
Services is adequately  secured in the case that the  utilization of the line is
required.  There was no balance  outstanding  at Matrix  Settlement  & Clearance
Services on such indebtedness at December 31, 2002.

     The trend of net cash used by our operating activities experienced over the
reported  periods  results  primarily  from the  growth at Matrix  Bank,  Matrix
Financial,  First  Matrix and  operating  expenses  incurred  at ABS.  We do not
anticipate that this trend will continue in 2003 for two reasons.  First, we are
not anticipating any growth in 2003 and, in fact, have initiated various expense
reduction strategies. Second, the sale of the wholesale production platform will
result in significant  liquidity  once the warehouse line of credit  provided to
Matrix  Financial  by Matrix  Bank is  repaid.  See "Item 1.  Business--Sale  of
Wholesale Production Platform."

     The Company is reliant on dividend and tax payments  from its  subsidiaries
in order to fund  operations,  meet debt  obligations and grow new or developing
lines of  business.  A long-term  inability  of a  subsidiary  to make  dividend

                                       52
<PAGE>

payments could significantly impact the Company's liquidity.  Historically,  the
majority  of the  dividend  payments  have  been  made by  Matrix  Bank  and its
consolidated subsidiaries,  which include Matrix Financial. The current dividend
policy approved by Matrix Bank is 75% of the consolidated cumulative earnings of
Matrix Bank. Due to the loss incurred during the year ended December 31, 2002 as
a result of the servicing  asset  impairment,  Matrix Bank is currently not in a
position to pay dividends under its current policy for the last quarter of 2002.
Matrix Bank has not paid a dividend since August 2002 which  reflected  earnings
from July 2002.  Matrix Bank currently  anticipates that it will resume dividend
payments under current policy in March 2003. In the interim, the Company intends
to utilize  dividends from its other  subsidiaries and the line of credit on its
bank stock loan, as needed, to meet its own and the other subsidiaries financial
obligations.

     Matrix Bank's primary source of funds for use in lending,  purchasing  bulk
loan portfolios, investing and other general purposes are:

       o      retail deposits;
       o      trust deposits;
       o      custodial escrow balances;
       o      brokered deposits;
       o      FHLB borrowings;
       o      sales of loan portfolios; and
       o      proceeds from principal and interest payments on loans.

Contractual  loan payments and net deposit  inflows are a generally  predictable
source  of funds,  while  loan  prepayments  and loan  sales  are  significantly
influenced by general market interest rates and economic conditions.  Borrowings
on a short-term  basis are used as a cash  management  vehicle to compensate for
seasonal or other  reductions in normal  sources of funds.  Matrix Bank utilizes
advances  from the FHLB as its primary  source for  borrowings.  At December 31,
2002,  Matrix Bank had  overnight  and term  borrowings  from the FHLB of $385.8
million. The availability of FHLB borrowings is based on the level of collateral
pledged. Generally, the availability will be limited to the lesser of 90% of the
collateral pledged or 50% of total assets. The custodial escrow balances held by
Matrix  Bank  fluctuate  based  upon  the mix and size of the  related  mortgage
servicing rights  portfolios and the timing of payments for taxes and insurance,
as well as the level of prepayments  which occur. For a tabular  presentation of
the our short-term borrowings,  see "Asset and Liability  Management--Short-Term
Borrowings."

      Matrix  Bank  offers  a  variety  of  deposit  accounts  having a range of
interest rates and terms.  Matrix Bank's retail deposits  principally consist of
demand deposits and certificates of deposit.  The flow of deposits is influenced
significantly by general  economic  conditions,  changes in prevailing  interest
rates and competition.  Matrix Bank's retail deposits are obtained from areas in
which it is located,  as well as through an  Internet  service.  Therefore,  its
retail deposits are  concentrated  primarily in Las Cruces and Sun City,  except
for the Internet deposits, which could be out-of-market retail deposits.  Matrix
Bank  relies  principally  on  customer  service,  marketing  programs  and  its
relationships with customers to attract and retain in-market deposits.  Brokered
deposits are accepted and have been  utilized to support  growth at Matrix Bank.
In pricing deposit rates,  management considers  profitability,  the matching of
term lengths with assets,  the  attractiveness to customers and rates offered by
competitors.  Matrix Bank intends to continue its efforts to attract deposits as
a primary source of funds to support its lending and investing activities.

     The following table sets forth the average balances for each major category
of Matrix Bank's deposit accounts and the  weighted-average  interest rates paid
for interest-bearing deposits for the periods indicated:
<TABLE>
<CAPTION>

                                                              Year Ended December 31,
                             -------------------------------------------------------------------------------------------
                                         2002                           2001                           2000
                             -----------------------------  -----------------------------  -----------------------------
                                              Weighted                       Weighted                       Weighted
                                Average        Average         Average        Average         Average        Average
                                Balance         Rate           Balance         Rate           Balance         Rate
                             -------------- --------------  -------------- --------------  -------------- --------------
                                                              (Dollars in thousands)
<S>                           <C>                 <C>        <C>                <C>        <C>                 <C>

Passbook accounts...........  $     5,998         1.95 %     $     3,467        3.12  %    $      2,981        3.42  %
NOW accounts................      119,585         0.48            98,872        0.94             64,523        0.96
Money market accounts.......      302,479         1.22           203,757        2.11            130,592        2.34
Time deposits...............      130,544         5.35           181,535        5.60            177,399        6.10
Brokered deposits...........      338,682         2.99           312,419        6.20            183,685        6.36
                                ----------- ------------       ----------- -----------       ------------ -----------
     Total deposits.........  $   897,288         2.40 %     $   800,050        4.36  %    $    559,180        4.70  %
                                =========== ============       =========== ===========       ============ ===========
</TABLE>

                                       53
<PAGE>


     The following table sets forth the amount of Matrix Bank's  certificates of
deposit that are greater than $100,000 by time  remaining  until  maturity as of
December 31, 2002:
<TABLE>
<CAPTION>

                                                                                                       Weighted
                                                                                      Amount         Average Rate
                                                                                                         Paid
                                                                                   --------------- ------------------
                                                                                        (Dollars in thousands)
     <S>                                                                         <C>                           <C>

     Three months or less....................................................... $         2,753               3.40 %
     Over three months through six months.......................................           2,198               3.73
     Over six months through twelve months......................................           4,257               3.19
     Over twelve months.........................................................           8,561               4.49
                                                                                   --------------- ------------------
          Total................................................................. $        17,769               3.92 %
                                                                                   --------------- ------------------
</TABLE>

     We actively  monitor  Matrix  Bank's  compliance  with  regulatory  capital
requirements.  Historically,  Matrix Bank has increased its core capital through
the  retention of a portion of its  earnings.  Matrix  Bank's  future  growth is
expected to be achieved through deposit growth,  brokered  deposits,  borrowings
from the FHLB and custodial deposits directed by affiliates.  In 2003,  however,
we are not anticipating any significant growth.

     Matrix  Financial's  principal  source of funding for its loan  origination
business  consists of a warehouse line of credit provided to Matrix Financial by
Matrix Bank, and a warehouse line of credit  provided to Matrix  Financial by an
unaffiliated financial  institution.  As of December 2, 2002, Matrix Financial's
warehouse  line  of  credit  facility  provided  by  an  unaffiliated  financial
institution was amended. It aggregates $50.0 million, of which $40.0 million was
available to be utilized as of December 31,  2002.  At December 31, 2002,  $10.0
million was outstanding  under the warehouse line at a weighted average interest
rate of 2.59%.  Borrowings under the warehouse line of credit are secured by all
of the mortgage  loans funded with  warehouse loan proceeds and bear interest at
the LIBOR rate plus a negotiated  margin.  Following the Final Closing Date, the
warehouse  facility at Matrix Bank will be terminated and we anticipate that the
warehouse  facility with the  unaffiliated  financial  institution  will also be
terminated. See "Item 1. Business--Sale of Wholesale Production Platform."

     ABS  School  Services'  principal  source of funding  for school  financing
consists of its internal  capital,  sales of loans to a third party  institution
and  partnership  trusts  with  unaffiliated  financial  institutions.   Amounts
available  to be sold and  amounts to be  financed  are at the  purchaser's  and
lender's sole discretion. We continue to pursue additional third party financing
and sale options for ABS; although, we do no anticipate significantly increasing
our current loan portfolio.

     The Company has placed tax-exempt  financing of approximately $31.1 million
at December 31, 2002 it originated to charter  schools into two grantor  trusts.
The trusts then issued Class "A" Certificates and Class "B"  Certificates,  with
the Class "A"  Certificates  being sold to various third party investors under a
private placement at a price of par.

     The "A"  Certificates  under the two  grantor  trusts are  guaranteed  by a
letter of credit issued by a third party investment bank for one, and the second
one is guaranteed equally by two unaffiliated  financial  institutions.  The "A"
Certificates'  interest rate may be determined weekly, monthly or for a term for
up to one  year.  The  interest  rate  and the  term of the  interest  rate  are
determined by the Remarking Agent, which is also the investment bank. Generally,
the trusts are short-term in nature with an average life of one year or less.

     The "B"  Certificates  are owned by the Company.  The interest rate paid on
the "A" Certificates is considered the Company's financing cost. The approximate
cost of the  financing  at  December  31,  2002 and 2001 was  1.55%  and  2.75%,
respectively.  The interest that the Company receives through its part ownership
of the "B" Certificates is tax-exempt.

     Although "A"  Certificates  are guaranteed by  unaffiliated  entities,  the
Company provides full recourse to the unaffiliated entities in all cases of loss
or  default.  Due to the  nature  of the  recourse  and the  ability  of the "A"
Certificate holders to put the certificates to the trusts, the transactions have
been  accounted for as a secured  financing.  In addition,  under a purchase and
sale  agreement,  ABS has sold school  financings to an  unaffiliated  financial
institution.  The school  financings  were sold with full  recourse to ABS.  ABS
services the school  financings on a  scheduled/scheduled  remittance and in the
case of a loss or default,  upon the  liquidation of the underlying  collateral,
ABS is required to  reimburse  for any  shortfall.  Due to the control  that the
unaffiliated   financial   institution  has  over  the  school  financing,   the
transaction was accounted for as a sale. The recourse provisions were considered
by us at the time of the sale. No gain or loss was booked at the sale date.  The
total  balance of the school  financings  sold with  recourse was $13 million at
December 31, 2002.

                                       54
<PAGE>

     Matrix Bank and Sterling  Trust are  restricted in certain  instances  from
paying dividends to Matrix Bancorp due to certain regulatory  requirements.  See
"Item 1. Business--Regulation and Supervision."

     As discussed in "Item 3. Legal Proceedings," we are from time to time party
to various litigation matters, in most cases,  involving ordinary routine claims
incidental to our business.  With respect to all pending litigation matters, our
ultimate legal and financial  responsibility,  if any,  cannot be estimated with
certainty.  As such, the impact on our liquidity and capital cannot be estimated
with certainty.  We have not made an accrual for any losses in the  consolidated
financial  statements as of December 31, 2002 related to these matters. One item
of  particular  note,  as discussed in the section noted above and in Note 15 of
our consolidated financial statements,  as of December 31, 2002, a subsidiary of
the Company  has been named a  defendant  in an action that was tried in Tarrant
County,  Texas District Court in the spring of 2000. The jury returned a verdict
adverse to the Company with  respect to 2 of 12 theories of  liability  posed by
the  plaintiffs,  and the  court  has  signed  a  judgment  for  certain  of the
plaintiffs in the amount of approximately $6.4 million. The Company has filed an
appeal of this  judgment  and believes it has  meritorious  points of appeal and
intends  to  vigorously  prosecute  the  appeal  of this  action.  The  ultimate
resolution  of this matter  could  result in a loss of up to $6.4  million  plus
post-judgment  interest and additional  attorneys'  fees. The ultimate legal and
financial liability,  if any, of the Company cannot be estimated with certainty.
To the extent  additional  information  arises or our strategies  change,  it is
possible that our liability in any of these matters may change.

     During  the fourth  quarter of 2002,  the  Company  executed a  Shareholder
Rights  Plan at which  time the Board of  Directors  of the  Company  declared a
dividend of one preferred stock purchase right for each outstanding share of the
Company's  common  stock.  Each of  these  Rights,  which  are  not  immediately
exercisable,  entitles the holder to purchase one  one-thousandth  of a share of
the Company's newly designated Series A Junior Participating  Preferred Stock at
an exercise price of $40.00. The Rights are not exercisable until certain events
occur,  are not detachable  from the Company's  common stock and do not have any
immediate value to  stockholders.  The Rights  distribution was made on November
15, 2002, payable to shareholders of record on that date. The Rights will expire
on November 5, 2012.

Inflation and Changing Prices

     The  consolidated  financial  statements and related data presented in this
document have been prepared in accordance with accounting  principles  generally
accepted in the United  States of America,  which  require  the  measurement  of
financial  position and operating results in terms of historical dollars without
considering  changes in the relative  purchasing power of money over time due to
inflation. Unlike most industrial companies, substantially all of our assets and
liabilities  are  monetary in nature.  As a result,  interest  rates have a more
significant  impact on our  performance  than the  effects of general  levels of
inflation.  Interest rates do not  necessarily  move in the same direction or in
the same magnitude as prices of goods and services.

Critical Accounting Policies

     The  Company  and its  subsidiaries  have  established  various  accounting
policies  which  govern  the  application  of  accounting  principles  generally
accepted in the United States of America in the preparation and  presentation of
the Company's  consolidated  financial  statements.  The significant  accounting
policies of the Company are  described in Note 2 of the  consolidated  financial
statements.   Certain  accounting   policies  involve   significant   judgments,
assumptions  and  estimates  by  management  that have a material  impact on the
carrying value of certain assets and liabilities,  which management considers to
be critical accounting policies.  The judgments,  assumptions and estimates used
by management are based on historical experience,  knowledge of the accounts and
other  factors,  which are believed to be  reasonable  under the  circumstances.
Because of the  nature of the  judgments  and  assumptions  made by  management,
actual results could differ from these judgments and estimates, which could have
a  material  impact on the  carrying  values of assets and  liabilities  and the
results of operations of the Company.

     The Company  believes  the  allowance  for loan and  valuation  losses is a
critical  accounting  policy  that  requires  the  most  significant  judgments,
assumptions  and estimates  used in preparation  of its  consolidated  financial
statements.  See  discussion at "--Asset and Liability  Management,  Analysis of
Allowance  for Loan and  Valuation  Losses"  for a detailed  description  of the
Company's  process  and  methodology  related  to the  allowance  for  loan  and
valuation losses.

     The Company also considers the valuation of mortgage servicing rights to be
a critical accounting policy that requires judgments,  assumptions and estimates
concerning impairment of their value in certain interest rate environments.  See

                                       55
<PAGE>

"--Business,  Mortgage  Servicing  Activities" for a detailed  discussion of the
nature of the servicing  rights,  and see Note 2 of the  consolidated  financial
statements  for a detailed  discussion  concerning  the use of  estimates in the
valuation of mortgage servicing rights.

     The  Company  also  considers  the  judgments  and  assumptions  concerning
litigation as a critical  accounting  policy. The Company has been notified that
we are a defendant in a number of legal proceedings. Most of these cases involve
ordinary and routine claims  incidental to our business.  Based on  management's
analysis, no accrual for loss has been made as of December 31, 2002 for any such
cases.   See  a  full   description  of  such  proceedings  at  "Item  3.  Legal
Proceedings." With respect to all pending litigation matters, our ultimate legal
responsibility,  if any,  cannot  be  estimated  with  certainty.  Based  on the
ultimate  outcome of such  proceedings,  it is possible  that future  results of
operations  for any  particular  quarterly or annual  period could be materially
affected by changes in our assumptions related to such proceedings.

Recent Accounting Pronouncements

     In November 2002, the Financial Accountings Standards Board ("FASB") issued
FASB  Interpretation No. 45 ("FIN 45"),  "Guarantor's  Accounting and Disclosure
Requirements for Guarantees,  Including  Indirect  Guarantees of Indebtedness of
Others." This  interpretation  expands the disclosures to be made by a guarantor
in its financial  statements about its obligations under certain  guarantees and
requires  the  guarantor  to  recognize  a  liability  for the fair  value of an
obligation assumed under a guarantee.  FIN 45 clarifies the requirements of SFAS
5, "Accounting for Contingencies,"  relating to guarantees.  In general,  FIN 45
applies to contracts or indemnification agreements that contingently require the
guarantor  to make  payments  to the  guaranteed  party  based on  changes in an
underlying  that is related to an asset,  liability,  or equity  security of the
guaranteed party.  Certain  guarantee  contracts are excluded free from both the
disclosure and recognition requirements of this interpretation, including, among
others, guarantees relating to employee compensation,  residual value guarantees
under  capital  lease   arrangements,   commercial   letters  of  credit,   loan
commitments, subordinated interests in an special purpose entity, and guarantees
of a company's own  performance.  Other guarantees are subject to the disclosure
requirements of FIN 45 but not to the recognition  provisions and include, among
others, a guarantee  accounted for as a derivative  instrument under SFAS 133, a
parent's  guarantee  of debt  owed to a third  party by its  subsidiary  or vice
versa,  and a guarantee which is based on performance not price.  The disclosure
requirements  of FIN 45 are  effective  for the Company as of December 31, 2002,
and require  disclosure of the nature of the  guarantee,  the maximum  potential
amount of future payments that the guarantor could be required to make under the
guarantee,  and the current amount of the liability, if any, for the guarantor's
obligations under the guarantee.  The recognition  requirements of FIN 45 are to
be applied  prospectively  to guarantees  issued or modified  after December 31,
2002.  Significant  guarantees  that have been  entered  into by the Company are
disclosed in Note 15. The Company does not expect the  requirements of FIN 45 to
have a material impact on the consolidated financial statements.

     In January  2003,  the FASB issued FASB  Interpretation  No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." This interpretation of Accounting
Research  Bulletin  No.  51,  Consolidated   Financial   Statements,   addresses
consolidation by business  enterprises of variable interest  entities  (selected
entities  with  related  contractual,   ownership,   voting  or  other  monetary
interests,  including  certain special purpose  entities),  and requires certain
additional  disclosure with respect to these entities.  The provisions of FIN 46
are immediately  applicable to variable  interest entities created after January
31, 2003 and for entities  that existed  prior to February 1, 2003.  The Company
does not expect  the  requirements  of FIN 46 to have a  material  impact on the
results of consolidated financial statements.  The disclosure  requirements,  as
applicable,  are included in our  consolidated  financial  statements  and notes
thereto.

In June 2001,  the FASB  issued  SFAS No. 142,  "Goodwill  and Other  Intangible
Assets,"  that  supersedes  APB Opinion  No. 17.  Under SFAS 142,  goodwill  and
intangible assets deemed to have indefinite lives are no longer  amortized,  but
are to be reviewed at least annually for impairment, under impairment guidelines
established in the statement. SFAS 142 also changes the amortization methodology
in  intangible  assets that are deemed to have finite lives and adds to required
disclosures  regarding goodwill and intangible assets. SFAS 142 is effective for
fiscal years  beginning after December 15, 2001. The Company adopted SFAS 142 on
January 1, 2002 and its unamortized balance of goodwill as of that date was $1.0
million.  Beginning in 2002,  the Company ceased its  amortization  of goodwill.
Goodwill  amortization  for 2001 and 2000 was less than $100,000,  respectively.
During the second quarter of 2002, under guidelines  contained in the statement,
management performed an analysis concerning potential impairment of the goodwill
carried at ABS School Services,  and determined that no impairment existed. This
analysis was based on the fact that ABS School Services was engaged in an effort
to increase  the client base and fee income on a national  basis and believed it
would be successful.  During the fourth quarter of 2002, it was determined  that
the efforts were  ultimately not successful in that ABS School  Services was not
able to attract the amount of new  contracts  it had targeted for the new school
year. As such,  the impairment  analysis on the goodwill at ABS School  Services
was  re-performed  in the fourth quarter of 2002, and it was determined  that an

                                       56
<PAGE>

impairment  of goodwill was  present,  and the entire  goodwill  balance of $1.0
million was  written-off in the fourth quarter of 2002.  After this charge,  the
consolidated goodwill balance at December 31, 2002 was $0.

     In June  2002,  the  FASB  issued  SFAS  No.  146,  "Accounting  for  Costs
Associated  with Exit or  Disposal  Activities."  SFAS 146  addresses  financial
accounting and reporting for costs  associated with exit or disposal  activities
and nullifies  Emerging  Issues Task Force  ("EITF")  issue No. 94-3,  Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity  (including  Certain  Costs  Incurred  in a  Restructuring).  SFAS  146
requires recognition of liability for a cost associated with an exit or disposal
activity when the liability is incurred,  as opposed to being  recognized at the
date an  entity  commits  to an  exit  plan  under  EITF  94-3.  SFAS  146  also
establishes  that fair value is the  objective  for initial  measurement  of the
liability.  SFAS 146 is  effective  for  exit or  disposal  activities  that are
initiated  after  December 31, 2002. The adoption of SFAS 146 on January 1, 2003
did not have a material impact on the consolidated financial statements.

     In October 2002, the issued SFAS No. 147, "Acquisition of Certain Financial
Institutions,  an amendment of SFAS No. 72, No. 144 and FASB  Interpretation No.
9." In accordance  with SFAS 147, the  acquisition of all or part of a financial
institution  that  meets  the  definition  of a  business  combination  will  be
accounted for by the purchase  method in accordance  with SFAS 141. In addition,
SFAS 147 provides that long-term customer-relationship intangible assets, except
for servicing assets,  recognized in the acquisition of a financial institution,
should be evaluated for impairment by the provisions of No. 144,  Accounting for
the Impairment or Disposal of Long-Lived  Assets. The effective date of SFAS 147
is for  acquisitions  on or after  October 1, 2002.  The adoption of SFAS 147 on
October  1,  2002  did  not  have  any  impact  on  the  consolidated  financial
statements.

     In December 2002,  the FASB issued SFAS 148,  "Accounting  for  Stock-Based
Compensation - Transition and Disclosure."  This amendment to FASB Statement No.
123 provides  alternative  methods of transition  for a voluntary  change to the
fair value based method of accounting for stock-based employee compensation.  In
addition,  this statement  amends the disclosure  requirements of FASB Statement
No. 123 to require  disclosures in both annual and interim financial  statements
about the method of accounting for  stock-based  employee  compensation  and the
effect of the method used on reported results.  The provisions of this statement
are  effective  for  financial  statements  of interim or annual  periods  after
December  15,  2002.  The  Company  does not  intend to change to the fair value
method of accounting. The required disclosures of this statement are included in
Note 2 and Note 14 of the consolidated financial statements.

Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance
Sheet Arrangements

     The  following  table  presents,  as of December  31, 2002,  the  Company's
significant fixed and determinable  contractual obligations by payment date. The
payment amounts  represent those amounts  contractually due to the recipient and
do not include any unamortized premiums or discounts, hedge basis adjustments or
other similar carrying value  adjustments.  Further  discussion of the nature of
each obligation is included in the referenced Note to the consolidated financial
statements.
<TABLE>
<CAPTION>
                                                                    As of December 31, 2002
                                      ------------------------------------------------------------------------------------
                                          Note          1 Year    1 to 3 Years     3 to 5     Over 5 Years
                                        Reference      or Less                      Years                       Total
                                      -------------- -------------------------- ------------------------------------------
                                                                         (In thousands)
<S>                                           <C>      <C>             <C>          <C>          <C>           <C>

Contractual Obligations
Deposits (passbook, NOW and money
   market)..................................   9             -              -            -       485,487       485,487
Certificate account.........................   9       352,854         75,452       20,164             -       448,470
Federal funds borrowed......................  11             -              -            -       385,785       385,785
Borrowed money and guarantee
   preferred beneficial interests...........  10        12,727         47,929            -        65,247       125,903
Operating leases............................  15         2,748          4,191        2,124           715         9,778

</TABLE>

A schedule of significant commitments at December 31, 2002 follows:

              Commitments                                    (In thousands)
              Loans secured by mortgages..................         $ 31,154
              Construction loans..........................           10,991
              Commercial lines of credit..................            8,338
              Commercial loans............................            4,858
              Consumer loans..............................              581

                                       57
<PAGE>

Further  discussion  of  these  commitments  is  included  in  Note  15  of  the
consolidated  financial statements.  In addition,  the Company has contingencies
due to various  litigation  matters  which are also  discussed in Note 15 of the
consolidated financial statements.

      The Company may also have liabilities under certain contractual agreements
contingent  upon  the  occurrence  of  certain  events.   A  discussion  of  the
significant  contractual  arrangements  under  which  the  Company  may be  held
contingently liable, including guarantee arrangements, is included in Note 15 of
the consolidated financial statements.

      The Company's  significant  off-balance sheet arrangements include the use
of school  financing sale agreements  which are discussed  further in Note 10 of
the consolidated financial statements.

Forward Looking Statements

      Certain statements contained in this annual report that are not historical
facts,  including,  but not limited to, statements that can be identified by the
use  of   forward-looking   terminology   such  as  "may,"   "will,"   "expect,"
"anticipate,"  "predict,"  "believe,"  "plan,"  "estimate"  or "continue" or the
negative  thereof or other  variations  thereon or comparable  terminology,  are
forward-looking   statements  within  the  meaning  of  the  Private  Securities
Litigation Reform Act of 1995, and involve a number of risks and  uncertainties.
The actual  results  of the  future  events  described  in such  forward-looking
statements  in this annual report could differ  materially  from those stated in
such  forward-looking  statements.  Among the factors  that could  cause  actual
results to differ  materially  are: third party claims or actions in relation to
the ongoing or future  bankruptcies  of the Company's  customers;  interest rate
fluctuations; level of delinquencies; defaults and prepayments; general economic
conditions;  competition; government regulation; possible future litigation; the
actions or inactions of third parties, including failure of the Buyer to perform
its obligations  under the Purchase  Agreement (See "Item 1.  Business--Sale  of
Wholesale  Production  Platform"),  and actions or  inactions  of those that are
parties to the existing or future  bankruptcies  of the  Company's  customers or
litigation  related thereto;  unanticipated  developments in connection with the
bankruptcy actions or litigation  described above,  including judicial variation
from existing legal  precedent and the decision by one or more parties to appeal
decisions  rendered;  the risks and  uncertainties  discussed  elsewhere in this
annual report and in the Company's  current  report on Form 8-K,  filed with the
Securities and Exchange  Commission on March 14, 2001; and the uncertainties set
forth from time to time in the  Company's  periodic  reports,  filings and other
public statements.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

      See Item  7."Management's  Discussion and Analysis of Financial  Condition
and Results of Operations--Asset and Liability Management--Risk Sensitive Assets
and Liabilities" and Item 1."Business--Mortgage Servicing Activities--Hedging of
Servicing Rights."

Item 8.  Financial Statements and Supplementary Data

      See Index to Financial Statements on page F-1.

Item 9.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure

      On  April  3,  2001,  our  Audit  Committee  recommended  to our  Board of
Directors  that we not  renew  our  engagement  with  Ernst  & Young  LLP as our
independent  auditors  and to appoint KPMG LLP to be our  principal  independent
auditors and to audit our consolidated  financial statements for the fiscal year
ending December 31, 2001. Our Board of Directors  accepted the recommendation of
the Audit  Committee  on April 3,  2001.  The Audit  Committee  and the Board of
Directors based their decisions on competitive  bids submitted by the two firms.
The dismissal of Ernst & Young and the  appointment  of KPMG both were effective
as of April 16, 2001.

      Ernst & Young's  reports  on our  consolidated  financial  statements  for
fiscal year 2000 did not contain an adverse  opinion or  disclaimer  of opinion,
nor were the reports  qualified  or modified as to  uncertainty,  audit scope or
accounting  principles.  During  fiscal  year  2000 and the  subsequent  interim
period,  there were no disagreements  between us and Ernst & Young on any matter
of  accounting  principle  or  practices,  financial  statement  disclosure,  or
auditing  scope or  procedure,  which would have caused  Ernst & Young to make a
reference to the subject matter of the  disagreements  in connection  with their
reports.  Ernst & Young  further has not  performed  any work on any  subsequent
period to December 31, 2000.

                                       58
<PAGE>


      We did not  consult  with KPMG with  regard to any matter  concerning  the
application  of  accounting  principles  to any  specific  transactions,  either
completed or proposed,  or the type of audit opinion that might be rendered with
respect to our financial statements prior to engaging the firm.


                                    PART III

Items 10 through 13.

     The information for these items is incorporated  from the definitive  proxy
statement to be filed with the Commission within 120 days of December 31, 2002.

Item 14.  Controls and Procedures

     Within 90 days prior to the date of this annual  report,  an evaluation was
performed  under the  supervision  and with the  participation  of the Company's
management,  including the Co-CEO's and CFO, of the  effectiveness of the design
and operation of the Company's disclosure controls and procedures. Based on that
evaluation, the Company's management,  including the Co-CEO's and CFO, concluded
that the Company's  disclosure  controls and  procedures are effective in timely
alerting them to material  information  relating to the Company  (including  its
consolidated subsidiaries) required to be included in the Company's periodic SEC
reports.  There  have been no  significant  changes  in the  Company's  internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of their evaluation.


                                     PART IV

Item 15.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

      (a) (1) and (a) (2) Financial statements and financial statement schedules

          See Index to Financial Statements on page F-1.

      (b) Reports on Form 8-K

          The  Company  filed  a Form  8-K  with  the  Securities  and  Exchange
          Commission on November 6, 2002 (Item 5)  announcing  the adoption of a
          Shareholder Rights Plan.

          The  Company  filed  a Form  8-K  with  the  Securities  and  Exchange
          Commission  on  March 4,  2003  (Item  5)  announcing  the sale of the
          wholesale mortgage origination platform.

      (c)  Exhibits

          See Exhibit Index, beginning on page II-1.

     (d)  Financial Statement Schedules

            None.


                                       59
<PAGE>


                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto  duly  authorized  on the 13th day of
March, 2002.

                                            MATRIX BANCORP, INC.


Dated:       March 14, 2003                 /s/ D. Mark Spencer
             -------------------            --------------------------------
                                            D. Mark Spencer
                                            President and Co-Chief
                                            Executive Officer
                                            (Principal Executive Officer)

Dated:       March 14, 2003                 /s/ Richard V. Schmitz
             --------------------           --------------------------------
                                            Richard V. Schmitz
                                            Co-Chief Executive Officer

Dated:       March 14, 2003                 /s/ David W. Kloos
             --------------------           --------------------------------
                                            David W. Kloos
                                            Senior Vice President and
                                            Chief  Financial  Officer
                                            (Principal Accounting and Financial
                                            Officer)


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>

Signatures                                  Title                                       Date
----------                                  -----                                       ----
<S>                                         <C>                                         <C>


/s/ D. Mark Spencer                         President, Co-Chief Executive               March 14, 2003
---------------------------                 Officer and a Director
D. Mark Spencer                             (Principal Executive Officer)

/s/ Richard V. Schmitz                      Co-Chief Executive Officer and              March 14, 2003
---------------------------                 Chairman of the Board
Richard V. Schmitz

/s/ Guy A. Gibson                           Director                                    March 14, 2003
---------------------------
Guy A. Gibson


/s/ David A. Frank                          Director                                    March 14, 2003
---------------------------
David A. Frank


/s/ Robert T. Slezak                        Director                                    March 14, 2003
---------------------------
Robert T. Slezak


/s/ Lester Ravitz                           Director                                    March 14, 2003
---------------------------
Lester Ravitz
</TABLE>

                                       60
<PAGE>

                                  CERTIFICATION


I, David W. Kloos,  Senior Vice President and Chief Financial  Officer of Matrix
Bancorp, Inc. (the "Registrant"), certify that:

          1.        I have  reviewed  this annual  report on Form 10-K of Matrix
                    Bancorp, Inc.;

          2.        Based on my  knowledge,  this annual report does not contain
                    any untrue  statement of a material  fact or omit to state a
                    material  fact  necessary to make the  statements  made,  in
                    light of the circumstances  under which such statements were
                    made,  not  misleading as with respect to the period covered
                    by this annual report;

          3.        Based on my knowledge,  the financial statements,  and other
                    financial information included in this annual report, fairly
                    present in all material  respects the  financial  condition,
                    results of  operations  and cash flows of the  Registrant as
                    of, and for, the periods presented in this annual report;

          4.        The  Registrant's  other  certifying   officers  and  I  are
                    responsible  for  establishing  and  maintaining  disclosure
                    controls  and  procedures  (as defined in Exchange Act Rules
                    13a-14 and 15d-14) for the Registrant and have:

                    a.        designed such  disclosure  controls and procedures
                              to ensure that  material  information  relating to
                              the   Registrant,   including   its   consolidated
                              subsidiaries, is made known to us by others within
                              those entities,  particularly during the period in
                              which this report in being prepared;
                    b.        evaluated the  effectiveness  of the  Registrant's
                              disclosure  controls and  procedures  as of a date
                              within 90 days  prior to the  filing  date of this
                              annual report (the "Evaluation Date"); and
                    c.        presented  in this annual  report our  conclusions
                              about the effectiveness of the disclosure controls
                              and  procedures  based on our evaluation as of the
                              Evaluation Date;

          5.        The  Registrant's  other  certifying  officers  and  I  have
                    disclosed,  based  on our  most  recent  evaluation,  to the
                    Registrant's   auditors  and  the  audit  committee  of  the
                    Registrant's Board of Directors:

                    a.        all  significant  deficiencies  in the  design  or
                              operation   of  internal   controls   which  could
                              adversely  affect  the  Registrant's   ability  to
                              record,  process,  summarize and report  financial
                              data  and  have  identified  for the  Registrant's
                              auditors  any  material   weaknesses  in  internal
                              controls; and
                    b.        any fraud, whether of not material,  that involves
                              management   or   other   employees   who  have  a
                              significant  role  in  the  Registrant's  internal
                              controls; and

          6.        The  Registrant's  other  certifying  officers  and  I  have
                    indicated  in  this  annual   report   whether   there  were
                    significant changes in internal controls or in other factors
                    that could significant  affect internal controls  subsequent
                    to the date of our most  recent  evaluation,  including  any
                    corrective  actions with regard to significant  deficiencies
                    and material weaknesses.



                                            /s/ David W. Kloos
                                            -----------------------------------
                                            David W. Kloos
                                            Senior Vice President and Chief
                                            Financial Officer
                                            (Principal Accounting and Financial
                                            Officer)
                                            March 14, 2003

                                       61
<PAGE>


                                  CERTIFICATION


I, D. Mark Spencer,  President and Co-Chief Executive Officer of Matrix Bancorp,
Inc. (the "Registrant"), certify that:

          1.        I have  reviewed  this annual  report on Form 10-K of Matrix
                    Bancorp, Inc.;

          2.        Based on my  knowledge,  this annual report does not contain
                    any untrue  statement of a material  fact or omit to state a
                    material  fact  necessary to make the  statements  made,  in
                    light of the circumstances  under which such statements were
                    made,  not  misleading as with respect to the period covered
                    by this annual report;

          3.        Based on my knowledge,  the financial statements,  and other
                    financial information included in this annual report, fairly
                    present in all material  respects the  financial  condition,
                    results of  operations  and cash flows of the  Registrant as
                    of, and for, the periods presented in this annual report;

          4.        The  Registrant's  other  certifying   officers  and  I  are
                    responsible  for  establishing  and  maintaining  disclosure
                    controls  and  procedures  (as defined in Exchange Act Rules
                    13a-14 and 15d-14) for the Registrant and have:

                    a.        designed such  disclosure  controls and procedures
                              to ensure that  material  information  relating to
                              the   Registrant,   including   its   consolidated
                              subsidiaries, is made known to us by others within
                              those entities,  particularly during the period in
                              which this report in being prepared;
                    b.        evaluated the  effectiveness  of the  Registrant's
                              disclosure  controls and  procedures  as of a date
                              within 90 days  prior to the  filing  date of this
                              annual report (the "Evaluation Date"); and
                    c.        presented  in this annual  report our  conclusions
                              about the effectiveness of the disclosure controls
                              and  procedures  based on our evaluation as of the
                              Evaluation Date;

          5.        The  Registrant's  other  certifying  officers  and  I  have
                    disclosed,  based  on our  most  recent  evaluation,  to the
                    Registrant's   auditors  and  the  audit  committee  of  the
                    Registrant's Board of Directors:

                    a.        all  significant  deficiencies  in the  design  or
                              operation   of  internal   controls   which  could
                              adversely  affect  the  Registrant's   ability  to
                              record,  process,  summarize and report  financial
                              data  and  have  identified  for the  Registrant's
                              auditors  any  material   weaknesses  in  internal
                              controls; and
                    b.        any fraud, whether of not material,  that involves
                              management   or   other   employees   who  have  a
                              significant  role  in  the  Registrant's  internal
                              controls; and

          6.        The  Registrant's  other  certifying  officers  and  I  have
                    indicated  in  this  annual   report   whether   there  were
                    significant changes in internal controls or in other factors
                    that could significant  affect internal controls  subsequent
                    to the date of our most  recent  evaluation,  including  any
                    corrective  actions with regard to significant  deficiencies
                    and material weaknesses.


                                                 /s/ D. Mark Spencer
                                                 -------------------------------
                                                 D. Mark Spencer
                                                 President and Co-Chief
                                                 Executive Officer
                                                 (Principal Executive Officer)
                                                 March 14, 2003


                                       62

<PAGE>


                                  CERTIFICATION


I, Richard V. Schmitz,  Co-Chief Executive Officer of Matrix Bancorp,  Inc. (the
"Registrant"), certify that:

          1.        I have  reviewed  this annual  report on Form 10-K of Matrix
                    Bancorp, Inc.;

          2.        Based on my  knowledge,  this annual report does not contain
                    any untrue  statement of a material  fact or omit to state a
                    material  fact  necessary to make the  statements  made,  in
                    light of the circumstances  under which such statements were
                    made,  not  misleading as with respect to the period covered
                    by this annual report;

          3.        Based on my knowledge,  the financial statements,  and other
                    financial information included in this annual report, fairly
                    present in all material  respects the  financial  condition,
                    results of  operations  and cash flows of the  Registrant as
                    of, and for, the periods presented in this annual report;

          4.        The  Registrant's  other  certifying   officers  and  I  are
                    responsible  for  establishing  and  maintaining  disclosure
                    controls  and  procedures  (as defined in Exchange Act Rules
                    13a-14 and 15d-14) for the Registrant and have:

                    a.        designed such  disclosure  controls and procedures
                              to ensure that  material  information  relating to
                              the   Registrant,   including   its   consolidated
                              subsidiaries, is made known to us by others within
                              those entities,  particularly during the period in
                              which this report in being prepared;
                    b.        evaluated the  effectiveness  of the  Registrant's
                              disclosure  controls and  procedures  as of a date
                              within 90 days  prior to the  filing  date of this
                              annual report (the "Evaluation Date"); and
                    c.        presented  in this annual  report our  conclusions
                              about the effectiveness of the disclosure controls
                              and  procedures  based on our evaluation as of the
                              Evaluation Date;

          5.        The  Registrant's  other  certifying  officers  and  I  have
                    disclosed,  based  on our  most  recent  evaluation,  to the
                    Registrant's   auditors  and  the  audit  committee  of  the
                    Registrant's Board of Directors:

                    a.        all  significant  deficiencies  in the  design  or
                              operation   of  internal   controls   which  could
                              adversely  affect  the  Registrant's   ability  to
                              record,  process,  summarize and report  financial
                              data  and  have  identified  for the  Registrant's
                              auditors  any  material   weaknesses  in  internal
                              controls; and
                    b.        any fraud, whether of not material,  that involves
                              management   or   other   employees   who  have  a
                              significant  role  in  the  Registrant's  internal
                              controls; and

          6.        The  Registrant's  other  certifying  officers  and  I  have
                    indicated  in  this  annual   report   whether   there  were
                    significant changes in internal controls or in other factors
                    that could significant  affect internal controls  subsequent
                    to the date of our most  recent  evaluation,  including  any
                    corrective  actions with regard to significant  deficiencies
                    and material weaknesses.


                                               /s/ Richard V. Schmitz
                                               ---------------------------------
                                               Richard V. Schmitz
                                               Co-Chief Executive Officer
                                               March 14, 2003


                                       63

<PAGE>


                                INDEX TO EXHIBITS


3.1        >        Amended  and  Restated  Articles  of  Incorporation  of  the
                    Registrant
3.2        +        Bylaws, as amended, of the Registrant (3.2)
4.1        ++       Indenture  by and  among  the  Registrant  and  First  Trust
                    National Association,  as trustee, relating to 11.50% Senior
                    Notes due 2004 (4.1)
4.2        /////    First  Amendment to the  Indenture,  dated as of December 5,
                    2001, by and between the  Registrant  and U.S. Bank National
                    Association   (the   successor   to  First  Trust   National
                    Association),  as trustee,  relating to 11.50%  Senior Notes
                    due 2004 (4.2)
4.3        +        Specimen  Certificate  for  Common  Stock of the  Registrant
                    (4.1)
4.4        + o      Amended and Restated 1996 Stock Option Plan (4.2)
4.5        ***o     Amendment  No. 1 to the 1996 Amended and  Restated  Employee
                    Stock Option Plan of the Registrant (4.1)
4.6        ***o     Amendment  No. 2 to the 1996 Amended and  Restated  Employee
                    Stock Option Plan of the Registrant (4.2)
4.7        // o     Employee Stock Purchase Plan, as amended (4.4)
4.8        ^        Indenture by and among the  Registrant and State Street Bank
                    and Trust  Company,  as trustee,  relating to the 10% Junior
                    Subordinated Debentures due 2029 (4.7)
4.9        ^        Form of Junior Subordinated Debentures (4.8)
4.10       ^        Certificate of Trust of Matrix Bancorp Capital Trust I (4.9)
4.11       ^        Amended  and  Restated  Trust  Agreement  of Matrix  Bancorp
                    Capital Trust I (4.10)
4.12       ^        Preferred  Security  Certificate  for Matrix Bancorp Capital
                    Trust I (4.11)
4.13       ^        Preferred  Securities  Guarantee  Agreement  of the  Company
                    relating to the Preferred Securities (4.12)
4.14       ^        Agreement as to the Expenses and Liabilities (4.13)
4.15       ^^       Amended and Restated  Trust  Agreement,  dated May 11, 2001,
                    between Matrix Bancorp,  Inc. and Matrix  Bancorp,  Inc., as
                    Trustee (4.2)
4.16       *        Indenture   between  the  Registrant  and  Wilmington  Trust
                    Company,  as debenture trustee,  dated as of March 28, 2001,
                    relating  to  the  10.18%  junior  subordinated   deferrable
                    interest debentures due June 8, 2031 (10.5)
4.17       *        Amended and Restated  Declaration of Trust of Matrix Bancorp
                    Capital Trust II, dated as of March 28, 2001 (10.6)
4.18       *        Common  Securities  Guarantee  Agreement of the  Registrant,
                    dated as of March 28, 2001 (10.7)
4.19       *        Capital  Securities  Guarantee  Agreement of the Registrant,
                    dated as of March 28, 2001 (10.8)
4.20       **       Indenture  between the  Registrant and The Bank of New York,
                    as debenture trustee, dated as of July 16, 2001, relating to
                    the   10.25%   junior   subordinated   deferrable   interest
                    debentures due July 25, 2031 (10.3)
4.21       **       Amended and Restated  Declaration of Trust of Matrix Bancorp
                    Capital Trust III, dated as of July 16, 2001 (10.4)
4.22       **       Common Securities  Subscription Agreement of the Registrant,
                    dated as of July 16, 2001 (10.5)
4.23       **       Capital Securities Agreement of the Registrant,  dated as of
                    June 28, 2001 (10.6)
4.24       /////    Indenture   between  the  Registrant  and  Wilmington  Trust
                    Company, as trustee, dated as of November 28, 2001, relating
                    to Floating Rate Junior  Subordinated  Debt  Securities  due
                    2031 (4.26)
4.25       /////    Amended and Restated  Declaration of Trust of Matrix Bancorp
                    Capital Trust IV, dated as of November 28, 2001 (4.27)
4.26       /////    Guarantee Agreement of the Registrant,  dated as of November
                    28, 2001 (4.28)
4.27       ******   Junior Indenture  between the Registrant and The Bank of New
                    York,  as trustee,  dated as of July 25,  2002,  relating to
                    Floating Rate Junior Subordinated Debt Securities,  due July
                    25, 2032 (4.1)
4.28       ******   Amended  and  Restated  Trust  Agreement  of Matrix  Bancorp
                    Capital Trust V, dated as of July 25, 2002 (4.2)
4.29       ******   Guarantee Agreement of Matrix Bancorp Capital Trust V, dated
                    as of July 25, 2002 (4.3)
4.30       ++++     Rights  Agreement  dated as of  November  4,  2002,  between
                    Matrix Bancorp, Inc. and Computershare Trust Company,  which
                    includes the form of Articles of Amendment to State Terms of
                    Series A Junior  Participating  Preferred  Stock,  $0.01 par
                    value,  the form of Right  Certificate  and the  Summary  of
                    Rights (4.1)

                                      II-1
<PAGE>

4.31       ++++     Form of  Articles  of  Amendment  to State Terms of Series A
                    Junior Participating Preferred Stock (4.2)
10.1       +        Assignment  and Assumption  Agreement,  dated as of June 28,
                    1996, by and among Mariano C. DeCola,  William M. Howdon, R.
                    James Nicholson and Matrix Funding Corp. (10.30)
10.2       >        Amendment to Assignment and Assumption  Agreement,  dated as
                    of August 13, 2002, by and among Mariano C. DeCola,  William
                    M. Howdon, R. James Nicholson and Matrix Funding Corp.
10.3       +        Development Management Agreement, dated as of June 28, 1996,
                    by and among Fort Lupton,  L.L.C.  and Matrix  Funding Corp.
                    (10.31)
10.4       ///      Coyote Creek Planned Unit Development Agreement, dated as of
                    July 1, 1998,  by and among Fort Lupton,  L.L.C.  and Matrix
                    Funding Corp. (10.12)
10.5       +        Fort  Lupton  Golf  Course   Residential  and  Planned  Unit
                    Development Agreement, dated as of November 28, 1995 (10.36)
10.6       ???      Credit  Agreement,  dated as of September 29, 2000,  between
                    Matrix Financial Services Corporation, as borrower, and U.S.
                    Bank National Association, as agent, and certain lenders, as
                    lenders (10.2)
10.7       *        First  Amendment to Credit  Agreement,  dated as of March 5,
                    2001, by and between Matrix Financial Services  Corporation,
                    as borrower,  and U.S. Bank National Association,  as agent,
                    and certain lenders, as lenders (10.1)
10.8       *        Second Amendment to Credit Agreement,  dated as of April 11,
                    2001, by and between Matrix Financial Services  Corporation,
                    as borrower,  and U.S. Bank National Association,  as agent,
                    and certain lenders, as lenders (10.2)
10.9       **       Third  Amendment to Credit  Agreement,  dated as of June 29,
                    2001, by and between Matrix Financial Services  Corporation,
                    as borrower,  and U.S. Bank National Association,  as agent,
                    and certain lenders, as lenders (10.1)
10.10      ***      Fourth Amendment to Credit Agreement,  dated as of September
                    28,  2001,  by  and  between   Matrix   Financial   Services
                    Corporation,   as   borrower,   and   U.S.   Bank   National
                    Association,  as agent,  and  certain  lenders,  as  lenders
                    (10.1)
10.11      /////    Fifth  Amendment to Credit  Agreement,  dated as of November
                    20,  2001,  by  and  between   Matrix   Financial   Services
                    Corporation,   as   borrower,   and   U.S.   Bank   National
                    Association,  as agent,  and  certain  lenders,  as  lenders
                    (10.11)
10.12      ****     Sixth Amendment to Credit  Agreement,  dated as of March 31,
                    2002, by and between Matrix Financial Services  Corporation,
                    as borrower,  and U.S. Bank National Association,  as agent,
                    and certain lenders, as lenders (10.1)
10.13      >        Seventh Amendment to Credit Agreement,  dated as of December
                    2,  2002,   by  and  between   Matrix   Financial   Services
                    Corporation,   as   borrower,   and   U.S.   Bank   National
                    Association, as agent, and certain lenders, as lenders
10.14      ???      Guaranty,   dated  as  of  September  29,  2000,   from  the
                    Registrant  to U.S.  Bank  National  Association,  as  agent
                    (10.3)
10.15      / o      Employment  Agreement,  dated as of February 4, 1997, by and
                    between The Vintage Group, Inc. and Paul Skretny (10.38)
10.16      ++o      Amendment of Employment  Agreement  (dated as of February 4,
                    1997)  dated as of  February  4, 2000,  by and  between  The
                    Vintage Group, Inc. and Paul E. Skretny (10.32)
10.17      /////o   Amendment of Employment  Agreement  (dated as of February 4,
                    1997)  dated as of  February  4, 2002,  by and  between  The
                    Vintage Group, Inc. and Paul E. Skretny (10.15)
10.18      ////     Credit  Agreement,  dated as of December  27,  2000,  by and
                    between  Registrant,  as borrower,  and U.S.  Bank  National
                    Association,  as agent,  and  certain  lenders,  as  lenders
                    (10.15)
10.19      *        First  Amendment to Credit  Agreement,  dated as of March 5,
                    2001, by and between Registrant,  as borrower, and U.S. Bank
                    National  Association,  as agent,  and certain  lenders,  as
                    lenders (10.3)
10.20      **       Second Amendment to Credit  Agreement,  dated as of July 27,
                    2001, by and between Registrant,  as borrower, and U.S. Bank
                    National  Association,  as agent,  and certain  lenders,  as
                    lenders (10.2)
10.21      /////    Third  Amendment to Credit  Agreement,  dated as of December
                    26, 2001, by and between Registrant,  as borrower,  and U.S.
                    Bank National Association, as agent, and certain lenders, as
                    lenders (10.19)
10.22      ****     Fourth Amendment to Credit Agreement,  dated as of March 31,
                    2002, by and between Registrant,  as borrower, and U.S. Bank
                    National  Association,  as agent,  and certain  lenders,  as
                    lenders (10.2)

                                      II-2
<PAGE>

10.23      +        Agreement  and Plan of Merger,  dated as of March 25,  1998,
                    among Fidelity National  Financial,  Inc., MCC Merger,  Inc.
                    and Matrix Capital Corporation (99.2)
10.24      ?        Merger   Termination   Agreement   between   Matrix  Capital
                    Corporation,  Fidelity  National  Financial,  Inc.,  and MCC
                    Merger Sub, Inc., dated August 28, 1998 (10.1)
10.25      ??o      Executive Employment Agreement,  dated as of April 20, 2000,
                    by and between United Financial, Inc. and Carl G. de Rozario
                    (10.6)
10.26      ////     Lease dated as of September 1, 1999,  by and between  Matrix
                    Financial   Services   Corporation  and  Suncor  Development
                    Company (10.22)
10.27      ////     Lease with a  reference  date of 1999,  by and  between  the
                    Registrant  and the  Regents of the  University  of Colorado
                    (10.23)
10.28      /////    Lease  dated as of December  21, 2001 by and between  Matrix
                    Bancorp, Inc. and WXI/SEV Realty, LLC (10.1)
10.29      ////     First  Amendment to Lease,  dated as of July,  2000,  by and
                    between the  Registrant and the Regents of the University of
                    Colorado,  amending the Lease with a reference  date of 1999
                    between the parties (10.24)
10.30      ////     Second Amendment to Lease, dated as of October, 2000, by and
                    between the  Registrant and the Regents of the University of
                    Colorado,  amending the Lease with a reference  date of 1999
                    between the parties (10.25)
10.31      ////o    Matrix Bancorp, Inc. Executive Incentive Plan (10.27)
10.32      /////o   Matrix  Bancorp,  Inc.  (f/k/a Matrix  Capital  Corporation)
                    401(k) Profit Sharing Plan (10.29)
10.33      /////o   Amendment  No. 1,  effective  as of January 1, 1994,  to the
                    Registrant's 401(k) Profit Sharing Plan (10.30)
10.34      /////o   Amendment  No.  2,  effective  as of May  20,  1996,  to the
                    Registrant's 401(k) Profit Sharing Plan (10.31)
10.35      /////o   Amendment  No.  3,  effective  as of April 1,  1997,  to the
                    Registrant's 401(k) Profit Sharing Plan (10.32)
10.36      /////o   Amendment  No. 4,  effective as of December 30, 2001, to the
                    Registrant's 401(k) Profit Sharing Plan (10.33)
10.37      *****    Warehousing Credit and Security Agreement, dated as of March
                    29, 2002, by and between  Matrix Capital  Markets,  Inc., as
                    borrower,  and  Residential  Funding  Corporation,  as agent
                    (10.1)
10.38      *****    First   Amendment   to   Warehousing   Credit  and  Security
                    Agreement,  dated as of May 24, 2002, by and between  Matrix
                    Capital Markets,  Inc., as borrower, and Residential Funding
                    Corporation, as agent (10.2)
10.39      +++o     Consulting  Agreement,  dated  as of  June 5,  2002,  by and
                    between Guy A. Gibson and Matrix Bancorp, Inc. (10.1)
10.40      /////o   Promissory  Note, dated as of January 31, 2002, from D. Mark
                    Spencer, as maker, to the Registrant, as payee (10.28)
10.41      ****o    Employment Agreement of T. Allen McConnell, dated October 1,
                    1997 (10.3)
10.42      +++++    Purchase and Assumption Agreement,  dated as of February 28,
                    2003,  between Matrix  Financial  Services  Corporation,  as
                    seller, and AmPro Mortgage Corporation, as purchaser (10.1)
12         >        Statement Re: Computations of Ratios
21         >        Subsidiaries of the Registrant
23.1       >        Consent of KPMG LLP
99.1       >        Certification  by D.  Mark  Spencer  pursuant  to 18  U.S.C.
                    Section  1350,  as adopted  pursuant  to Section  906 of the
                    Sarbanes-Oxley Act of 2002.
99.2       >        Certification  by Richard V.  Schmitz  pursuant to 18 U.S.C.
                    Section  1350,  as adopted  pursuant  to Section  906 of the
                    Sarbanes-Oxley Act of 2002.
99.3       >        Certification  by  David  W.  Kloos  pursuant  to 18  U.S.C.
                    Section  1350,  as adopted  pursuant  to Section  906 of the
                    Sarbanes-Oxley Act of 2002.

                                      II-3
<PAGE>

__________
>   Filed herewith

+   Incorporated by reference from the exhibit number shown in parenthesis  from
    the Registrant's  registration statement on Form S-1 (No. 333-10223),  filed
    by the Registrant with the Commission on August 15, 1996.

++  Incorporated by reference from the exhibit number shown in parenthesis  from
    the Registrant's  registration statement on Form S-1 (No. 333-34977),  filed
    by the Registrant with the Commission on September 4, 1997.

/   Incorporated by reference from the exhibit number shown in parenthesis  from
    the  Registrant's  annual  report on Form  10-K for the  fiscal  year  ended
    December 31, 1996, filed by the Registrant with the Commission.

//  Incorporated by reference from the exhibit number shown in parenthesis  from
    the  Registrant's  annual  report on Form  10-K for the  fiscal  year  ended
    December 31, 1997, filed by the Registrant with the Commission.

/// Incorporated by reference from the exhibit number shown in parenthesis  from
    the  Registrant's  annual  report on Form  10-K for the  fiscal  year  ended
    December 31, 1998, filed by the Registrant with the Commission.

////Incorporated by reference from the exhibit number shown in parenthesis  from
    the  Registrant's  annual  report on Form  10-K for the  fiscal  year  ended
    December 31, 2000, filed by the Registrant with the Commission.

/////  Incorporated  by reference  from the exhibit  number shown in parenthesis
    from the  Registrant's  annual report on Form 10-K for the fiscal year ended
    December 31, 2001, filed by the Registrant with the Commission.

+   Incorporated by reference from the exhibit number shown in parenthesis  from
    the  Registrant's  report  on Form  8-K,  filed by the  Registrant  with the
    Commission on April 8, 1998.

++  Incorporated by reference from the exhibit number shown in parenthesis  from
    the  Registrant's  report  on Form  8-K  filed  by the  Registrant  with the
    Commission on June 30, 2000.

+++ Incorporated by reference from the exhibit number shown in parenthesis  from
    the  Registrant's  report  on Form  8-K  filed  by the  Registrant  with the
    Commission on June 6, 2002.

++++Incorporated by reference from the exhibit number shown in parenthesis  from
    the  Registrant's  report  on Form  8-K  filed  by the  Registrant  with the
    Commission on November 6, 2002.

+++++  Incorporated  by reference  from the exhibit  number shown in parenthesis
    from the  Registrant's  report on Form 8-K filed by the Registrant  with the
    Commission on March 4, 2003.

?   Incorporated by reference from the exhibit number shown in parenthesis  from
    the  Registrant's  quarterly  report  on Form  10-Q  for the  quarter  ended
    September 30, 1998, filed by the Registrant with the Commission.

??  Incorporated by reference from the exhibit number shown in parenthesis  from
    the  Registrant's  quarterly  report on Form 10-Q for the quarter ended June
    30, 2000, filed by the Registrant with the Commission.

??? Incorporated by reference from the exhibit number shown in parenthesis  from
    the  Registrant's  quarterly  report  on Form  10-Q  for the  quarter  ended
    September 30, 2000, filed by the Registrant with the Commission.

*   Incorporated by reference from the exhibit number shown in parenthesis  from
    the  Registrant's  quarterly report on Form 10-Q for the quarter ended March
    31, 2001, filed by the Registrant with the Commission.

**  Incorporated by reference from the exhibit number shown in parenthesis  from
    the  Registrant's  quarterly  report on Form 10-Q for the quarter ended June
    30, 2001, filed by the Registrant with the Commission.

*** Incorporated by reference from the exhibit number shown in parenthesis  from
    the  Registrant's  quarterly  report  on Form  10-Q  for the  quarter  ended
    September 30, 2001, filed by the Registrant with the Commission.

****Incorporated by reference from the exhibit number shown in parenthesis  from
    the  Registrant's  quarterly report on Form 10-Q for the quarter ended March
    31, 2002, filed by the Registrant with the Commission.


                                      II-4
<PAGE>


*****  Incorporated  by reference  from the exhibit  number shown in parenthesis
    from the  Registrant's  quarterly  report on Form 10-Q for the quarter ended
    June 30, 2002, filed by the Registrant with the Commission.

******  Incorporated  by reference  from the exhibit number shown in parenthesis
    from the  Registrant's  quarterly  report on Form 10-Q for the quarter ended
    September 30, 2002, filed by the Registrant with the Commission.

^   Incorporated by reference from the exhibit number shown in parenthesis  from
    the Registrant's  registration statement on Form S-1 (No. 333-79731),  filed
    by the Registrant with the Commission on June 1, 1999.

^^  Incorporated by reference from the exhibit number shown in parenthesis  from
    the Registrant's  registration statement on Form S-8 (No. 333-75000),  filed
    by the Registrant with the Commission on December 12, 2001.

o Management contract or compensatory plan or arrangement.








                                      II-5

<PAGE>
                          INDEX TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>

Consolidated Financial Statements of Matrix Bancorp, Inc. and Subsidiaries

<S>                                                                                                   <C>

Independent Auditors' Report, December 31, 2002 and 2001..............................................F-2

Report of Independent Auditors, December 31, 2000.....................................................F-3

Consolidated Balance Sheets--December 31, 2002 and 2001...............................................F-4

Consolidated Statements of Operations--for the years ended
December 31, 2002, 2001 and 2000......................................................................F-5

Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss)
for the years ended December 31, 2002, 2001 and 2000..................................................F-7

Consolidated Statements of Cash Flows--for the years ended
December 31, 2002, 2001 and 2000......................................................................F-8

Notes to Consolidated Financial Statements............................................................F-10

</TABLE>


                                      F-1

<PAGE>


                          Independent Auditors' Report


The Board of Directors and Shareholders of Matrix Bancorp, Inc.:

We have audited the accompanying  consolidated balance sheets of Matrix Bancorp,
Inc. and  subsidiaries  (the Company) as of December 31, 2002 and 2001,  and the
related  consolidated   statements  of  operations,   shareholders'  equity  and
comprehensive  income  (loss),  and  cash  flows  for  each of the  years in the
two-year period ended December 31, 2002. These consolidated financial statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an  opinion  on these  consolidated  financial  statements  based on our
audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain reasonable  assurance about whether the consolidated
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  consolidated  financial  statements.  An audit also includes  assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of Matrix Bancorp, Inc.
and  subsidiaries  as of December  31,  2002 and 2001,  and the results of their
operations  and their  cash flows for each of the years in the  two-year  period
ended  December 31, 2002, in conformity  with  accounting  principles  generally
accepted in the United States of America.

As discussed in Note 2 to the  consolidated  financial  statements,  in 2001 the
Company changed its method of accounting for derivative  instruments and hedging
activities  and in 2002 changed its method of accounting  for goodwill and other
intangible assets.


KPMG LLP

Denver, Colorado
February 10, 2003

                                      F-2
<PAGE>


                         REPORT OF INDEPENDENT AUDITORS


The Board of Directors and Shareholders of Matrix Bancorp, Inc.

We  have   audited  the   accompanying   consolidated   statements   of  income,
shareholders'  equity,  and cash flows of Matrix Bancorp,  Inc. and subsidiaries
(the Company) for the year ended December 31, 2000. These consolidated financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audit.

We conducted our audit in accordance with auditing standards  generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audit  provides a  reasonable  basis for our
opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the  consolidated  results of operations of
Matrix Bancorp,  Inc. and  subsidiaries  and their cash flows for the year ended
December 31, 2000, in conformity with accounting  principles  generally accepted
in the United States.


Ernst & Young LLP

Phoenix, Arizona
February 23, 2001


                                      F-3
<PAGE>


                      Matrix Bancorp, Inc. and Subsidiaries

                           Consolidated Balance Sheets

                             (Dollars in thousands)
<TABLE>
<CAPTION>

                                                                                  December 31,
                                                                             2002              2001
                                                                       ------------------------------------
<S>                                                                        <C>           <C>

Assets
Cash and cash equivalents                                                  $    58,725   $        52,506
Interest-earning deposits and federal funds sold                                 3,687            31,959
Securities available for sale                                                   29,073             6,963
Loans held for sale, net                                                     1,107,926         1,149,539
Loans held for investment, net                                                 285,891           191,161
Mortgage servicing rights, net                                                  63,200            78,712
Other receivables                                                               54,811            76,894
Federal Home Loan Bank stock, at cost                                           30,379            18,181
Foreclosed real estate                                                           8,343             8,355
Premises and equipment, net                                                     27,705            13,631
Other assets, net                                                               31,857            19,039
                                                                       ------------------------------------
Total assets                                                              $  1,701,597   $     1,646,940
                                                                       ====================================

Liabilities and shareholders' equity
Liabilities:
   Deposits                                                               $    933,957   $       866,235
   Custodial escrow balances                                                   151,790           129,665
   Draft Payable                                                                 7,097            28,875
   Payable for purchase of mortgage servicing rights                               782             4,738
   Federal Home Loan Bank borrowings                                           385,785           303,361
   Borrowed money                                                               61,403           162,532
   Guaranteed preferred beneficial interests                                    64,500            59,500
   Other liabilities                                                            22,575             8,501
   Income taxes payable and deferred income tax liability                        6,772            12,221
                                                                       ------------------------------------
Total liabilities                                                            1,634,661         1,575,628
                                                                       ------------------------------------

Commitments and contingencies (Note 15)

Shareholders' equity:
   Preferred stock, par value $.0001; authorized
     5,000,000 shares; no shares outstanding                                          -                -
   Common stock, par value $.0001; authorized 50,000,000 shares;
     issued and outstanding 6,489,543 and 6,518,604 shares at
     December 31, 2002 and 2001, respectively                                         1                1
   Additional paid-in capital                                                    20,375           20,800
   Retained earnings                                                             46,534           50,486
   Accumulated other comprehensive income                                            26               25
                                                                       ------------------------------------
Total shareholders' equity                                                       66,936           71,312
                                                                       ------------------------------------
Total liabilities and shareholders' equity                                $   1,701,597     $  1,646,940
                                                                       ====================================
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>


                      Matrix Bancorp, Inc. and Subsidiaries

                      Consolidated Statements of Operations

                (Dollars in thousands, except share information)
<TABLE>
<CAPTION>

                                                                   Years Ended December 31,
                                                            2002             2001              2000
                                                     ------------------------------------------------------
<S>                                                  <C>               <C>                <C>

Interest income:
   Loans and securities                              $         89,205  $        103,393   $       93,965
   Interest-earning deposits                                    1,272             2,004            3,421
                                                     ------------------------------------------------------
Total interest income                                          90,477           105,397           97,386

Interest expense:
   Savings and time deposits                                   17,242            29,652           22,603
   Demand and money market deposits                             4,254             5,220            3,672
   Federal Home Loan Bank borrowings                            9,478            16,071           27,242
   Borrowed money and guaranteed preferred
     beneficial interests                                      10,304            13,944           14,084
                                                     ------------------------------------------------------
Total interest expense                                         41,278            64,887           67,601
                                                     ------------------------------------------------------
Net interest income before provision for loan and
   valuation losses                                            49,199            40,510           29,785
Provision for loan and valuation losses                         2,821             2,980            4,235
                                                     ------------------------------------------------------
Net interest income after provision for loan and
   valuation losses                                            46,378            37,530           25,550

Noninterest income:
   Loan administration                                         32,243            30,113           23,850
   Brokerage                                                    8,105             4,815            8,119
   Trust services                                               5,345             4,036            4,923
   Real estate disposition services                             4,153             2,572            3,677
   Gain on sale of loans and securities                           521             1,475              982
   Gain on sale of mortgage servicing rights, net                 675               167            2,634
   Loan origination                                            35,829            35,293            7,587
   School services                                              4,616             5,427            4,240
   Other                                                        5,923             7,618            2,780
                                                     ------------------------------------------------------
Total noninterest income                                       97,410            91,516           58,792

Noninterest expense:
   Compensation and employee benefits                          59,484            52,573           34,245
   Amortization of mortgage servicing rights                   24,176            21,862            9,851
   Occupancy and equipment                                      7,862             6,525            4,785
   Postage and communication                                    4,580             4,063            2,812
   Professional fees                                            3,175             2,883            4,687
   Data processing                                              3,140             2,907            2,413
   Impairment on mortgage servicing rights                     14,219               181                -
   Other general and administrative                            35,421            24,905           19,048
                                                     ------------------------------------------------------
Total noninterest expense                                     152,057           115,899           77,841
                                                     ------------------------------------------------------
(Loss) income before income taxes                              (8,269)           13,147            6,501
Income tax (benefit) expense                                   (4,317)            4,275            2,243
                                                     ------------------------------------------------------
</TABLE>

                                      F-5
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries

                Consolidated Statements of Operations (continued)

                (Dollars in thousands, except share information)
<TABLE>
<CAPTION>


                                                                   Years Ended December 31,
                                                            2002             2001              2000
                                                     -----------------------------------------------------
<S>                                                     <C>           <C>              <C>

(Loss) income before cumulative effect of a
   change in accounting principle                       (3,952)            8,872            4,258
Less cumulative effect of a change in accounting
   principle, net of tax benefit of $190                    -                360               -
                                                     ======================================================
Net (loss) income                                    $  (3,952)       $    8,512       $    4,258
                                                     ======================================================

Basic net (loss) income per share before change in
   accounting principle                              $   (0.61)       $     1.36       $     0.63

Less cumulative effect of a change in accounting
   principle                                                -               0.05               -
                                                     ------------------------------------------------------
Net (loss) income per share-basic                    $   (0.61)       $     1.31       $     0.63
                                                     ======================================================
Net (loss) income per share assuming dilution before
   change in accounting principle                        (0.61)             1.35             0.63
Less cumulative effect of a change in accounting
   principle                                                       -        0.05                -
                                                     ------------------------------------------------------
Net (loss) income per share - assuming dilution      $  (0.61)        $     1.30       $     0.63
                                                     ======================================================
Weighted average shares - basic                       6,462,272        6,495,583        6,713,251
                                                     ======================================================
Weighted average shares - assuming dilution           6,462,272        6,560,454        6,748,857
                                                     ======================================================
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-6
<PAGE>


                      Matrix Bancorp, Inc. and Subsidiaries
 Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss)
                             (Dollars in thousands)

<TABLE>
<CAPTION>

                                                                                             Accumulated
                                                            Additional                          Other
                                         Common Stock       Paid-In     Treasury   Retained  Comprehensive            Comprehensive
                                     ---------------------
                                       Shares    Amount     Capital      Shares    Earnings       Income      Total    Income (loss)
                                     -----------------------------------------------------------------------------------------------
<S>                                   <C>        <C>        <C>         <C>        <C>           <C>        <C>         <C>


Balance at December 31, 1999          6,759,241  $    1     $  22,780   $     -    $   37,716    $   -      $ 60,497
   Shares repurchased                 (237,000)       -             -    (1,775)            -        -       (1,775)
   Issuance of stock related to
     employee stock purchase
     plan and options                    36,663       -           224         -             -        -           224
   Comprehensive income:
      Net income                              -       -             -         -         4,258        -         4,258    $    4,258
      Net unrealized holding gains            -       -             -         -                    819           819           819
                                                                                                                      --------------
   Comprehensive income                                                                                                 $    5,077
                                     ---------------------------------------------------------------------------------==============
Balance at December 31, 2000          6,558,904       1        23,004    (1,775)       41,974      819        64,023
                                     -----------------------------------------------------------------------------------------------
   Shares repurchased                  (86,500)       -         (746)         -             -        -         (746)
   Shares retired (323,500 shares)            -       -       (1,775)      1,775            -        -            -
   Issuance of stock related to
     employee stock purchase
     plan and options                    46,200       -           317         -             -        -          317
   Comprehensive income:
     Net income                               -       -             -         -         8,512        -        8,512     $    8,512
     Net unrealized holding losses            -       -             -         -             -     (794)       (794)          (794)
                                                                                                                      --------------
   Comprehensive income                                                                                                 $    7,718
                                     ---------------------------------------------------------------------------------==============
Balance at December 31, 2001          6,518,604   $   1     $  20,800         -    $   50,486   $   25     $ 71,312
                                     -----------------------------------------------------------------------------------------------
Shares repurchased                     (66,060)       -             -     (726)             -        -        (726)
Shares retired (389,560 shares)               -       -         (726)       726             -        -            -
Issuance of stock related to
employee stock purchase                  36,999       -           301         -             -        -          301
    plan and options
Comprehensive (loss):
       Net loss                               -       -             -         -       (3,952)        -      (3,952)     $  (3,952)
       Net unrealized holding gains(1)        -       -             -         -             -                                    1
                                                                                                                      --------------
Comprehensive (loss)                                                                                 1            1     $  (3,951)
                                     ---------------------------------------------------------------------------------==============
Balance at December 31, 2002          6,489,543   $   1      $ 20,375  $      -    $   46,534   $   26     $ 66,936
                                     ===============================================================================================

(1) Disclosure of reclassification amount
    Unrealized holding gain arising during the year ended
    December 31, 2002                                                                                                   $       1
   Less: reclassification adjustment of gains included in net income
   (loss)                                                                                                                       -
                                                                                                                       -------------
   Net unrealized holding gain on securities                                                                            $       1
                                                                                                                       =============
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-7
<PAGE>


                      Matrix Bancorp, Inc. and Subsidiaries

                      Consolidated Statements of Cash Flows

                             (Dollars in thousands)
<TABLE>
<CAPTION>

                                                                        Years Ended December 31,
                                                                  2002            2001            2000
                                                             ------------------------------------------------
<S>                                                           <C>            <C>             <C>

Operating activities
Net (loss) income                                             $      (3,952) $       8,512   $      4,258
Adjustments to reconcile net (loss) income to
   net cash  used in  operating activities:
     Depreciation and amortization                                    4,756          3,116           2,583
     Provision for loan and valuation losses                          2,821          2,980           4,235
     Amortization of mortgage servicing rights                       24,176         21,862           9,851
     Impairment of mortgage servicing rights                         14,219            181               -
     Unrealized gain on securities                                        -              -             819
     Gain on sale of loans and securities                              (521)        (1,475)           (982)
     Gain on sale of mortgage servicing rights                         (675)          (167)         (2,634)
     Gain on sale of building and equipment                              17         (3,425)         (1,159)
     Gain on sale of foreclosed real estate                            (284)           (16)             14
Changes in assets and liabilities:
     Loans originated for sale, net of loans sold                    28,194       (377,628)       (130,895)
     Loans purchased for sale                                    (1,127,632)       (97,486)       (204,922)
     Proceeds from sale of loans purchased for sale                 791,732         76,074         108,466
     (Increase) decrease in securities available for sale           (22,110)        59,586               -
     Originated mortgage servicing rights, net                      (34,511)       (30,266)            (16)
     Decrease (increase) in other receivables and other
       assets                                                        10,608        (19,844)        (11,698)
     (Decrease) increase in payable for purchase of mortgage
       servicing rights                                              (3,956)        (7,791)          9,503
     Increase in other liabilities, income tax payable and
       deferred income taxes liability                                8,625          3,672           3,142
                                                             ------------------------------------------------
Net cash used in operating activities                              (308,493)      (362,115)       (209,435)

Investing activities
Loans originated and purchased for investment                      (253,672)      (159,619)       (202,300)
Principal repayments on loans                                       476,174        345,031         353,713
(Purchase) redemption of Federal Home Loan Bank stock
                                                                    (12,198)         9,633          (5,400)
Purchases of premises and equipment                                 (17,614)       (14,415)         (7,089)
Hedging of servicing portfolio, net                                       -              -              95
Acquisition of mortgage servicing rights                                  -           (530)        (31,883)
Proceeds from the sale of building and equipment                         45         14,601           3,664
Proceeds from sale of foreclosed real estate                          8,306          1,521           2,458
Proceeds from sale of mortgage servicing rights                       9,682          1,600           3,537
                                                             ------------------------------------------------
Net cash provided by investing activities                           210,723        197,822         116,795

</TABLE>

                                      F-8
<PAGE>


                      Matrix Bancorp, Inc. and Subsidiaries

                Consolidated Statements of Cash Flows (continued)

                             (Dollars in thousands)
<TABLE>
<CAPTION>


                                                                      Years Ended December 31,
                                                                2002            2001            2000
                                                          -------------------------------------------------
<S>                                                         <C>             <C>             <C>
Financing activities
Net increase in deposits                                    $     67,722    $   263,566     $     40,475
Net increase (decrease) in custodial escrow balances              22,125          52,018         (16,559)
(Decrease) increase in revolving lines and repurchase
   agreements, net                                               (18,663)       (138,946)        125,743
Payments of notes payable                                         (1,981)        (13,298)        (31,169)
Proceeds from notes payable                                        2,000           1,786           2,325
Payment of financing arrangements                                    (61)            (86)            (63)
Proceeds from issuance of guaranteed preferred beneficial
   interests                                                       5,000          30,977               -
Treasury shares repurchased                                         (726)           (746)         (1,775)
Proceeds from issuance of common stock related to
   employee stock purchase plan and options                          301             317             224
                                                          -------------------------------------------------
Net cash provided by financing activities                         75,717         195,588         119,201
                                                          -------------------------------------------------
(Decrease) increase in cash and cash equivalents                 (22,053)         31,295          26,561
Cash and cash equivalents at beginning of the year                84,465          53,170          26,609
                                                          -------------------------------------------------
Cash and cash equivalents at end of the year                $     62,412    $     84,465    $     53,170
                                                          =================================================

Supplemental disclosure of noncash activity
Loans transferred to foreclosed real estate                 $       8,010   $     7,214     $      4,318
                                                          =================================================


Supplemental disclosure of cash flow information
Cash paid for interest                                      $     45,050    $     62,520    $     68,298
                                                          =================================================
Cash (received) paid for income taxes                       $      (4,074)  $       4,557   $      1,592
                                                          =================================================

</TABLE>


See accompanying notes to consolidated financial statements.

                                      F-9
<PAGE>


                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)

1. Organization

Matrix  Bancorp,  Inc. (the Company) is a unitary thrift  holding  company that,
through  its  subsidiaries,   is  a  diversified   financial   services  company
headquartered  in Denver,  Colorado.  The  Company's  operations  are  conducted
primarily through Matrix Capital Bank (Matrix Bank),  Matrix Financial  Services
Corporation (Matrix Financial),  Matrix Capital Markets,  Inc. (Matrix Capital),
Matrix  Asset  Management  Corporation  (Matrix  Asset  Management),  ABS School
Services,  L.L.C.  (ABS),  Sterling  Trust Company  (Sterling)  and First Matrix
Investment  Services  Corp.  (First  Matrix),  all of  which  are  wholly  owned
subsidiaries of the Company.

Matrix  Bank, a federally  chartered  savings and loan  association,  serves its
local communities of Las Cruces, New Mexico, and Phoenix,  Arizona, by providing
personal  and  business  depository  services,  offering  residential  loans and
providing, on a limited basis, commercial real estate, multi-family and consumer
loans.  During 2002,  Matrix Bank  completed the relocation of its domicile from
Las Cruces to Denver,  Colorado and now offers all existing  banking services in
the Denver market.

The Company's  mortgage banking business is primarily  conducted  through Matrix
Financial,  and was  established  with the  primary  objective  of  originating,
acquiring and servicing  residential mortgage loans. Matrix Financial originates
residential  loans primarily  through its wholesale loan origination  offices in
Atlanta,  Dallas,  Denver,  Houston,  Jacksonville,  Phoenix,  Santa Ana and St.
Louis.  Servicing mortgage loans involves the contractual right to receive a fee
for processing and administering mortgage loan payments.

Matrix Capital Markets provides  brokerage and consulting  services to financial
institutions and financial  services companies in the mortgage banking industry,
primarily  related to the  brokerage and analysis of  residential  mortgage loan
servicing  rights and residential  mortgage  loans,  corporate and mortgage loan
servicing  portfolio  valuations  and,  to a  lesser  extent,  consultation  and
brokerage  services in  connection  with  mergers and  acquisitions  of mortgage
banking entities.

Matrix Asset Management provides real estate management and disposition services
on  foreclosed  properties  owned by financial  service  companies and financial
institutions.

ABS provides  outsourced  business  services and financing  primarily to charter
schools.

Sterling is a non-bank  trust  company  specializing  in the  administration  of
self-directed  individual  retirement  accounts,  qualified business  retirement
plans and personal  custodial  accounts,  as well as corporate escrow and paying
agent services.

First Matrix is registered with the National  Association of Securities  Dealers
as a fully disclosed  broker-dealer.  First Matrix is  headquartered  in Denver,
Colorado and has branch  offices in Fort Worth,  Texas and  Memphis,  Tennessee.
First Matrix offers a wide range of investment  options for both  individual and
institutional  investors,  long term investing and retirement planning,  and the
acquisition,  brokering  and sale of Small  Business  Administration  (SBA) loan
pools.

                                      F-10
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


The  accounting  and  reporting  policies of the  Company  and its  subsidiaries
conform to  accounting  principles  generally  accepted in the United  States of
America.  The following is a description of the more  significant  policies that
the Company  follows in preparing  and  presenting  its  consolidated  financial
statements.

2. Significant Accounting Policies

Basis of Presentation

The accompanying  consolidated  financial statements include the accounts of the
Company  and  its  wholly  owned   subsidiaries.   Inter-company   accounts  and
transactions have been eliminated in consolidation.

Critical Accounting Policies and Estimates

The Company and its subsidiaries have established  various  accounting  policies
which govern the application of accounting  principles generally accepted in the
United States of America in the  preparation  and  presentation of the Company's
consolidated   financial   statements.   Certain  accounting   policies  involve
significant  judgments,  assumptions  and  estimates by  management  that have a
material impact on the carrying value of certain assets and  liabilities,  which
management  considers  to  be  critical  accounting  policies.   The  judgments,
assumptions and estimates used by management are based on historical experience,
knowledge of the accounts and other factors, which are believed to be reasonable
under the circumstances.  Because of the nature of the judgments and assumptions
made by  management,  actual  results  could  differ  from these  judgments  and
estimates,  which could have a material  impact on the carrying values of assets
and liabilities and the results of operations of the Company.

The Company  believes the allowance for loan and valuation  losses is a critical
accounting policy that requires the most significant judgments,  assumptions and
estimates used in  preparation of its  consolidated  financial  statements.  See
further detail in this Note for a detailed  description of the Company's process
and  methodology  related to the allowance for loan and  valuation  losses.  The
Company  also  considers  the  valuation  of mortgage  servicing  rights to be a
critical  accounting policy that requires  judgments,  assumptions and estimates
concerning impairment of their value in certain interest rate environments.  See
further  detail in this Note for a  detailed  discussion  concerning  the use of
estimates  in the  valuation  of mortgage  servicing  rights.  The Company  also
considers  the  judgments and  assumptions  concerning  litigation as a critical
accounting  policy.  The Company has been  notified that we are a defendant in a
number of legal  proceedings,  as  discussed in detail in Note 15. Most of these
cases involve ordinary and routine claims  incidental to our business.  Based on
management's analysis, no accrual for loss has been made as of December 31, 2002
for any such cases. With respect to all pending litigation matters, our ultimate
legal responsibility,  if any, cannot be estimated with certainty.  Based on the

                                      F-11
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


ultimate  outcome of such  proceedings,  it is possible  that future  results of
operations  for any  particular  quarterly or annual  period could be materially
affected by changes in our assumptions related to such proceedings.

The  preparation of the  consolidated  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 amounts of
assets and liabilities at the date of the consolidated financial statements, and
disclosures of contingent  assets and  liabilities  and the reported  amounts of
revenue and expenses  during the reporting  period.  Actual results could differ
from these estimates.  See discussion above regarding estimates used in critical
accounting policy areas.

Certain   reclassifications  have  been  made  to  prior  periods'  consolidated
financial   statements   and  related   notes  to  conform   with  current  year
presentation.

Derivative Instruments and Hedging Activities

The Company,  through its subsidiary  Matrix  Financial,  enters into derivative
transactions  principally  to  protect  against  the  risk of  adverse  price or
interest  rate  movements on the value of certain  assets and  liabilities.  The
Company is also  required to recognize  certain  contracts  and  commitments  as
derivatives when the characteristics of those contracts and commitments meet the
definition of a derivative.

Under the guidelines of Statement of Financial  Accounting  Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Certain Hedging Activities",  as
amended, all derivative  instruments are required to be carried at fair value on
the balance sheet. The Company adopted SFAS 133 on January 1, 2001. The adoption
of SFAS 133 resulted in a pre-tax transition loss of $550,000, or $360,000 after
tax  which  was  recorded  as a  cumulative  effect  of a change  in  accounting
principle for the year ended December 31, 2001. SFAS 133 provides  special hedge
accounting  provisions,  which permit the change in the fair value of the hedged
item related to the risk being hedged to be  recognized  in earnings in the same
period and in the same income  statement line as the change in fair value of the
derivative.

Derivative  instruments  designated in a hedge relationship to mitigate exposure
to  changes  in the  fair  value  of an  asset,  liability,  or firm  commitment
attributable  to a particular  risk,  such as interest rate risk, are considered
fair value  hedges  under  SFAS 133.  Fair value  hedges  are  accounted  for by
recording the fair value of the derivative instrument and the fair value related
to the risk being hedged of the hedged  asset or  liability on the  consolidated
balance  sheets  with   corresponding   offsets  recorded  in  the  consolidated
statements  of  operations.  The  adjustment to the hedged asset or liability is
included in the basis of the hedged item, while the fair value of the derivative
is recorded  as a  freestanding  asset or  liability.  Actual  cash  receipts or
payments and related amounts  accrued during the period on derivatives  included
in a  fair  value  hedge  relationship  are  recorded  as  adjustments  to  loan
origination income recorded on the hedged asset or liability.

                                      F-12

<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


Under fair value  hedges,  derivative  gains and losses not effective in hedging
the  change  in  fair  value  are  recognized  immediately  in the  consolidated
statements  of  operations.  At the  hedge's  inception  and at least  quarterly
thereafter, a formal assessment is performed to determine whether changes in the
fair  values  of the  derivative  instruments  have  been  highly  effective  in
offsetting  changes in the fair values of the hedged  items and whether they are
expected to be highly effective in the future.

The Company  discontinues  hedge accounting  prospectively when it is determined
that the  derivative is no longer  effective in  offsetting  changes in the fair
value of the hedged item,  the  derivative  expires or is sold,  terminated,  or
exercised, the derivative is dedesignated as a hedging instrument, because it is
unlikely that a forecasted  transaction  will occur, a hedged firm commitment no
longer meets the definition of a firm commitment,  or management determines that
designation of the derivative as a hedging instrument is no longer appropriate.

When  hedge  accounting  is  discontinued  because  it is  determined  that  the
derivative no longer  qualifies as an effective  fair-value  hedge,  the Company
continues to carry the derivative on the consolidated balance sheets at its fair
value,  and no longer  adjusts the hedged asset or liability for changes in fair
value. The adjustment of the carrying amount of the hedged asset or liability is
accounted for in the same manner as other  components of the carrying  amount of
that asset or  liability.  When hedge  accounting  is  discontinued  because the
hedged item no longer meets the  definition  of a firm  commitment,  the Company
continues to carry the derivative on the consolidated balance sheets at its fair
value,  removes any asset or liability that was recorded pursuant to recognition
of the firm commitment from the  consolidated  balance sheets and recognizes any
gain or loss in earnings.  In all other  situations in which hedge accounting is
discontinued, the Company continues to carry the derivative at its fair value on
the consolidated balance sheets, and recognizes any changes in its fair value in
operations.

SFAS  133  requires  the  Company  to  record  its  best  effort  and  mandatory
commitments  associated  with its mortgage  loan  origination  activities on the
consolidated  balance sheets.  In order to hedge against the changes in the fair
value of  mortgage  loans,  the Company  enters  into best effort and  mandatory
commitments to deliver  mortgage loans,  which locks the price at which the loan
will be sold into the secondary  market.  These  derivatives are recorded on the
consolidated balance sheets and qualify for hedge accounting, as the commitments
are highly  effective in offsetting  changes in fair values of the hedged items.
The ineffective  portion of a hedge,  which  typically  represents the amount by
which the  derivatives  exceed or is less than the hedged items,  is reported in
the consolidated statements of operations.

Securities Available for Sale

Securities  available  for  sale  include  mortgage-backed  securities  and  SBA
securities.  Securities  available for sale are carried at estimated fair values
with  the  net  unrealized  gains  or  losses  reported  in  accumulated   other
comprehensive income, which is included as a separate component in shareholders'
equity. The Company records its securities  portfolio at estimated fair value at

                                      F-13
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


the end of each quarter  based on public  market  quotes.  At  disposition,  the
realized  gain or loss is included in  operations  on a specific  identification
basis.

Loans Held for Sale

Loans  originated or purchased with the intent for sale in the secondary  market
are carried at the lower of aggregate  cost,  net of discounts or premiums and a
valuation allowance, or estimated fair market value. Estimated fair market value
is  determined  using  forward  commitments  to sell  loans  or  mortgage-backed
securities to permanent investors,  or current market rates for loans of similar
quality and type. Net unrealized  losses,  if any, are recognized in a valuation
allowance by charges to operations.  SFAS No. 91,  "Accounting for Nonrefundable
Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of  Leases,"  requires  discounts  or  premiums  on loans held for sale be
deferred until the related loan is sold. However, the Company accretes discounts
and amortizes premiums related to repayment of loan principal, which is included
in  interest  income.  The  loans  are  primarily  secured  by  1-  to  4-family
residential real estate located throughout the United States.

Loans  are  considered  sold  when  the  Company  surrenders  control  over  the
transferred  assets  to  the  purchaser,   with  standard   representations  and
warranties. At such time, the loan is removed from the loan portfolio and a gain
or loss is recorded on the sale.  Gains and losses on loan sales are  determined
based on the difference  between the allocated cost basis of the assets sold and
the  proceeds,  which  includes  the  estimated  fair  value  of any  assets  or
liabilities  that are  newly  created  as a result  of the  transaction.  Losses
related to  recourse  provisions  are  accrued as a  liability  at the time such
additional losses are determined,  and recorded as part of noninterest  expense.
Losses related to asset quality are recorded  against the allowance for loan and
valuation losses at the time the loss is probable and quantifiable.

Loans Held for Investment

Loans  held for  investment  are  stated at unpaid  principal  balances,  net of
unearned  discounts  and premiums,  deferred  loan fees,  and allowance for loan
losses.   The  loans  are   residential   mortgage  loans,   commercial   loans,
multi-family, SBA loans and school financing loans, and are primarily secured by
real estate.

Allowance for Loan Losses

The allowance for loan losses is calculated,  in part,  based on historical loss
experience. In addition,  management takes into consideration other factors such
as the  size  and  current  risk  characteristics  of the  loan  portfolio,  any
qualitative  evaluations of individual  classified assets,  geographic portfolio
concentrations, new products or markets, regulatory guidance, evaluations of the
changes in the historical  loss  experience  component,  and projections of this
component  into the current and future  periods  based on current  knowledge and
conditions. The loss factors are applied to the outstanding principal balance of
loans in their respective  categories,  plus additional loan review is performed

                                      F-14
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


on all significant  commercial and school finance loans.  After an allowance has
been  established  for the loan  portfolio,  from the factors  described  above,
management evaluates other factors such as trends in loans in foreclosure, loans
in bankruptcy and other relevant factors,  and establishes a valuation allowance
that cannot be associated  with a specific loan or loan  portfolio.  The Company
evaluates its residential loans  collectively due to their  homogeneous  nature.
These factors  include  general  economic  conditions,  recognition  of specific
regional  geographic  concerns,  loan type and trends in portfolio growth.  Loan
losses are charged  against the allowance when the  probability of collection is
considered  remote.  In the opinion of management,  the allowance is adequate to
absorb the inherent losses in the current loan portfolio.

The Company  considers a loan impaired when,  based on current  information  and
events,  it is  probable  that it will be  unable to  collect  all  amounts  due
according to the  contractual  terms of the loan and the recorded  investment in
the loan exceeds its fair value.  Estimated  fair value is measured using either
the present  value of expected  future  cash flows  discounted  using loan rate,
market  price  of the  loan or  fair  value  of the  collateral,  if  collateral
dependent.  All loans considered  impaired are included in nonperforming  loans.
The  Company  evaluates  its  residential   loans   collectively  due  to  their
homogeneous nature. Accordingly, potential impaired loans of the Company include
only commercial loans, real estate  construction  loans,  commercial real estate
mortgage loans,  larger multi-family loans and school financing loans classified
as nonperforming loans.  Impairment  allowances are considered by the Company in
determining the overall adequacy of the allowance for loan losses.

Loans are placed on nonaccrual status when full payment of principal or interest
is in doubt, or generally when they are past due 90 days as to either  principal
or interest,  unless the interest is guaranteed by a creditworthy entity through
recourse  provisions.  Previously  accrued but unpaid  interest is reversed  and
charged against  interest income,  if not  collectible,  and future accruals are
discontinued.  Interest  payments  received on nonaccrual  loans are recorded as
interest income unless there is doubt as to the  collectibility  of the recorded
investment.  In those  cases,  cash  received  is  recorded  as a  reduction  in
principal.

Mortgage Servicing Rights

The Company  recognizes  mortgage  servicing  rights (MSRs) as an asset separate
from the underlying originated mortgage loan at the time of sale. Upon sale of a
loan, the Company  measures  retained MSRs by allocating  the previous  carrying
amount of the originated  mortgage loan between the loan and the servicing right
based on their  relative  estimated  fair values.  Purchased  MSRs are initially
measured  at cost.  MSRs are  carried at the lower of cost  (allocated  cost for
originated MSRs), less accumulated  amortization,  or estimated fair value. MSRs
are amortized in  proportion to and over the period of the estimated  future net
servicing income.

                                      F-15
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


The estimated fair value of MSRs is determined  based on the  discounted  future
servicing   income   stratified   based   on  one  or  more   predominant   risk
characteristics  of the  underlying  loans.  The Company  stratifies its MSRs by
product  type,  interest  rate and  investor  to reflect  the  predominant  risk
characteristics. To determine the estimated fair value of MSRs, the Company uses
a valuation  model that  calculates  the present value of future cash flows.  In
using this valuation  model,  the Company  incorporates  assumptions that market
participants would use in estimating future net servicing income, which includes
estimates of the cost of servicing per loan, including incremental interest cost
of servicer advances,  foreclosure expenses and losses, the discount rate, float
value,  an inflation  rate,  ancillary  income per loan,  prepayment  speeds and
default  rates.  For purposes of performing an impairment  analysis on MSRs, the
Company estimates fair value using the following primary assumptions: prepayment
speeds  ranging from 180 PSA (Public  Securities  Association  prepayment  speed
measurement)  to 1,033 PSA;  discount  rates  ranging from 9.00% to 21.50%;  and
default rates ranging from 0% to 100%. The Company records a valuation allowance
where the  estimated  fair  value is below  the  carrying  amount of  individual
stratifications,  even though the overall fair value of the servicing assets may
exceed  amortized cost. As of December 31, 2002 and 2001, a valuation  allowance
of $14,400,000 and $181,000,  respectively,  was required, and the fair value of
the aggregate MSRs was approximately $63,200,000 and $81,900,000, respectively.

Gain on sale of MSRs is  recorded  when title to MSRs and the risks and  rewards
inherent in owning the MSRs have been transferred to the buyer.

Premises and Equipment

Premises  and  equipment  are  carried  at cost less  accumulated  depreciation.
Depreciation is computed using the straight-line method over the estimated lives
of the assets, which range from 2 to 7 years for software,  office furniture and
equipment and 30 years for buildings.

Foreclosed Real Estate

Residential or commercial real estate acquired through foreclosure, deed in lieu
of  foreclosure  or in judgment is carried at the lower of estimated fair value,
less  estimated  costs to  sell,  or the  related  loan  balance  at the date of
foreclosure.   Valuations  are  periodically  performed  by  management  and  an
allowance  for loss is  established  by a charge to  operations  if the carrying
value of a property  exceeds its estimated fair value,  less estimated  costs to
sell.

Income Taxes

The Company and its subsidiaries file consolidated  federal and state income tax
returns.  The subsidiaries are charged for the taxes applicable to their profits
calculated  on the basis of filing  separate  income tax  returns.  Matrix  Bank
qualifies as a savings and loan association for income tax purposes.


                                      F-16
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


The Company uses the asset and liability  method in accounting for income taxes.
Under this method,  deferred tax assets and liabilities are determined  based on
differences between financial reporting and tax basis of assets and liabilities,
and are  measured  using the  enacted  tax rates and laws that will be in effect
when the differences are expected to reverse.

Loan Administration Income

Loan administration  income represents service fees and other income earned from
servicing loans for various  investors,  as well as gains from the sale of loans
bought out of our Ginnie Mae servicing  portfolio and  subsequently  sold.  Loan
administration  income  includes  service  fees that are based on a  contractual
percentage  of the  outstanding  principal  balance  plus  late  fees and  other
ancillary charges. Service fees on loans and all other income is recognized when
the related payments are received.

Brokerage Income

Brokerage  income  represents  fees  earned  related  to third  party  servicing
brokerage and consulting  services  performed  pertaining to mortgage  servicing
rights, as well as brokerage income from whole loan activities, retail and fixed
income  activities  and SBA trading fees.  Brokerage  income is recognized  when
services are performed.

Trust Services Income

Trust services income  represents  fees earned related to services  provided for
self-directed individual retirement accounts, qualified benefit plans and escrow
arrangements.  Trust services  income is recognized  over the contract period in
proportion to when the services are performed.

Real Estate Disposition Services Income

Real estate  disposition  services income represents fees earned related to real
estate  management  and  disposition  services  provided to others.  Real estate
disposition services income is recognized when services are performed.

Loan Origination Income

Loan  origination  income for loans  originated  for sale,  which  includes  all
mortgage    origination   fees,    secondary    marketing   activity   including
servicing-released  premiums and  capitalized  servicing on mortgage loans sold,
servicing retained, net of outside origination costs, is recognized as income at
the time the loan is sold and funded by the investor.

Loan  origination  income for loans  originated for  investment,  which includes
mortgage  origination  fees  and  certain  direct  costs  associated  with  loan
originations,  is  deferred  and  amortized  as  a  yield  adjustment  over  the
contractual  life of the related  loan using the interest  method,  adjusted for
estimated prepayments.


                                      F-17
<PAGE>


                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


School Services Income

School services income represents fees earned related to outsourced business and
consulting  services  provided to schools.  School services income is recognized
when services are performed.

Stock-Based Compensation

See    discussion    of   SFAS   No.   148,    "Accounting    for    Stock-Based
Compensation--Transition  and Disclosure,"  under this Note,  Impact of Recently
Issued Accounting Standards.

At December  31, 2002,  the Company has one  stock-based  employee  compensation
plan,  which  is  described  more  fully  in Note 14.  We  apply  the  intrinsic
value-based  method of  accounting  prescribed by  Accounting  Principles  Board
("APB") Opinion No. 25,  "Accounting for Stock Issued to Employees."  Under this
method,  compensation  expense  is  recorded  on the date of  grant  only if the
current market price of the underlying  stock exceeded the exercise price.  SFAS
123,  "Accounting  for  Stock-Based  Compensation"  established  accounting  and
disclosure  requirements  using a fair  value-based  method  of  accounting  for
stock-based employee  compensation plan. As allowed by SFAS 123, we have elected
to continue to apply the intrinsic  value-based  method of accounting  described
above, and have adopted the disclosure requirements of SFAS 123. Accordingly, we
do not recognize  compensation  expense for our  stock-based  plan, as we do not
issue  options at  exercise  prices  below the  market  value at the date of the
grant.  Had  compensation   cost  for  our  stock-based  plans  been  determined
consistent  with SFAS No. 123, our net (loss) income and (loss) income per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>

                                                                    Year ended December 31,
                                                            2002             2001              2000
                                                     ------------------------------------------------------
                                                         (Dollars in thousands except per share data)
<S>                                                   <C>                <C>                 <C>

Net (loss) income:
   As reported                                        $        (3,952)   $        8,512      $      4,258
   Deduct: Total stock-based employee compensation
   expense determined under fair value based method
   for awards, net of related tax effects                        (358)            (307)             (278)
                                                     ------------------------------------------------------
   Pro forma                                          $        (4,310)   $        8,205      $      3,980
                                                     ======================================================
(Loss) Income per share:
   Basic, as reported                                 $         (0.61)   $         1.31      $       0.63
                                                     ======================================================
   Basic, pro forma                                   $         (0.67)   $         1.26      $       0.59
                                                     ======================================================
   Diluted, as reported                               $         (0.61)   $         1.30      $       0.63
                                                     ======================================================
   Diluted, pro forma                                 $         (0.67)   $         1.25      $       0.59
                                                     ======================================================
</TABLE>

                                      F-18
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


Cash and Cash Equivalents

Cash  equivalents,  for purposes of the  consolidated  statements of cash flows,
consist of nonrestricted cash, federal funds sold and interest-earning  deposits
with banks with original maturities, when purchased, of three months or less.

Net (Loss) Income Per Common Share

Basic  (loss)  income per common  share (EPS) is computed by dividing net (loss)
income by the  weighted  average  number of common  shares  outstanding  for the
period.  Net income per common share  assuming  dilution is computed by dividing
net income by the weighted  average number of common shares  outstanding for the
year and the effect of potentially dilutive securities such as stock options and
warrants  outstanding for the year. Due to the net loss in 2002, the potentially
dilutive  securities  have not been used in the  calculation of diluted loss per
share for the year ended December 31, 2002.

Restructuring Charges and Gain on Sale of Building

During the second quarter of 2001, the Company  announced a plan to relocate the
domicile  of Matrix  Bank to  Denver,  Colorado  from Las  Cruces,  New  Mexico.
Associated with this  relocation,  the Company accrued expenses of approximately
$984,000 in 2001  primarily for  severance  and contract  benefits to be paid to
certain of Matrix Bank's employees, mainly consisting of back office, accounting
and human resources personnel.  Additionally, the accrued liability included the
payout  of the  contract  Matrix  Bank had with its  prior  president  and chief
executive  officer.  As of  December  31,  2002,  approximately  $233,000 of the
liability  remains which  management  believes  payment is probable  through May
2004. The expense was charged to other general and administrative expense on the
consolidated  statement of operations in 2001.  The  relocation was completed in
the  second  quarter  of 2002 with the  opening  of Matrix  Bank  operations  in
downtown  Denver in the  Matrix  Financial  Center,  a building  acquired  by an
operating  subsidiary of Matrix Bank, which purchase was completed in June 2002.
Matrix Financial Center was acquired to replace the original building  purchased
by Matrix Bank for approximately $11.5 million in June 2001.  Subsequent to that
acquisition,  Matrix  Bank was  notified of the intent of the City and County of
Denver to condemn the building in connection  with its planned  expansion of the
Denver  Convention  Center.  In October 2001, the condemnation  proceedings were
held.  The City and County of Denver was granted  possession  of the building in
consideration  of a  payment  totaling  approximately  $14.9  million.  The sale
resulted  in a $3.4  million  pre-tax  gain on sale of  assets  recorded  in the
consolidated financial statements for the year ended December 31, 2001.

Associated  with the purchase of Matrix  Financial  Center,  Matrix  Bancorp and
certain  subsidiaries  with various  leased office space  throughout  the Denver
metropolitan  area have or will be moving their  offices  into Matrix  Financial
Center.  Associated  with this move,  the Company  recorded a pre-tax  charge of
$700,000 in other  general and  administrative  expenses  during June 2002.  The
charge represents the excess of costs to be incurred on original leased space in

                                      F-19
<PAGE>


                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


excess of expected  revenues on subleasing of the space or terminating  original
lease commitments.  Moving expenses  associated with the relocation are included
in other  general and  administrative  expenses for the year ended  December 31,
2002. Final relocations are anticipated to be completed in the second quarter of
2003.

Investment in Joint Venture

The  Company  has a  45%-owned  investment  in  Matrix  Settlement  &  Clearance
Services,  L.L.C.  (MSCS), and in MSCS' wholly owned subsidiary,  MSCS Financial
Services,  L.L.C.,  which  is  accounted  for  using  the  equity  method.  This
investment was classified in other assets,  and had a carrying value of $802,000
and $589,000 as of December 31, 2002 and 2001, respectively. For the years ended
December  31,  2002,  2001 and 2000,  the Company  recorded  income  (losses) of
$213,000,  $(175,000) and $(478,000),  respectively,  in other income related to
MSCS consolidated operations.

As of  December  31,  2002 and 2001,  MSCS had total  assets of  $3,362,000  and
$1,626,000;  total  liabilities  of  $1,709,000  and  $499,000;  and  equity  of
$1,653,000 and $1,127,000,  respectively. For the years ended December 31, 2002,
2001 and 2000, MSCS had revenues of $7,714,000,  $3,517,000 and $1,470,000;  and
pre-tax income (loss) of $475,000, $(388,000) and $(955,000), respectively.

Fair Value of Financial Instruments

The Company  determines  the fair value of financial  instruments as required by
SFAS No.  107,  "Disclosures  about Fair Value of  Financial  Instruments."  The
amounts  disclosed  represent  the  Company's  best  estimate  of fair  value of
financial instruments required to be disclosed under the Statement.  The Company
also has disclosed the methods and significant  assumptions used to estimate the
fair value of its financial instruments.

Impact of Recently Issued Accounting Standards

In November 2002, the Financial  Accountings  Standards Board (FASB) issued FASB
Interpretation  No.  45  (FIN  45),   "Guarantor's   Accounting  and  Disclosure
Requirements for Guarantees,  Including  Indirect  Guarantees of Indebtedness of
Others." This  interpretation  expands the disclosures to be made by a guarantor
in its financial  statements about its obligations under certain  guarantees and
requires  the  guarantor  to  recognize  a  liability  for the fair  value of an
obligation assumed under a guarantee.  FIN 45 clarifies the requirements of SFAS
5, "Accounting for Contingencies,"  relating to guarantees.  In general,  FIN 45
applies to contracts or indemnification agreements that contingently require the
guarantor  to make  payments  to the  guaranteed  party  based on  changes in an
underlying  that is related to an asset,  liability,  or equity  security of the
guaranteed  party.  Certain  guarantee  contracts  are  excluded  from  both the
disclosure and recognition requirements of this interpretation, including, among
others, guarantees relating to employee compensation,  residual value guarantees

                                      F-20
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


under  capital  lease   arrangements,   commercial   letters  of  credit,   loan
commitments, subordinated interests in an special purpose entity, and guarantees
of a company's own  performance.  Other guarantees are subject to the disclosure
requirements of FIN 45 but not to the recognition  provisions and include, among
others, a guarantee  accounted for as a derivative  instrument under SFAS 133, a
parent's  guarantee  of debt  owed to a third  party by its  subsidiary  or vice
versa,  and a guarantee which is based on performance not price.  The disclosure
requirements  of FIN 45 are  effective  for the Company as of December 31, 2002,
and require  disclosure of the nature of the  guarantee,  the maximum  potential
amount of future payments that the guarantor could be required to make under the
guarantee,  and the current amount of the liability, if any, for the guarantor's
obligations under the guarantee.  The recognition  requirements of FIN 45 are to
be applied  prospectively  to guarantees  issued or modified  after December 31,
2002.  Significant  guarantees  that have been  entered  into by the Company are
disclosed in Note 15. The Company does not expect the  requirements of FIN 45 to
have a material impact on the consolidated financial statements.

In  January  2003,  the  FASB  issued  FASB  Interpretation  No.  46  (FIN  46),
"Consolidation of Variable Interest Entities." This interpretation of Accounting
Research  Bulletin  No.  51,  Consolidated   Financial   Statements,   addresses
consolidation by business  enterprises of variable interest  entities  (selected
entities  with  related  contractual,   ownership,   voting  or  other  monetary
interests,  including  certain special purpose  entities),  and requires certain
additional  disclosure with respect to these entities.  The provisions of FIN 46
are immediately  applicable to variable  interest entities created after January
31, 2003 and for entities  that existed  prior to February 1, 2003.  The Company
does not expect  the  requirements  of FIN 46 to have a  material  impact on the
consolidated financial statements.  The disclosure requirements,  as applicable,
are included in our consolidated financial statements and notes hereto.

In June 2001,  the FASB  issued  SFAS No. 142,  "Goodwill  and Other  Intangible
Assets,"  that  supersedes  APB Opinion  No. 17.  Under SFAS 142,  goodwill  and
intangible assets deemed to have indefinite lives are no longer  amortized,  but
are to be reviewed at least annually for impairment, under impairment guidelines
established in the statement. SFAS 142 also changes the amortization methodology
in  intangible  assets that are deemed to have finite lives and adds to required
disclosures  regarding goodwill and intangible assets. SFAS 142 is effective for
fiscal years  beginning after December 15, 2001. The Company adopted SFAS 142 on
January  1, 2002 and its  unamortized  balance of  goodwill  as of that date was
$1,004,000.  Beginning in 2002, the Company ceased its amortization of goodwill.
Goodwill  amortization  for 2001 and 2000 was less than $100,000,  respectively.
During the second quarter of 2002, under guidelines  contained in the statement,
management performed an analysis concerning potential impairment of the goodwill
carried at ABS School Services,  and determined that no impairment existed. This
analysis was based on the fact that ABS School Services was engaged in an effort
to increase  the client base and fee income on a national  basis and believed it
would be successful.  During the fourth quarter of 2002, it was determined  that
the efforts were  ultimately not successful in that ABS School  Services was not
able to attract the amount of new  contracts  it had targeted for the new school
year. As such,  the impairment  analysis on the goodwill at ABS School  Services
was  re-performed  in the fourth quarter of 2002, and it was determined  that an

                                      F-21
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


impairment  of  goodwill  was  present,  and  the  entire  goodwill  balance  of
$1,004,000 was written-off in the fourth quarter of 2002. After this charge, the
consolidated goodwill balance at December 31, 2002 was $0.

In June 2002,  the FASB issued SFAS No. 146,  "Accounting  for Costs  Associated
with Exit or Disposal  Activities." SFAS 146 addresses financial  accounting and
reporting for costs  associated  with exit or disposal  activities and nullifies
EITF Issue No. 94-3,  "Liability  Recognition for Certain  Employee  Termination
Benefits and Other Costs to Exit an Activity  (including  Certain Costs Incurred
in a  Restructuring)".  SFAS 146 requires  recognition of a liability for a cost
associated with an exit or disposal activity when the liability is incurred,  as
opposed to being  recognized at the date an entity commits to an exit plan under
EITF  94-3.  SFAS 146 also  establishes  that fair  value is the  objective  for
initial measurement of the liability. SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002, with earlier  application
encouraged.  The adoption of SFAS 146 on January 1, 2003 did not have a material
impact on the consolidated financial statements.

In  October  2002,  the FASB  issued  SFAS No.  147,  "Acquisitions  of  Certain
Financial  Institutions,  an  amendment  to SFAS No.  72,  SFAS No. 144 and FASB
Interpretation  No. 9." In accordance  with SFAS 147, the  acquisition of all or
part  of a  financial  institution  that  meets  the  definition  of a  business
combination will be accounted for by the purchase method in accordance with SFAS
141.  In  addition,  SFAS  147  provides  that  long-term  customer-relationship
intangible assets, except for servicing assets, recognized in the acquisition of
a financial institution, should be evaluated for impairment by the provisions of
SFAS 144. The effective date of SFAS 147 is for acquisitions on or after October
1,  2002.  The  adoption  of SFAS 147 on October 1, 2002 did not have a material
impact on the consolidated financial statements.

In  December  2002,  the FASB  issued  SFAS  148,  "Accounting  for  Stock-Based
Compensation - Transition and Disclosure."  This amendment to FASB Statement No.
123 provides  alternative  methods of transition  for a voluntary  change to the
fair value based method of accounting for stock-based employee compensation.  In
addition,  this statement  amends the disclosure  requirements of FASB Statement
No. 123 to require  prominent  disclosures in both annual and interim  financial
statements about the method of accounting for stock-based employee  compensation
and the effect of the method used on reported  results.  The  provisions of this
statement are effective  for financial  statements of interim or annual  periods
after December 15, 2002. The Company does not intend to change to the fair value
method of accounting.  The required  disclosures are included in the Stock-Based
Compensation section of this note.

3. Subsequent Event  - Sale of Wholesale Production Platform

On  February  28,  2003,  Matrix  Capital  Bank and  Matrix  Financial  Services
Corporation   entered  into  a  Purchase  and  Assumption   Agreement  (Purchase
Agreement) to sell  substantially  all of Matrix  Financial's  assets associated
with its  wholesale  mortgage  origination  platform  (Platform).  The purchaser
(Buyer)  is  a  newly  formed   corporation   whose   principals  are  long-time
participants  in the  mortgage  banking  industry.  The Company  intends for the
foreseeable future to retain Matrix  Financial's  servicing platform and operate

                                      F-22
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


it in the ordinary  course of business.  Included in the sale are the  wholesale
production offices, the back office personnel that process the loan originations
and a significant portion of the corporate  operations and personnel.  After the
sale, our remaining  operations will primarily consist of our mortgage servicing
platform and a limited amount of corporate personnel and operations.

The  following  discussion is a summary of the terms of the sale of the Platform
and is not intended to be complete. For a more complete description of the terms
of the  Purchase  Agreement,  the  reader  is  invited  to review  the  Purchase
Agreement, which is filed as an exhibit to the Annual Report on Form 10-K.

The Buyer is not yet licensed to engage in any mortgage banking activities under
state or federal  law. It is  anticipated  that it will take  approximately  six
months  for the Buyer to obtain the  necessary  licensing.  Accordingly,  Matrix
Financial,  Matrix Bank and the Buyer desired to structure the  transaction in a
manner that transferred substantially all the economic risks and benefits of the
operation of the Platform  during the Transition  Period  (defined below) to the
Buyer,  while at the same time having Matrix  Financial and Matrix Bank maintain
continuous  effective control over the operations of the Platform for regulatory
purposes. The Purchase Agreement, therefore,  contemplates a two-staged closing.
The first  closing  (Initial  Closing  Date)  occurred on the date the  Purchase
Agreement was signed and is the effective date for the sale of the fixed assets,
and the final or second  closing  (Final  Closing  Date)  will  occur six months
following the Initial  Closing Date.  The period of operation of the Platform in
between the Initial  Closing  Date and the Final  Closing Date is referred to as
the "Transition Period."

As Matrix  Financial  will  maintain  effective  control at all times during the
Transition Period,  Matrix Financial will continue to be an operating subsidiary
of Matrix Bank. The Platform will be operated,  for accounting purposes,  during
the Transition Period as a division of Matrix Financial.

On the  Initial  Closing  Date,  the Buyer  purchased  substantially  all of the
tangible personal property and intangible property associated with the Platform.
The Buyer additionally will take the transfer and assignment of certain contract
rights,  real property leases and equipment leases from Matrix Financial as soon
as the necessary consents have been obtained.

The parties  intend for the Final  Closing Date to occur within six months after
the Initial Closing Date. At that time, the Buyer will purchase any tangible and
intangible  personal  property  of the  Platform  that is  acquired  during  the
Transition Period in the ordinary course of business or otherwise  inadvertently
not purchased on the Initial Closing Date (the "Subsequently  Acquired Assets"),
as well as  Matrix  Financial's  loan  files,  pipeline  applications  and sales
commitments.  Due to the fact  the  Matrix  Financial  will  maintain  effective
control of the operation,  the effective sale date for accounting  purposes will
be the Final Closing Date.


                                      F-23
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)



The purchase price is determined as follows:

     o    The Asset  Payment  Amount  (as  defined in the  Agreement),  which is
          approximately  $3,000,000  in payment for the tangible and  intangible
          assets of the Platform as of the Initial Closing Date; plus
     o    The  Subsequently  Acquired  Assets  Payment Amount (as defined in the
          Agreement),  which is the  book  value  of the  Subsequently  Acquired
          Assets as of the Final Closing Date; plus
     o    The  Production  Premium  (as  defined  in the  Agreement),  which  is
          generally 20 basis points times the original  principal balance of all
          loans  originated  during the 12 months  following the Initial Closing
          Date at the Matrix  Financial  loan  production  offices  purchased by
          Buyer.  The  Production  Premium is  "floored"  at  $4,900,000  and is
          "capped" at $9,100,000 plus;
     o    The  Aggregate  Locked  Loan  Profitability  Amount (as defined in the
          Agreement),  which pays Matrix Financial one-half of the profit over a
          specified  threshold  amount (the threshold  being  generally 30 basis
          points) on loans that fund after the Initial  Closing  Date which have
          resulted from its locked pipeline as of the Initial Closing Date; plus
          or minus
     o    The Transition Period Gain or Loss (as defined in the Agreement).  The
          Transition  Period Gain or Loss is a mechanism  that  provides  for an
          approximation  of the accounting for the  transaction as if the entire
          sale and transfer occurs on the Initial Closing Date. For example,  if
          the Platform  generates a loss during the first month of the six-month
          Transition  Period,  then the Buyer is  required  to fund such loss by
          paying the loss into an escrow account.  And if the Platform generates
          a profit  during the first month of the six-month  Transition  Period,
          then  Matrix  Financial  is required to pay such profit into an escrow
          account.

On the Initial  Closing  Date,  the Buyer and Matrix  Financial  established  an
escrow  account (the  "Escrow")  with an Escrow Agent to act as a repository for
the escrow amounts  described  above and certain other payments  contemplated by
the Purchase  Agreement.  On the Initial  Closing Date, the Buyer deposited into
the Escrow $3.5 million as an advance  against the  Production  Premium and paid
directly to Matrix Financial one-half of the Asset Payment Amount.

On the Final  Closing  Date,  the Buyer will pay Matrix  Financial the remaining
one-half  of the Asset  Payment  Amount and will pay Matrix  Financial  the book
value of the Subsequently Acquired Assets.

The  Production  Premium will be paid over the 12 months  following  the Initial
Closing Date and the  Aggregate  Locked Loan  Profitability  Amount will be paid
over the 2 months following the Initial Closing Date.

The Company  estimates  that the aggregate  sales price for the Platform will be
between $8,000,000 and $13,000,000.

During the six-month  Transition  Period,  Matrix Financial will lease-back from
the Buyer the  tangible  and  intangible  assets that have been  transferred  to
Buyer, including any contract rights, real property leases and equipment leases.


                                      F-24
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


The operations of the Platform  during the six-month  Transition  Period will be
governed  by the terms of an  Operating  Plan,  which is  incorporated  into the
Purchase Agreement. The Operating Plan requires Matrix Financial to, among other
things, continue to operate the Platform substantially in the manner in which it
currently  operates and in conformity with its current  policies and procedures.
Any changes to the  Operating  Plan must be approved in advance by an  Executive
Committee  consisting of the following three  individuals:  (a) the President of
Matrix Bank, (b) the President of Matrix Financial,  and (c) another  individual
selected by the Board of Directors of Matrix  Financial.  By  establishing  this
structure,  the  Company  believes it will be able to  maintain  for  regulatory
purposes  continuous  effective  control over the Platform  during the six-month
Transition Period.

Currently,  Matrix Bank provides a warehouse line for  substantially  all of the
loans originated by the Matrix Financial production platform. As of December 31,
2002, the balance of the warehouse line was  $458,900,000.  During the six-month
Transition  Period,  it is  contemplated  that that Matrix Bank will continue to
provide a warehouse  line to the Platform under similar terms that existed prior
to the sale. At the end of the Transition  Period, the Buyer will be required to
utilize third party  financings to fund new  originations and the warehouse line
will be  required  to be  paid-off  within 60 days after the  completion  of the
Transition Period.

For a period of two years from the Initial Closing Date,  Matrix Bank has agreed
that neither Matrix Bank nor any of its affiliates  will engage in,  directly or
indirectly,  the single-family retail or wholesale mortgage origination business
in those states in which the acquired  division operates or is located as of the
Initial  Closing Date.  However,  this  non-compete  provision does not prohibit
Matrix  Bank or their  affiliates  from  engaging  in such  business in order to
comply with applicable law, rule, regulation, directive, agreement or order from
the Office of Thrift  Supervision  (OTS) or other party where it is necessary to
resolve  regulatory  or  supervisory  concerns.  Additionally,  the  non-compete
provision  does not apply in the event of a change in control of the Matrix Bank
or the Company.

The Purchase  Agreement  requires  Matrix Bank to guarantee  Matrix  Financial's
obligations under the Purchase Agreement if certain events occur, such as Matrix
Financial's  bankruptcy,  failure to  maintain a minimum  net worth,  or loss of
voting control of Matrix Financial.


                                      F-25
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


4. Net (Loss) Income Per Share

The following  table sets forth the  computation  of basic net (loss) income per
share and net (loss) income per share, assuming dilution:
<TABLE>
<CAPTION>

                                                                  Years Ended December 31,
                                                          2002             2001              2000
                                                   -------------------------------------------------------
                                                                   (Dollars in thousands)
<S>                                                <C>                  <C>               <C>

Numerator:
   Net (loss) income available to shareholders     $         (3,952)    $       8,512     $      4,258
                                                   =======================================================

Denominator:
   Weighted average shares outstanding-basic              6,462,272         6,495,583        6,713,251
Effect of dilutive securities:
   Common stock options                                           -            64,871           35,606
   Common stock warrants                                          -                 -                -
                                                   -------------------------------------------------------
Dilutive potential common shares                                  -            64,871           35,606
                                                   -------------------------------------------------------
Denominator for net (loss) income per share,
   assuming dilution                                      6,462,272         6,560,454        6,748,857
                                                   =======================================================

</TABLE>

For the year ended  December  31,  2002,  there were  90,702  stock  options and
warrants outstanding which are potentially convertible to common stock. Assuming
conversion at the beginning of 2002, the aggregate weighted average shares would
be 6,552,974.  These securities are  anti-dilutive  due to the net loss in 2002;
therefore,  these  potentially  dilutive  securities  have not been  used in the
calculation of diluted loss per share for the year ended December 31, 2002.

5. Securities Available for Sale

Securities available for sale were as follows:
<TABLE>
<CAPTION>

                                           December 31, 2002                     December 31, 2001
                                 ----------------------------------------------------------------------------
                                                 Gross                                 Gross
                                  Amortized   Unrealized    Estimated    Amortized   Unrealized  Estimated
                                     Cost        Gains     Fair Value      Cost        Gains     Fair Value
                                 ----------------------------------------------------------------------------
                                                                (In thousands)
<S>                               <C>             <C>         <C>        <C>            <C>      <C>

Mortgage-backed securities        $    1,046      $  40       $ 1,086    $   1,961      $  38    $ 1,999
SBA securities                        27,987          -        27,987        4,964          -      4,964
                                 ----------------------------------------------------------------------------
Total                             $   29,033      $  40       $29,073    $   6,925      $  38    $ 6,963
                                 ============================================================================
</TABLE>

The Company  expects to receive  payments on  securities  over  periods that are
considerably  shorter than the contractual  maturities of the securities,  which
range  from 6 to 30 years,  due to  prepayments.  Realized  gains on the sale of
securities available for sale were approximately $78,000,  $1,198,000 and $0 for
the years ended December 31, 2002, 2001 and 2000, respectively.

                                      F-26
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)



6. Loans Held for Sale and Investment

Loans Held for Investment

Loans held for investment consist of the following:
<TABLE>
<CAPTION>
                                                                                    December 31,
                                                                                2002             2001
                                                                          ----------------------------------
                                                                                   (In thousands)
<S>                                                                       <C>                 <C>

Residential loans                                                         $         54,420    $       6,833
Multi-family, commercial real estate, SBA guaranteed commercial                    196,556          147,038
Construction loans                                                                  34,175           35,510
Consumer loans and other                                                             4,313            5,431
Premium (discounts), net                                                               570             (361)
Unearned fees                                                                         (699)            (514)
                                                                          ----------------------------------
                                                                                   289,335          193,937
Less:
   Allowance for loan and valuation losses                                           3,444            2,776
                                                                          ----------------------------------
Loans held for investment, net                                            $        285,891   $      191,161
                                                                          ==================================
</TABLE>

Activity  in the  allowance  for loan and  valuation  losses  on loans  held for
investment is summarized as follows:
<TABLE>
<CAPTION>

                                                             Years Ended December 31,
                                                     2002              2001             2000
                                               -----------------------------------------------------
                                                                  (In thousands)
<S>                                                 <C>               <C>           <C>

Balance at beginning of year                        $   2,776         $   2,107     $        1,433
Provision for loan and valuation losses                 1,700             1,821              1,508
Charge-offs                                            (1,127)           (1,235)              (874)
Recoveries                                                 95                83                 40
                                               -----------------------------------------------------
Balance at end of year                              $   3,444         $   2,776     $        2,107
                                               =====================================================
</TABLE>

Loans Held for Sale

Loans held for sale consist of the following:
<TABLE>
<CAPTION>

                                                                               December 31,
                                                                          2002              2001
                                                                    ------------------------------------
                                                                              (In thousands)
<S>                                                                  <C>              <C>

Residential loans                                                       $    941,256     $  1,042,556
SBA guaranteed commercial loans, school financing and other                  163,160          107,482
Purchase premiums, net                                                         9,409            6,063
                                                                    ------------------------------------
                                                                           1,113,825        1,156,101
Less:
   Allowance for loan and valuation losses                                     5,899            6,562
                                                                    ------------------------------------
Loans held for sale, net                                                $  1,107,926     $  1,149,539
                                                                    ====================================

</TABLE>

                                      F-27
<PAGE>


                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


Activity in the allowance  for loan and valuation  losses on loans held for sale
is summarized as follows:
<TABLE>
<CAPTION>
                                                          Years Ended December 31,
                                                   2002              2001             2000
                                            ------------------------------------------------------
                                                                 (In thousands)
<S>                                               <C>               <C>           <C>

Balance at beginning of year                      $   6,562         $   6,474     $        4,921
Provision for loan losses                              1,121             1,159             2,727
Charge-offs                                           (1,871)           (1,075)           (1,175)
Recoveries                                                87                 4                 1
                                            ------------------------------------------------------
Balance at end of year                            $    5,899        $    6,562    $        6,474
                                            ======================================================
</TABLE>

The following lists information related to nonperforming loans held for sale and
held for investment:
<TABLE>
<CAPTION>
                                                                         December 31,
                                                                     2002             2001
                                                              ------------------------------------
                                                                        (In thousands)

<S>                                                                 <C>              <C>

Loans on nonaccrual status in the held for investment
   portfolio                                                        $  11,604        $  13,760
Loans on nonaccrual status in the held for sale portfolio              19,214           23,491
                                                              ------------------------------------
Total nonperforming loans                                           $  30,818        $  37,251
                                                              ====================================
Interest  income that would have been  recognized  at
   original contract terms                                           $    916        $   1,374
                                                              ====================================
</TABLE>

The Company continues to accrue interest on  government-sponsored  loans such as
Federal Housing Administration (FHA) insured and Department of Veterans' Affairs
(VA) guaranteed loans which are past due 90 or more days, as the majority of the
interest on these loans is insured or guaranteed by the federal government.  The
aggregate unpaid principal balance of  government-sponsored  accruing loans that
were past due 90 or more days was $34,791,000 and $55,200,000 as of December 31,
2002 and 2001, respectively.


                                      F-28
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)



7. Premises and Equipment

Premises and equipment consist of the following:
<TABLE>
<CAPTION>

                                                                         December 31,
                                                                     2002             2001
                                                              ------------------------------------
                                                                        (In thousands)
<S>                                                                 <C>               <C>

Land                                                                $    3,520        $      830
Buildings                                                               13,987             6,324
Leasehold improvements                                                   2,992             1,667
Office furniture and equipment                                          20,513            15,162
                                                              ------------------------------------
                                                                        41,012            23,983
Less accumulated depreciation                                           13,307            10,352
                                                              ------------------------------------
Premises and equipment, net                                         $   27,705        $   13,631
                                                              ====================================
</TABLE>

Included in occupancy and equipment expense is depreciation  expense of premises
and equipment of  approximately  $3,478,000,  $2,797,000  and $2,212,000 for the
years ended December 31, 2002, 2001 and 2000, respectively.

8. Mortgage Servicing Rights

The activity in the MSRs is summarized as follows:
<TABLE>
<CAPTION>

                                                                 Years Ended December 31,
                                                          2002             2001              2000
                                                   ------------------------------------------------------
                                                                      (In thousands)
<S>                                                     <C>              <C>               <C>

Mortgage servicing rights
  Balance at beginning of year                          $   78,893       $   71,529        $   63,479
  Purchases                                                      -              530            31,883
  Originations                                              34,511            30,129              16
  Amortization                                             (24,176)          (21,862)          (9,851)
  Sales                                                     (9,994)           (1,433)         (13,998)
                                                   ------------------------------------------------------
  Balance before valuation allowance at
    end of year                                             79,234            78,893           71,529
                                                   ------------------------------------------------------

Valuation allowance for impairment of mortgage
   servicing rights
  Balance at beginning of year                                (181)                -                -
  Additions                                                (14,219)             (181)               -
                                                   ------------------------------------------------------
  Balance at end of year                                   (14,400)             (181)               -
                                                   ------------------------------------------------------
Valuation allowance for foreclosure costs                   (1,634)               -                 -
                                                   ------------------------------------------------------
Mortgage servicing rights, net                          $   63,200       $   78,712        $   71,529
                                                   ======================================================
</TABLE>

                                      F-29
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


The  Company's  servicing  activity  is  diversified  throughout  50 states with
concentrations at December 31, 2002, in California,  Texas, Missouri and Arizona
of  approximately  15%,  14%,  15% and 10%,  respectively,  based  on  aggregate
outstanding  unpaid  principal  balances of the mortgage loans  serviced.  As of
December 31, 2002,  2001 and 2000, the Company  subserviced  loans for others of
approximately $26,613,000, $889,000,000 and $1,163,811,000, respectively.

The Company's servicing portfolio (excluding  subserviced loans) is comprised of
the following:
<TABLE>
<CAPTION>

                                                            December 31,
                                                 2002                          2001
                                    --------------------------------------------------------------
                                                     Principal                      Principal
                                       Number         Balance         Number         Balance
                                      of Loans      Outstanding      of Loans      Outstanding
                                    --------------------------------------------------------------
                                                      (Dollars in thousands)
<S>                                      <C>      <C>                  <C>       <C>

Freddie Mac                               9,027   $       417,583      12,422    $       613,527
Fannie Mae                               27,678         1,832,276      31,069          1,885,197
Ginnie Mae                               25,453         1,823,706      26,718          1,820,691
VA, FHA, conventional and other
   loans                                 13,489         1,260,062      15,946          1,336,950
                                    --------------------------------------------------------------
Total servicing portfolio                75,647   $    5,333,627       86,155    $    5,656,365
                                    ==============================================================
</TABLE>

The Company's  custodial escrow balances shown in the accompanying  consolidated
balance sheets at December 31, 2002 and 2001, pertain to payments held in escrow
in  respect  of taxes and  insurance  and the float on  principal  and  interest
payments on loans serviced and owned by the Company.  The custodial accounts are
maintained at Matrix Bank in  noninterest-bearing  accounts.  The balance of the
custodial  accounts  fluctuates from month to month based on the pass-through of
the principal and interest payments to the ultimate  investors and the timing of
taxes and insurance payments.

The  estimated  aggregate  amortization  of our  MSR's for each of the next five
years ending  December  31,  2003,  2004,  2005,  2006 and 2007 is  $17,523,000,
$13,966,000,  $10,362,000,  $7,759,000, $5,935,000,  respectively. The estimated
amortization  is based on several  assumptions  as of December 31, 2002 with the
most  significant  being the  anticipated  prepayment  speeds of the  underlying
mortgages.  It is  reasonably  possible  the  actual  repayment  speeds  of  the
underlying  mortgage  loans may differ  materially  from the estimate  repayment
speed, and thus, the actual amortization may be significantly different than the
amounts estimated.



                                      F-30
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)



9. Deposits

Deposit account balances are summarized as follows:
<TABLE>
<CAPTION>

                                                            December 31,
                                             2002                                  2001
                             ----------------------------------------------------------------------------
                                           Percent of   Weighted                 Percent of   Weighted
                                             Total    Average Rate                 Total    Average Rate
                                Amount      Deposits                  Amount      Deposits
                             ----------------------------------------------------------------------------
                                                          (Dollars in thousands)
<S>                           <C>            <C>           <C>     <C>             <C>           <C>
Passbook accounts             $     5,514      0.59%       1.95%   $     4,291       0.50%       3.12%
NOW accounts                      145,465     15.57        0.48        107,183      12.37        0.94
Money market accounts             334,508     35.82        1.22        249,234      28.77        2.11
                             ----------------------------------------------------------------------------
                                  485,487     51.98        1.02        360,708      41.64        1.74
Certificate accounts              448,470     48.02        3.65        505,527      58.36        5.98
                             ----------------------------------------------------------------------------
Deposits                      $   933,957    100.00%       2.40%   $   866,235     100.00%       4.36%
                             ============================================================================
</TABLE>

Included in NOW accounts are noninterest-bearing DDA accounts of $96,289,000 and
$67,137,000 at December 31, 2002 and 2001, respectively.

Contractual  maturities of  certificate  accounts as of December 31, 2002 are as
follows:
<TABLE>
<CAPTION>

                                         Under 12  months    12 to 36 months   36 to 60 months     Total
                                         ------------------------------------------------------------------
                                                                  (In thousands)
<S>                                          <C>              <C>               <C>           <C>

1.00-1.99%                                   $  210,979       $       -         $     -       $ 210,979
2.00-2.99%                                       91,268           2,813               -          94,081
3.00-3.99%                                       38,151           8,927           1,905          48,983
4.00-4.99%                                        3,991          50,092           9,476          63,559
5.00-5.99%                                        4,345           3,896           8,336          16,577
6.00-6.99%                                        4,070           8,976             447          13,493
7.00-7.99%                                           50             748               -             798
                                         ------------------------------------------------------------------
                                             $  352,854       $  75,452         $20,164       $ 448,470
                                         ==================================================================
</TABLE>

Approximately   $141,278,000   and   $120,428,000  of  fiduciary   assets  under
administration  by Sterling are included in NOW and money market  accounts as of
December 31, 2002 and 2001,  respectively.  Included in certificate accounts are
$327,335,000 and  $361,271,000 of brokered  deposits as of December 31, 2002 and
2001, respectively.

                                      F-31
<PAGE>


                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>

                                                          Years Ended December 31,
                                                   2002              2001             2000
                                            ------------------------------------------------------
                                                               (In thousands)
<S>                                         <C>                  <C>               <C>
Passbook accounts                           $            117     $         108     $         102
NOW accounts                                             570               929               619
Money market                                           3,684             4,291             3,053
Certificates of deposit                               17,125            29,544            22,501
                                            ------------------------------------------------------
Interest expense on deposits                $          21,496    $      34,872     $      26,275
                                            ======================================================
</TABLE>

The aggregate  amount of deposit  accounts with a balance  greater than $100,000
(excluding  brokered deposits) was approximately  $17,769,000 and $22,410,000 at
December 31, 2002 and 2001, respectively.

10. Borrowed Money and Guaranteed Preferred Beneficial Interests

Borrowed money and guaranteed  preferred  beneficial interests are summarized as
follows:
<TABLE>
<CAPTION>

                                                                                           December 31,
                                                                                      2002             2001
                                                                             ----------------------------------
                                                                                         (In thousands)
<S>                                                                             <C>              <C>

Borrowed Money
   $50,000,000   revolving  warehouse  loan  agreement  at  December  31,  2002,
     $120,000,000  at December  31,  2001,  through  April 30,  2003,  renewable
     annually,  secured by mortgage loans held for sale,  interest at LIBOR plus
     1.20%  at  December  31,  2002 and  2001  (2.59%  at  December  31,  2002);
     $40,000,000 available at December 31, 2002                                 $    10,000      $ 95,450
   Senior notes, interest at 11.50% payable semiannually, unsecured and
     maturing September 30, 2004                                                      9,545        10,455
   $8,215,000 note payable to a third party financial institution due
     in quarterly  principal  installments  of $357,000 plus  interest,  through
     December  31,  2004,  collateralized  by the common  stock of Matrix  Bank;
     interest at LIBOR plus 2.65% (4.04% at December 31,
     2002)                                                                            7,501         8,572

                                      F-32
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


   $12,000,000 revolving line of credit to a third party financial
     institution, through March 31, 2003, renewable annually,  collateralized by
     the common  stock of Matrix  Bank;  interest at LIBOR plus 2.65%  (4.04% at
     December 31, 2002); $12,000,000
     available at December 31, 2002                                                      -          3,000
   Note payable with a bank, secured by real estate, interest only at
     7% at December 31, 2002, maturing September 30, 2004                             2,000            -
   School financing repurchase agreements with a third-party bank to
     sell school  financing  originated by the Company under various  agreements
     Interest rates are variable from prime to 8.00%. Total commitment is at the
     discretion of the third-party bank.                                                 -         22,807
   School financing  agreements,  renewable  September 2004 and September  2005,
     collateralized  by school  financing;  interest rates are variable based on
     the BMA mini-swap index. Future commitment is
     at the discretion of the third-party lenders.                                   32,328        22,157
   Other financing agreements                                                            29            91
                                                                                --------------------------
Total borrowed money                                                            $    61,403    $  162,532
                                                                                ==========================

Guaranteed Preferred Beneficial Interests
Matrix  Bancorp  Capital  Trust I, 10% junior  subordinated  debentures  payable
   quarterly, unsecured and maturing September 30, 2029                         $    27,500    $  27,500
Matrix Bancorp Capital Trust II, 10.18% junior  subordinated  debentures payable
   semi-annually, unsecured and maturing June 8, 2031                                12,000       12,000
Matrix Bancorp Capital Trust III, 10.25% junior subordinated  debentures payable
   semi-annually, unsecured and maturing July 25, 2031                               15,000       15,000
Matrix Bancorp  Capital Trust IV, LIBOR plus 3.75% (5.140% at December 31, 2002)
   junior subordinated debentures payable semi-annually,  unsecured and maturing
   December 8, 2031                                                                   5,000        5,000
Matrix Bancorp  Capital Trust V, LIBOR plus 3.625% (5.015% at December 31, 2002)
   junior subordinated debentures payable semi-annually,
   unsecured and maturing January 25, 2032                                            5,000           -
                                                                                --------------------------
Total Guaranteed Preferred Beneficial Interests                                 $    64,500    $  59,500
                                                                                ==========================

</TABLE>

                                      F-33
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


As of  December  31,  2002,  the  maturities  of borrowed  money and  guaranteed
preferred beneficial interest are as follows:

                                                      (In thousands)

2003                                                    $  12,727
2004                                                       30,185
2005                                                       17,744
2006                                                           -
2007                                                           -
Thereafter                                                 65,247
                                                        -----------
                                                        $ 125,903
                                                        ===========

The Company must comply with certain  financial and other  covenants  related to
the foregoing debt agreements including,  among other things, the maintenance of
specific  ratios,  net  income,  net worth and other  amounts  as defined in the
credit  agreements,  limiting the  Company's  and its  subsidiaries'  ability to
declare dividends or incur additional debt, and requirements to maintain certain
capital levels in certain subsidiaries. These covenants include requirements for
the  Company  to  maintain  "consolidated  tangible  capital"  of not less  than
$60,000,000,  Matrix Bank to maintain  "classified  assets" of not greater  than
three  percent,  Matrix Bank to earn not less than $7.5  million  over the prior
four  quarters,  and maintain the  requirements  necessary such that Matrix Bank
will not be classified as other than "well  capitalized," all as defined.  As of
December 31, 2002, the Company exceeded two of the covenant requirements: Matrix
Bank's classified assets under definition were 3.15%, and Matrix Bank's earnings
over the prior four quarters were less than $7.5 million. Matrix Bank received a
wavier on both covenants  subsequent to December 31, 2002. At December 31, 2002,
the Company was in compliance with the other covenants  described  above. We are
in the process of renewing the revolving  line of credit.  As part of the annual
renewal process,  we anticipate that the two covenants  maintained above will be
amended to address to our satisfaction,  prospectively, the covenant levels that
we did not meet at December 31, 2002.  However,  there can be no assurances that
the bank stock loan will be renewed or that,  if renewed,  the issues  mentioned
above will be resolved to our satisfaction.

The credit  facility  agreement for the  $50,000,000  warehouse  loan  agreement
requires  Matrix  Financial  to  maintain,  among other  things,  net worth,  as
defined, of at least $30,000,000, a leverage ratio of no more than 14 to 1 and a
minimum cash flow coverage ratio for four  consecutive  quarters of no less than
1.3 to 1.0. At December 31, 2002,  Matrix Financial was in compliance with these
covenants.  The warehouse loan agreement,  which matured  February 28, 2003, was
amended by agreement on February 28, 2003,  which  extended the maturity date to
April 30, 2003 . All other terms remained unchanged.

The Company  anticipates that the various borrowed money agreements which are up
for a renewal in 2003 will be renewed with similar terms and conditions as those
currently in effect.

School Financing Agreement

The Company had  approximately  $31,100,000 and $22,200,000 at December 31, 2002
and 2001, respectively, in tax-exempt financing it originated to charter schools
into two grantor trusts (Trusts).  The Trusts then issued Class "A" Certificates
and  Class "B"  Certificates,  with the Class  "A"  Certificates  being  sold to
various third party investors under a private placement at a price of par.

                                      F-34
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


The "A" Certificates,  under the two grantor trusts,  are guaranteed by a letter
of credit  issued by a third party  investment  bank  (Investment  Bank) for one
trust, and the other grantor is guaranteed equally by two unaffiliated financial
institutions.  The "A"  Certificates'  interest rate may be  determined  weekly,
monthly or for a term for up to one year.  The interest rate and the term of the
interest  rate  are  determined  by the  Remarking  Agent,  which  is  also  the
Investment Bank in one case and First Matrix,  LLC (a wholly owned subsidiary of
First  Matrix) for the second  trust.  Generally,  the Trusts are  short-term in
nature with an average life of three years or less.


The "B" Certificates are owned in part by the Company. The interest rate paid on
the "A" Certificates is considered the Company's financing cost. The approximate
cost of the  financing  at  December  31,  2002 and 2001 was  1.55%  and  2.75%,
respectively.  The interest that the Company  receives  through its ownership of
the "B" Certificates is tax-exempt.

Although the Investment Bank and the unaffiliated  financial institutions act as
guarantors to the "A"  Certificates,  the Company  provides full recourse to the
letter of credit providers in all cases of loss or default. Due to the nature of
the  recourse  and  the  ability  of the  "A"  Certificate  holders  to put  the
certificates  to the  Trusts,  the  transactions  have been  accounted  for as a
secured financing.

Through a Purchase  and Sale  Agreement,  the Company has sold school  financing
loans to a third party financial  institution.  The Company  provides  scheduled
interest and principal  plus full  recourse in the case of loss or default.  The
transaction was treated as a sale due to the transfer of control over the school
financing  loans.  No gain or loss was recorded at the time of sale. The balance
of the school financing loans sold with recourse was  approximately  $13,000,000
at December 31, 2002.

Guaranteed  Preferred  Beneficial  Interests  in Company's  Junior  Subordinated
Debentures

On July 30, 1999,  Matrix Bancorp Capital Trust I (Trust I), a Delaware business
trust formed by the Company,  completed the sale of $27,500,000 of 10% preferred
securities.  Trust I also issued  common  securities to the Company and used the
net proceeds from the offering to purchase  $28,600,000  in principal  amount of
10% junior  subordinated  debentures of the Company due September 30, 2029.  The
junior  subordinated  debentures  are  the  sole  assets  of  Trust  I  and  are
eliminated,  along  with the  related  operating  effects,  in the  consolidated
financial statements.

The preferred  securities  accrue and pay  distributions  quarterly at an annual
rate of 10% of the stated liquidation amount of $25 per preferred security.  The
Company has fully and unconditionally guaranteed all of the obligations of Trust
I  under  the  preferred   securities.   The  guarantee   covers  the  quarterly
distributions  and  payments  on  liquidation  or  redemption  of the  preferred
securities, but only to the extent of funds held by Trust I.

The preferred  securities are  mandatorily  redeemable  upon the maturity of the
junior  subordinated  debentures  or upon earlier  redemption as provided in the
indenture.  The  Company  has  the  right  to  redeem  the  junior  subordinated

                                      F-35
<PAGE>


                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


debentures,  in whole or in part on or after September 30, 2004, at a redemption
price  specified in the  indenture  plus any accrued but unpaid  interest to the
redemption date.

On March 28,  2001,  Matrix  Bancorp  Capital  Trust II (Trust  II),  a Delaware
business  trust  formed by the Company,  completed  the sale of  $12,000,000  of
10.18%  preferred  securities.  Trust II also issued  common  securities  to the
Company and used the net proceeds from the offering to purchase  $12,400,000  in
principal  amount of 10.18%  junior  subordinated  debentures of the Company due
June 8, 2031. The junior subordinated debentures are the sole assets of Trust II
and  are  eliminated,   along  with  the  related  operating  effects,   in  the
consolidated financial statements.

The preferred securities accrue and pay distributions semi-annually at an annual
rate of  10.18%  of the  stated  liquidation  amount  of  $1,000  per  preferred
security.  The  Company  has fully  and  unconditionally  guaranteed  all of the
obligations of Trust II under the preferred securities. The guarantee covers the
quarterly  distributions  and  payments  on  liquidation  or  redemption  of the
preferred securities, but only to the extent of funds held by Trust II.

The preferred  securities are  mandatorily  redeemable  upon the maturity of the
junior  subordinated  debentures  or upon earlier  redemption as provided in the
indenture.  The  Company  has  the  right  to  redeem  the  junior  subordinated
debentures, in whole or in part, on or after June 8, 2011, at a redemption price
specified  in  the  indenture  plus  any  accrued  but  unpaid  interest  to the
redemption date.

On July 16,  2001,  Matrix  Bancorp  Capital  Trust III (Trust  III), a Delaware
business  trust  formed by the Company,  completed  the sale of  $15,000,000  of
10.25%  preferred  securities.  Trust III also issued  common  securities to the
Company and used the net proceeds from the offering to purchase  $15,464,000  in
principal  amount of 10.25%  junior  subordinated  debentures of the Company due
July 25, 2031. The junior  subordinated  debentures are the sole assets of Trust
III and are  eliminated,  along  with  the  related  operating  effects,  in the
consolidated financial statements.

The preferred securities accrue and pay distributions semi-annually at an annual
rate of  10.25%  of the  stated  liquidation  amount  of  $1,000  per  preferred
security.  The  Company  has fully  and  unconditionally  guaranteed  all of the
obligations of Trust III under the preferred  securities.  The guarantee  covers
the quarterly  distributions  and payments on  liquidation  or redemption of the
preferred securities, but only to the extent of funds held by Trust III.

The preferred  securities are  mandatorily  redeemable  upon the maturity of the
junior  subordinated  debentures  or upon earlier  redemption as provided in the
indenture.  The  Company  has  the  right  to  redeem  the  junior  subordinated
debentures,  in whole or in part,  on or after July 25,  2006,  at a  redemption
price  specified in the  indenture  plus any accrued but unpaid  interest to the
redemption date.

On November 28, 2001,  Matrix  Bancorp  Capital  Trust IV (Trust IV), a Delaware
business  trust  formed by the  Company,  completed  the sale of  $5,000,000  of
floating rate of six-month LIBOR plus 3.75% preferred securities.  Trust IV also
issued  common  securities  to the  Company and used the net  proceeds  from the

                                      F-36
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


offering  to  purchase  $5,155,000  in  principal  amount  of  floating  rate of
six-month  LIBOR plus 3.75% junior  subordinated  debentures  of the Company due
December  8, 2031.  The junior  subordinated  debentures  are the sole assets of
Trust IV and are eliminated,  along with the related operating  effects,  in the
consolidated financial statements.

The  preferred  securities  accrue and pay  distributions  semi-annually  at the
floating  rate as described  above percent of the stated  liquidation  amount of
$1,000  per  preferred  security.  The  Company  has fully  and  unconditionally
guaranteed all of the  obligations  of Trust IV under the preferred  securities.
The guarantee covers the quarterly  distributions and payments on liquidation or
redemption of the preferred securities,  but only to the extent of funds held by
Trust IV.

The preferred  securities are  mandatorily  redeemable  upon the maturity of the
junior  subordinated  debentures  or upon earlier  redemption as provided in the
indenture.  The  Company  has  the  right  to  redeem  the  junior  subordinated
debentures,  in whole or in part, on or after  December 8, 2006, at a redemption
price  specified in the  indenture  plus any accrued but unpaid  interest to the
redemption date.

On July 25, 2002,  Matrix Bancorp Capital Trust V (Trust V), a Delaware business
trust formed by the Company,  completed  the sale of $5,000,000 of floating rate
of six-month LIBOR plus 3.625% preferred securities.  Trust V also issued common
securities  to the  Company  and used the net  proceeds  from  the  offering  to
purchase $5,155,000 in principal amount of floating rate of six-month LIBOR plus
3.625%  junior  subordinated  debentures  of the Company due July 25, 2032.  The
junior  subordinated  debentures  are  the  sole  assets  of  Trust  V  and  are
eliminated,  along  with the  related  operating  effects,  in the  consolidated
financial statements.

The  preferred  securities  accrue and pay  distributions  semi-annually  at the
floating rate as described above of the stated  liquidation amount of $1,000 per
preferred security. The Company has fully and unconditionally  guaranteed all of
the obligations of Trust V under the preferred securities.  The guarantee covers
the quarterly  distributions  and payments on  liquidation  or redemption of the
preferred securities, but only to the extent of funds held by Trust V.

The preferred  securities are  mandatorily  redeemable  upon the maturity of the
junior  subordinated  debentures  or upon earlier  redemption as provided in the
indenture.  The  Company  has  the  right  to  redeem  the  junior  subordinated
debentures,  in whole or in part,  on or after July 25,  2007,  at a  redemption
price  specified in the  indenture  plus any accrued but unpaid  interest to the
redemption date.

Capitalized  expenses  associated  with all of the  offerings  of  approximately
$2,398,000  and $2,328,000 are included in other assets at December 31, 2002 and
2001,  respectively,  and are being amortized on a straight-line  basis over the
life of the junior  subordinated  debentures.  Use of the straight-line basis is
not  materially  different  from the amounts that would be recognized  under the
interest method.

                                      F-37
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


11. Federal Home Loan Bank Borrowings

In connection with Matrix Bank's change in domicile in 2002, Matrix Bank obtains
FHLB  advances  from  FHLB of  Topeka,  which is the FHLB  that  serves  Denver,
Colorado,  and utilizes FHLB of Topeka as its primary  correspondent  bank. This
change was approved March 25, 2002. Long-term advances that existed at March 25,
2002 with FHLB of Dallas are still outstanding under their original terms.



The balances of FHLB borrowings are as follows:

                                                  December 31,
                                             2002             2001
                                      ------------------------------------
                                                 (In thousands)
FHLB of Dallas borrowings              $      147,285    $      303,361
FHLB of Topeka borrowings                     238,500                 -
                                      ------------------------------------
                                       $      385,785    $      303,361
                                      ====================================

Advances  of  $266,000,000  and  $136,000,000  at  December  31,  2002 and 2001,
respectively,  were borrowed under Convertible  Advance and Short Option Advance
(SOA)  Agreements with the FHLB.  These SOA borrowings have a term of ten years,
but are callable by the FHLB  beginning  after a six-month to five-year  lockout
period,  depending on the particular SOA borrowing.  After the expiration of the
lockout  period,  the SOA borrowings are callable at various  intervals.  If the
FHLB exercises its call option on a SOA borrowing, the FHLB is required to offer
replacement  funding  to the  Company  at a  market  rate  of  interest  for the
remaining  term of the SOA borrowing.  Additionally,  under the terms of the SOA
Agreement, the Company is not permitted to prepay or otherwise retire a callable
SOA  borrowing  prior to the final  maturity  date.  At December 31,  2002,  the
interest  rates on the SOA  borrowings  ranged  from  2.69% to 5.63%,  and their
possible  call dates  varied  from  February  2003 to November  2006.  Community
investment  advances of $1,285,000 and $1,361,000 at December 31, 2002 and 2001,
respectively,  were borrowed  under a fixed term and rate. At December 31, 2002,
the  advances  are at a rate of 5.84% and mature  June 2014.  All  advances  are
secured by first lien mortgage loans of Matrix Bank and all of its FHLB stock.

Matrix Bank is on full custody status at FHLB-Dallas, which requires Matrix Bank
to place loan  collateral  at the  FHLB-Dallas.  At  December  31,  2002,  loans
collateralized  by mortgages of  $208,772,000  and  securities  held for sale of
$2,461,000  were  pledged for  FHLB-Dallas  advances.  Matrix Bank is on blanket
collateral  status at FHLB-Topeka,  which requires Matrix Bank to identify,  yet
maintain in its possession,  loan collateral pledged at FHLB-Topeka. At December
31, 2002, loans  collateralized  by mortgages of $333,731,000 and guaranteed SBA
loans of $89,763,000 were pledged for the FHLB-Topeka  advances.  As of December
31, 2002,  Matrix Bank had available unused  borrowings from the FHLB-Topeka for
advances of approximately $118,885,000.


                                      F-38
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)



12. Income Taxes

The income tax (benefit) provision consists of the following:
<TABLE>
<CAPTION>

                                                          Years ended December 31,
                                                   2002              2001             2000
                                            ------------------------------------------------------
                                                                  (In thousands)
<S>                                               <C>               <C>            <C>

Current:
   Federal                                        $   832           $  (7,713)     $   2,350
   State                                                -                 (15)           411

Deferred:
   Federal                                         (4,306)             11,162           (451)
   State                                             (843)                841            (67)
                                            ------------------------------------------------------
(Benefit) provision                               $(4,317)          $   4,275      $   2,243
                                            ======================================================
</TABLE>

A reconciliation  of the (benefit)  provision for income taxes with the expected
income taxes based on the statutory federal income tax rate follows:
<TABLE>
<CAPTION>

                                                          Years ended December 31,
                                                   2002              2001             2000
                                            ------------------------------------------------------
                                                                 (In thousands)
<S>                                            <C>                 <C>              <C>
Expected income tax (benefit) provision        $  (2,811)          $  4,470         $  2,210
State income tax (benefit) provision                (556)               545              343
Other                                               (950)              (740)            (310)
                                            ------------------------------------------------------
(Benefit) provision for income taxes           $  (4,317)          $  4,275         $  2,243
                                            ======================================================
</TABLE>

The actual  tax  (benefit)  provision  differs  from the  expected  tax  expense
(computed by applying the applicable United States Federal corporate tax rate of
34% and the  composite  state tax  rates,  which  range from 4.5% to 8.0% to the
(loss)  income  before taxes for the years ended 2002,  2001 and 2000).  This is
principally due to state income tax expense and various income and expense items
which  are  not  deductible  for  tax  purposes,   including  certain  meal  and
entertainment deductions and nontaxable interest income.

Deferred  tax assets and  liabilities  result from the tax effects of  temporary
differences  between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes shown below.
<TABLE>
<CAPTION>

                                                                         December 31,
                                                                     2002             2001
                                                              ------------------------------------
                                                                        (In thousands)
<S>                                                                 <C>              <C>

Deferred tax assets:
   Allowance for loan and valuation losses                          $    6,481       $     6,541
   Discounts and premiums                                                    -                71
   Deferred fees                                                         1,270             1,352
   Delinquent interest                                                     552               552
   Impairment reserve                                                    5,789                73
   Net operating loss carry-forwards                                     1,082             1,574
   Other                                                                   393                24
                                                              ------------------------------------
Total deferred tax assets                                               15,567            10,187

Deferred tax liabilities:
   Loss on sale of loans                                           $   (17,374)      $   (14,711)
   Amortization of mortgage servicing rights                            (1,407)           (4,351)
   Gain on sale of building                                             (1,368)           (1,377)
   Other                                                                (1,355)             (834)
                                                              ------------------------------------
Total deferred tax liabilities                                         (21,504)          (21,273)
                                                              ------------------------------------
Net deferred tax liability                                        $     (5,937)      $   (11,086)
                                                              ====================================
</TABLE>

                                      F-39
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


The net deferred  tax  liability  is recorded on the  accompanying  consolidated
balance sheets in income taxes payable and deferred  income tax  liability.  The
current  income tax payable of  $835,000 as of December  31, 2002 is recorded in
income taxes payable and deferred income tax liability. .

There is no valuation allowance for gross deferred tax assets as of December 31,
2002,  2001 or 2000.  In  assessing  the  realizability  of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the  deferred tax assets will not be realized.  The ultimate  realization  of
deferred tax assets is dependent  upon the  generation of future  taxable income
during the  periods in which  those  temporary  differences  become  deductible.
Management  considers  the  scheduled  reversal  of  deferred  tax  liabilities,
projected  future  taxable  income,  and tax planning  strategies in making this
assessment.

Based upon the level of historical  taxable  income and  projections  for future
taxable  income over the periods that the  deferred  tax assets are  deductible,
management  believes it is more likely  than not the  Company  will  realize the
benefits of these deductible differences,  and does not believe that a valuation
allowance  is  necessary.  The  amount  of the  deferred  tax  asset  considered
realizable,  however,  could be reduced in the near term if  estimates of future
taxable income during the carry-forward period are reduced.

13. Regulatory

The Company is a unitary thrift holding  company and, as such, is subject to the
regulation, examination and supervision of the OTS.

Matrix Bank is subject to various regulatory capital  requirements  administered
by the OTS.  Failure to meet minimum capital  requirements  can initiate certain
mandatory,  and possibly additional discretionary actions by regulators that, if
undertaken,  could  have a direct  material  effect  on  Matrix  Bank's  and the
Company's consolidated  financial statements.  Under capital adequacy guidelines

                                      F-40
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)



and the regulatory framework for prompt corrective action, Matrix Bank must meet
specific capital guidelines that involve quantitative  measures of Matrix Bank's
assets,  liabilities  and certain  off-balance  sheet  commitments as calculated
under  regulatory  accounting  practices.  Matrix  Bank's  capital  amounts  and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require  Matrix  Bank to maintain  minimum  amounts and ratios (set forth in the
following  table) of total and Tier I capital (as defined in the regulations) to
risk-weighted  assets (as defined),  and of Tier I capital (as defined) to total
assets (as defined). Management believes, as of December 31, 2002 and 2001, that
Matrix Bank met all applicable capital adequacy requirements.

As of December 31, 2002, the most recent  notification  from the OTS categorized
Matrix  Bank as well  capitalized  under the  regulatory  framework  for  prompt
corrective  action.  To be  categorized  as well  capitalized,  Matrix Bank must
maintain minimum total risk-based,  Tier I risk-based and Tier I leverage ratios
as set forth in the table.  There have been no  conditions  or events since that
notification that management believes have changed the institution's category.
<TABLE>
<CAPTION>

                                                                                     To Be Well Capitalized
                                                                  For Capital       Under Prompt Corrective
                                           Actual              Adequacy Purposes       Action Provisions
                                  ---------------------------------------------------------------------------
                                     Amount       Ratio       Amount       Ratio       Amount      Ratio
                                  ---------------------------------------------------------------------------
                                                            (Dollars in thousands)
<S>                                 <C>             <C>      <C>            <C>       <C>            <C>
As of December 31, 2002
   Total Capital
     (to Risk Weighted Assets)      $ 100,367       11.5%    $  70,179      8.0%      $   87,724     10.0%
   Core Capital
     (to Adjusted Tangible Assets)     94,349        5.8        64,602      4.0           81,065      5.0
   Tier Capital
     (to Risk Weighted Assets)         94,349       10.8           N/A       N/A          52,634      6.0
As of December 31, 2001
   Total Capital
     (to Risk Weighted Assets)      $ 106,310       11.7%    $  72,418      8.0%      $   90,522     10.0%
   Core Capital
     (to Adjusted Tangible Assets)     99,949        6.5        61,671      4.0           77,089      5.0
   Tier Capital
     (to Risk Weighted Assets)         99,949       11.0           N/A       N/A          54,313      6.0

</TABLE>

The  various  federal  banking  statutes to which  Matrix  Bank is subject  also
include other  limitations  regarding the nature of the transactions in which it
can engage or assets it may hold or liabilities it may incur.

Matrix  Bank is required  to  maintain  vault cash or balances  with the Federal
Reserve  Bank of Kansas City in 2002 and the Federal  Reserve  Bank of Dallas in

                                      F-41
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


2001  in  a  noninterest-earning  account  based  on  a  percentage  of  deposit
liabilities.  The required  reserve  balance was $6,989,000  and  $10,456,000 at
December 31, 2002 and 2001, respectively.

As a wholly owned subsidiary of Matrix Bank,  Matrix Financial is subject to OTS
regulation.  In addition,  Matrix  Financial is also subject to  examination  by
various  regulatory  agencies  involved in the mortgage banking  industry.  Each
regulatory agency requires the maintenance of a certain amount of net worth, the
most  restrictive  of  which  required  $5,561,000  at  December  31,  2002  and
$4,020,000 at December 31, 2001. At December 31, 2002 and 2001, Matrix Financial
was in compliance with these regulatory requirements.

First Matrix,  headquartered in Denver,  Colorado,  a wholly owned subsidiary of
Matrix Capital  Markets,  is a broker-dealer  registered with the Securities and
Exchange Commission (SEC) under rule  15c3-3(k)(2)(ii).  First Matrix is subject
to the SEC's Net Capital  Rule which  requires  the  maintenance  of minimum net
capital and requires  that the ratio of aggregate  indebtedness  to net capital,
both as defined,  shall not exceed 15 to 1. At December 31,  2002,  First Matrix
had net capital of $285,000  which was  $247,000 in excess of its  required  net
capital of $38,000. First Matrix's net capital ratio was 1.99 to 1.

Sterling,  a Texas trust  company,  is  generally  required to maintain  minimum
restricted  capital of at least  $1,000,000,  and may be  required  to  maintain
additional  capital  if the Texas  Banking  Commissioner  determines  that it is
necessary to protect the safety and soundness of Sterling. At December 31, 2002,
Sterling was in compliance with capital requirements under Texas law.

14. Shareholders' Equity

Stock Option Plan

The  Company has  elected to follow APB  Opinion  No. 25,  Accounting  for Stock
Issued to Employees,  and related interpretations in accounting for its employee
stock options. Under Opinion No. 25, because the exercise price of the Company's
employee stock options  equals the market price of the  underlying  stock on the
date of grant, no compensation expense is recognized.

In September  1996,  the board of directors  and  shareholders  adopted the 1996
Stock Option Plan,  which amended and restated the  Company's  stock option plan
adopted in 1995.  The Company's  1996 Stock Option Plan, as amended,  allows for
the grant of options to substantially all of the Company's  full-time  employees
and directors for up to 750,000  shares of the Company's  common stock.  Options
granted generally have ten-year terms and vest based on the determination by the
Company's compensation committee.

The 1996 Stock Option Plan  authorized  the granting of incentive  stock options
(Incentive  Options) and nonqualified  stock options  (Nonqualified  Options) to
purchase  common  stock to  eligible  persons.  The 1996  Stock  Option  Plan is

                                      F-42
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


currently  administered by the  compensation  committee  (administrator)  of the
board of directors.  The 1996 Stock Option Plan provides for  adjustments to the
number of shares and to the exercise price of  outstanding  options in the event
of a declaration of stock dividend or any recapitalization  resulting in a stock
split, combination or exchange of shares of common stock.

No Incentive  Option may be granted  with an exercise  price per share less than
the fair market value of the common stock at the date of grant. The Nonqualified
Options may be granted with any exercise price  determined by the  administrator
of the 1996 Stock Option Plan. To date, all grant prices have equaled the market
price of the underlying  stock on the date of the grant.  The expiration date of
an option is determined by the administrator at the time of the grant, but in no
event may an option be  exercisable  after the  expiration of ten years from the
date  of  grant  of  the  option.   All  options   granted   to-date  have  been
non-qualified.

The 1996 Stock Option Plan further  provides that, in most instances,  an option
must be exercised by the optionee  within 30 days after the  termination  of the
consulting  contract  between such  consultant and the Company or termination of
the optionee's  employment  with the Company,  as the case may be, if and to the
extent such option was exercisable on the date of such termination.  To date, no
options have been granted to consultants.

Pro forma information regarding net (loss) income and (loss) income per share is
required by SFAS 148 and is included in Note 2. The fair value for these options
was estimated at the date of grant using a  Black-Scholes  option  pricing model
with the  following  weighted-average  assumptions  for  2002,  2001  and  2000,
respectively:  risk-free interest rates of 4.5%, 5.0% and 5.1%; a dividend yield
of  zero  percent;  volatility  factors  of the  expected  market  price  of the
Company's common stock of 0.52, 0.57 and 0.63; and a  weighted-average  expected
life of the option of four years.

The  Black-Scholes  option valuation model for used in estimating the fair value
of traded options which have no vesting restrictions and are fully transferable.
In addition,  option  valuation  models  require the input of highly  subjective
assumptions including the expected stock price volatility. Because the Company's
employee stock options have characteristics  significantly  different from those
of traded options,  and because changes in the subjective input  assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.

A summary of the Company's stock option  activity and related  information is as
follows:

                                      F-43
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)

<TABLE>
<CAPTION>

                                                        Years ended December 31,
                                        2002                     2001                      2000
                             ------------------------------------------------------------------------------
                                            Weighted                 Weighted                  Weighted
                                            Average                   Average                  Average
                                            Exercise                 Exercise                  Exercise
                               Options       Price       Options       Price      Options       Price
                             ------------------------------------------------------------------------------
<S>                              <C>       <C>             <C>       <C>            <C>       <C>
Outstanding, beginning of
   year                          611,825   $     9.99      496,700   $    10.54     431,600   $    11.07
Granted                           86,500        11.12      250,000         9.32      95,000         7.65
Exercised                         (1,700)        9.11      (16,250)        8.55        (500)       10.00
Forfeited                        (18,500)       10.44     (118,625)       11.09     (29,400)       10.77
                             -------------             -------------            -------------
Outstanding, end of year         678,125        10.11      611,825        10.54     496,700        10.54
                             =============             =============            =============


Exercisable end of year          397,655        10.31      306,683        10.34     286,500        10.34

Weighted average fair value
   of options granted during
   the year                      $  6.20                   $  5.79                  $  4.86
                             =============             =============            =============
</TABLE>

Options  outstanding  at December 31, 2002,  have exercise  prices  ranging from
$5.13 to $26.50 per share as outlined in the following table:
<TABLE>
<CAPTION>

                                                         Weighted
                                        Weighted          Average                             Weighted
                      Number of          Average         Remaining          Number of          Average
Range of Exercise      Options        Exercise Price    Contractual         Options         Exercise Price
      Prices         Outstanding        Per Share          Life           Exercisable         Per Share
-----------------------------------------------------------------------------------------------------------
<S>                       <C>         <C>                      <C>             <C>         <C>

$           5.13           79,500     $        5.13            2.00             79,500     $  5.13
     7.00 - 7.88            7,500              7.29            8.50              1,500        7.29
     8.00 - 8.69          123,625              8.53            7.69             44,525        8.45
     9.15 - 9.86          135,000              9.68            8.70             27,000        9.68
   10.00 - 10.37          173,950             10.36            6.14            107,700       10.03
   11.50 - 13.88           74,800             12.45            6.04             56,030       12.46
   14.25 - 17.25           80,750             15.13            4.57             78,400       15.13
                            3,000             26.50            5.33              3,000       26.50
                  -----------------------------------------------------------------------------------------
                          678,125     $       10.11            6.27            397,655     $ 10.31
                  =========================================================================================
</TABLE>

Employee Stock Purchase Plan

In September 1996, the board of directors and  shareholders  adopted an Employee
Stock  Purchase Plan  (Purchase  Plan) and  authorized  125,000 shares of common
stock (ESPP Shares) for issuance thereunder.  The Purchase Plan became effective
upon consummation of the initial public offering. The price at which ESPP Shares
are sold under the  Purchase  Plan is 85% of the lower of the fair market  value
per share of common stock on the  enrollment or the purchase  date. In May 2000,
the authorized  number of shares  available for issuance under the Purchase Plan

                                      F-44
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


was increased to 250,000 shares. As of December 31, 2002, there were 39,102 ESPP
Shares available for future issuance.




15. Commitments, Contingencies and Related Party Transactions

Leases

The Company  leases  office  space and  certain  equipment  under  noncancelable
operating leases. Annual amounts due under the office and equipment leases as of
December 31, 2002 are approximately as follows:
                                                      (In thousands)

     2003                                          $          2,748
     2004                                                     2,139
     2005                                                     2,052
     2006                                                     1,627
     2007                                                       497
     Thereafter                                                 715
                                                   ------------------
                                                   $          9,778
                                                   ==================

Total  rent  expense  aggregated   approximately   $3,018,000,   $3,011,000  and
$2,319,000 for the years ended December 31, 2002,  2001 and 2000,  respectively,
and is recorded in occupancy and equipment expense.

The Company,  through  Matrix Tower  Holdings,  LLC, an operating  subsidiary of
Matrix Bank,  is a lessor of office  space under  various  operating  leases for
Matrix  Financial  Center.  Annual  amounts  expected for future  minimum rental
income as of December 31, 2002 are approximately as follows:

                                                      (In thousands)

   2003                                             $          1,530
   2004                                                        1,543
   2005                                                        1,500
   2006                                                        1,248
   2007                                                          862
   Thereafter                                                     92
                                                   ------------------
                                                    $          6,775
                                                   ==================


                                      F-45
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


Total rental  income for the years ended  December 31, 2002 and 2001  aggregated
approximately $373,000 and $0, respectively.

Included in the above office rents are the following  amounts under an operating
lease with MSCS: $129,000,  $129,000,  $135,000, $136,000 and $113,000 for 2003,
2004, 2005, 2006 and 2007, respectively.

Off-Balance Sheet Risk and Concentration of Commitments

A summary of the contractual amount of significant commitments follows:

                                                      December 31,
                                                 2002             2001
                                         ------------------------------------
                                                    (In thousands)

Loans secured by mortgages               $          31,154      $  27,759
Construction loans                                  10,991          7,355
Commercial lines of credit                           8,338          9,027
Commercial loans                                     4,858          2,948
Consumer loans                                         581            620

The Company is party to various  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 undisbursed  commercial mortgage
construction  loans,  commercial  lines of credit and  letters of credit.  These
financial  instruments  involve, to varying degrees,  elements of credit risk in
excess of the amounts recognized in the consolidated financial statements.

The  Company's  exposure to credit loss, in the event of  nonperformance  by the
other party,  to off-balance  sheet  financial  instruments  with credit risk is
represented by the contractual  amounts of those  instruments.  The Company uses
the same credit policies in making commitments and conditional obligations as it
does for on balance sheet instruments with credit risk.

Commercial  credit  off-balance  sheet instruments are agreements to lend to, or
provide credit guarantee for, a customer as long as there is no violation of any
condition  established in the contract.  Such  instruments  generally have fixed
expiration dates or other  termination  clauses and may require the payment of a
fee.  Because many of these  instruments  are expected to expire  without  being
drawn upon, the total  commitment  amounts do not necessarily  represent  future
cash requirements.  The Company evaluates each customer's  creditworthiness on a
case-by-case  basis, and the amount of collateral or other security  obtained is
based on management's credit evaluation of the customer.

Matrix  Bancorp,  Inc. has  guaranteed,  with 50% recourse to the joint  venture
partner, the indebtedness of MSCS to a third party financial institution,  in an
amount of no greater than $3,000,000 at December 31, 2002.  There was no balance
outstanding at MSCS on such indebtedness at December 31, 2002.


                                      F-46
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


Mortgage Banking Risk Management Activities

In the ordinary course of business,  the Company makes  commitments to originate
residential  mortgage loans (pipeline) and holds originated loans until delivery
to an investor.  Inherent in this business is a risk  associated with changes in
interest rates and the resulting  change in the market value of the pipeline and
funded loans.  The Company  mitigates this risk through the use of mandatory and
best effort forward commitments to sell loans or securities.

The Company uses derivative instruments primarily to protect against the risk of
changes in the price or interest rate  movements on the value of certain  assets
and liabilities. Derivative instruments represent contracts between parties that
usually  require no initial net  investment  and result on one party  delivering
cash or another type of asset to the other party based on a notional  amount and
underlying as specified in the contract. A notional amount represents the number
of units of a specific item, such as currency units. An underlying  represents a
variable, such as an interest rate, security price or price index. The amount of
cash or other asset delivered from one party to the other is determined based on
the  interaction  of the notional  amount of the contract  with the  underlying.
Derivatives are also implicit in certain contracts and commitments.

The Company's  primary use of derivative  instruments is in connection  with its
mortgage loan origination activities.  Management uses derivative instruments to
protect  against  the risk of changes in fair value  caused by changes in market
interest rates of originated  mortgage loans and a portion of the mortgage loans
that are not yet closed but for which the  interest  rate has been  established.
These  instruments  primarily  include  best effort  commitments  and  mandatory
commitments.  The nature and volume of the derivative instruments used to manage
the risk of change in fair value of mortgage  loan  originations  depends on the
level of mortgage  loans and  commitments  to  originate  mortgage  loans on the
consolidated balance sheet.

As discussed in Note 2, on January 1, 2001, the Company  adopted SFAS 133, which
requires all  derivative  instruments to be carried at fair value on the balance
sheet.  Prior to 2001,  unrealized  gains  and  losses on  derivatives  used for
hedging  purposes  were  generally  not required to be reported in the financial
statements.  In order to reduce the earnings  volatility  that would result from
having to recognize in earnings the fair value of certain derivative instruments
used to hedge risks  associated  with financial  instruments not carried at fair
value, SFAS 133 provides special hedge accounting  provisions.  These provisions
permit the change in the fair value of the hedged item related to the risk being
hedged to be  recognized  in  earnings in the same period and in the same income
statement  line as the  change  in fair  value of the  derivative.  The  Company
usually designates derivative instruments used to manage interest rate risk into
SFAS 133 hedge  relationships  with the  specific  assets or  liabilities  being
hedged.

As with any financial  instrument,  derivative  instruments have inherent risks.
Market  risk is the  adverse  effect a change in interest  rates,  currency,  or
implied  volatility  has on the value of a  financial  instrument.  The  Company

                                      F-47
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


manages market risk associated with derivative  instruments by establishing  and
monitoring limits as to the amount of mortgage  origination  commitment coverage
obtained.

Credit risk is the risk that a  counter-party  to a derivative  contract with an
unrealized gain fails to perform according to the terms of the agreement. Credit
risk is managed by monitoring the size and maturity  structure of the derivative
portfolio and applying  uniform credit  standards  maintained for all activities
with credit risk.

During the current year, as well as the prior year, the Company used best effort
and mandatory  commitments  to hedge the change in fair value of mortgage  loans
and  commitments to originate  mortgage loans. At December 31, 2002, the Company
had $559,780,000 of commitments to originate  mortgage loans and $357,305,000 of
funded loans, offset with mandatory forward commitments of $500,289,000 and best
effort forward  commitments of  $128,163,000.  The commitments  mature within 90
days of December 31, 2002. At December 31, 2001, the Company had $155,023,000 of
commitments  to  originate  mortgage  loans and  $492,613,000  of funded  loans,
respectively, hedged with mandatory forward commitments of $434,336,000 and best
effort forward commitments of $96,162,000.  At December 31, 2002, the fair value
of the  Company's  derivatives  to originate  mortgage  loans of  $2,473,000  is
recorded in other assets,  the increase in the fair value of the mortgage  loans
committed  for sale of  $2,982,000  is recorded in loans held for sale,  and the
fair value of  commitments  to sell mortgages of $5,231,000 is recorded in other
liabilities; the difference representing the ineffective portion of the hedge of
$224,000, was recorded as a credit to loan origination income in 2002.

Risk Management Activities for MSRs

Ownership  of MSRs  exposes  the Company to  impairment  of the value of MSRs in
certain  interest rate  environments.  The incidence of prepayment of a mortgage
loan increases during periods of declining interest rates as the homeowner seeks
to refinance  the loan to a lower  interest  rate. If the level of prepayment on
segments of the Company's mortgage  servicing  portfolio achieves a level higher
than projected by the Company for an extended period of time, then an impairment
in the  associated  basis in the MSRs may occur.  In 2001 and 2002,  the Company
implemented  a  strategy  to  mitigate  this  risk of  retaining  a  portion  of
originated  servicing as management  believed that retaining  servicing that was
generated in the lower  interest  rate  environment  will incur less  prepayment
risk.  During 2002,  interest rates  continued to decrease which resulted in the
Company incurring a significant provision against the value of its investment in
mortgage  servicing rights.  Due to the low interest rate  environment,  in late
2002 the Company began to sell the majority of its newly  originated  servicing.
The strategy is to reduce the Company's overall investment in mortgage servicing
rights.

At December 31, 2000, the Company used a program of exchange-traded  futures and
options to hedge approximately 6.4% of its mortgage servicing portfolio.  Due to
the cost of the requirements  that must be met to achieve hedge accounting under
SFAS 133 for  mortgage  servicing  rights the Company did not attempt to qualify
for hedge accounting and effective March 31, 2001 the Company sold,  repurchased
or allowed to mature all derivative instruments recorded on the books associated
with mortgage  servicing.  In the fourth  quarter 2002,  the Company  elected to
reinstate  its  hedging  program to reduce the risk of loss in fair value of the
mortgage  servicing  rights due to  declining  interest  rates.  This program is
identical  to the program  instituted  in 1997.  The  decision  was based on the
historically  low  interest  rates,  the  continued   weakening   economy,   the
geopolitical  environment and the impairment that the Company incurred  to-date.
During the fourth quarter 2002, the Company  hedged  approximately  $400,000,000
notional balance of its servicing  portfolio,  or 7.5%. As of December 31, 2002,
the  company  removed  the  hedge  and  recorded  a gain  from  the  sale of the
derivatives  of  $800,000,  which is  recorded  in other  income.  The hedge was
reinstated on January 2, 2003, at approximately  $600,000,000  notional balance.
Although  the Company  believes  its  hedging  program  could  qualify for hedge
accounting  under SFAS 133,  the  Company  did not  attempt to qualify for hedge
accounting  treatment due to the requirements in SFAS 133 that were necessary to
do so. The decision to increase or decrease  hedging  coverage  will be based on
several factors,  including those discussed above, as well as the composition of
the curent servicing portfolio.


                                      F-48
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


Contingencies

The Company and its subsidiaries are parties to various litigation  matters,  in
most cases,  involving ordinary and routine claims incidental to the business of
the Company.  The Company  accrues  liabilities  when it is probable that future
costs will be incurred and such costs can be reasonably estimated. Such accruals
are based upon  developments to date, the Company's  estimates of the outcome of
these matters and its  experience in  contesting,  litigating and settling other
matters. Based on evaluation of the Company's litigation matters and discussions
with internal and external  legal counsel,  management  believes that an adverse
outcome on one or more of the matters set forth below,  against which no accrual
for loss has been made as of December 31, 2002, is  reasonably  possible but not
probable,  and that the outcome with respect to one or more of these matters, if
adverse,  is  reasonably  likely  to  have  a  material  adverse  impact  on the
consolidated  financial  position,  results of  operations  or cash flows of the
Company.

In early 1999,  Matrix Bancorp and Matrix Bank instituted an arbitration  action
with the American Arbitration  Association in Phoenix,  Arizona against Fidelity
National  Financial,  Inc. The arbitration action arose out of an alleged breach
by Fidelity of a Merger  Termination  Agreement entered into between the Company
and Fidelity in connection  with the termination of their proposed  merger.  The
arbitration  panel has ruled that the entire  Merger  Termination  Agreement was
unenforceable.  The Company  and Matrix Bank filed an appeal of the  arbitration
panel's decision in federal district court in Phoenix,  Arizona,  which has been
denied. In October 2001,  Fidelity  initiated a second  arbitration to determine
the  validity  of a release  given in  connection  with the  Merger  Termination
Agreement.  Matrix  Bancorp  contested  that the releases were valid and, in the
alternative,  made  a  counterclaim  against  Fidelity  demanding  restitutional
damages  for the  value of the  releases  if they  were  determined  valid.  The
arbitration  panel has held the  releases  to be valid and  enforceable  and has
denied the  Company's  claim for  restitutional  damages.  Fidelity  has filed a
motion  requesting  that it be  awarded  its  attorney  fees,  and the panel has
awarded Fidelity  approximately  $500,000.  The Company anticipates an appeal of
the findings of the arbitration panel.

Sterling  Trust has been named a  defendant  in an action  that was tried in the
District Court of Tarrant County, Texas in the spring of 2000. The jury returned
a verdict  adverse to  Sterling  Trust with  respect  to two of 12  theories  of
liability  posed by the  plaintiffs,  and the court has  signed a  judgment  for
certain of the plaintiffs in the amount of  approximately  $6,400,000.  Sterling
Trust has  filed an appeal of this  judgment  and  believes  it has  meritorious
points of appeal. It intends to vigorously  prosecute the appeal of this action.
The ultimate  resolution  of this appeal,  which is expected at any time,  could
result in a loss of up to  $6,400,000  million plus  post-judgment  interest and
additional attorneys' fees. The ultimate legal and financial liability,  if any,
of the Company cannot be estimated with certainty at this time.

                                      F-49
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


Related to the matter  described in the previous  paragraph,  Sterling Trust and
several officers have been named defendants in an action in which the plaintiffs
have asserted various theories of liability,  including  control person theories
of liability under the Texas Securities Act and fraudulent  transfer theories of
liability,  to seek to  impose  liability  on the  defendants  for the  judgment
described  above.  The  parties  have  agreed to abate this  action  pending the
outcome  of the appeal  mentioned  in the  previous  paragraph.  The  defendants
believe they have adequate defenses and intend to vigorously defend this action.
The ultimate  legal and financial  liability,  if any, of the Company  cannot be
estimated with certainty at this time.

Sterling Trust was named a defendant in several  putative class action  lawsuits
instituted  in  November  2000 by one  law  firm  in  Pennsylvania.  All of such
lawsuits  were  originally  filed in the United  States  District  Court for the
Western District of Pennsylvania.  On April 26, 2001, the District Court for the
Western  District of Pennsylvania  ordered that all of such cases be transferred
to the United States  District  Court for the Western  District of Texas so that
Sterling Trust could properly present its motion to compel arbitration. Sterling
Trust filed separate  motions to compel  arbitration  in these  actions,  all of
which were granted.  Each of the six plaintiffs timely filed arbitration demands
with the American Arbitration  Association.  The demands seek damages and allege
Sterling Trust  breached  fiduciary  duties and was negligent in  administrating
each claimant's self-directed individual retirement account holding a nine-month
promissory  note.  Sterling  Trust believes it has  meritorious  defenses and is
defending the matters vigorously. The ultimate legal and financial liability, if
any, of the Company cannot be estimated with certainty at this time.

Sterling  Trust has been named a defendant  in an action filed in August 2002 in
the Second  Judicial  District Court in the County of  Bernalillo,  State of New
Mexico.  The plaintiffs have claims they were defrauded in connection with their
investment of  approximately  $200,000 through their  self-directed  IRA held by
Sterling Trust.  Sterling Trust has filed a motion to compel  arbitration  based
upon the account  agreements  entered  into by the  plaintiffs.  Sterling  Trust
believes  it has  meritorious  defenses  to the claims and intends to defend the
matter vigorously.  The ultimate legal and financial  liability,  if any, of the
Company cannot be estimated with certainty at this time.

Sterling Trust has been named a defendant in an action filed in July 2001 in the
Superior Court for the County of San Diego, State of California.  The plaintiffs
have alleged various  theories of liability  against  Sterling Trust relating to
their investments of an indeterminable  amount through their  self-directed IRAs
held by Sterling Trust.  Sterling Trust believes it has meritorious  defenses to
the claims and intends to defend the matter  vigorously.  The ultimate legal and
financial  liability,  if any, of the Company cannot be estimated with certainty
at this time.

Sterling Trust has been named in an arbitration action filed in July 2002 in the
Judicial Arbiter Group of Denver,  Colorado.  The plaintiffs have alleged breach
of  contract   against   Sterling  Trust   relating  to  their   investments  of
approximately  $850,000 through their self-directed IRAs held by Sterling Trust.
In January 2003, this action was settled and the matter has been closed.

                                      F-50
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


Sterling Trust has been named a defendant in an action pending in Superior Court
of the State of California.  The complaint  seeks class action status,  requests
unspecified damages and alleges negligent misrepresentation, breach of fiduciary
duty and breach of written  contract on the part of Sterling  Trust. On December
10,  2002,  the court  denied  Sterling  Trust's  motion to compel  arbitration.
Sterling Trust believes it has meritorious  defenses and is defending the matter
vigorously.  The ultimate legal and financial liability,  if any, of the Company
cannot be estimated with certainty at this time.

In addition to the other litigation matters described above,  Sterling Trust has
been the subject of  numerous  lawsuits  and  arbitration  proceedings  in which
customers  and, in some  cases,  persons who are not  customers  allege  various
theories of liability against the Company for losses suffered by these claimants
in  connection  with their failed  investments  in several  enterprises.  To the
extent that Sterling Trust has had any relationship  with any of such claimants,
it has been solely as custodian of such claimants self-directed IRAs pursuant to
contracts that specify the limited nature of Sterling  Trust's  obligations.  We
believe Sterling Trust has in each case acted in accordance with its obligations
under the contracts and/or as otherwise  imposed by law. We further believe that
the  ultimate  outcome  of each of  these  cases  will  not be  material  to the
consolidated financial position and results of operations of Company; but, there
can be no  assurances  that there  will not be an adverse  outcome in any one or
more of these cases or that any such  adverse  outcome  will not have a material
adverse effect on the consolidated  financial position and results of operations
of the Company.

A former  customer of the Company is a debtor in a Chapter 11  proceeding  under
the  Bankruptcy  Code  pending in the  United  States  Bankruptcy  Court for the
Eastern  District of New York. Prior to the bankruptcy  filing,  the Company had
provided  the  customer  with a  purchase/repurchase  facility  under  which the
Company  purchased  residential  mortgage  loans  from the  customers,  with the
customer having the right or obligation to repurchase such mortgage loans within
a specified period of time. The Company purchased  approximately  $12,400,000 in
original  principal  amount (the Purchased  Loans) at the time of the Chapter 11
filing.  The  principals  of the customer  were indicted for fraud in connection
with financial improprieties committed.

Various  third  parties  have  instituted  lawsuits,  adversary  proceedings  or
competing  bankruptcy claims against the Company claiming an equitable  interest
in approximately  eighteen of the Purchased Loans  (approximately  $2,100,000 in
original  principal  amount).  These third  parties  consist  primarily of title
companies,  closing attorneys and other closing agents that provided  settlement
funds in  connection  with the funding of a borrower's  mortgage  loan,  in many
cases,  we believe in violation of various  "good funds" laws,  which  typically
require  a  closing  agent  to  wait  for  receipt  of  "good  funds"  prior  to
disbursement of settlement  funds on the origination of a loan.  After providing
settlement funds, these closing agents discovered that the customer had placed a
stop payment on the checks  provided to the closing  agent to fund the mortgage.
To date,  the  Company  has  successfully  litigated  two claims and has reached
tentative  agreements to settle claims  asserted  against five others upon terms
satisfactory to the Company.


                                      F-51
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


Additionally,  certain  parties  in the  chain  of title  to  property  securing
approximately $2,700,000 of loans, including sellers and prior lien holders, are
seeking  to void or rescind  their  transactions  on the theory  that they never
received consideration. The Company has reached tentative agreement to settle 13
of  these  purchased  loans  upon  terms  satisfactory  to  the  Company.  These
settlements  can be consummated  once the trustee's  claims have been settled as
discussed below.

The trustee for the customer received an order from the Bankruptcy Court finding
that the Purchased Loans are a part of the estate of the customer. Nevertheless,
the  trustee  and  the  Company  have  reached  an  agreement,  approved  by the
Bankruptcy  Court,  in which  the  trustee  relinquished  any and all  claims to
approximately  $8,300,000 of the loans,  in exchange for a fee of  approximately
5.8% of the principal  balance of the loans. Of the $8,300,000  settled with the
trustee,  approximately  $1,700,000  remains  subject to the third party  claims
discussed above.

The trustee has also filed two separate adversarial actions against the Company.
One such  action  claims the  Company  does not have a  perfected  ownership  or
security interest in 17 of the Purchased Loans. The second adversarial action is
in the approximate amount of $6,000,000,  claiming  preferential payments by the
customer to the Company during the 90 days  proceeding the filing of bankruptcy.
These payments were funds returned by the customer's escrow agent to the Company
for funds the Company  paid for the  purchase  of  customer  loans which did not
close.

The Company believes it has adequate  defenses and intends to vigorously  defend
the actions  discussed in the previous five  paragraphs.  The ultimate legal and
financial  liability of the Company,  if any, in any of these matters  cannot be
estimated with certainty at this time.

Additionally,   the  Company  has  initiated  an  adversary  claim  against  the
depository bank for the customer  discussed above. The Company believes that the
depository  bank bears  liability  for any loss  sustained  by the  Company as a
result of the fraud perpetrated by the customer.  The Company also believes that
any loss it may  sustain  as a result  of its  dealings  with the  customer  are
insured.  The Company cannot  accurately assess at this time whether and to what
extent it will receive compensation from any source for any loss it may incur as
a result of its relationship with the customer.

Matrix  Financial  has been named a defendant in an  arbitration  claim  pending
before the American Arbitration  Association in Denver,  Colorado. The claim was
filed on May 22, 2002 by a former  employee,  who was  terminated in early 2002.
The claimant  claims that he was not terminated "for cause," as specified in his
employment agreement and has made claims for, among other things, breach of good
faith and fair dealing,  breach of his employment agreement,  back pay and other
economic loss, violation of the Colorado wage act and attorneys' fees and costs.
Matrix Financial believes it has meritorious  defenses to this claim and intends
to defend the matter vigorously.  The ultimate legal and financial liability, if
any, of the Company cannot be estimated with certainty at this time.


                                      F-52
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


ABS has been  named a  defendant  in an action  filed in the  Superior  Court of
Arizona,  Maricopa  County  on June 3,  2002 by a former  employee.  The  former
employee  claims that she is entitled to  approximately  $450,000 in commissions
owed to her at the time of  termination  of her  employment.  She has also  made
claims under the Arizona wage act and for an award of her  attorneys'  fees. ABS
believes  it has  meritorious  defenses  to this claim and intends to defend the
matter vigorously.  The ultimate legal and financial  liability,  if any, of the
Company cannot be estimated with certainty at this time.

Related Party Transactions

From time to time,  Matrix  Financial has  originated  mortgage loans to various
employees,  including  executive  officers of the Company.  These mortgage loans
generally are sold to third party investors on a servicing released basis within
30 to 60 days after  closing,  and are made in the ordinary  course of business,
are  made  on  substantially  the  same  terms,  including  interest  rates  and
collateral,  as those  prevailing at the time for comparable  transactions  with
other persons, and do not involve more than the normal risk of collectibility or
present  other  unfavorable  features.  At December  31,  2002,  the Company had
approximately  $424,000 of closed  mortgage  loans,  and $0 of  commitments  for
mortgage loans to related parties.

In June of 2002,  the Company  accepted the  resignation of Guy A. Gibson as the
President  and Chief  Executive  Officer  of the  Company.  Mr.  Gibson is still
serving  on the Board of  Directors  of the  Company  and is  providing  ongoing
consulting  services to the Company.  Under the terms of a Consulting  Agreement
entered into with Mr. Gibson,  the Company paid Mr. Gibson  $250,000 in 2002 for
his consulting  services.  The expense is recorded in compensation  and employee
benefits expense in the consolidated statements of operations.

16. Defined Contribution Plan

The Company has a 401(k) defined contribution plan (Plan) covering all employees
who have elected to participate in the Plan.  Each  participant may make pre-tax
contributions  to the  Plan  up to 25% of  such  participant's  earnings  with a
maximum of $11,000 in 2002. The Company makes a matching  contribution of 50% of
the first 6% of the  participant's  compensation  deferred of the  participant's
total  contribution.  Matching  contributions made by the Company vest over five
years. The Company  contributed  approximately  $716,000,  $298,000 and $261,000
during the years ended December 31, 2002, 2001 and 2000,  respectively,  and was
recorded in  compensation  and  employee  benefits  expense in the  consolidated
statements of operations.



                                      F-53


<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)



17. Fair Value of Financial Instruments

The carrying  amounts and estimated fair value of financial  instruments  are as
follows:
<TABLE>
<CAPTION>

                                                               December 31,
                                                       2002                      2001
                                            ------------------------------------------------------
                                                           Estimated                  Estimated
                                              Carrying       Fair        Carrying       Fair
                                               Amount        Value        Amount        Value
                                            ------------------------------------------------------
                                                               (In thousands)
<S>                                         <C>           <C>           <C>           <C>
Financial assets:
   Cash and cash equivalents                $     62,412  $    62,412   $   84,465    $   84,465
   Securities                                     29,073       29,073        6,963         6,963
   Loans held for sale, net                    1,107,926    1,112,841    1,149,539     1,152,931
   Loans held for investment, net                285,891      290,084      191,161       191,661
   FHLB stock                                     30,379       30,379       18,181        18,181
Financial liabilities:
   Deposits                                      933,957      936,809      866,235       869,215
   Custodial escrow balances                     151,790      151,790      129,665       129,665
   Payable for purchase of MSRs                      782          782        4,738         4,738
   FHLB borrowings                               385,785      400,418      303,361       309,931
   Borrowed money and guaranteed preferred
     beneficial interests                        125,903      126,849      222,032       222,032
</TABLE>

The following methods and assumptions were used by the Company in estimating the
fair value of the financial instruments:

The carrying amounts  reported in the  consolidated  balance sheets for cash and
cash  equivalents,  securities,  FHLB stock,  payable  for  purchase of MSRs and
certain  components of borrowed money approximate those assets' and liabilities'
fair values based on the nature of the asset or liability.

The fair values of loans are based on quoted  market  prices where  available or
outstanding  commitments from reputable  investors.  If quoted market prices are
not  available,  fair values are based on quoted  market prices of similar loans
sold  in   securitization   transactions,   adjusted  for  differences  in  loan
characteristics. The value of derivative financial instruments used to hedge the
loan portfolio is included in the carrying amount and fair value of the loans.

The fair value  disclosed for FHLB  borrowings  is estimated  using a discounted
cash flow  calculation  that applies  interest rates  currently being offered on
FHLB  borrowings.  The fair value for the  remainder  of borrowed  money,  which
includes the Company's 11.50% senior notes and guaranteed  preferred  beneficial
interests, is based on over the counter market prices, if available.

                                      F-54
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


The fair value  disclosed for demand  deposits  (e.g.,  interest and noninterest
checking,  savings and money market  accounts) are, by definition,  equal to the
amount payable on demand at the reporting date (i.e.,  their carrying  amounts).
Fair  values for  fixed-rate  certificates  of  deposit  are  estimated  using a
discounted  cash flow  calculation  that applies  interest rates currently being
offered on certificates to a schedule of aggregated expected periodic maturities
on time deposits. The component commonly referred to as deposit base intangible,
was not  estimated at December 31, 2002 and 2001,  and is not  considered in the
fair value  amount.  The fair value  disclosed  for  custodial  escrow  balances
liabilities  (noninterest  checking)  is,  by  definition,  equal to the  amount
payable on demand at the reporting date (i.e., their carrying amounts).

18. Parent Company Condensed Financial Information

Condensed financial information of Matrix Bancorp, Inc. (Parent) is as follows:
<TABLE>
<CAPTION>

                                                                         December 31,
                                                                     2002             2001
                                                              ------------------------------------
                                                                        (In thousands)
<S>                                                                  <C>              <C>

Condensed Balance Sheets
Assets:
   Cash                                                              $    854         $    155
   Loans receivable                                                     2,430            3,500
   Other receivables                                                      491                9
   Premises and equipment, net                                            915            1,139
   Other assets                                                         3,046            3,168
   Investment in and advances to subsidiaries                         157,480          151,755
                                                              ------------------------------------
Total assets                                                        $ 165,216        $ 159,726
                                                              ====================================


Liabilities and shareholders' equity:
   Borrowed money and guaranteed preferred beneficial
     interests (a)                                                  $  86,046        $  81,527
   Other liabilities                                                   12,234            6,887
                                                              ------------------------------------
Total liabilities                                                      98,280           88,414
Shareholders' equity:
   Common stock                                                             1                1
   Treasury shares                                                          -                -
   Additional paid-in capital                                          20,375           20,800
   Retained earnings                                                   46,560           50,511
                                                              ------------------------------------
Total shareholders' equity                                             66,936           71,312
                                                              ------------------------------------
Total liabilities and shareholders' equity                         $  165,216        $ 159,726
                                                              ====================================

<FN>
(a)      The  Parent's  debt is set  forth in a table  following  the  condensed
         statements  of cash flows.  The Parent also  guarantees  the  revolving
         warehouse loan agreement and the financing  related to charter schools.
         See Note 10 for additional information regarding the debt.
</FN>
</TABLE>


                                      F-55

<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


<TABLE>
<CAPTION>

                                                                      Years ended December 31,
                                                                2002             2001            2000
                                                     ----------------------------------------------------
                                                                           (In thousands)
       <S>                                                 <C>             <C>              <C>

       Condensed Statements of Operations
       Income:
          Interest income on inter-company advances
                                                           $    1,232      $      2,395     $     2,202
          Other                                                    57             1,230           1,362
                                                     ----------------------------------------------------
       Total income                                             1,289             3,625           3,564

       Expenses:
          Compensation and employee benefits                    4,584             3,529           3,686
          Occupancy and equipment                                 817               748             674
          Interest on borrowed money                            7,766             8,511           6,923
          Professional fees                                       299               437             510
          Other general and administrative                        943             2,553           2,209
                                                     ----------------------------------------------------
       Total expenses                                          14,409            15,778          14,002
                                                     ----------------------------------------------------

       Loss before income taxes and equity income of
          subsidiaries                                        (13,120)          (12,153)        (10,438)
       Income taxes (b)                                             -                 -               -
                                                     ----------------------------------------------------
       Loss before equity income of subsidiaries              (13,120)          (12,153)        (10,438)
       Equity income of subsidiaries                            9,168            20,665          14,696
                                                     ----------------------------------------------------
       Net (loss) income                                   $   (3,952)     $      8,512     $     4,258
                                                     ====================================================
<FN>
(b)  The Company's tax sharing agreement with its subsidiaries provides that the
     subsidiaries will pay the Parent an amount equal to its individual  current
     income tax (benefit)  provision  calculated on the basis of the  subsidiary
     filing a separate return.  In the event a subsidiary incurs a net operating
     loss in future periods,  the subsidiary will be paid an amount equal to the
     current  income  tax  refund  the  subsidiary  would be due as a result  of
     carry-back of such loss, calculated on the basis of the subsidiary filing a
     separate  return.   Accordingly,   the  Parent's  condensed  statements  of
     operations do not include any income tax benefit for the current losses.
</FN>
</TABLE>


                                      F-56
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)

<TABLE>
<CAPTION>

                                                            Years ended December 31,
                                                     2002             2001              2000
                                              ------------------------------------------------------
                                                                 (In thousands)
<S>                                             <C>               <C>              <C>

Condensed Statements of Cash Flows
   Operating activities:
   Net (loss) income                            $        (3,952)  $        8,512   $        4,258

   Adjustments to reconcile  net (loss)
     income to net cash  provided (used) by
     operating activities:
       Equity income of subsidiaries                    (9,168)          (20,665)         (14,696)
       Dividend from subsidiaries                        8,485            11,996            6,509
       Depreciation and amortization                       757               703              621
       Unrealized gain (loss) on securities
         available for sale                                  1              (794)             819
       Loss on sublease                                    700                 -                -
       Gain on sale of building                              -                 -             (823)
       Increase (decrease) in other
         liabilities                                     4,647              (888)           3,800
       Decrease (increase) in other
         receivables and other assets                      534            (3,133)           1,459
                                              ------------------------------------------------------
Net cash provided (used) by operating
   activities                                            2,004            (4,269)           1,947

Investing activities:
   Purchases of premises and equipment                    (274)             (606)            (457)
   Proceeds from sale of building                            -                 -            2,191
   Investment in and advances to subsidiaries           (5,042)          (19,331)           1,722
                                              ------------------------------------------------------
Net cash (used) provided by investing
   activities                                           (5,316)          (19,937)           3,456


Financing activities:
   Repayments of notes payable and revolving
     line of credit                                    (34,877)          (49,437)         (39,554)
   Proceeds from notes payable and revolving
     line of credit                                     34,396            43,250           35,700
   Shares repurchased                                     (726)             (746)          (1,775)
   Proceeds from junior subordinated                                                            -
     debentures                                          4,917            30,977
   Proceeds from issuance of common stock
                                                           301               317              224
                                              ------------------------------------------------------
Net cash provided (used) by financing
   activities                                            4,011            24,361           (5,405)
                                              ------------------------------------------------------
Increase (decrease) in cash                                699               155               (2)
Cash at beginning of year                                  155                 -                2
                                              ------------------------------------------------------
Cash at end of year                             $          854    $          155   $            -
                                              ======================================================

</TABLE>


                                      F-57
<PAGE>


                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


Parent Company Debt is set forth below:
<TABLE>
<CAPTION>

                                                                           December
                                                                     2002             2001
                                                              ------------------------------------
                                                                        (In thousands)
<S>                                                            <C>               <C>

Senior notes                                                   $        9,545    $       10,455
Bank stock loan                                                         7,501             8,572
                                                              ------------------------------------
Total term notes                                                       17,046            19,027
Bank stock revolving line of credit                                         -             3,000
Guaranteed preferred beneficial interests                              64,500            59,500
Other                                                                   4,500                 -
                                                              ------------------------------------
Total debt                                                     $       86,046    $       81,527
                                                              ====================================
</TABLE>

As of December 31, 2002, the maturities of debt are as follows:

                                                     (In thousands)

2003                                                  $   1,428
2004                                                      6,073
2005                                                      9,545
Thereafter                                               69,000
                                                  ----------------------
                                                      $  86,046
                                                  ======================

19. Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>

                                                                         2002
                                           -----------------------------------------------------------------
                                                Fourth          Third           Second          First
                                               Quarter         Quarter         Quarter         Quarter
                                           -----------------------------------------------------------------
                                                           (In thousands except share data)
        <S>                                     <C>            <C>             <C>             <C>

        Operations
        Net interest income before
           provision for loan and
           valuation losses                     $   12,721     $   12,576       $   12,279      $   11,623
        Provision for loan and valuation
           losses                                      392          1,308              642           1,058
        Noninterest income                          26,992         23,875           23,497          23,426
        Noninterest expense                         42,405         44,378           34,182          30,893
                                           -----------------------------------------------------------------
        (Loss) income before income taxes           (3,084)        (9,235)             952           3,098
        (Benefit) provision for income
           taxes                                    (1,391)        (4,034)              48           1,060
                                           -----------------------------------------------------------------
        Net (loss) income                       $   (1,693)    $   (5,201)      $      904      $    2,038
                                           =================================================================

        Net (loss) income per share data
                                           -----------------------------------------------------------------
        Basic                                   $    (0.26)    $    (0.81)      $     0.14      $     0.31

                                           =================================================================
        Diluted                                 $    (0.26)    $    (0.81)      $     0.14      $     0.31
                                           =================================================================

        Balance Sheet
        Total assets                            $1,702,000     $1,778,000       $1,623,000      $1,570,000
        Total loans, net                         1,394,000      1,450,000        1,304,000       1,210,000
        Shareholders' equity                        67,000         68,000           74,000          73,000

</TABLE>

                                      F-58
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


<TABLE>
<CAPTION>


                                                                         2001
                                           -----------------------------------------------------------------
                                                Fourth          Third           Second          First
                                               Quarter         Quarter         Quarter         Quarter
                                           -----------------------------------------------------------------
                                                           (In thousands except share data)
        <S>                                    <C>             <C>              <C>            <C>

        Operations
        Net interest income before
           provision for loan and              $   11,379      $    9,335       $  11,133      $    8,663
           valuation losses
        Provision for loan and valuation
           losses                                     830             648             526             976
        Noninterest income                         28,679          22,500          21,951          18,386
        Noninterest expense                        32,668          30,415          30,006          22,810
                                           -----------------------------------------------------------------
        Income before income taxes                  6,560             772           2,552           3,263
        Provision for income taxes                  2,255             144             924             952
        Less cumulative effect of a change
           in accounting principle, net of
           tax benefit                                  -               -               -             360
                                           -----------------------------------------------------------------
        Net income                             $    4,305      $      628       $   1,628      $    1,951
                                           =================================================================

        Net Income per share data
        Basic before accounting change         $     0.66      $     0.10       $    0.25      $     0.30
        Cumulative effect of a change in
           accounting principle                         -               -               -            0.05
                                           -----------------------------------------------------------------
        Basic                                  $     0.66      $     0.10       $    0.25      $     0.30
                                           =================================================================
        Diluted before accounting change             0.66            0.10            0.34            0.34
        Cumulative effect of a change in
           accounting                                   -               -               -            0.05
                                           -----------------------------------------------------------------
        Diluted                                $     0.66      $     0.10       $    0.25      $     0.29
                                           =================================================================

        Balance Sheet
        Total assets                           $1,647,000      $1,530,000       $1,685,000     $1,692,000
        Total loans, net                        1,341,000       1,256,000        1,387,000      1,455,000
        Shareholders' equity                       71,000          67,000           66,000         65,000

</TABLE>

                                      F-59
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


20. Transactions with Harbor Financial Mortgage Corporation

During 1999 and 1998, the Company entered into several  transactions with Harbor
Financial  Mortgage  Corporation  and its wholly  owned  subsidiary  New America
Financial Inc.  (collectively Harbor). The transactions included the purchase of
nonperforming   FHA/VA  loans,   servicing   retained,   on  a  scheduled/actual
remittance;  the purchase of performing  residential  mortgage  loans  including
sub-prime loans,  servicing retained, on a  scheduled/scheduled  remittance with
full recourse;  the acquisition of MSRs; and the purchase of receivables related
to servicing sales by Harbor to third parties.

In July 1999, Harbor, as servicer for the nonperforming  FHA/VA loans,  breached
its servicing contract.  As a result, in September 1999, the Company transferred
the servicing of the loans to Matrix Financial.

In October 1999, Harbor filed for bankruptcy. Subsequent to the bankruptcy there
were  several  lawsuits  filed by and against  the  Company  and third  parties,
generally  surrounding  the ownership  and competing  interest in certain of the
Harbor assets that the Company had acquired. In August 2000, the Company entered
into a global settlement with all of the third parties.

The most  significant  assets which remain from the Harbor  transactions are the
FHA/VA loans with a balance of $18,102,000  and $50,397,000 at December 31, 2002
and 2001, respectively. Because the principal and interest is largely insured or
guaranteed by the federal  government at a stated  debenture  rate,  the Company
continues  to accrue  interest  on the loans.  However,  both the  interest  and
advances made on the loans are subject to certain curtailments. The interest and
advances are analyzed quarterly by the Company for collectibility.

21. Transactions with Island Mortgage Network

In 2000, the Company  provided  Island  Mortgage  Network  (Island),  a New York
mortgage  banking entity,  with a  purchase/repurchase  facility under which the
Company purchased residential mortgage loans from Island, with Island having the
right or obligation to repurchase such mortgage loans within a specified  period
of time. In June 2000,  Island  breached terms of its agreement with the Company
and,  in  October  2000,  Island  filed  for  bankruptcy.  At  the  time  of the
bankruptcy,  the  Company  had  approximately  $12,400,000  of loans that it had
acquired from Island. At December 31, 2002, relating to $2,000,000 of the loans,
there  have been  lawsuits  initiated  by third  parties  alleging  a  competing
interest in the loans.  With respect to an additional  $2,700,000 of loans,  the
Company  believes  that the loans  were  never  closed  with good  funds.  As of
December  31,  2002 and  2001,  the  Company  had  $7,500,000  and  $10,100,000,
respectively,  of loans and receivables originated by Island. The Company has an
allowance  for loan  losses for these  loans and  receivables  of  approximately
$2,300,000 and $2,900,000 as of December 31, 2002 and 2001, respectively.

22. Segments of the Company and Related Information

The Company has four reportable segments under SFAS No. 131,  "Disclosures About
Segments  of an  Enterprise  and Related  Information":  a  traditional  banking
subsidiary,   a  mortgage  banking  subsidiary,   two  servicing  brokerage  and
consulting  subsidiaries  and a  school  services  subsidiary.  The  traditional
banking  subsidiary  provides  deposit and lending services to its customers and
also makes  investments  in residential  mortgage  loans.  The mortgage  banking
subsidiary  originates  residential  mortgage  loans through its wholesale  loan
origination  offices,  as well as acquires  residential  MSRs and  services  the

                                      F-60
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


mortgage loans underlying those MSRs. The servicing brokerage subsidiaries offer
brokerage and consulting  services for residential  MSRs and brokerage  services
for whole loan activities, retail and fixed income activities, and SBA loans and
securities.  The school services  subsidiary  provides  outsourced  business and
consulting  services,  as well as financing to charter  schools.  The  remaining
subsidiaries  are included in the "all other" category for purposes of Statement
No. 131  disclosures and consist  primarily of the Company's  trust  operations,
real estate disposition services and the Parent company operations.

The Company  evaluates  performance  and allocates  resources based on operating
profit or loss before income taxes.  The  accounting  policies of the reportable
segments  are  the  same  as  those  described  in the  summary  of  significant
accounting policies.  Transactions between affiliates, the resulting revenues of
which are shown in the intersegment  revenue  category,  are conducted at market
prices (i.e., prices that would be paid if the companies were not affiliates).



For the years ended December 31:
<TABLE>
<CAPTION>

                                                        Servicing
                           Traditional    Mortgage    Brokerage and     School
                             Banking      Banking      Consulting      Services    All Others      Total
                          -----------------------------------------------------------------------------------
                                                            (In thousands)
<S>                         <C>           <C>         <C>              <C>         <C>           <C>
2002
Revenues from external
   customers:
     Interest income        $   55,172    $   27,858  $      123       $    6,823  $      501    $   90,477
     Noninterest income          4,677        66,595       9,273            6,445      10,420        97,410

Intersegment revenues           19,167         3,694       1,192               11       2,260        26,324

Interest expense                31,037        19,723         154            2,771     (12,407)       41,278

Depreciation/amortization          602        25,433         109            1,405       1,383        28,932

Segment income (loss)
   before income taxes          20,081       (10,621)      2,311           (6,736)    (13,304)       (8,269)

Segment assets (a)           1,556,268       527,328       7,209           70,237      50,842     2,211,884
2001
Revenues from external
   customers:
     Interest income        $    67,752   $   30,602   $      14       $    6,854   $     175    $  105,397
     Noninterest income          9,652        64,019       3,658            7,252       7,125        91,706

Intersegment revenues           20,821         4,418       2,345                -       3,346        30,930

Interest expense                51,008        23,548          85            4,931     (14,685)       64,887

Depreciation/amortization          489        23,013         124              360         992        24,978

Segment income (loss)
   before income taxes          21,529         7,803      (1,406)          (1,177)    (13,412)       13,337

Segment assets (a)           1,410,072       669,317       6,506           78,131      57,367     2,221,393
2000
Revenues from external
   customers:
     Interest income        $   86,535    $    5,973  $       11       $    4,691  $      176    $   97,386
     Noninterest income          9,144        27,430       8,214            4,240       9,764        58,792

Intersegment revenues            3,620         5,746         220                -       2,233        11,819

Interest expense                47,978         8,296           7            4,413       6,907        67,601

Depreciation/amortization        2,447         8,469         164              269       1,085        12,434

Segment income (loss)
   before income taxes          17,170         2,209       1,542           (4,019)    (10,401)        6,501

Segment assets (a)           1,286,971       259,726       2,628           62,245      30,394     1,641,964

<FN>
(a) See reconciliation to total consolidated assets in the following table.
</FN>
</TABLE>

                                      F-61
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)

<TABLE>
<CAPTION>


                                                            2002             2001              2000
                                                     ------------------------------------------------------
                                                                        (In thousands)
<S>                                                   <C>                 <C>                 <C>

Revenues for year ended December 31:
Interest income for reportable segments                $       89,976     $     105,222       $   97,210
Noninterest income for reportable segments                     86,990            84,581           49,028
Intersegment revenues for reportable segments                  24,064            27,584            9,586
Other revenues                                                 13,181            10,646           12,173
Elimination of intersegment revenues                          (26,324)          (30,930)         (11,819)
                                                     ------------------------------------------------------
Total consolidated revenues                            $      187,887     $     197,103       $  156,178
                                                     ======================================================

(Loss) income for year ended December 31:
Total profit for reportable segments                   $        5,035     $      26,749       $   16,902
Other loss                                                    (12,664)          (13,339)         (10,914)
Elimination of intersegment profit (loss)                        (640)              (73)             513
                                                     ------------------------------------------------------
(Loss) income before income taxes                      $       (8,269)    $      13,337       $    6,501
                                                     ======================================================

Assets as of December 31:
Total assets for reportable segments                   $    2,161,042     $   2,164,026       $1,611,570
Other assets                                                   50,842            57,367           30,394
Elimination of intersegment receivables                      (497,514)         (563,304)        (215,998)
Other intersegment eliminations                               (12,773)          (11,149)          (7,193)
                                                     ------------------------------------------------------
Total consolidated assets                              $    1,701,597     $   1,646,940       $1,418,773
                                                     ======================================================
</TABLE>


                                      F-62
<PAGE>

                      Matrix Bancorp, Inc. and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


Other Significant Items for the year ended December 31:

<TABLE>
<CAPTION>

                                                       2002                2001                2000
                                                     ------------------------------------------------------
                                                                      (In thousands)
<S>                                                   <C>               <C>               <C>


Depreciation/amortization expense:
   Segment totals                                     $  27,549         $  23,986         $  11,349
   Intersegment adjustments                               1,383               992             1,085
                                                     ------------------------------------------------------
Consolidated totals                                   $  28,932         $  24,978         $  12,434
                                                     ======================================================

Interest expense:
   Segment totals                                     $  53,685         $  79,572         $  60,694
   Intersegment adjustments                             (12,407)          (14,685)            6,907
                                                     ------------------------------------------------------
Consolidated totals                                   $  41,278         $  64,887         $  67,601
                                                     ======================================================


</TABLE>





                                      F-63